Creative destruction.

When I think of the subprime debacle I think of "creative destruction". That sort of puts a positive spin on it.

The economist Joseph Schumpeter popularized the phrase. He attributed it to capitalism, about its capacity to cause economic ruin but then invent something new from the aftermath and rubble. In other words, capitalism is a rejuvenator and a restorer. So from the destruction left in the wake of the subprime debacle and the housing bubble it spawned we can expect an economic revival, like grew out of other past economic quakes.

The subprime debacle has certainly wrought economic upheaval and destruction. Subprime loans helped enable the housing bubble that subsequently burst, forcing many people to give up their homes, builders to go bankrupt, financial institutions to quake and communities to suffer financially. The ripple effect has staggered many sectors of the economy in America and abroad. Prior to the housing bubble there was the dot-com/technology bubble of the 90’s, which collapsed in 2000, ushering in the longest bear stock market in 60 year. It is hard to imagine how those collapses could be viewed as creative destruction. Nevertheless, past economic disasters heralded new technologies, management skills and resources to sustain economic activity in the future.

Capitalism's creative destruction is rooted in nature where nothing remains static and is constantly changing. Capitalism is a social construct designed to manage it better, the effects of the natural, cyclical deterioration and renewal of material on society. Capitalism's creative destructive style is also seen in the creative but some times destructive manner it replenishes and restores the resources we consume.

Let's examine another example of creative destruction in the mode of nature and capitalism. Some may consider it a sick example of creative destruction. Nevertheless it is. The event was 9/11. After 9/11 there was a rebirth and renewal. Some economists and intellectuals saw 9/11 as the harbinger of things to come, as the end of how things once were, the end of capitalism and globalization. However, what transpired after that horrendous event was the opposite. The world proceeded to continue on the same trajectory as before, of globalization and interdependence, only to a greater extent, as though validating what transpired before 9/11. Moreover, New York City, where 9/11 occurred, continues to grow and prosper, as did the rest of the world, and not go down hill as many had predicted. And 9/11 did not bring about the ‘clash of civilizations’ as some had anticipated but instead reinforced the globalization that was already happening throughout the world.

Creative destruction is a paradoxical phenomenon. In a brutal way it reinforces that which is essential and legitimate. I have a theory as to why it occurs, because societies and governing systems sometimes grow inadequate, become complacent and stale, and need disrupting. Societies periodically have to be awakened from their complacency and staleness, hence the need for the imposition and agitation of creative destruction. In the past nations used war as a form of creative destruction, to overcome the slumber and decay they fell into. Today, though, for obvious reasons, wars have become less of an acceptable way to achieve the creative destruction needed to keep a society from atrophying. Wars tended to throw the baby out with the bath water, so it was essential the civilization find an alternative form of creative destruction. Today that mantle has passed on to the discipline of economics because wars have become far too destructive and now not very creative. The world can no longer endure or afford the 'creativeness' of wars, hence the creative destruction of economics and capitalism. The creative destruction that wars once brought about, and now economics does, was also an historic meant to transcend many of the obstacles that humankind had erected, like those of isolation, racism, inequality and complacency.

Systems of governance have collapsed because they ignored or thwarted the cycle of economic creative destruction. Communism is the last such system to collapse because it did. Inherently, creative destruction is incompatible with communism, because it is a closed system that doesn't allow for such flexibility. It forbad any creative destruction through stringent controls and the manipulation of markets. In capitalism creative destruction emanates from individuals, individuals who ‘rock the boat’. Communism, to its determent, didn’t recognize the individual, just the collective. Creative destruction also occurs naturally. Capitalism has acknowledged and incorporated this fact when it harnesses and cultivates its forces, allowing individuals to take the lead. Communism thwarted and denying this organic order of things. Because communism didn’t acknowledge its existence it was domed and unable to renew itself, collapsing in favor of capitalism. Without creative destruction and its agitating forces communism didn’t develop the necessary technologies, resources and management skills to keep going.

To many it doesn’t seem right that we should have to endure these cycles of capitalism’s creative destruction. Why do we need so much creative destruction? The creative destruction capitalism foments does seem exaggerated at time, what with its disruptive ways of out-sourcing jobs, plant closures, market sector collapses and constant socioeconomic upheavals. One reason economic creative destruction seems so have intensified lately is because, as mentioned above, there aren’t the wars like before to change things. Also, the pace of the world has intensified, therefore increasing the need for renewal and the need for other alternatives and additional ways of doing things. The pressure has intensified to keep civilization humming, so it can and will combat its natural tendency to grow complacent and static.

The subprime debacle is not the best example of creative destruction. Perhaps it’s been too destructive and its creative abilities are still questionable. The subprime debacle really shouldn’t have happened in this age of economic savvy and sophistication. People knew better. However, one reason it happened is because the economic lessons learned in the past were taken for granted or ignored. Some people thought they had discovered a new economic nirvana, a new paradigm, or that the laws of economics had been repealed. People weren’t using common sense and forgot that what goes up must come down and that there are limits to borrowing and spending and borrowing and spending. So if there is a creative aspect to this latest economic crisis it is its bringing attention to the fact that the economic principles learned in past still stand and should be relearned. What also must be relearned is the fact that the free market is not the be-all and end-all as some believe it is. For another, the free market shouldn’t be completely left unfettered, but at times needs selective regulation so that it acts less destructive and more mutually beneficial.