Prosperity looms

It seems to me that prosperity is just around the corner. Happy times will be here again. Uh, unless that's just Herbert Hoover with a ghastly forced smile on his face.

Since such smiles are the typical attire of the prognosticator I usually stick to predicting the past. But we study history to illuminate the present, so let me throw my head into the ring and explain my qualified optimism.

I think we are going through a massive shakeout. All sorts of things that weren't working and couldn't work are being exposed. What Joseph Schumpeter called "creative destruction" is upon us and while it's regrettably blowing close to gale force, the destruction of failed arrangements is essential to the creation of successful ones.

Remember, the U.S. "subprime" market didn't become unsustainable last fall. That's when we discovered it was unsustainable and stopped it destroying wealth. Likewise, the financial downturn also didn't make North American automakers unprofitable. It simply drove home that they had long ago ceased to be a rational use of labour and capital. The faster we liquidate counterproductive arrangements the better off we are, by definition.

If this advice seems harsh or unfeeling my short answer is that the worse our economic prospects the more important it is not to waste our dwindling resources on things that destroy value. But my long answer is that things may not be nearly as bad as they seem.

First, let me revisit this notion of gale force creative destruction. I realize it's hard for people who've lost their jobs. It always is. But really, when you look out your window or go to the mall do you see catastrophe? Just because politicians keep saying it's a crisis (and I've said it too) doesn't mean it is one.

Of course we may just be enjoying the false spring of March 1930 and in three years people may be selling apples in the streets. But I think it's far more probable that we're getting a lot of things right at the moment and governments are, as usual, getting them wrong.

What the financial contraction has revealed is that massive improvements in efficiency have rendered a lot of old ways of doing business obsolete and brought storied old firms crashing down, too often onto a soft bed of tax money.

But those same improvements in efficiency are causing a huge upsurge in economic vitality, one that traditional measurements such as GDP can't capture.

I'm no gaga technophile; I'm barely reconciled to fire. But let me especially mention new dedicated "social networking" online systems like Ning (www.ning.com). These things make it far easier to conduct social, economic and charitable activity, and that's hugely wealth enhancing because it cuts costs dramatically. I won't give you an elaborate sales pitch partly because I'm not paid to and partly because I don't have to. But I'm on this bandwagon and you should be too.

I admit I still don't understand the business model of getting rich by giving stuff away online. But when my brain stem panics about us all making a living taking in one another's websites, I remind myself that the switch from manufacturing to services caused alarm as did the switch from farming to manufacturing. Heck, nomads probably said you can't run an economy on people watching plants grow, you gotta go find stuff.

Here's why it will all be OK: When new technologies reduce the effort required to do things, everything gets cheaper.

Remember, in the early days of the microchip there was much talk of a "productivity paradox" as big investments in information technology seemed to reduce growth. Actually we were measuring it wrong. GDP likes effort, not wealth, and gains in efficiency reduce effort. (For more on this topic see my recent article on Mercatornet.com.)

Faced with a decline in GDP, governments are tempted to "save the economy." But the economy isn't a thing you can go tinker with, nor is a "failing industry."

So they actually give money they haven't earned to firms that have proved they can't earn it, which destroys wealth instead of preserving it.

It isn't surprising that governments respond to creative destruction by stifling the creativity to increase the destruction, given their chronic fixation on the visible and short-term over the subtle and long-term.

But it is dangerous.

I actually hope the modern bloated state will be among the things whose failings will be exposed by this bout of creative destruction.

But we must be vigilant against the proven capacity of governments to mess things up with tax hikes, protectionism and frantic misguided subsidies.

Otherwise we'll all end up with sickly smiles again.

[First published in the Ottawa Citizen]