Whatever happened to hell?
“It can’t carry on like this … but how many weeks have we said that for?”
— Justin Urquhart Stewart, director at Seven Investment Management (via James Pethokoukis here)
To make a protracted topic out of this phenomenon is to offer a hostage to fortune. Everything could go over the cliff tomorrow. Perhaps it already has (and we’re just waiting, like Wile E. Coyote, for the consummating splatter).
Greens have been dealing with exactly this question, for a while. After Paul Ehrlich had his credibility torched by Julian Simon, in the most intellectually consequential wager in history, he responded in frustration: “The bet doesn’t mean anything. Julian Simon is like the guy who jumps off the Empire State Building and says how great things are going so far as he passes the 10th floor.”
If environmental catastrophe is structured like this, according to a pattern of durable unsustainability, or disconcerting postponement, there is no obvious theory to account for the fact. With economics, things are different, to such an extent that the entire political economy of the world, along with the overwhelming preponderance of professionalized economic ‘science’, has been geared over the course of a little under a century to crisis postponement as a dominant objective. If the New World Order follows a master plan, this is it.
For ideological purists on the free-market right, laissez-faire capitalism is the ‘unknown ideal’ (although early 20th century Shanghai approached it, as did its student, Hong Kong, in later decades), but it requires no purism whatsoever to acknowledge that the Great Depression effectively buried it as an organizing principle of the world, and that the system which replaced it found political and intellectual expression in the ideas of John Maynard Keynes. Commercial self-organization, which built industrial capitalism before anyone had even the sketchiest understanding of what was happening, gave way to the technocracy of macroeconomics, guided by the radically original belief that governments had a responsibility to manage the oscillations of economic fortune.
In the words of Peter Thiel (drawn straight from the free-market id):
… the trend has been going the wrong way for a long time. To return to finance, the last economic depression in the United States that did not result in massive government intervention was the collapse of 1920–21. It was sharp but short, and entailed the sort of Schumpeterian “creative destruction” that could lead to a real boom. The decade that followed — the roaring 1920s — was so strong that historians have forgotten the depression that started it. The 1920s were the last decade in American history during which one could be genuinely optimistic about politics. Since 1920, the vast increase in welfare beneficiaries and the extension of the franchise to women — two constituencies that are notoriously tough for libertarians — have rendered the notion of “capitalist democracy” into an oxymoron.
As Cato’s Daniel J. Mitchell puts it, more narrowly:
A vibrant and dynamic economy requires the possibility of big profits, but also the discipline of failure. Indeed, capitalism without bankruptcy is like religion without hell.
Because hell’s a hard sell, political and economic rationality have been heading in different directions for 80 years. Even the tropical latitudes of purgatory have proven to be socially combustible, and popularly sensitized politics – which need not be formally ‘democratic’ – tend (strongly) to flee Molotov cocktails in the direction of macroeconomic management. The crucial Keynesian maxim, “In the long run we are all dead,” is especially pertinent to regimes. Who’s going to regenerate deep economic recovery, if the route to it lies through gulfs of fire and brimstone that are fundamentally incompatible with political survival? History, redundantly, provides the obvious answer: nobody is.
The accursed path not taken, across the infernal abyss, has become so neglected and overgrown with weeds that it is rarely noticed, but it is still graphically marked by the advice that Treasury Secretary Andrew Mellon gave to Herbert Hoover as the way to navigate the Great Depression (advice that was, of course, dismissed):
… liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.
In recalling this recommendation, as an unacceptable option, Hoover commemorates the precise moment that capitalism ceased to exist as a politically credible social possibility. The alternative – which has many names, although ‘corporatism’ will do – was defined by its systematic refusal of the ‘liquidationist’ path. Coming out stronger on the other side meant nothing, because the passage would probably kill us – it would certainly destroy our political careers. In any case, it was a long run solution to a short term problem, scheduled by volatile popular irritability and election cycles, and in the long run we are all dead. Better, by far, to use ‘macroeconomic policy’ (monetary mind-control) to artificially prolong unsustainable economic euphoria – or even its jaded, hung-over simulation – than to plunge into a catastrophe that might imaginably have been delayed.
