resilience, not stability

Archive for July, 2012

Creative Destruction and The Class Struggle

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In a perceptive post, Reihan Salam makes the point that private equity firms are simply an industrialised version of corporate America’s efficiency-seeking impulse. I’ve made a similar point in a previous post that the the excesses of private equity mirror the excesses of the economy during the neoliberal era. To right-wing commentators, neoliberalism signifies a much-needed transition towards a free-market economy. Left-wing commentators on the other hand lament the resultant supremacy of capital over labour and rising inequality. But as I have argued several times, the reality of the neoliberal transition is one where a combination of protected asset markets via the Greenspan Put, an ever-growing ‘License Raj’, regulations that exist primarily to protect incumbent corporates and persistent bailouts of banks and large corporates have given us a system best described as “stability for the classes and instability for the masses”.

The solution preferred by the left is to somehow recreate the golden age of the 50s and the 60s i.e. stability for all. Although this would be an environment of permanent innovative stagnation bereft of Schumpeterian creative destruction, you could argue that restoring social justice, reducing inequality and shoring up the bargaining position of the working class is more important than technological progress. In this post I will argue that this stability-seeking impetus is counterproductive and futile. A stable system where labour and capital are both protected from the dangers of failure inevitably breeds a fragile and disadvantaged working class.

The technology industry provides a great example of how disruptive competitive dynamics can give workers a relatively strong bargaining position. As Reihan notes, the workers fired by Steve Jobs in 1997 probably found employment elsewhere without much difficulty. Some of them probably started their own technology ventures. The relative bargaining power of the technology worker is boosted not just by the presence of a large number of new firms looking to hire but also by the option to simply start their own small venture instead of being employed. This vibrant ecosystem of competing opportunities and alternatives is a direct consequence of the disruptive churn that has characterised the sector over the last few decades. This “disorder” means that most individual firms and jobs are vulnerable at all times to elimination. Yet jobseekers as a whole are in a relatively strong position. Micro-fragility leads to macro-resilience.

In many sectors, there are legitimate economies of scale that prevent laid-off workers from self-organising into smaller firms. But in much of the economy, the digital and the physical, these economies of scale are rapidly diminishing. Yet these options are denied to large sections of the economy due to entry barriers from licensing requirements and regulatory hurdles that systematically disadvantage small, new firms. In some states, it is easier to form a technology start-up than it is to start a hair-braiding business. In fact, the increasingly stifling patent regime is driving Silicon Valley down the same dysfunctional path that the rest of the economy is on.

The idea that we can protect incumbent firms such as banks from failure and still preserve a vibrant environment for new entrants and competitors is folly. Just like a fire that burns down tall trees provides the opportunity for smaller trees to capture precious sunlight and thrive, new firms expand by taking advantage of the failure of large incumbents. But when the incumbent fails, there must be a sufficient diversity of small and new entrants who are in a position to take advantage. A long period of stabilisation does its greatest damage by stamping out this diversity and breeding a micro-stable, macro-fragile environment. Just as in ecosystems, “minor species provide a ‘‘reservoir of resilience’’ through their functional similarity to dominant species and their ability to increase in abundance and thus maintain function under ecosystem perturbation or stress”. This deterioration is not evident during the good times when the dominant species, however homogeneous, appear to be performing well. Stabilisation is therefore an almost irreversible path – once the system is sufficiently homogenous, avoiding systemic collapse requires us to put the incumbent fragile players on permanent life support.

As even Marxists such as David Harvey admit, Olsonian special-interest dynamics subvert and work against the interests of the class struggle:

the social forces engaged in shaping how the state–finance nexus works…differ somewhat from the class struggle between capital and labour typically privileged in Marxian theory….there are many issues, varying from tax, tariff, subsidy and both internal and external regulatory policies, where industrial capital and organised labour in specific geographical settings will be in alliance rather than opposition. This happened with the request for a bail-out for the US auto industry in 2008–9. Auto companies and unions sat side by side in the attempt to preserve jobs and save the companies from bankruptcy.

This fleeting and illusory stability that benefits the short-term interests of the currently employed workers in a firm leads to the ultimate loss of bargaining-power and reduced real wage growth in the long run for workers as a class. In the pursuit of stability, the labour class supports those very policies that are most harmful to it in the long run. A regime of Smithian efficiency-seeking i.e. the invisible hand, without Schumpeterian disruption i.e. the invisible foot inevitably leads to a system where capital dominates labour. Employed workers may achieve temporary stability via special-interest politics but the labour class as a whole will not. Creative destruction prevents the long-term buildup of capital interests by presenting a constant threat to the survival of the incumbent rent-earner. In the instability of the individual worker (driven by the instability of their firm’s prospects) lies the resilience of the worker class. Micro-fragility is the key to macro-resilience but this fragility must be felt by all economic agents, labour and capital alike.

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Written by Ashwin Parameswaran

July 5th, 2012 at 1:11 am