macroresilience

resilience, not stability

Creative Destruction and The Class Struggle

with 20 comments

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

20 Responses to 'Creative Destruction and The Class Struggle'

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  1. Small point: since the 1997 tech market was a bubble market in which money was pouring in in large part because people were desperate for RoI after a few years of relative stagnation, it might not be realistic to extrapolate from that..

    Foppe

    5 Jul 12 at 9:14 am

  2. Foppe – fair point and I thought about putting that caveat in. But the point still holds IMO – there are a lot of areas which could be more amenable to disruption if the regulatory structure wasn’t so dedicated to protecting the interests of the incumbents. The Business Dynamics data also bears out these intuitions – topic for another post some other day!

    Ashwin

    5 Jul 12 at 10:19 am

  3. The neo-Schumpeterian manifesto – Good stuff! I’m sold.

    One way to look at this from a purely Wicksellian-Keynesian perspective is to say that creative destruction ensures equilibrium in the ‘stock’ of capital so that the real interest rate (natural)does the easier task of equilibrating the flow of capital. The natural rate then does not crash, maintains its more natural positive level, and even when it does crash below the market rate, AD policies are able to manage inflation expectations for a more ‘normal’ range of nominal rates.

    AD stabilization also works better in a Schumpeterian world.

    Ritwik

    5 Jul 12 at 3:03 pm

  4. Interesting that you call it the neo-Schumpeterian manifesto. A lesser known fact is that Karl Marx was strongly opposed to guilds because he viewed them as a vestige of the feudal past, a sentiment that he also expressed in the Communist Manifesto http://www.marxists.org/archive/marx/works/1848/communist-manifesto/ch01.htm .

    When people call the current crony capitalist system a neo-feudal system, they’re maybe closer to the truth than they realise.

    On AD stabilisation, that’s a nice way of looking at it. I have nothing against AD policies in general, just opposed to the specific asset-price obsessed variant that dominates the conventional discourse.

    Ashwin

    5 Jul 12 at 4:30 pm

  5. Yes, I agree. I haven’t read much Marx but if I must, then I’d rather interpret him through Schumpeter!

    Anyway, looking back, I think I didn’t make my point about the rates of return entirely clear. I am building upon your post on innovation & stagnation, and SRW’s post on the negative ‘unnatural’ rate of interest (and rsj’s post on the tough job that interest rates have of equilibrating both the stock of capital, and the flow of capital). My key takeaway from your post was that the aim should not be to eliminate the capitalist’s rent, the aim should be to maintain the rent but either force the incumbent to take risks or be obsolete. In the aggregate, I see this as equivalent to ‘stabilize the stock of capital chasing risk free returns’. This happens either through reduced risk aversion on the part of the incumbents, or a simple capital destruction. But this happens through microeconomic fragility, rather than macroeconomic stabilization. The invisible foot, as you call it.

    This does two things :

    1) It keeps the natural rate (risk free, real) positive.
    2) It stabilizes the capital stock, thereby leaving interest rates to do the simpler job of equilibrating capital flows.

    The loanable funds and liquidity preference views of the world are not at odds anymore.

    And even when they are, so that the natural rate deviates from the market rate, the deviations are small-ish (within Leijonhufvud’s corridor) an so can be sorted out through light touch AD management – cutting nominal rates or raising inflation expectations (or vice versa). The economy is more classical and the central bank has bigger bazookas than it conceivably needs.

    Ritwik

    5 Jul 12 at 6:56 pm

  6. As you say, the political representatives of both labor and capital have an interest in maintaining the current stability-seeking regime. What would make this “technocratic center” fray? Germany is an interesting test case. Both the SPD and CDU are broadly supportive of bail outs for Europe. However, the reaction to the latest accord seems a bit different. The CSU is making noises about affirming ESM seniority. The SPD dislikes direct aid to rich Spanish bank shareholders. Each element in question was key to the positive market reaction to the recent summit agreement.

