Acyclical Creative Destruction
By Bryan Caplan
Schumpeter famously praised the “creative destruction” of the market:
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory 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.
This sort of reasoning prompts an interesting question to Mike Moffatt of About.com:
I have come to believe that a recession is good for an economy because it culls away weak businesses and teaches the strong to survive by cutting the fat that is not needed. I was wondering, though, do you think a depression is good for an economy and why?
Moffatt has a creative reply:
While the logic seems sound, it doesn’t seem to match the data. If recessions were necessary to “clean the fat out of the system”, we’d expect there to be a lot of bankruptcies and firm closures during recessions and little during booms. The data, however, does not support this as you can see in the table on the bottom of the page.
[F]irm closures are a necessary part of capitalism since it allows “resources (skilled workers, capital) [to be] freed up to be deployed more efficiently elsewhere.” When we look at the data, though, we see that we do not need recessions for this to occur; firms do not close that much more frequently in busts than in booms. So at least in this regard, recessions are not necessary at all.
In short, if Moffatt’s admittedly preliminary inspection of the data is correct, creative destruction is roughly constant – or “acyclical” – over the business cycle.