Illnesses of the U.S. economy

“For the last decade, the U.S. economy has suffered from a combination of hypochondria and iatrogenic illnesses. The hypochondria stems from spurious statistics and deceptive anecdotes and erroneous theories of American decline. It results in a period of fear and anxiety, propagated by the media, measured in public opinion polls, and enhanced by alarmist demagoguery. Iatrogenic illnesses are diseases caused by the doctor — in this instance by hundreds of economic Ph.D.s, government planners, and politicians who have responded to the pangs of hypochondria by inflicting thousands of real cuts on the entrepreneurs who make the economy go, as if, like the physicians of the Middle Ages, the experts believe in bleeding the patient as a way of restoring him to productive health.”

From The Spirit of Enterprise by George Gilder, written 25 years ago (1984).

Related post: Starting a business is not as risky as people say

13 thoughts on “Illnesses of the U.S. economy

  1. Interesting. I heard of Gilder as a supply-sider. The statement seems to follow chronologically “Knowledge and Decisions” by Thomas Sowell, and anticipate “The vision of the Anointed” by the same author. Even though Sowell has recently gone completely nuts (in my opinion), his interpretation of modern liberalism is original. It goes beyond the dychotomy equality/liberty, and replaces it with technocracy/self-organization. Too often we listen to the technocrats without questioning their motivations. We should remember the multiple, systematic failures of “experts” everywhere and in any field (a few random examples: our recent foreign policy, the nationalization of “natural monopolies” in Europe in the 60s and 70s, the tragic failure of international aid).

    Regarding ekzept’s comment: the statement that risk-taking entrepreneurs make the economy go is empirically empty. It’s a matter of reasonable ideology. Personally I agree with the statement, not because of statistics or panel studies, but because of direct experience. But in any case, the link you posted is irrelevant toward supporting it. That study, which you could have linked to not by way of Yves Smith, deals with industry concentration across countries, as measured by employment. That does not disprove that businesses make the economy go. Indeed, many large industrial companies are net exporters, and the US is still the largest manufacturing country in the world. And aside from this, there are many more other metrics that would show that small business in the US grow and become incredible wealth creators and large employers. In the past 33 years the US has incubated Microsoft, SUN, Google, Genentech. Europe, which has a higher percentage of small businesses, has incubated nothing. Italy, which has the largest percentage of small businesses, has incubated even less.

    Now, back to Statistics…

  2. @gappy, Okay I’ll buy that the study “does not disprove that [small] businesses make the economy go”, phrased in exactly that way. I merely observe that for each of the successful companies you cite, that were “incubated”, there are probably a dozen “true entrepreneurial originating cadaver-companies” they built their empires upon, also incubated. I think that in order to achieve the results cited in addition to embracing simple entrepreneurship in the United States, creative economic destruction needs to be embraced as well. I’d say the most severe or frequent of the “thousands of real cuts on the entrepreneurs” Gilder claims are the subsidies of existing, non-competitive businesses by government and implicit subsidy by imposing regulations favoring the entrenched, whether Gilder meant or recognized these or not. (I have not read him.) While championing the entrepreneur is popular in U.S. culture, the embrace of creative economic destruction clearly is not. Avoiding creative economic destruction is not sole preoccupation of “hundreds of economic Ph.D.s, government planners, and politicians”, but is a sentiment which is widespread everywhere, including the USA.

    Are incubators good?

  3. @ekzept: Gilder doesn’t use the phrase “creative destruction,” though I believe he would support the idea. Here are a couple sentences from The Spirit of Enterprise to that effect.

    The rate of business failures, moreover, is less an index of economic decay than of industrial change. In the United States and around the world, the fastest-growing regions have the highest level of bankruptcies.

    He goes on to criticize the “obsession with business failure” and how misleading it is. See my comments here about what constitutes a “failure” in government statistics.

  4. I cannot speak for the US population, but I think I understand the essential trade-off between growth spurred by innovation and risk generated by failure. I agree with you that many are instinctively against failure, among them a good percentage of progressives and of traditionalist conservatives. But I also believe that a good number of libertarian-leaning intellectuals (Gilder included) are both against restrictive regulations and “positive” investments, e.g., in green energy. These top-down approaches have a low success rate exactly because don’t receive any useful feedback from potential buyers and competitors.

