July 2 2012
Should We Have Bailed Out the Pony Express?
One of the most astute things ever said about the Obama administration’s haplass approach to trying to save jobs is that, if they’d been around in 1861, we’d still be subsidizing the Pony Express.
I wish I could remember who said that. It explains why we bailed out the automobile industry, without even asking that it change its ways. I thought about the Pony Express analogy again today when I read an excellent piece in City Journal.
The article is by Guy Sorman, and it is headlined “Schumpeter in the White House: How to talk about Creative Destruction.”
Sorman sets the stage:
The 2012 presidential race will be, in part, a showdown between two different models of economic growth. President Barack Obama and his Democratic administration will defend the once-discredited and now-resurgent theory that government must act as the economy’s “tutor” and use public funds to stimulate it.
The Republican nominee, presumably Mitt Romney, will advance the free-market argument that the main source of new growth is the innovative energy of American entrepreneurs and that government needs to get out of the way.
An essential part of the free-market argument is “creative destruction,” a theory proposed by the great Austrian economist and Harvard University professor Joseph Schumpeter. If you don’t understand Schumpeter’s insight—expressed most powerfully in his classic 1942 book Capitalism, Socialism and Democracy—you’ll have a hard time understanding why free markets work so well to generate prosperity. Yet creative destruction is a complicated concept, poorly understood by the general public and not always easy to defend. As November nears, the Republican nominee will have to figure out a way to show voters how essential it is to American prosperity.
Schumpeter believed that progress in a capitalist economy requires that the old give way constantly to the new: production technologies in a free economy improve constantly, and new products and services are always on offer.
People who understand creative destruction know that, when an industry is obsolete, the last thing you want to do is prop it up. In the long run this is disastrous for job creation and for the economy. In the short run, President Obama will say it is cruel not to allow government to save jobs by dropping billions of taxpayer dollars into failing and flailing industries.
But the attempt to “help” people by subsidizing moribund industries is disastrous:
Trying to prevent creative destruction brings economic torpor or worse. At the extreme were the twentieth century’s totalitarian Communist regimes. I vividly recall the Soviet economy under Brezhnev and the Chinese economy under Mao Zedong. In these state-controlled societies, competition was illegal and existing factories were never shuttered; every industrial complex contained layers of antiquated technologies to which more recent ones had been added. To close down a factory, after all, would imply that the central planners had made mistakes—an impossibility, since socialism was supposedly scientific.
Innovation is very rare under such state-stifled conditions.
In a way, most of the President Obama's criticism of Bain Capital is based on the president's failure to understand creative destruction. Of course, creative destruction can be devastating to individuals. In the long run, a stagnant economy is more painful. But that is hard to see in the moment. Because the death of a business hurts people and the benefits of clearing out dead companies are not immediately apparent, a Schumpeterian candidate in 2012 is, says Sorman, going to have to be an excellent rhetorician to win the White House.
I suggest starting by asking if we should be subsidizing the Pony Express.