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Why creative destruction beats central planning every time

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IN HUMAN AFFAIRS necessity is well known to be the mother of new ideas; but in economics numbers are the grandfathers of delusion and diversion.  The proposed Australian trade deal is criticised by some for being so small as to be of little importance, while others claim it will destroy British farming as we know it.

Our trade with the EU is lauded as vital, on the same day that it is reported that we import more from China than Germany, alongside other reports that UK-EU trade is almost back to pre-Brexit levels, including record exports of fish.

How is any sane person meant to grasp what is going on?

One way of looking at this is to consider that the meat industry sells 3.5 million sausages daily, Tesco sells 4 million bananas each day, and Hovis sell 18 million loaves of bread each week.  Few of us see anything but a tiny part of the organisation of this productive outpouring.

Economists talk about having “an extended social” order; an arena of nested relationships between individuals across our society.  Our productive potential is buried within these relationships; and good economists are taught not to presume they know very much at all about them; for knowledge about what this network of relations can achieve is hidden to us.

In addition to the well-known facts that sausages are meat, bread is wheat and bananas are yellow, the source and treatment of the pigs for our sausages, the shipment and storage of our bananas, and the type of ovens that mass produce bread are largely unknown to most of us. More importantly, the tacit knowledge held within the black arts that make some sausage makers, banana shippers and bread makers more successful than others is a key asset of productive economies; implicit intellectual property, crucially not visible to the central state and the driver of post-Brexit opportunity.

Which leads to an oddity, in this context; why do we so often hear criticism about “Boris Johnson” or “Nicola Sturgeon” or “Mark Drakeford” being so bad at “running the country”?  They don’t run it because they can’t see what “it” is, or what that “it” is doing; despite what the media would like us to think in its innate desire for an immediate fix to all problems.  When public debate is carried out as if this knowledge exists, it becomes sterile to many.

Leaders can set a tone and alter productive spirit; Boris is famous for encouraging optimism and ambition and may even be beginning to catalyse those things; Nicola Sturgeon is divisive and leads through announced grievance, and I think it may turn out that she is single-handedly creating a Scottish business investment disaster in the pursuit of secession.

Both are up against a lack of knowledge about the dealings of a cohort of the population who get up early in the morning, don’t listen to the news, and get on with production, innovating as they go to profitable effect using learnt and tacit knowledge.  The political scientist, Ralf Dahrendorf, was clear that the UK is deeply divided between this apolitical cohort of rational pragmatists, in conflict with concerned Utopians seeking aspirational outcomes.

The fact is we still have around eighteen separate core ministerial roles in cabinet, managing around 450,000 civil servants. Again, the numbers are telling.  It’s said that the average person makes 35,000 decisions a day.  If only 1 per cent of these were work related, each bureaucrat would be making around 80,000 choices on behalf of each of us in a working year – at no loss to themselves if they are wrong, and some gain if those choices benefit them with their career.

This view of public choices within networks of public servants has led economists to recognise that, in general, central planning is not only unproductive, but counter-productive.  The sheer mass of special interests with diverse incentives and varying objectives makes policy progress in a complex modern society extremely difficult. Change then stalls.

It also has an outcome we should fear; calls for “strong leadership”.  History repeatedly tells us that strong leaders simply use their powers to concentrate yet greater division within and between communities. Think Belarus – or Scotland. 

The proposed Australian free trade deal is a good; it releases the potential for change. Those who like to plan trade centrally are actually trying to make themselves safe from change – at a notable cost to others. The economist Catherine McBride has written frequently about the blindness of the agri-lobby in this regard; pointing out that farmers need to compete by becoming more productive. Those against Brexit and against free trade are now in the odd position of disapproving of any trade arrangement worldwide unless it is with the EU; a bastion of highly inefficient farming.  All that has led to is a world in which there are more bureaucrats in farming than farmers.

We often hear the suggestion that the freedom to make mistakes and go bust is necessary for progress in a capitalist society. But that is really a harsh interpretation of the idea of “creative destruction” in the modern technological world.  Seen from the perspective of innovation, technical progress involves a cascade of discovered knowledge from pure science, to engineering science, to practical applied engineering, to the tool-makers and tool-users who innovate through their own knowledge. That then has to be wrapped in a market-facing discovery process where knowledge about consumer preferences and expectations of product serviceability and after-sales service are learned. Across all of these steps, mistakes are made and ideas honed; creative destruction simply describes that process.

The idea that state spending, a honey pot hugely attractive to vested interests who want to spend public money on their best guesses within the fog of their own ignorance, will somehow and inevitably be sustainably successful across the myriad of decisions made is laughable.

This does not mean we should stop all spending on blue sky thinking and research. In the end, much of that mental thought can become valuable, but we cannot tell when, where or how.

The fluidity of this creative process is anathema to those who like tidy order created by planners and bureaucrats. The past eighteen months should have taught us all that such control and certainty are unattainable within any government.  I expect many of us realise this instinctively, which may be why Boris Johnson still rides high in the polls while the media scrum screams and wrestles in its politicised glasshouse; trying to draw blood from adopted outrage about curtains. Who cares?

Let me offer a seemingly heretical thought as our “world-beating”, “rapid” and successful vaccination roll-out continues. Why is it taking so long? We’ve been vaccinating for around 170 days now and have put needles into over 60 million arms as I write this. That’s over 400,000 people a day you may say, but there are around 620,000 clinically trained staff in the NHS, probably double that who could do injections across our caring support professions.  So, the UK’s clinical and caring service assets putting one needle in one arm every two days is not perhaps that rapid.

Of course, no-one has injected seventy million adult arms twice over before.  Equally, the vaccine industry has not increased its production rates to Tesco levels of rapid output before; and we know that the tacit knowledge of how best to do the vaccine “brew up” was missing in several centres early on this year; it took time to iron out both production and logistics.

But it is all amazing, cry the politicians. No, it’s a mess, cry the critics.  It’s all a muddle cry the hangers-on of the chatterati on hearing these contrary howls.  And the technician who wears a white coat, a mask and vinyl gloves all day, watching over a vial filling machine in a clean room in the industrial north, steps off the bus that takes him to the factory gate at six am to do another shift in the business of saving lives.  His knowledge is our progress.  

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