My friends, the 236-year embrace of free-market, democratic capitalism is why America has a $15 trillion economy and why our per capita GDP is $47,000 vs. $36,000 for Germany, $35,000 for Great Britain, $34,00 for France and Japan, $16,000 for Russia, and $8,000 for China. And this is what’s at the heart of the American Economic Experiment:
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. – Joseph Schumpeter, “Capitalism, Socialism, and Democracy.”
Competition drives innovation, which drives growth, which creates new jobs. I once asked Diana Farrell, then at the McKinsey Global Institute, about the best way to boost innovation. Her answer: “Maximum competitive intensity.”
There is a huge net benefit for society from Schumpeterian capitalism, but there are losers, as economist Michael Cox of the Dallas Fed points out in this great article (and table) on creative destruction at the Library of Economics and Liberty:
A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order. … The disruption of lost jobs and shuttered businesses is immediate, while the payoff from creative destruction comes mainly in the long term. As a result, societies will always be tempted to block the process of creative destruction, implementing policies to resist economic change.
Attempts to save jobs almost always backfire. Instead of going out of business, inefficient producers hang on, at a high cost to consumers or taxpayers. The tinkering short circuits market signals that shift resources to emerging industries. It saps the incentives to introduce new products and production methods, leading to stagnation, layoffs, and bankruptcies.
Unintended consequences, in other words. I think this is something to keep in mind when evaluating Mitt Romney’s record at Bain Capital. “Capitalism’s pain and gain are inextricably linked”—but ultimately for the betterment of society.
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This presentation was fine up to the final point. The Bain model of LBO was not creative destruction. The resources of the takeover targets were drained into the pockets of Bain, not made available to efficient competitors. Simply not an example of creative destruction. Allowing creative destruction is essential for long-term economic growth. Ron Paul 2012
The issue is not which companies fail or succeed in a private equity environment; such is the creative disruption of capitalism, IF driven solely by market forces in a perfectly free market.
The issue is rather to what extent Bain and other PE, VC, & hedge funds benefit from “carried interest” in their portfolios that is taxed at a 15% rate, while returns on labor and investment capital in other industries are taxed as high as 39% (individual or corporate tax rates). This favored treatment of carried interest encourages destructive, predatory behavior and misallocates capital.
Politically, it is hypocritical of Romney to suggest that he would reduce the capital gains tax only on the “middle class”, while keeping all other tax rates the same (see points 1 & 2 of his 59 point plan), all the while benefiting and having benefitted from a government subsidized tax rate.
The way to restore free market capitalism to allow creative disruption to occur salubriously and distortion-free is to abolish the corporate tax and, with it, all government-favored treatment of business costs (such as corporate subsidies, direct and indirect) and of returns on capital (such as carried interest).
Let the market decide how to allocate capital without government intervention or incentive.
Capitalism doesn’t exist in the US…there is no such thing as TBTF or bailouts in capitalism…much less free markets. The US has a $15 Tril economy because the govt is going into debt to keep it going. Q3 GDP grew by ~$165Bil, Q3 debt grew by $447 Bil..
I agree save the blacksmiths.