Arnold Kling  

The Dynamics of Creative Destruction

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Dane Stangler and Paul Kedrosky write,


When they come into existence, for example, startup firms create, on average, three millions jobs per year. Many of these jobs are lost and new ones are created, but employment at the moment of startup is not reached again in subsequent years.

They are looking at the ever-fascinating data set on business dynamics. The whole paper is interesting, although the language and methods may seem unfamiliar to many economists.

The future of empirical macro is in the new labor dynamics (JOLTS) and business dynamics data sets. I predict that if the CBO, Mark Zandi, and other traditional macro modelers continue to ignore these data sets, they will be stuck in a time warp, like somebody who doesn't know how to use email or a cell phone.

I also think that these data sets will change macroeconomic theory. I think they will bring more people around to thinking of economic activity as patterns of sustainable specialization and trade, rather than as aggregates of spending.


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COMMENTS (7 to date)
Ted writes:

What in the world does "patterns of sustainable specialization and trade" mean - let alone what does it mean to built a theory around that. Macro is always going to deal with aggregates. I mean, sure, if I'm designing a monetary general equilibrium model I guess I could try to model the individual exchange of money for goods as a series of bilateral trades. But I mine as well just model velocity in an aggregated model and get the same result. Perhaps you could explain what you mean by that statement since it's so vague.

Really though, I don't think this will fundamentally change macro. We will still talk in aggregates, but the data set might help us better understand the internal dynamics. One of the things I think data sets like this will change is some of our understanding of internal dynamics and it will help use in further building more realistic models as well more heterogeneous agent models to understand important distributional effects.

As a side note, I do think the lack of appreciation for firm entry and exist across the business cycle is a huge gap in macroeconomics. I would actually be really interested to see someone take the endogenous entry and product variety model Bilbiie, Ghironi, and Melitz and augment it with some type of labor market model. The results would be interesting I think.

For reference the two excellent, and underrated, papers by BGM on firm entry across the business cycle are here and here

Rebecca Burlingame writes:

Ted, as a non-economist who has thought of little else but economics for the last 6 years, here is an example of what patterns of sustainable specialization and trade mean to me. At what point do individuals and municipalities find survivability and ways to begin anew? It may be that individuals and local economies need to come together in new ways, because:
1) people in business are telling society that all good things can not come from business.
2) governments are telling their citizens that all good things can not come from government, and in the coming years they really mean it.
3) families and friends surely can not take care of their own, when were they ever able to?
4) non-profits can not take care of any but tiny designated populations.
Therefore, who is in a position to capture the economic wealth of the present just sitting unused? The individual has numerous sets of skills which have value to communities even if no one can hire them. The community, as tax bases decline, is in serious need of individual skills, especially as private hospitals tell small towns they can no longer afford their own doctors and local public hospitals. If economies can be seriously considered in this perspective, a lot of the resources presently slipping away, can be recaptured and turned into wealth once more.

Bill N writes:

"I think they will bring more people around to thinking of economic activity as patterns of sustainable specialization and trade, rather than as aggregates of spending"

It implies an end to (or at least de-emphasized) linear thinking. See for example some economics citations at the end of the wikipedia article.
http://en.wikipedia.org/wiki/Chaos_theory

While conventional models might be useful local approximations, the system would be subject to disruptions that could not be easily resolved with a nudge, or even a push pack. Moreover, it may change understanding of the conditions that lead to a local stability.

Rebecca Burlingame writes:

I was introduced to what I now recognize as chaos theory at a macrobiotic conference in California in the early eighties...of all things. (Shouldn't that have been macroeconomic?) Of course, the end to linear activities could likely be short lived, and then the linear path - whatever the new path happens to be, returns for who-knows-how-long. Small wonder that the brief window of opportunity - of suspended resources, has scarcely been recognized. How many times has history even been able to capture the non-linear storm.

Lord writes:

These two are not in any real conflict. Sure we have lost most of the construction industry, but if the Fed was doing its job, the profitability of all other industries would be boosted enough to compensate for its loss. That it has not is an indictment of the Fed, not its irreplacability. I get the feeling you believe the profitability of business is immutable, so the loss of construction means we all have to make do with less. This just isn't true. What we thought were less profitable activities were in fact more profitable than we believed. We don't need anything new to replace construction, just more of everything else. Unfortunately when we hear about structural unemployment, we are given this as an excuse for subpar performance and inadequate response. Employmment can change if there are the jobs to hire them.

Pete writes:

Lord,

"Sure we have lost most of the construction industry, but if the Fed was doing its job, the profitability of all other industries would be boosted enough to compensate for its loss."

You are missing a key point - when economies are "boosted" the new demand doesn't flow out equally to all industries. The stimulus money went largely to teachers, researchers, and other professionals (whose unemployment rate has NEVER gotten much above 5% during the last 24 months).

Even if you believe overall demand was boosted by the Fed - this doesn't help the unemployed construction worker. His job skills no longer match what is wanted from new job openings.

fundamentalist writes:

Austrians have complained for almost a century that the data used by mainstream econ is too highly aggregated and hides the most interesting and important things going on in the economy. If these data do nothing but force macro to break up the huge globs of data, that will be a major accomplishment.

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