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Creative Destruction and More Economic Nonsense

John Kozy asked:

My opinion of classical economics and economists turned sour shortly after I enrolled in my first economics course as a college sophomore. I was not a wet behind the ears recent high school graduate, having recently been discharged from the army after service during the Korean War. People holding positions of authority had to earn my respect, for I had seen to many people from corporals to captains whose incompetence was deadly. So when my professor began to make claims that seemed wrong to me, I vocally questioned them and often posed counterexamples. His arguments were often ineffective, and I once told him that what he had said was “stupid.” The class roared, and he threatened to evict me from his class. He didn’t and I mellowed my questioning somewhat, but never ceased even though it became obvious that questioning was not encouraged. I Aed that course, not because I accepted what was presented but because the so-called objective examinations favored by professors in the social sciences were so simple minded that a braying jackass could have passed them. About a year later, I met this professor again at a party hosted by some graduate students I had become friendly with. He said, in reference to me, that he was glad to know that there still were students around who were willing to question their professors, and I answered him by saying that he didn’t feel that way when it was happening in his class. So much for professorial integrity.

When I was a student, students and professors in Arts and Sciences did not hold the social sciences in high regard. Social science courses were thought of as crip, and they drew hoards of weak students looking for easy As. The sad fact is that those who went on to major in some social science were students who were drawn from these courses. Of course, not all those students were weak; there are always exceptions, but the social science departments abetted the attraction of these weak students by asking other academic departments to offer special, watered down courses for their majors. The mathematics department, for instance, had to offer a “statistics for social science majors” course. Required readings in these courses almost always were found in textbooks; readings from original sources were almost never required.

Someone will say, of course, that this is a mere anecdote, which is true. It has no probative value. But this anecdote is not all there is.

Adam Smith has had a vast, but not total, influence on Classical Economics. He was a professor of moral philosophy, and any serious student of philosophy who has read Smith’s philosophical works knows that he was not a first-rate thinker. In fact, philosophy curriculums almost totally ignore him. How such a mediocre thinker’s work should have become so influential is a mystery, unless those who thought him “brilliant” were themselves not very bright or because they found his theses useful in promoting their own economic beliefs for good or evil. Raising serious questions about the validity of most of his theses is easy. But there is more, lots more.

Read the daily postings on economistsview (http://economistsview.typepad.com/) and notice how much controversy exists among economists on almost every issue. Similar controversy doesn’t exist among mathematicians, chemists, physicists, and astronomers or the people in any of the true sciences. While reading these posts, count the number of times the words “believe” and “opinion” are used and how rarely the words “know” and “known” are used. These controversies indicate that not knowledge but ideology is at work. These economists are “true believers” who accept certain economic writings as holy writ, and all of this holy writ is summarized in the textbooks mentioned above. Greg Mankiw has even stated that the purpose of a textbook is to present “the consensus” of views even though a consensus is not only often wrong but can be altered by altering the list of the people asked. Given the controversy evident among economists on issues, only a fraud can claim to have found a consensus.

But the most probative evidence comes from an analysis of the theorems economists uncritically adopt. I have previously argued that comparative advantage is an entirely unworkable principle. It requires enormous amounts of data from many nations, all of which is always out of date. Even if the data shows that one country had a comparative advantage when the data was collected, there is no way of knowing that the comparative advantage still exists. After all, things change. Comparative advantage is also what mathematicians call a transitive function. If country A has a comparative advantage over country B, and country B has a comparative advantage over country C, then country A has a comparative advantage over country C. It would then be logically possible for one country to have a comparative advantage over every other country in the production of some product. But if every other country decided not to produce that product any longer and instead buy it from the country with the ultimate comparative advantage, the price of the product would increase so much that the comparative advantage would disappear. In other words, the principle reduces itself to a logical absurdity.

But given the current possible worldwide collapse of financial markets, consider Joseph Schumpeter’s principle of creative destruction. The Economist recently wrote that Schumpeter “argued that recessions are a process of creative destruction in which inefficient firms are weeded out. Only by allowing the ‘winds of creative destruction’ to blow freely could capital be released from dying firms to new industries.” Strange as it may be, I find no such argument in Schumperer.

He writes, the “kind of competition which counts [is] the competition from the new commodity, the new technology, the new source of supply, the new type of organization. . . . It is hardly necessary to point out that competition of the kind we now have in mind acts not only when in being but also when it is merely an ever-present threat. . . .” And “This process of Creative Destruction is the essential fact about capitalism.” (Capitalism, Socialism and Democracy (New York: Harper, 1975), pp. 82-85) Notice that the words “recession” and “depression” do not appear in this passage.

Although there is something true in Schumpeter’s insight, it is also highly misleading. If you look at a list of all inventions since 1800, there are not many that no longer survive in one form or another. The telegraph disappeared when the telephone was invented, but American Telegraph and Telephone still exists. The typewriter disappeared when the personal computer was invented, but many companies that previously made typewriters still exist, having switched their production to computers and computer peripherals. Brother is a good example. The invention of the vacuum cleaner did not eliminate the broom. The fluorescent light bulb has not eliminated the incandescent, and most of the companies that originally made only incandescent bulbs now also make fluorescent ones. The electric shaver has not eliminated the safety razor. The air conditioner has not eliminated the fan. Television has not eliminated either radio or motion pictures. The microwave oven has not eliminated the convection oven. In most of these cases, although a few companies succumbed, the others merely adapted, and there is no way to prove that those that succumbed wouldn’t have succumbed if the new technology hadn’t appeared.

What is more interesting, however, is whether what was created was in all respects better than what was lost. Consider the invention of the airplane and its adaptation to trans-oceanic passenger conveyance. The airliner certainly did away with the ocean liner. But one can argue over whether the change was a great benefit to humanity. For when the ocean liner succumbed to the airliner, the ambiance of trans oceanic travel was also destroyed. So was the craftsmanship that bu
ilt the elegance found
in ocean liners. The airliner took travelers out of an elegant, relaxed, social environment and stuffed them like small fish into a sardine can in the sky. Is that really a benefit? So even when Schumpeter is read properly, what is destroyed may have been better than what is created. So if creative destruction really is the essence of Capitalism, Capitalism may be worse than even anti-capitalists believe.

Economic downturns, recessions and depressions, are not part of Schumpeter’s principle of creative destruction. They are merely unnatural catastrophes, and like natural catastrophes, they are merely destructive. Sometimes the destruction gets rebuilt to its former greatness; sometimes not. Sometimes it never gets rebuilt at all. And although Schumpeter did say, “For capitalism, a depression is a good cold douche,” anyone who has spent time among good professors knows that they will often utter the most outrageous things to provoke their students into a response. So just because Schumpeter did make this statement doesn’t mean that he considered it to be part of the principle of creative destruction. To make that jump is simply a bad inference. But classical economists make those all the time. So although economists claim to be engaged in a rational enterprise, they themselves are not clearly rational.

©2008 John Kozy

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