A century ago, Joseph Schumpeter posited the idea of creative destruction to describe the way in which economies grow. He suggested that creative entrepreneurs find new ways to make use of resources (human and material) to increase the value of outputs with the same inputs, or produce the same outputs for reduced input costs. The key to this process is not the availability of more capital, labor, or natural resource, but rather the accumulation of more knowledge. Unlike all other commodities, there is no limit to the amount of knowledge that can be acquired.
In order for entrepreneurs, and hence a country’s economy, to thrive, using bail outs and subsidies to sustain older, or simply less efficient, firms will actually have a negative impact on growth. The regulatory environment for business must balance the type of liberal democratic system that allows for creativity and adventure with enough social welfare institutions to help the vast majority of the population effectively cope with the pace of change. The more conservative approach of shielding people and firms from change can only lead to the ultimate destruction of an economy.
Over the past several years, business has become less and less about providing goods and services, and more and more about using money to make money, through a variety of complex investment mechanisms (derivatives, algorithmic trading). Shareholder value has become the ultimate measure of corporate success and the social value of enterprise is largely neglected. However, the perpetual accumulation of capital does not represent true economic growth, and the increasing distance between rich and poor reflects the fact that as the richer get richer, capital actually disappears from the economy, eventually grinding it to a halt. Schumpeter’s prescription seems simple and obvious. Capitalists have money, but no ideas. Entrepreneurs have ideas, but no money. It is only when these two groups interact in a cyclical manner that an economy grows, and provides for all members of society. So, why aren’t we doing this?