It doesn’t take a Schumpeterian fanatic to suspect that such ‘creative destruction (but without the destruction)’ is unlikely to provide a sustainable recipe for economic vitality. When evaluated realistically, it is a formula that programs a trend to perpetual stagnation. Stagnation as a choice.
Because money serves as a general equivalent, and thus as a neutral, non-specific, purely quantitative medium of exchange, it is very supportive of certain highly-consequential economic illusions, of a kind that macroeconomics has been especially prone to. It can easily seem as if ‘the economy’ consists essentially of undifferentiated, quantitative aggregates, such as ‘demand’, ‘gross domestic product’, ‘money supply’, ‘land’, ‘labor’, and ‘capital’. In fact, none of these things exist, except as high-level abstractions, precipitated by the monetary function of general exchangeability.
An understanding of Schumpeterian creative destruction requires, as a preliminary, the recognition that capital is heterogeneous. When expressed in a monetary form, it can appear as a homogeneous quantity, susceptible to simple accumulation, but in its productive social reality it consists of technological apparatus – tools, machines, infrastructures, and installations – representing irretrievable investments, of qualitatively distinctive kinds. The monetary equivalent of such industrial capital is derived from the market values attributed its various components, and these are extremely dynamic, virtual, and speculative. Since the value retrievable from liquidation (and ultimately from scrap) is generally a small fraction, or lower bound, of capital asset value, the ‘capital stock’ is estimated with reference to its productive usage, rather than its intrinsic worth. Schumpeter was careful to break this down into two very different aspects.
Firstly, and most straightforwardly, industrial capital is a resource that depreciates at a regular and broadly predictable rate as a function of output. It is consumed in the process of production, like any other material input, but at a slower rate. Creative destruction, however, refers to a second, far more drastic type of capital depreciation, resulting from technological obsolescence. In this case, capital stock is ‘destroyed’ – suddenly and unpredictably – by an innovation, taking place elsewhere in the economy, which renders its anticipated use unprofitable. In this way, large ‘quantities’ of ‘accumulated’ capital can be depreciated overnight to scrap values, and the investments they represent are annihilated. The hallucination of homogeneous capital is instantaneously vaporized, as painstakingly built fortunes are written down to nothing.
Several points suggest themselves:
1. The violence of creative destruction is directly proportional to its fecundity. The greater, deeper, and more far-reaching the innovation, the more colossal is the resulting capital destruction. At the extreme, profound technological revolutions lay waste not only to specific machines and skills, but to entire infrastructures, industries, occupational categories, and financial systems.
2. The cultural implication of creative destruction far exceeds issues of ‘moral hazard’ and ‘time preference’. The victims of industrial change waves – whether businesses, workers, or financiers – are not being punished by the market for imprudence, slackness, or short-sightedness. They are ruined by pure hazard, as the reciprocal of the absolutely unanticipated nature of technological invention (occurring elsewhere). Neither the creation, nor the destruction, is remotely ‘fair’ – or ever could be. (Although Dawinian ‘virtue’ lies in flexible adaptability — Hong Kong always does OK.)
3. Massive capital destruction expresses technological revolution. Macroeconomic analysis (measuring homogeneous aggregates) will always miss the most significant episodes in industrial evolution, since these do not register primarily as growth, but rather the opposite. Hell is a hothouse.
4. A policy environment designed to preserve macroeconomic aggregates (e.g. ‘wealth’ or ’employment’) necessarily opposes itself to the basic historical process of industrial revolution, because destruction of the existing economy is strictly indistinguishable from industrial renewal. For that old stuff to be worth anything (beyond scrap) we have to keep using it, which means that we’re not switching over. To cross the gulf, we have to enter the gulf. (Like most things in this universe: harsh but true.)
5. Real historical advance is now politically unacceptable. Either politics wins (eternal stagnation) or history does (political collapse). Interesting times (or not).
The world couldn’t take the heat, so it got out of the kitchen. There’s cold porridge for dinner, and it’s going to be cold porridge for breakfast. Eventually the porridge will run out, but that could take a while …
… and here’s Ben Bernanke on topic: “I’m not a believer in the Old Testament theory of business cycles. I think that if we can help people, we need to help people.” (via Mike Krieger at ZH)
Cold porridge politics forever. Yum!