Arnold Kling Provides An Interesting Framework for Economic Growth

I thought this was a useful simple picture from Arnold Kling, vis a vis countries and their economies:

Low Creation High Creation
Low Destruction Corporatist Stagnation Schumpeterian Boom
High Destruction Minsky Recession Rising Dynamism

He suggests the US may currently be in the lower-left quadrant.  Europe and Japan in the upper left.   My sense is that China is in the upper right, not the lower right (too much of the economy is controlled by the politicians in power for any real destruction to occur).

Once a government gains powerful tools for economic intervention, it becomes politically almost impossible to allow destruction to occur, no matter how long-term beneficial it can be.  The US is one of the few countries in the world that has ever allowed such destruction to occur over an extended period.  The reason it is hard is that successful incumbents are able to wield political power to prevent upstart competition that might threaten their position and business model (see here for example).

It takes a lot of discipline to have government not intervene in favor of such incumbents.  Since politicians lack this discipline, the only way to prevent such intervention is by castrating the government, by eliminating its power to intervene in the first place.  Feckless politicians cannot wield power that does not exist (though don't tell Obama that because he seems to be wielding a lot of power to modify legislation that is not written into my copy of the Constitution.).


  1. mesaeconoguy:

    We are now in the upper left, with Europe and Japan.

    That is the regressive and Obama Administration vision – fundamentally change the way government exists in society.

    It is diametrically opposed to your version of the Constitution, coyote, because these people want to wield power at all cost, and the Constitution was written precisely to prevent that from happening.

    Permanent large government intervention carries with it enormous economic consequences, which is why growth is so bad, and will remain that way.

  2. kidmugsy:

    The Constitution remains a fascinating historical document, like Magna Carta.

  3. MingoV:

    A quote from the link: "There is high destruction when incumbent businesses are disappearing at a high rate."

    Supposedly, high destruction of businesses is a good thing. It is, when existing businesses fail and are replaced by better ones. But, it sucks when existing businesses fail and nothing takes their place, as in a severe recession. And, it sucks more when existing businesses fail because governments take their place. This is one reason why that 2x2 grid is ridiculously simplistic.

  4. mesaeconoguy:

    I agree, but you hit the important scenario: where businesses fail, and are replaced by government/government prevents replacement by other businesses.

    There’s another part, too: Those businesses which do survive, thrive due to their exploitation of rent-seeking and regulatory capture power, and affiliation with government.

    That’s where we are in 2014, after 5 years of leftist corporatism.

  5. NL7:

    China has seen tens of millions of people move from country to cities in the last decade or two, one of the biggest human migrations in history, so to some extent the rural lifestyle is being "destroyed" by economic depopulation.