John Rapley is a political economist at the University of Cambridge and managing director of Seaford Macro.
I recently met a man who described himself as a perfectionist and boasted that he never failed at anything he did. That may be true, but I thought it was an odd way to define perfection that is concerned with avoiding failure rather than reaching new heights.
Never failing is actually not that hard. Stick to the usual methods and avoid risks. But in doing so, you also avoid new things. It doesn’t break new ground or generate new ideas.
For Austrian economist Joseph Schumpeter in the early 20th century, failure, especially business failure, was integral to economic dynamism. He is the person who created the phenomenon of “creative destruction”. The market crash killed inefficient firms and freed up resources (customers, capital, workers) for more promising firms.
Such an Austrian economic view is today in the minority, supported mainly by right-wing libertarians. More dominant schools of thought, such as neoclassical theory and the New Keynesianism of economists such as Paul Krugman, eschew the dog-eat-dog undertones that Schumpeter admired. We now seem to live in a society far too compassionate to celebrate market crashes, business failures, and unemployment as evolutionary processes through which the most adaptable companies can thrive.
And the current definition of perfection embodied in today’s economics comes at a price. Our determination to avert pain has led to repeated market interventions across major economies to stem the impact of the crash. It clearly stifles dynamism, making the economy worse, more vulnerable, and more in need of such interventions in the future.
If the predicted recession is coming this year, perhaps politicians and central banks should step aside and let the market take over.
Look at Crash in 2008. Over the past decade, economists have blamed themselves for devising the economic model that prevented that crisis from turning into the next Great Depression. The house did not help devise the model that caused the collapse in the first place). Instead, the repeated use of loose-money policies prevented asset values from plummeting, undermining the economy, resulting in a relatively short and shallow recession.
But that also meant he had very little rebound afterward. Since 2008, the developed economies have hit bottom and never really got back on track. Instead of revitalizing the economy, the cheap currency has pushed asset prices higher, pushing stocks, bonds and property markets to record highs. This keeps the economy from going into recession. But it also prevented “zombie companies” from going bankrupt and made it harder for new ones to come into being. Just as buying your first home is becoming harder and harder, so is creating your first business.
Growth is slowing as labor productivity is nearly stagnant across the G7. Economists have struggled to explain why things have suddenly turned sour since 2008, but a recent study by the UK’s Center for Cities may have solved the mystery.
Focusing on London, the study found that rising costs for office space, which surged in response to the easy money policy, are “eaten up business budgets and crowd out investment related to innovation”. . Similarly, rising house prices “made London less competitive for global talent”. Sound familiar? Over the past decade, Canada’s labor productivity has largely stagnated, while property prices have skyrocketed.
I recently encountered the other side of this effect in a conversation in South Africa (where I currently live). A colleague here said he was thinking of moving to London because it would double his income. I pointed out to him that most of his income would go to the landlord (or the bank if he bought a car), so it would be a step down in his lifestyle.
Equities and bonds got off to a good start to the year. But investors have recently come back under pressure as they find that the fight against inflation is far from being won. The real estate market looks fragile. Politicians and central bank officials will undoubtedly be under pressure to monitor the situation closely and do something if prices start to plummet.
But if they just sit back and get ready for the ride, the final destination might be better for the economy—and for most people looking to make headway there.