    I close with a couple of articles on the importance of failure:

  5. “These top-down approaches have a low success rate exactly because don’t receive any useful feedback from potential buyers and competitors.” And if those “potential buyers and competitors” are children at present, or not yet born, but the capability or technology needs 20 years to mature, what then?

  6. “I don’t see how very uncertain demand for a future good fit in the market failure category.” Definitely agree, and did not intend it to do so, unless by “market failure” you don’t mean a business failing the marketplace but, rather, the market failing to anticipate. That I DID mean. I defer to your superior knowledge of the matter, but, surely, there are other examples besides the highway system, including the strong support of university research during the mid-Cold War, and the indirect subsidies to private industry to develop high technology for war development efforts during the same period.

    I have no doubt that the best that could have been done for GM and Chrysler was to let them fail, but the government has been in the business of bailing them and others (UAL, USAir, etc) for a couple of decades. Should have let ’em die, long ago, agreed.

    I just don’t see how certain key activities in a knowledge-based society can be properly funded using STRICTLY private capital, notably research and education. I don’t know if it is in response to government action or not, but, surely, the collapse of the great industrial research centers in the USA, apart from a couple like that at Microsoft and (perhaps) Google, is moved by market economics, focusing increasingly upon short term return and, so, cutting costs for activities which don’t help the next year’s results.

    I know it’s off topic, but it is a key point, I think.

    Also, surely, “closed world” economics has recently been impugned by the degree to which the PRIVATE sector in the United States spent beyond its means, subsidized by foreign investors.

    I rest, and will comment no more.

  7. Ekzept, I think the subject is shifting from the causes of the US malaise, to the role of the government. Interesting topic, even though it’s unusual for this blog.

    Anyway, I would respond to your objection on two grounds. The first one is based on the view in mainstream economic policy that governments should intervene in the case of market failures (most notably. externalities and imperfect information; there is less agreement on monopoly and monopsony). Public goods (radio spectrum) and bads (pollution) are non-controversial examples. Doing otherwise can result in crowding out of private investment. A search on Econlit will yield a good deal of research. I don’t see how very uncertain demand for a future good fit in the market failure category.

    The second argument is that I can point to many, many cases of egregious failures of long-term government investment. Random examples: lisenkoism, the massive investment in nuclear fusion in the 60’s (“just 25 years away”), fifth-generation computing and MITI. The only folk example of a successful and prescient public investment in the US is the national highway system, but I think it has had negative and unintended consequences. In the concrete case of recent interventions, I suspect that green mandates for GM and Chrysler will make their business even less sustainable, contrary to the government’s assertions.

  8. Breaking my own rule, I post and say, yes, definitely, universities have SEVERE limits on innovation. I think some of the deliberate efforts on the part of the government to create government-industry-university triads are interesting, but I don’t know if they’ll work.

    The definition of innovation by John/Peter Denning is interesting, because there are inventions which not only don’t translate into innovations in that sense, but which are still waiting to do so. It also seems to mean that without such translation, there are inventions which could be lost entirely, needing to be rediscovered again some time.

    I keep running into these old papers written by the likes of Grace Wahba which seem to be far in advance of things done even 20 years later. John Backus once told me that the first FORTRAN compiler was much better at compiling than the next two generations of them.

  9. I tend to agree with you, or at least have very weak opinions on the subject of research. My professional affiliation is not really a secret, but I know first-hand the situation both of industrial research labs and research universities (added bonus: my wife is a prof in a medical school). I don’t believe that a private research mechanism, even only for scientific disciplines, could ever work. Sadly, contributions to fundamental science fro corporate labs are a thing of the past. There are definitely inefficiencies in the current system, but the american way of doing research is still very, very good, and I would not break it.

  10. I used to think that universities held more promise for innovation than private companies. Now I see that universities have their limits too. In fact, I believe universities are very poor at innovation. Universities can invent, but they can hardly innovate, at least by this definition of innovation.

  11. Gilder has missed the real problem, which is the creation of an economy where people who do not innovate or add value do well, which saw it’s conclusion in the last decade. The basis of most growth in Western economies has been through expansion of debt, through keeping interest rates low and using that to stimulate the economy. Result is increased asset prices which encourages speculation, and makes everyone associated rich without creating real wealth.

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