Creative destruction

Sami Mahroum, of Birkbeck College, University of London

Politicians worldwide have presented the economic crisis as an opportunity to galvanise efforts to build a low-carbon economy. Governments are throwing their weight behind stimulus packages featuring an array of environmental targets, with China putting $221.3 billion into green measures and the US $94 billion. In some senses, politicians have become the accidental heroes of a green revolution.

But this crisis is not of the kind envisaged by the influential economist Joseph Schumpeter, in which the status quo is pushed aside by superior innovation embodied in technical change and entrepreneurial genius. On the contrary, in many ways it is like a counter-Schumpeterian revolution.

Before the financial crisis hit economies worldwide towards the end of 2008, a green revolution was under way. The skyrocketing price of oil and gas meant that investments in alternative - and more sustainable - energy technologies were finally worthwhile.  From wind turbines to electric cars, there was a move to low-carbon technologies, and it could be said this paradigm shift was following the prescribed Schumpeterian course. Then the global crisis hit home, demand shrivelled, and the price of oil plummeted from $150 per barrel to under $50.

Compounding this, the world of finance and venture capital ground to a halt, derailing the shift towards a sustainability-driven economy, and with it the march towards a Schumpeterian industrial revolution came to a halt.  

Today, politicians are seeking to artificially kick-start the infant green revolution with a combination of Keynesian anti-recessionary instruments and Schumpeterian pro-growth and renewal instruments. The hope is that stimulus packages will leap-frog us over the current crisis and into a low carbon economy. But this assumes that “green” and “growth” can go hand-in-hand in reviving the world economy.

The stark fact is the requirements for economic recovery in the short-term are in conflict with the requirements for long-term green growth: A long-term shift towards a low-carbon economy requires industrial restructuring and renewal, which means company closures and jobs losses. But a short-term recovery requires exactly the opposite – corporate rescues and saving jobs.  

These conflicting objectives present policymakers with a massive headache. There will be sunset and sunrise sectors. Some firms must fade away, others will emerge. A competitive economy has no place for ailing industries.

Preserving dead jobs and firms prolongs the crisis as much as does the banks starving the system of credit. What is needed is to release surplus resources and channel them towards new avenues of economic growth.  

This is something for which politicians must prepare the public. Bridging from the short term to the long term requires an investment in the forces of transition.

Governments should use the stimulus money to invest in re-training workers for new jobs rather than preserving outdated ones, to help companies diversify rather than subsidising more of the same, to support employees to spin-off new businesses from failing companies rather than propping up their employers, and to provide new funds for seed capital and micro-finance rather than to subsidise the purchase of new cars.

Investments in public infrastructure such as schools, public buildings, roads, power, and waste management systems should not aim to create as many low-skilled jobs as possible, but to apply innovation to provide supply-side stimuli such as a well-educated workforce, broadband networks and robust infrastructure.  Public works funded by stimulus packages should clearly involve the added-value embodied in the development new partnerships, technologies, processes, and expertise.

Transforming the current global economic crisis into an innovation-driven Schumpeter-style revolution requires politicians to make bold and courageous decisions to invest in the transition tools that are necessary to generate long-term economic growth. Economies that focus mainly on immediate recovery will simply be facing these short-term challenges for much longer.

Sami Mahroum is a Visiting Reader at the School of Management & Organisational Psychology at Birkbeck College, University of London, and an Associate of IKED, the International Organisation for Knowledge Economy and Enterprise Development.