One of the most powerful concepts in economics, which has provided a rather original explanation for business cycles, is the concept of “creative destruction,” introduced by Joseph Schumpeter (1883-1950) in his book “Capitalism, Socialism and Democracy” (1942).
The Austrian-American economist defines the concept as “the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
Contrary to left-wing economists’ theories, it is the creative destruction process that explains the repetitive crises of capitalism (except the COVID-19 crisis which is a health crisis with economic consequences), and not its internal contradictions, market drifts, or even inter-class conflict.
Creative destruction also explains the market economy’s strength and its ability to emerge stronger and more resilient from the various crises, since it undergoes a “makeover” every time. Crises are, therefore, a transition phase between the destruction of old systems and the appearance of new systems, thanks to innovation and future bets.
Entrepreneurs are the central figures of economic activity during the process of creative destruction. They have to materially (combining factors of production) and emotionally manage the uncertainty linked to the transition phase between destruction and creation.
According to John Keynes (1883-1946), the entrepreneur responds to an innate need to take on a dream and realize it. He has a natural enthusiasm stimulated by an instinctive urge to act, rather than do nothing. The entrepreneur’s innate need for activity represents the real engine of economic growth and justifies the entrepreneur’s profit.
Keyne’s definition is far from that of Karl Marx (1818-1883) who defines capital as “dead labor, that, vampire-like, only lives sucking living labor, and lives, the more labor it sucks. The time during which the laborer works, is the time during which the capitalist consumes the labor-power he has purchased from him.”
The two diametrically opposite viewpoints regarding the entrepreneur, between a holder of divine creation for Schumpeter and Keynes, and a blood-sucking vampire for Marx, explain a range of attitudes. Economic strength, therefore, stems from accepting the vanishing of poorly-performing entrepreneurs in favor of new ones with more dynamism for wealth creation.
The price to pay is the emergence, from time to time, of some short-term economic imbalances. However, if market mechanisms continue to work without obstruction, they can successfully, and within a reasonable timeframe, achieve the mutation from destruction into creation.
However, it is usually during this phase of economic renewal that states intervene in fear of the transition’s temporary negative consequences, such as slower growth, unemployment, and deficits. The intervention creates a mismatch between two opposite temporalities—a long-term economic temporality and a short-term political one.
To reduce the undesirable effects of the transition from destruction to creation, governments mobilize the current and future tax revenues—in the form of debt, and divert real and fictitious savings—through ex nihilo monetary creation, to finance the so-called demand-stimulus policies, which have immediate though short-lived positive effects.
In doing so, governments hit three wrong targets with one shot. They prevent the disappearance of unprofitable businesses—because of the artificial boost through public procurement and low-interest loans, they accelerate the bankruptcy of young promising startups—because of the lack of strong foundations, and they slow down, or worse, eliminate the whole process of creative destruction.
Naturally, the interventions’ effects, such as boosting growth, creating jobs, and increasing consumption, are beneficial in the short term. However, they are disastrous in the long term because they destroy the very foundations of market dynamics.
The question that readers are now legitimately entitled to ask is: Why do we continue to use these kinds of policies that are harmful to long-term economic dynamics?
The answer is more political than it is economic. No governor can, during their mandate, venture to let market mechanisms operate economic adjustments because of the social consequences it would induce and, therefore, its effect on elections.
Governors would not dare to sacrifice their popularity for an economic policy that would preserve the country’s economic interests, but would benefit their successor. One example of this pattern are the reforms German Chancellor Gerhard Schroeder launched, which benefited his successor, Angela Merkel.
Additionally, politicians prefer demand-stimulus policies because of their immediate effects. The distribution of income through loans often automatically generates an increase in consumption, while the increase in public procurement automatically boosts investments.
As explained above, the idea that “the State should intervene in the economy to correct market drifts, create jobs, and distribute wealth fairly”—a song that has been long resonating among the public—is economically meaningless. In fact, it is the State’s intervention that transforms a creative destruction into a destructive creation.
Text translated from French by Yahia Hatim.
The views expressed in this article are the author’s own and do not necessarily reflect Morocco World News’ editorial views.
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