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Growing Pains

July 22, 2008

Economic growth relies on successes but also on failures. As Schumpeter said you can’t have creation without destruction. Now these simple sentences can easily be misinterpreted. Destruction doesn’t mean going around breaking windows and nobody ought to cheer in the presence of someone else’s failure. Saying that growing comes with some pain means just that, it’s a description on how society evolves. However, public opinion does not really care about descriptive statements. Conventional wishful thinking demands that there be no failures, ever; especially for large firms. The present should extend into the future ad infinitum, stable, sustainable, happy, for everyone.

Of course, everyone is out to resist and not fail. Society will explore uncountable solutions: mergers, loans, insurances, hedged risks, etc…When a firm finally fails it’s a good bet that almost everything was tried. So why is talk of Great Depression on everyone’s mind these days? Wouldn’t a regular depression do just fine? Should Jefferson have said “Every generation needs a new recession”? It is quite possible that recessions will become more and more mild and far in between, who knows, but one thing is for sure: it’s not by abolishing failure by law that you get rid of bad economic times.

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