The rising resistance to creative destruction | Statism, easy money and risk aversion are sapping the west’s economic dynamism

absolutely fantastic essay from Tej Parikh. The [whole thing](https://archive.is/iU0aE) (it’s much longer than this excerpt) is worth a read

# Widespread decline in (proxy measures for) creative destruction

> Welcome back. This week, I turn to “creative destruction”. The concept was popularised by Austrian political economist Joseph Schumpeter in the 1940s, and describes how old ideas, technology and businesses are displaced by new ones.

> Creative destruction is hard to measure. That said, proxies for economic dynamism in developed nations have been weakening over the past few decades.

> “For much of the 20th century, high rates of firm entry, job reallocation and entrepreneurial risk-taking kept American productivity surging ahead,” says Ufuk Akcigit, professor of economics at the University of Chicago. “But in recent decades, that engine has been losing steam — and the numbers are hard to ignore.”

> Data from the US Census Bureau shows that business entry and exit rates have trended downward since the 1970s. The job reallocation rate — a measure of how quickly jobs are being created and destroyed — has also dropped over the past few decades.

> Europe, perhaps less surprisingly, shows similar trends. The UK’s Office for National Statistics finds that the job reallocation rate in Britain has slowed by one-third in the past two decades.

> What is contributing to the decline in creative destruction? As I outlined in an FT column in January, there are economic, political and social incentives to sustain the status quo. These preservative forces block new ideas and businesses from emerging — and coddle unproductive ones.

# Lobbying from big businesses

> Take incumbent businesses in advanced economies. They have become more economically dominant over time. America’s top 10 listed companies currently account for approximately one-third of the S&P 500’s entire market capitalisation — the highest concentration in several decades.

> In Europe, the average market share of the top four companies across industries in fifteen countries increased by five percentage points between 2000 and 2019, according to OECD research.

> Some economists reckon globalisation and technology, which support economies of scale, are partly behind the rise of mega-businesses.

> Size can, however, create protective barriers to entry, as potential market entrants fear entering sectors with domineering firms, notes Akcigit. His research also finds that a greater share of US inventors today work in large, mature firms. “Inventors in young firms are jumping to the established ones where the wage premium has risen over recent decades”, he says. “But in doing so, we find that they end up innovating less.”

> “The real concern arises when large firms shift from innovation-driven strategies to defensive ones”, says Akcigit. Indeed, there are examples of direct actions taken by incumbents to preserve market share, including buying start-ups, defensive patenting, talent poaching and garnering political influence.

> “Lobbying today includes regulatory shaping, digital targeting and building political connections”, says Francesca Lotti, an economist at the Bank of Italy. “These activities often insulate established firms from competitive pressures.”

> Annual lobbying expenditure in the US has risen by $1.7bn in real terms since 1998. In the EU, the number of registered lobbyists has more than doubled since 2012.

> Policy also acts as a preserving force. Over the past decade, tariff and non-tariff trade barriers have risen globally, partly in reaction to a political backlash against the perceived threat of foreign competition to jobs and industries.

# Social movements against economic dynamism

> This is evident in NIMBYism, and special interest groups which, for instance, resist new technologies in their sector and push for regulations that favour incumbents. In December, then US president-elect Donald Trump backed unionised dockworkers in their opposition to the use of technology in American ports. He said automation was not worth the “distress, hurt and harm” it causes US workers.

> Data compiled by Pola Lehmann, co-leader of the Manifesto Project, which analyses election manifestos in over 60 countries, shows that mentions of anti-growth sentiment in G7 political campaign documents has surged ahead of pro-growth references in the past decade.

> The success of creative destruction was, ironically, why Schumpeter thought capitalism would not survive in the long run. He believed the prosperity that it generated would eventually drive a demand for security and stability that would usurp society’s willingness to endure further job losses and disruption.