    In the end, stability seeking regimes will only die if both the left and the right tug the technocratic center apart. It may not happen in a dramatic fashion, but instead in a gradual fraying that renders the nth bail-out accord unimplementable. So far, I would say the left has been more quiescent than the right, but perhaps, at least in Europe, that is beginning to change.

    Diego Espinosa

    5 Jul 12 at 7:15 pm

  7. My favorite left-libertarian slogan:

    Deregulate from the bottom up, end welfare from the top down.

    Michael Strong

    6 Jul 12 at 2:18 am

  8. Ritwik – spot on. Btw the invisible foot is a concept I borrowed from another little known economist called Joseph Berliner who after huge amounts of exacting detailed and empirical work on the Soviet economy concluded that it was the absence of innovation rather than the calculation argument that ultimately sunk the Soviet project. Hopefully a post dedicated to the invisible foot coming very soon.

    Diego – you said that “stability seeking regimes will only die if both the left and the right tug the technocratic center apart.” That is spot on – i wish more people on the far left and far right appreciated just how much they have in common.

    Michael – that is a great slogan!

    Ashwin

    6 Jul 12 at 5:53 pm

  9. “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”

    1. The 50s and 60s were not a period of “permanent innovative stagnation”. What is the evidence for this hyperbole?

    2. What evidence is there that running a whole society along Schumpeterian lines helps “technological progress”? By all means have a strong, decentralized, unstable market structure in order to get consumers what they value (but in many industries even this won’t work), but don’t confuse this with “technological progress”. Technological progress comes from scientific innovation not economic innovation, and most science can be funded by the state (the Higgs Boson is but the latest example) or done in people’s free time without regard to any monetary profit (e.g. hacker culture).

    3. The 50s and 60s were not a period of “stability for all”, and while perhaps there are communists who advocate “stability for all”, I think it’s a bit of a strawman to say that that’s what “the left” favours.

    I don’t believe is possible to generalise about what “the left” or “the right” wants, but if you did, you could say “the left” wants “social security for all” (and you could then say that the 50s and 60s perhaps had “social security for white men”). Social security for all though, is not the same as “stability for all”. For instance, you can lose your job but the government should still follow a policy of full employment such that you can find a new one fairly quickly.

    “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”

    4. The “invisible foot” is not an absolute, but a relative concept. And too much of the invisible foot can be a bad thing even just on innovation grounds – what would innovation be like if the population are too fearful of falling backwards to experiment and innovate?

    5. Also, too much of the invisible foot can lead to capital dominating labour also – see e.g:

    http://crookedtimber.org/2012/07/01/let-it-bleed-libertarianism-and-the-workplace/

    “Micro-fragility is the key to macro-resilience but this fragility must be felt by all economic agents, labour and capital alike”

    6. Surely it is better to say that fragility or instability must be balanced by a certain amount of stability? For instance, obviously the Elizabethan monopolies didn’t help economic innovation in England. But the Industrial Revolution was produced partly by a combination of stability and instability – instability for many incumbent peasants forced off their land, and stability from better protected property rights for the aristocracy after 1688-9. That particular balance at that particular time is not my point – my point is that policy should be based on some intricate balance between stability and instability, not as holding up one as always necessary in all circumstances.

    Alex

    8 Jul 12 at 5:28 pm

  10. Alex –

    1. On the stagnation of the 50s and 60s, quoting from Alexander Field here on post-WW2 http://books.google.co.uk/books?id=n2tXIWa8PoYC :
    “Through marketing and planned obsolescence, the disruptive force of technological change – what Joseph Schumpeter called creative destruction – had largely been domesticated, at least for a time. Whereas large corporations had funded research leading to a large number of important innovations during the 1930s, many critics now argued that these behemoths had become obstacles to transformative innovation, too concerned about the prospect of devaluing rent-yielding income streams from existing technologies. Disruptions to the rank order of the largest U.S. industrial corporations during this quarter century were remarkably few. And the overall rate of TFP growth within manufacturing fell by more than a percentage point compared with the 1930s and more than 3.5 percentage points compared with the 1920s.”

