Friday, February 19, 2010

Exam 1 Comment 4: Recessions Can be Good Because They “Clean Out” the Economy

The statement in the title might be true. This viewpoint is called Schumpeterian, after the economist who conceived of the idea of creative destruction.

But it also might not, and it’s very difficult to determine the extent to which it is true or not.

This means that it amounts to a belief, rather than a fact. My own belief is that this view is partly true, but that it is less than half of what we see in recessions.

On the other hand, a great deal of what we see in recessions appears to be coordination failures: people are willing to work, firms are willing to hire, but they can’t get together and satisfy each other. It ought to happen, but it doesn’t.

I also think we tend to de-emphasize the amount of bad luck that others may have had, or good luck that we might have had.

I think those two ideas are dominant.

Having said that, I don’t think we should suppress the creative destruction aspects of recessions, by say, keeping GM in business.

I raise this point about the exam, because claiming that recessions are mostly creative destruction is getting very close to saying that the unemployed deserve their situation. I think this is true during the latter half of expansions when the economy is booming. But … I don’t think it holds during recessions or the early parts of expansions.

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