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The displacement of the old with the new, the capitalist model popularized as “creative destruction” by the Austrian economist Joseph Schumpeter in the 1940s, has in fact led to… Eastern roots. In Hinduism, creation and destruction are two parts of the triad of balancing cosmic forces. The etymology is useful because an imbalance in the third force – conservation – may be the reason why creative destruction has actually slowed throughout the developed world.
According to Schumpeter, creative destruction is essential for long-term economic growth, because it allows people, capital and other resources to be continuously better deployed. A quick look at the United States—the quintessential free market economy—would suggest that the dynamic is alive and well. Silicon Valley in California is the cradle of global innovation, and the stocks of the seven largest technology companies in America are leading the artificial intelligence revolution.
But overall, it's not very clear. “It's hard to measure directly,” says Michael Peters, an assistant professor of economics at Yale University. “But in America, if you look at entry rates, exit rates, or the frequency of switching from one job to another — which are indicators of business dynamism — they have been declining in the last decade.”
Outside America, the weakness of business dynamism is less evident. Former Italian Prime Minister Mario Draghi's recent report on Europe's competitiveness reveals its struggles with innovation. German industry has become synonymous with inertia. and In BritainThe rate of job creation and destruction has slowed by a third in the past two decades.
Philippe Aghion, a professor at the College of France, INSEAD and the London School of Economics, believes the decline in creative destruction could explain some of the recent slowdown in productivity growth across the developed world. If so, what explains this?
Here comes the role of conservation. These are the forces that seek to maintain the status quo. Sometimes they are necessary: large profits – which take time to collect – attract competition, bailouts help avoid financial contagion in crises, and regulation provides environmental and social protection. But it can also undermine disruption.
Take, for example, the increasing focus on companies. The share of the US economy dominated by the top 1 percent of companies by assets has risen to more than 90 percent, from 70 percent in the 1930s. Scaling enables innovation, but existing companies can also leverage it to raise barriers to entry. For example, data network effects are already helping companies build competitive moats in the AI sector.
Protectionism is another growing conservative force. Tariffs and non-tariff barriers support domestic producers, discouraging innovation pressures imposed by competitive forces. Restrictions on foreign investment and foreign talent can also limit the penetration of new ideas.
Financing also plays a role. The era of low interest rates and quantitative easing that followed the financial crisis kept weak companies afloat. Less efficient companies have also been able to ride out the recent rise in interest rates by accessing government pandemic support, committing to longer-term reforms, or through private credit. The proportion of unprofitable companies in the Russell 2000 – the index of small companies in the United States – has risen from 15 percent to about 40 percent in the past 30 years.
Then there are societal factors. Generational crises – including the credit crunch, the pandemic, and the energy price shock – may have raised expectations for the state to play a supportive role. eEconomic success It also brings a drive to protect him. Economist Mancur Olson said lobbyists “slow down society's ability to adopt new technologies and reallocate resources in response to changing circumstances.” Examples include negativism, industry lobbying, and increasing regulatory burdens. (Routine is the reason ca It has the highest flow of businesses of any US state.)
It would be helpful for policies to focus more on economic flexibility. Trade and competition systems should lower barriers to market entry. National retraining schemes should support industrial transformation, bankruptcy systems should ensure that companies fail well and quickly, and pressure forces must be checked. Any future bailouts and stimulus packages also need to be better targeted.
The AI boom may unleash a wave of innovation. Trade wars can separate the wheat from the chaff for companies. It is possible that higher average interest rates will drive out zombie companies. It is easy to see the effects of creation and destruction, but this should not lull us into a false sense of security about how dynamic our economies really are.
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