Bryan Caplan  

Acyclical Creative Destruction

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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

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.

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TRACKBACKS (3 to date)
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The author at De Gustibus Non Est Disputandum in a related article titled É possível ensinar empreendedorismo? writes:
    Não. Não adianta espernear. É não mesmo. Claudio p.s. e um bom ponto sobre a destruição criadora aqui.... [Tracked on November 25, 2005 9:36 AM]
COMMENTS (2 to date)
Jason Johnson writes:

Recessions play a useful economic role by slashing state and local tax revenues, forcing legislatures to slow the growth of government spending.

If only the same mechanism worked at the federal level....

RP writes:

Yeah, because it's not like easy Fed money shows up during recessions to allow the weak to hold as long as needed to keep employment stable or anything.

You guys need to get out more.

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