Tag: crisis

Creating Disequilibrium is Good

Originally posted here.

There is no denying that our economy is undergoing dramatic changes. That brings not just difficulty, but also opportunity for entrepreneurs. In fact, the “creative destruction” of the market is part of what drives economic growth.

Putting aside the causes of our current economic troubles (except to say free markets are not the culprit), we can’t forget that, though massive bubbles are not necessary, markets are by nature dynamic even in the most stable of times. This dynamism is not an evil to be avoided at all costs but the very thing that makes free economies so productive.

Classical economists often treated economic growth as a mechanistic operation that happened at a stable rate as a result of unchanging levels of investment and production — as if economies simply grew on their own as long as production was steady and inputs were not disrupted. The problem with this view is that, quite simply, the real world doesn’t work that way. In 1911, economist Joseph Schumpeter’s Theory of Economic Development radically changed this view, and his insights are still relevant today.

Schumpeter stressed the role of the entrepreneur in economic growth and argued that, far from a static maintenance of equilibrium in production, it was the entrepreneurial ability to causedisequilibrium that created wealth. The constant innovation of these economic actors shakes the economy up, breaking down old methods and building up newer and better ones.

It’s not just increases in production that create wealth but a radical reforming of the way production itself is done. Think Henry Ford’s assembly line. Such entrepreneurial innovations disrupt the unrealistic ideal of a stationary economy. They do destroy the old order — like the classic example of buggy makers losing their jobs when the automobile took hold — but they cause growth because what they create is more valuable than what they replace. Can you imagine halting the progress of the automobile in order to preserve buggy makers?

Schumpeter argued that the role of the entrepreneur was different from that of the inventor, manager, laborer, or capitalist. Entrepreneurs need not be wealthy or even especially intelligent. They may be all or some of these things, but that’s not what makes them entrepreneurs. Schumpeter said the entrepreneur was the person who creates new combinations in production.

The creation of a new good or service — a new way to produce the same good or service, a new market for the good or service, a new source of supply, a new organization of the industry — these are the entrepreneurial functions. Such innovation does not necessarily require new invention, just a different utilization of available knowledge and technology.

As Schumpeter said in a 1928 edition of the Economic Journal,

“[I]t is not the knowledge that matters, but the successful solution of the task … of putting an untried method into practice.”

The entrepreneur, by seeing and acting on different combinations of existing knowledge, products, and services, disrupts the economic order and creates growth. There is evidence of this “creative destruction” all around us: every year millions of jobs are created and destroyed, yet the overall long-term trend is continued economic growth.

The growth could not happen without both creation and destruction; it is the driver of growth, not a problem to be solved. If the economy were static — if jobs were never lost, prices never shifted up or down, investments never enjoyed large profits or major losses — we would not live in a stable utopia but a stagnant subsistence economy.

Don’t be afraid to disrupt the economy. Look for ways that things can be done differently — goods, services, and production methods that can be rearranged, new technologies that can be better used. Right now, as the economy reshuffles, there are more opportunities to generate change than ever — the kind of dynamic change that we need to grow out of this slump.

Don’t just sit there, create some disequilibrium!

Should We Let Things Get So Bad They Finally Get Better?

A snippet I wrote for the March 2010 issue of Liberty Magazine in the Reflections section under the title “Story Time”:

I’ve heard people say that the only way to achieve a truly free society is to let things get so bad that they finally get better. If we hit rock bottom and live in a fully socialist world people will see how bad it is and realize how much better a free economy would be. They will not have to struggle to understand the unseen because they will be living in the world that free-market advocates warned against. People will embrace liberty only after learning the hard way.

I wish to dispel that idea. This strategy would be disastrous, for two reasons.

First, there is no guarantee we will hit rock bottom. The city of Detroit has been in an economic freefall for 50 years. I’ve heard many times that the city can fall no farther and its bloated government will have to loosen its grip. As far as I can tell, the city is still in freefall.

There are countries that have been mired in socialist mediocrity or worse for decades and show few signs of a free-market revolution. Apparently they haven’t hit bottom either.

Second, if things actually did bottom out, there is no guarantee that people would understand why. After the stock and housing markets tanked in 2008, was there a general awareness of the failures of central banking and interventionism? Was the response a swift move toward a freer market? Government created the crisis, yet there was little agreement among Americans about whom to blame and what to do next.

