Our free-market economy is the best form to adapt to innovation and adjust to the creative destruction it creates. State government tax revenues in Oklahoman are down more than $1.5 billion because of depressed oil prices. Prices are down because of increases in the supply of oil brought on by innovations in drilling technology [horizontal drilling with frak-ing.]

Creative Destruction

Our free-market economy is the best form to adapt to innovation and adjust to the creative destruction it creates. State government tax revenues in Oklahoman are down more than $1.5 billion because of depressed oil prices. Prices are down because of increases in the supply of oil brought on by innovations in drilling technology [horizontal drilling with frak-ing.]

Soviet Union

Two major alternative economic systems to ours that have arisen e.g., the Soviet Union in 1918 [USSR] and the People’s Republic of China [PRC] in 1949. History judged the Soviet Union’s failure.

In my first visit to the USSR in 1965, they provided full employment by make-work jobs and their command economic system couldn’t provide consumer products.

Later visits in 1991-2 confirmed both conclusions. By then, when appliances broke down, they had to be trashed because there were no replacement parts to be had. Drivers drove in downtown Moscow at night with lights turned off to extend the life of headlight bulbs which were unavailable. When drivers parked, they removed windshield wipers and aerials because they would be stolen and irreplaceable. Bathrooms in the Moscow airports were dark because all the light bulbs were stolen. The Soviet Union collapsed from within and not from any Cold War threat from the free world. State socialism didn’t work. By 1990 even their leaders realized their king was naked and simply gave up the 70-year charade.

China

China is already four times larger in population than the U.S. with an economy that has recently surpassed ours in size. Its “state capitalism” the political and economic institutions are “exclusive”, controlled by a few ‘extractive’ e.g., for their benefit. [1] After Tianamen Square, the government became more repressive with even greater control of media and the internet. The ‘grand bargain’or social contract between party leaders and people is “we will improve your standard of living and you will follow our orders.”[2]

China’s unprecedented growth in recent decades presents “the irresistible charm of authoritarian growth.” Is state capitalism with its highly contrived economy a preferable alternative to the West’s free market and democratic model?

Acemoglu and Robinson conclude that authoritarian growth as per the Chinese model has an “irresistible charm” but its success not because of its extractive institutions but in spite of them. They contend China will not and cannot produce long-run prosperity. As I discovered when I taught their factory managers [1993-4-5] factory managers have a dual hierarchy e.g., one a hierarchy of managers who run the plant and another, political set of managers watching them.

One journalist reported that on the desk of the head of their biggest state companies is a red telephone connecting them with party officials! They do not think authoritarian growth will lead to democracy of inclusive political institutions. [1]

The party that controls does so to benefit its members—not the firm’s—and those benefits depend on the continued existence of the firm’s product or service. Hence the party has a vested interest in the continued existence of the firm’s products and markets. This creates a strong resistance to innovative technology threatening existing technology. This is an inherent, self-limiting feature of state capitalism that resists the ‘creative destruction’ characteristic of a dynamic economy like free market capitalism.[1] It is the Achilles heel of the Chinese economy causing it to recently to “run out of steam.”

“Last year China missed its 7% growth target—its slowest growth in 25 years. They are reported to have “a lot of factories churning out unwanted goods so the government is scrapping out some of their state-owned ‘zombie’ steel and coal industries and laying off 1.8 million Yet even as Beijing pledges to nurture an innovation economy, President Xi Jinping is glorifying the Communist Party.” [3]

USA

Unlike China’s disastrous “Great Leap Forward” that starved its people leaving 40 million dead, America’s own great leap forward 1920-1970 occurred at three times the rate since 1970. Our growth is inhibited by four ‘headwinds” first being family structure and second being education . Once the leader worldwide in education, now only 25% of our high school graduates are prepared to attend college.

For the poor, high school is too late to correct the problem. “Age 5 is too late for the educational system to intervene.” [4] “A better educational system, particularly for children at the youngest ages, can counter the handicaps faced by at-risk children. Experts predict our GDP will increase 1.5% a year in the future.” [5] Childhood poverty and educational achievement are highly correlated and by overcoming many of the disadvantages of childhood poverty through early childhood education would so increase their education achievement in later years it would triple the anticipated growth in GDP to 4.5%! [6]

The USA ranks 32nd among the 39 member nations of the OECD in early childhood education. Only 50% of the nation’s three-year olds are enrolled in preschool programs.[5] The importance of this policy proposal is the fact that the last two words in Gordon’s 652-page tome on growth from innovation and productivity are “preschool education” [4]

 

[1] Acemoglu, Daron, James A. Robinson, “Why Nations Fail,” NY: Crown, 2012, 441.

[2] Marshall, Tim, ‘Prisoners of Geography,’ NY: Scribner, 2015, p52.

[3] Time, Mar.21,2016, pg17.

[4] Gordon, Robert J., ‘The Rise and Fall of American Growth,’ Princeton U. Press, 2016, 652.

[5] Piketty, Thomas, ‘Capital in the 21st Century,’ Harvard U Press, 2014. 488,572.

[6] Putnam, Robert D., “Our Kids,” NY: Simon & Schuster, 2015,231,249-51.