Destructive creation or creative destruction?

It's amazing how quickly a billion dollars has become insignificant. Apparently, if you stacked $100 bills on top of eachother $1 million would be a measly 6 inches high, $1 billion would be slightly more consequential at 555 ft high, which would scale roughly 2/3rds of London's highest building (One Canada Square in Canary Wharf at 771ft). If you want to be taken seriously, though, these days you really need to work in trillions. With $1 trillion, stacked in $100 bills, you literally could build a bridge directly from One Canada Square across the Channel to Calais to make up the required 92 mile distance. That's a lot of dough.

Represented in that physical form, the easy transition the world has made from dealing in millions and billions to trillions is truly staggering. But that seems to be a transition that we have firmly made. The decision by the G20 leaders this week to build the proverbial "money bridge", and agree to spend another $1.1 trillion in the effort to exorcise the current economic demons, was hailed as by Barack Obama as a "historic moment", and was lauded widely as the worlds leaders claimed their piece of political capital. It could well be historic alright, but not in the way that he means. The equivalent tale here might be that after a particularly large monthly credit card bill calling it an achievement that you managed to convince your wife that next months bill should be at least twice as large.

That is essentially what the G20 leaders have agreed; spending on the credit card is the only way out of this mess. The world is interconnected, and we all rely on each other, they concurred. In order to protect jobs and to secure future growth we need to facilitate a return to the trade flows, and export led growth, that heralded 'the good times'. We need to stimulate or protect, via the IMF, the emerging market countries whose economies have embraced free trade, and opened up export markets creating domestic growth and prosperity.

To go against the tide here and to pose the counter-argument:
What ever happened to creative destruction? What if much of what has been established over the extended period of 'globalisation' post Second World War world is untenable - an interconnectivity that is incredibly fragile? Will these 'saving' gestures - the biggest fiscal stimulus the world has ever seen - just sustain a flawed system in a way that will create an even bigger bushfire in the future? And furthermore, when we do spend this stimulus money, what evidence exists to suggest that it will be done efficiently, fairly or usefully? It will be an incredibly expensive mistake if it is not.

The recent bushfires in Australia, may be a fitting and similarly tragic metaphor. Small bushfires are part of Nature's process - they happen naturally from lightening strikes and they play an important role in the regeneration of the land. When perfectly understandable human interference led those areas in and around Melbourne to seek to avoid such fires because of the potential risk to their homes, there may well have been unintended consequences. By preventing the small bush fires that naturally occur, over many years a very large area of land had not been "regenerated" and consequently the scope for a one off massive fire was increased. And, as we saw at the start of this year, it came with devastating effect. As the Australian government now considers what went wrong, the interference with the "Natural Process" of destruction and regeneration is certainly one of the issues on the table.

In a similar vein, there are those who suggest that the aid flows that powered into Ethiopia in the late 1980s, to address the immediate impact of famine and widespread starvation, may have only solved part of the problem - and in doing so created an even bigger risk in the future. As politically incorrect as it may be, those same voices quietly suggest that more people may end up dying in Ethiopia as a consequence of the massive influx of aid - on the basis that the real issues that cause famine there have never really been addressed, and the risk is that while the aid sustained the current generation the risks of a 'mega-famine' in the future were increased. Not a particularly palatable subject for discussion.

I would like to think that the protections that we put in place today do act to reduce the risk of a system malfunction like the current economic crisis, the bush fires in Australia and famines in Africa. There is a real risk, however, that if we interfere with the natural destructive and regenerative processes of the world, that we just fan the flames for a bigger catastrophe in future. Fiscal stimulus on the scale that is being discussed certainly would not have been part of the world order envisioned by a Darwinian "survival of the fittest" mindset, and may as an unintended consequence make us weaker and more vulnerable in the future. While our pressing needs - of employment and financial survival - may be soothed by fiscal policy, what are the long term consequences of the decisions we are making so "historically" today?

The $1.1 trillion needs to be an investment that pays the worlds taxpayers back, and not a handout to sustain a system that can't sustain itself. Maybe it will be, but celebrations about the achievements of the G20 meetings are politically charged - Gordon Brown's for one has been 'enhanced' in the media coverage, but he will be long gone when the consequences of these decisions have fully played out. It may be politically unpalatable to see the destruction of previously successful enterprises, and significant unemployment as a consequence, but the longer term consequences of sustaining the unsustainable may be a very significant price to pay for future generations.

The notion of creative destruction is originally found in the writings of that old black humorist Friedrich Nietzsche - who is often seen darkly for his willingness to address tough questions with unsavoury, but credible answers. The Austrian economist Joseph Schumpeter popularized and used the 'creative destruction' term to describe the process of transformation that accompanies significant innovation. In Schumpeter's vision of capitalism innovative activity by entrepreneurs was the force that sustained long-term economic growth even as it destroyed the value of established companies that enjoyed some degree of monopoly power.

Creative destruction can hurt. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

Last week I attended a reunion (read 'fundraising') event for the London based alumni of my old university - Trinity College, Dublin. In an attempt to reconnect with the gathered group, the Dean of Research from the university outlined some of the significant projects and discoveries that the university had pulled off in recent times. Some incredible progress was outlined in fields such as nano-technology and bio-sciences, particularly impressive when compared to achievements of some of the big-name US universities, who have research endowments hundreds or thousands of times the size of the TCD budget of 300mm Euros. In Irelands case, it is clear to me, that the long term health of the economy is dependent on the capacity to create meaningful value added based off these innovations. Such innovation forms the foundations of the creative destruction process that ultimately fuels real economic growth and improves prosperity both locally and globally. Nonetheless, the capacity for government to understand how important this process is tends to be swayed by pressing needs - wage bargaining with unions, sustaining inefficient public sector workers, and most critically, winning elections.

The fiscal stimulus around the world desperately needs to be directed away from these areas, and into the sort of innovation that will lead to longer term prosperity. While ensuring that the worlds financial system does not completely break down is really critical, a by-product of the process should not be attempts to sustain jobs in industries or areas where innovation is not forthcoming. Large scale job losses now may be a price that needs to be paid, in order to insure that the whole system goes through the appropriate regeneration process. If we don't allow these difficult things to occur, then the longer term consequences may be the mother-of-all bush fires where there aren't enough hoses to go round.