    2. I’m referring not to scientific progress but to disruptive technological innovation which requires new firm entry to remain vibrant – this is simply a rehash of arguments made by Clayton Christensen, Levinthal-March and James Utterback amongst others.

    3. By stability, I mean stability for corporate entities and the jobs of workers in them. The best reference for the situation of the 50s and 60s is Burton Klein in his book Dynamic Economics and I have explained my position further in the section of this post title the ‘Golden Age’ http://www.macroresilience.com/2011/11/02/innovation-stagnation-and-unemployment/

    4. The invisible foot is a term used by Joseph Berliner and Burton Klein referring to the fear of failure of incumbent businesses. I agree with Mancur Olson that the resilient approach allows businesses to fail and jobs to remain vulnerable with a system of unemployment benefits etc to mitigate the fallout on those affected.

    5. See above – this is not what the invisible foot refers to.

    6. I’m not arguing for permanent instability – I am arguing that currently we have too little instability. As well, I am arguing that macro-resilience comes from micro-flux/instability.

    Ashwin

    9 Jul 12 at 6:58 pm

  11. Ashwin,
    Just an observation of one area where perhaps the left missed a chance to embrace disruption: foreclosures. These represent homeowners exercising the “put” embedded in their mortgage contracts, at a strike that results in a relatively small loss (having to move/rent, foregoing new credit for a time) compared to the ongoing cost of debt service.

    Mortgage defaults are really a disruptive “foot” aimed at lenders that made bad decisions and their regulators. The left could have argued for some kind of rent transition assistance for defaulters, plus, perhaps, favorable credit bureau treatment. Instead they threw their weight behind supporting house prices, a policy that transfers wealth to rent-seeking shadow banks.

    Diego Espinosa

    9 Jul 12 at 9:09 pm

  12. Diego – That’s an excellent point.

    Ashwin

    10 Jul 12 at 5:30 am

  13. I think you might be overemphasizing the importance of policy here. Couldn’t the stability of the “golden age” be seen as the result of the United States’ absolute industrial supremacy following World War II? In such an environment of “monopoly capital” there naturally would be little incentive for innovation. It was only the revival of German and Japanese capital that forced the neo-liberal turn.

    Perhaps in the interests of Shumpeterianism the US government could have engaged in aggressive trust-busting during this period, but that seems extremely unlikely from a historical standpoint.

    It seems to me that your argument also falls under a “stability-seeking impetus” insofar as it seeks to neutralize class tensions through ensuring low barriers to entry and thereby softening the distinction between the capitalist class and the working class. To me at least socialism seems like a more attractive prospect.

    Kyle Thompson

    17 Nov 12 at 2:16 am

  14. You’re eliding the very reason that people want to prevent that fragility on the labor side in the first place; fragility for capital means, perhaps, the potential of moving from one strata of affluence to a lower strata of affluence. For labor, fragility means the potential of poverty, of severe material suffering. Labor and capital alike will never feel the same fragility because capital will never be exposed to the material consequences of that fragility in anything like the way labor is. Micro-fragility is thus just another name for the degradations of capitalism: abundance for those on the top, suffering for those on the bottom.

    Freddie

    17 Nov 12 at 2:14 pm

  15. Kyle – The supremacy of the US post WW-2 was the pre-condition that allowed stabilisation to be maintained for such a long time without the resultant collapse in technological innovation being a problem. Alexander Fields’ work has some excellent analysis on how most of the productivity gains in the 50s-60s were driven by innovations that had already occurred pre-WW2.

    On the last point, you need to define what you mean by socialism a little bit more. If you mean something close to the Soviet model, then the problem is the same one that the Soviets faced – the complete absence of exploratory product innovation because no one had any incentive to take on risky projects that might fail. Joseph Berliner’s empirical work on this subject is again excellent.

