Is creative destruction on the decline?

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The migration of the old to the new, capitalist form known as “creative destruction” by the Austrian economist Joseph Schumpeter in the 1940s, has indeed happened. oriental roots. In Hinduism, creation and destruction are considered two parts of the trifecta of cosmic forces that balance. The etymology teaches because the imbalance of the third power – to save – may be the reason that the destruction of creation is really delayed throughout the developed world.

According to Schumpeter, innovation is essential to long-term economic growth, as it enables people, capital and other resources to be put to better use each time. A look at the US – the archetypal free market economy – would suggest that energy is alive and well. California’s Silicon Valley is the birthplace of global innovation, and America’s Magnificent Seven tech stocks are at the forefront of the AI ​​revolution.

But get out, and it doesn’t seem that way. “It’s hard to measure directly,” says Michael Peters, an associate professor of economics at Yale University. “But, in America, if you look at entry rates, exit rates or the frequency of job-to-job transitions — which are proxies for business strength — they’ve been going down over the last decade.”

Outside of America, the power of contagion is invisible. Former Italian Prime Minister Mario Draghi’s latest report on European competition exposes its problems with innovation. German industry is becoming a byword for inertia. Yes in Britainthe rate at which jobs are created and destroyed has fallen by a third over the past two decades.

Philippe Aghion, a professor at the College de France, INSEAD and LSE, thinks that the reduction of innovation losses can explain some of the sharp declines in productivity across the developed world. If so, what does it describe?

That’s where conservation comes in. These are forces that want to maintain the status quo. Sometimes they are necessary: ​​high profits – which take time to accumulate – attract competition, financial payments help avoid financial contagion in crisis and regulations provide environmental and social protection. But they can also reduce distraction.

Try to raise the stress level. The share of the US economy controlled by the top 1% of companies by assets has risen to over 90 percent, compared to 70 percent in the 1930s. Scale helps innovation, but employers can also use it to raise barriers to entry. For example, the network effects of data are already helping firms to create competitive atmospheres in the AI ​​sector.

Security is another growing security force. Tariffs and non-tariff barriers support domestic producers, preventing new competitive pressures. Restrictions on foreign investment and talent can also limit the penetration of new ideas.

Finances also play a role. The era of low interest rates and downsizing that followed the financial crisis kept fewer firms afloat. Inefficient companies have also been able to combat recent price increases by receiving government epidemic support, locking in long-term repairs, or private loans. The percentage of unprofitable companies in the Russell 2000 — the US small-cap index — has risen from 15 percent to 40 percent over the past 30 years.

Then there are social reasons. Generational crises — including the credit crunch, the pandemic, and energy price scares — may have raised expectations for the government to act as a buffer. Yeseconomic prosperity it also brings the goal of protecting it. Economist Mancur Olson said representative groups “slow down society’s ability to adopt new technologies and reallocate resources to changing circumstances”. Nimbyism, industry lobbies and rising regulatory burdens are all examples. (The red tape is the reason California has companies from any US state.)

Greater focus on economic conditions would help. Business and competition regimes should lower barriers to market entry. National retraining programs need to support industrial change, bankruptcy regimes need to ensure businesses fail properly, quickly, and advocacy needs to be reviewed. Any future bailouts and stimulus packages also need to be carefully considered.

The AI ​​boom may yet produce a wave of new technologies. Trade wars could separate the commercial wheat from the chaff. High interest rates can wipe out zombie firms. The effects of nature and destruction are readily apparent, but that should not lull us into a false sense of security about how strong our economy is.

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