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MMT and creative destruction

Stephanie Kelton’s explanation of modern monetary theory on Russia Today offered a neat introduction to the school. But I wish time would have allowed a bit more discussion of creative destruction, which Lauren Lyster feared would be stifled by an interventionist MMT government.

 

I’m not an economist, but it seems to me that there’s a simpler way to think of it (which suits my simple mind): not all destruction is “creative” — and not all forms of government intervention impede creative destruction.

For example, the huge spike in unemployment during the financial crisis was not creative. The credit crunch meant that even good companies couldn’t raise funding because markets had become extremely dysfunctional.

Schumpeter argued that recessions are healthy for the economy because it clears out a lot of inefficient business models and opens the door for new technologies to carve a niche. But why do you need a recession for bad businesses to go broke? Even in a stable economy, bad businesses are still bad businesses.

I suspect that Schumpeter was describing what happens, rather than what has to happen. Yes, recessions are followed by recoveries. This is inevitable. And, yes, good things happen during a recovery — new businesses are created and new technologies are adopted to fill the space left by the losers who went bankrupt. But it’s not sufficient, in my opinion, to say that recessions are healthy because they’re followed by recoveries (I’m sure Schumpeter never actually said anything as simplistic as this).

Would we really complain about a lack of innovation if growth was stable and sustainable? I don’t know, but I doubt it. I suspect that what we’d see is in fact a much more orderly winding down of unprofitable companies, instead of all of it happening at once.

What if all the good that is supposedly created by a recession is actually offset by all the bad that happens during the boom? We can surmise that unprofitable companies forced into bankruptcy during a bust were also being kept alive by the preceding boom, which surely made it harder for new entrants to kick their asses out of business.

And nobody would claim that a recession is the only way to wind companies up. It’s just the only way to wind companies up in a mass and indiscriminate way, which seems of limited usefulness.

If Skelton is right and monetary policy could be used to smooth economic growth to a much greater degree than is currently believed by the mainstream, then the fear of suppressing “creative destruction” seems to me to be totally irrelevant anyway.

I might even argue that boom-bust is what really impedes creative destruction, not least because booms tend to last longer than busts.

I see today that Lyster and her team on the Capital Account show got a bit of stick for airing such radical views as Skelton’s:

 

Her guest the next day? Conspiracy nutjob and paranoid currency warrior Jim Rickards! Wonder how many complaints they got about him…

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