Creative destruction: How to start an economic renaissance

To be published on 29 March 2017 by Policy Press

The mature economies have been stuck in a long, contained depression since the 1970s. The pressing question that arises today is not why investment and productivity have been so weak, important though that is. Rather it is whether we are hitting the limits of effectively muddling through this dismal reality. The financial crash of 2008 was the first significant indicator that sustaining reasonable living standards could no longer rely on an ever-expanding financialised debt economy. The subsequent recession was one of the sharpest since the 1930s but thankfully the system’s collapse was avoided. Can we expect to be as fortunate when today’s bubbles burst?

This book explores the interaction between the forces of productive decay and the sources of resilience that has characterised Western economic history for almost half a century. In particular it highlights the consequences of state interventions that have sought economic stabilisation, but have unintentionally entrenched economic stagnation. Governments have brought about a corporate dependency that is as debilitating for the economy as the welfare dependency they have created for individuals.

The result of this pro-stability orientation of state intervention is the development of a zombie economy: an economy dead in productive dynamism that is being propped up to ensure the semblance of life. This interferes with the process of creative destruction with the result that new sources of growth are stifled and aggregate productivity suppressed. In preventing a thorough business cycle shakeout these policies of governments, central banks and regulators are not achieving their goal of strengthening the economy. They have been making it more depressed.

Escaping from this Long Depression will not be easy or pain-free, but the perpetuation of the status quo and the slow drift into further crises is much worse. Sustaining a zombie economy trades the prospect of decent, better paying jobs in the future for keeping people in worse paying, more unreliable jobs now. It puts one form of pain – including growing economic insecurity, punctuated by severe recessions – over the other that comes from losing those jobs through economic restructuring, but with the opportunity of obtaining new and better ones.

The book charts a way out of depression based on kindling the forces of creative destruction and establishing a fourth industrial revolution. This means letting the low-productivity parts of the economy go and creating new sectors and industries deploying and developing the latest technologies. Society can help people through the transition between jobs, both financially and also with quality training.

This is not a transformation that can be left to the private sector to initiate, or to implement alone. Established businesses have too much at stake in the here and now to lead such disruptive change. Instead the state will be required to overturn its recent practices and act towards society’s economic renaissance. In particular state institutions need to stop blocking economic change through the policies and actions that sustain the way things are now.

The current estranged political elites are unlikely to bring about such a departure. To come about, this will need a popular democratic renewal around the enlightened embrace of liberty and the benefits of economic and social progress. This can reset an expanding and broad dynamic of investment, innovation and productivity growth, bringing an end to the increasingly perilous journey of muddling through the depression.