Dear Friends,
It seems to me, Obama is channeling Marx in his latest diatribe against technological growth. Along with the US President, the elite in the media chant the absurdity… that productivity innovations are bad. On Bloomberg radio yesterday, they were interviewing some CEO and the questions constantly turned to how the advance in technology is damaging the middle class, and that the reason wages are stagnant and dropping is because of the advances in productivity. The theme is that labor saving wipes out labor. To someone who is ignorant about economics that might sound logical, but it is in fact spurious logic… an argument made to sound logical but is in fact illogical and used to fool the listener. It is critically important to understand the truth behind this lie. Technological driven productivity gains are critical to an increasing standard of living. Moreover, the reason wages are stagnant and jobs are scarce in the US and around the world is that regulatory constraints on our economies have reached critical mass, and are melting down our economies.
Marx basic theme in his Manifesto was that the mechanical loom was going to drive everyone out of work. He said, “As the forest of arms looking for work grows ever thicker, while the arms themselves grow ever thinner…” Meaning the mechanical loom made the production of cloth so much less labor intensive, and most people worked in the textile industry at the time, mass starvation was just around the corner. That is essentially the exact argument Obama made about ATMs. Of course Marx was proven wrong in his assessment just as Obama is in his. The mechanical loom allowed the price of a wool coat to drop, (the evil deflation), so that the average worker could afford one! Imagine, the mechanical loom allowed a mere plebeian to wear a warm coat! Horrors! He didn’t have to stuff his shirt with straw to keep warm he could wear a warm coat!
The Bloomberg interviewer argued against the Schumpeter model, by saying that those workers in the buggy whip industry got jobs in Ford’s factories making much better wages with less taxing labor, but today, there are no new jobs for the laid off workers to go to. An ignorant argument at best and spurious at worst. The reason that wages are stagnant is that government policies, policies designed to protect the politically favored, are destroying the creation of small businesses. For the first time in US history the creation of small businesses is NEGATIVE!!! Let that sink in a moment, there are more small businesses going bankrupt… than are being created! Creative destruction needs, as a fundamental input, new businesses and new business models. Regulation, taxation and the lack of standards, have so undermined that fundamental aspect of a growing economy that small business creation is now negative.
There was a story in the media the other day about some kids walking from house to house in New Jersey shoveling driveways for spending money. I did that when I was a kid. It is a great way for children and young people to learn that labor creates wealth. In a market system that is an important lesson. In America today however, the police were called, and the kids counter revolutionary snow shoveling business was shut down by the state. There was another story recently about some kids setting up a lemonade stand, they were also shut down by the government, running afoul of some regulation. In a society where even children cannot shovel a driveway or set up a lemonade stand, without facing daunting regulation and a police investigation, how can any business get started?
Without new businesses, creative destruction is destroyed. Giant firms are not entrepreneurial, that is a basic law of economics. Large corporations are run by the new class, for the new class, and against the interests of employees, customers and shareholders. The very definition of the principle agent dilemma. Anything that threatens the status quo is to be feared. Those at the top of large corporations always pay lip service to entrepreneurial ideas, but when faced with the choice of striking out on a new path or staying on the old one, unless there is a large bonus in it for them, the old one is always preferred. That is why new ideas are implemented by entrepreneurial small businesses. If those new ideas are profitable those new small businesses grow to large ones and wealth is created, if not, the risk taker gets a haircut. That is why Capital expenditure is so low while mergers and acquisitions are so high.
The new class progressives have effectively wrested the economy from the Bourgeois, (shareholders and entrepreneurs). Large corporations are able to line the pockets of politicians to protect their businesses from competition. When they do face competition their response is telling of their utter incompetence. Blockbuster is a perfect example of this in action. When faced with competitors who provided a better product at a lower price point, Blockbuster would have preferred to regulate their competition out of business, but couldn’t because of public scrutiny, so they did the next best thing, they raised their prices and lowered the quality of their product… to maintain their profit margin. The new class executives got their bonuses. Of course in doing so, they ignored the basic mantra of any and all businesses, provide value to the customers else they will shop elsewhere. So, Blockbuster went bankrupt, wiping out the investments of the shareholders, screwing their employees and abandoning their customers. The only ones who made out were the new class executives who got their bonuses and new executive jobs.
It isn’t creative destruction that is broken, nor is it the market system, it is the nonsense of the new class, in academia, politics and business, that has broken our economy. Regulation, taxation and cronyism have combined to eliminate small business start ups. So much so that the creation of small businesses has turned negative. Creative destruction requires small businesses to implement the new ideas that every economy, everywhere need, to grow the standard of living of the people. The new class run the businesses they have wrested from the owners, for themselves, at cost to every other element of our population. When faced with competition, lowering price and raising quality are not even a consideration, raising prices and lowering quality are the norm now, to maintain the bonuses of the new class. Deflation, the normal course of price evolution in a market economy is attacked as evil, so government can continue it’s profligate spending, to hide the outcomes of their policies and their cronyism. The “journalists” at Bloomberg are inculcated in the new class way of thinking, as are the “journalists” of every other major news outlet, and so we get one unanimous voice, all agreeing creative destruction is dead and socialism is the way forward… forward into slavery. Just as Joesph Schumpeter predicted.
Sincerely,
John Pepin