Few see a cause-effect relationship between government activity and the Great Depression. When they do see such a relationship, it’s often that of reverse causality; they believe intervention cured rather than caused the depression.

Waiting to hit rock bottom is not the key to a classical-liberal resurgence. What is?

Narrative.

Whether you think the future is bright or dim, no favorable long-term change will occur unless we tell the right story.

Most narratives place the blame for crises on free markets. The story during the Great Depression was that capitalism had failed. With a few notable exceptions, it was only many years after the histories had been written that alternative explanations entered the discussion. How many bad policies were (and still are) enacted because of false narratives of the Depression?

Shaping narrative is more important than winning policy battles. A good policy in which the public has no faith will be charged with crimes it did not commit. A bad policy which the public loves will be credited with successes it did not achieve. Policy follows paths blazed by belief.

I do not believe we are headed for rock bottom. Market liberals have been in the limelight with the right story about the financial crisis. They may not have the loudest voices, but they have discredited simplistic antimarket explanations and forced further discussion.

But even if we are on a death spiral toward socialism, the only way back is clear and continuous communication of the causal connection between intervention and economic stagnation. Only if people hear the correct narrative on the way down will they know why they hit bottom and how to climb out.

In my weaker moments I think I’d love to see socialists live in the world their policies would create. But as long as I have to share that world, I don’t want to let it happen. Neither should you. Tell the right story.

America’s Great Depression

Murray Rothbard’s seminal but often overlooked work, America’s Great Depression, is especially enlightening since the 2007 financial crisis.  If you want to read the entire 400 page book (which I highly recommend), here it is.  If you’re short on time, here’s a 12 page summary of the main arguments in the book with some additional context.  Enjoy.

Monster and the Fed

A blog post originally written for the Prometheus Institute.

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There’s a reason the earliest economists likened the economy to a human body

I’m a huge fan of Monster energy drinks.  The things are dangerous.  I have to severely limit myself.  I only consume one if I’m in desperate need of a wake-up and I know I can handle the crash that inevitably follows.

Energy drinks are basically a way of fooling your body.  When the human body needs something, it sends all kinds of signals to let you know.  When you need sleep, you feel tired.  It tells you when you need food.   You feel sick when you’ve not eaten the right nutritional mix.  Health problems kick in when exercise is lacking.  Headaches can mean lack of sleep, water, nutrition, too much stress, bad posture, etc.  These signals can be a pain in the butt – but they perform a vital function.  Ignore them at your own peril.

Your body is begging you to sleep; so you slam a Monster to make you feel like you have energy and shut down the bodily signals screaming for repose.  This may give you a temporary productive burst, but there is no long-run net benefit.  The burst is followed by a crash of equal (sometimes greater) magnitude on the opposite end.  Worse still, the greenish liquid you’re putting in via Monster has other deleterious health effects (sugar and acid which rot your teeth to name just one) that will be especially pronounced if you frequently imbibe.  So while your body is tricked into telling you that you feel great for a few hours, inside bad things are happening, and they’ll be felt in short order.

If you begin to rely on high doses of caffeine and ginseng, you find the dosage must be continually increased, which makes the crashes greater.  To avoid the crashes, even more must be taken; but this only prolongs the inevitable and causes more negative health effects.  It can get to a point where the Monster fails to give you a boost at all.  (If you’ve gotten this far, I suggest stopping vs. moving on to anything stronger).

Monetary inflation is a lot like a Monster drink, and the Fed is a lot like an addict.

The current housing “crisis” was created in part by the Fed injecting constant doses of caffeine-like dollar bills into the economy, tricking the market into thinking it had more capital than it did, and mixing up a system as vital to economics as your nerves are to your body – prices, profits and interest rates.

The problem with mortgages was created largely by the Fed increasing the money supply, causing rates to be artificially low like your body is artificially energized via Monster.  Meanwhile, the screwed up rates diverted capital and production away from its truly best use towards uses that looked deceptively profitable – i.e. the purchase of crappy mortgages banked on exaggerated equity rates.  The natural market signals were fuzzied by an injection of valueless dollars, and some made decisions based on those false signals.

As with Monster, a crash has to come.

I would say that the Fed should be as careful with inflation as I am with Monster, but that wouldn’t be a fair comparison.  They need to be far more careful than that.  When I drink Monster, I choose to do so and take the consequences myself.  When the Fed inflates they are force feeding the monetary Monster to us and making us pay for the fallout.  That’s not just economic stupidity, it’s moral transgression.