    Ashwin

    17 Nov 12 at 5:19 pm

  16. Freddie – when I talk about fragility, I am referring to the fragility of the business units in the economy. I am not advocating a system where individuals are subject to catastrophic risk. The idea is to allows businesses to fail and provide individuals with catastrophic risk insurance to cope with it – unemployment benefits, health insurance etc. Currently, we end up propping up failed firms and the only long-run beneficiary of this regime is “capital”.

    The best real-world example of something similar to such a system is the Scandinavian model where banks, large firms, national “treasures” etc are routinely allowed to fail.

    Ashwin

    17 Nov 12 at 5:33 pm

  17. Ashwin – I am aware of Berliner’s research, and certainly would not advocate becoming the next USSR.

    Instead I had something like what David Kotz has called “Democratic Planned Participatory Socialism” (DPPS) in mind. See his paper “Socialism and Innovation” where he addresses Berliner’s points. It is impossible to say exact what sort of institutional arrangements would result from a revolution (peaceful or otherwise) but those perspectives seem preferable to me compared to any sort of capitalism.

    I am very skeptical of the willingness and capacity of a capitalist state to engage in continuous pro-competitive measures (I think these mostly happen if there is a competitive shock from foreign capital or if there is a popular movement advocating them, but such effects fade and there is a return to monopoly) and even if they were put in place I still would not like to live in such a tumultuous and competition-minded society.

    Kyle Thompson

    18 Nov 12 at 3:09 am

  18. Kyle – the key point in Berliner’s research is the absence of what he called the “invisible foot” of failure from the incentives facing Soviet firms. Kotz suggests that we provide this negative incentive via penalties enforced by industry/enterprise boards. I am not convinced that the fear of failure from competitive innovation can be replaced by a board’s decision.

    I agree that capitalism tends to favour a similar stability. As I try to explain in the long rambling post linked below, the only difference between modern capitalism and the Soviet project was that the “control project” of capitalism failed a lot more often than the Soviet control project. http://www.macroresilience.com/2012/02/21/the-control-revolution-and-its-discontents-the-uncanny-valley/

    Ashwin

    19 Nov 12 at 10:48 am

  19. Ashwin – I see where you are coming from, although I am not quite as skeptical as you are of Kotz’s proposals, I actually am more inclined to favour Cockshott and Cottrell’s version of DPPS which combines a democratic planning system with a consumer market.

    Kotz’s proposal has the benefit of maximizing the representation of all concerned parties in the planning process, but it is heavily dependent on the organizational culture of the planning body. If the planners are not willing to engage in hard-nosed bargaining the system would stagnate, whereas if they were too hostile to one another the system would breakdown into chaos. A “middle path” of negotiation practices would be required for the system to work, which is certainly concerning.

    On the other hand Cockshott and Cottrell’s proposal presents a number of what we might call “psychological” advantages. If consumers interact with producers through a market, their relations become much more abstracted and therefore it seems likely that consumers would be more willing to honestly impose their judgement on the merit of products than they would if they were in direct negotiation with producers. In a properly Marxist sense this would not be seen as a good thing, because it maintains the “fetish character” of the market by presenting relations between people as relations between things. Nevertheless it would likely allow for more disruption than Kotz’s model, and would mitigated through the use of referenda on disruptive technologies and planning commissions.

    I share your concerns about the limitations of planning boards, but I don’t think we can afford to discard the possibilites of socialism in the name of a speculative concern. The best we can do is to balance that concern against other considerations (stability, solidarity, democracy, public goods, etc.) in conceiving of alternative social organizational forms.

    Kyle Thompson

    19 Nov 12 at 1:21 pm

  20. Is there a problem with bringing together representatives from business, government and labor every five years to negotiate arrangements
    that strengthen a nation’s economy?

    gc_wall

    25 Nov 12 at 12:51 am

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