May 14, 2014

Creative Destruction and you

Source: M.J. Perry

Recently I stumbled upon an article in The Federalist about the destruction of the middle class by 'robots'. The point of the article was that advancing technology does not destroy jobs as a by-product of excessive greed of the rich, which is a commonly held progressive belief.

The article makes the point about the automobile vs. Facebook as industrial innovations, rhetorically asking which would be more disruptive to an economy.  It follows, with this great section:
 ...Isn’t it more likely that an administration that fosters a “fairer” economy over an innovative one is hampering job creation? 
Question: Which one of these things is more likely to undermine economic activity:


     a) Twitter

     b) over 12,000 new pages of regulations added by this administration 
“The temptation is to blame markets if, for ordinarily workers, creative destruction is more destructive than creative,” Boudreaux says, “But perhaps the accumulation over the years of capital-market regulations, labor-market and occupational-licensing regulations, consumer-products-market regulations, and the hidden taxes (e.g., Obamacare) that attend many of these regulations are, unlike in the past, finally indeed preventing markets from doing what markets would otherwise naturally do: create new opportunities for workers displaced by technology.”
 I agree with the fundamental argument of the piece.  The one point I would however, is that while the creative destruction of a capitalist economy does indeed replace obsolete jobs with newer ones, those new jobs need not exist in the same economy.  Creative destruction does not operate in a vacuum.  Freer trade has made it possible to replace an existing worker with a far cheaper worker in India (for example).

This does not come without geo-political considerations.  Wealth transfers to China as part of the global economic re-structuring pose an existential risk for America. Undermining the notion that the United States can move freely to a post industrial economy by becoming a service economy overlooks the basic fundamentals of life - things still need to be farmed, things and still need to be manufactured, from clothing to cars.  As the world moves to a more wealthy existence overall, those making pennies on the dollar for sewing jobs in Bangladesh, will ultimately expect more relative to someone working at a Wendy's in Arkansas.  All of this to say that in an inter-dependent world economy, change, even change as a result of innovation, is more chaotic than it has been in previous eras.

Cycling back to the point in The Federalist, given that resultant chaos, the most humane thing for the government to do would not be to prolong the agony by propping up failing industries or pet projects, but rather to get out of the way as much as possible and allow the pain of the creative destruction to happen as quickly as possible and be over with.  Think of the Reagan recovery in 1983. The economy blasted back from the stagflation of the late Carter, early Reagan years after the decision to allow interest rates to rise to the point they did which cleared out (destroyed) those who were operating most inefficiently and could not absorb the shock.

In that light, allowing all jobs to just go offshore would seem to be the most humane approach, but that might not be realistic on a macro scale just as much as on a micro scale. That caveat aside, those who argue against innovation (rhetorically or via implementing policy or executive orders that hamper it from happening) are truly damaging to the long term viability of the United States.
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