You probably know the idea of “creative destruction.” Basically, it means that smart people come into a poorly performing company. They get rid of the dead wood—they fire people. Then the company’s prices go down so that consumers have money they can spend on other things, increasing demand elsewhere. Then the fired people and even more can be better employed doing something else. The idea is that it may be disruptive, but in the long run, everyone is better off.
I have always had a problem with this idea. The reason is that prices do not reflect costs. Let’s suppose that I manufacture chairs and they cost me $5 each to make. I’m not going to sell them for $10 because that’s a reasonable markup. If I can get people to pay $100 for them, I’ll sell them for that price. On the other hand, if people will only pay $2 for the chairs, I will sell my existing inventory at that price and discontinue the line. So the only way that costs matters to me is if I’m not making enough. Otherwise, if people want to pay a million bucks for my $5 chair, that’s just fine.
Those of you who know a little economics will say, “Yeah, but you aren’t the only person who makes chairs!” And this is right. In the perfect markets of Chicago School models, other producers will come in and beat down my price. We will go back and forth until we get a price that is some reflection of the cost of bring the product to market. But such truly free markets are almost nonexistent. Let’s look at the way things normally work.
There are a bunch of little drug stores and they employ a whole bunch of people. A Walmart comes into town and puts them all out of business for both good (Walmart really has perfected the supply chain) and bad (Walmart illegally suppresses unions and can provide lost leaders) reasons. So there is lots of disruption but consumers really do get better prices. But the extra savings in the community is not equal to the loss wages. So creative destruction creates profits for the already rich and destroys the incomes of the community.
I was thinking about this after reading a great interview at Truthout between Jason Hickel and Alnoor Ladha, Are Economic Growth and Social Justice Incompatible? I recommend reading the whole thing, because it discusses the way the economy actually works and not the myths that we are constantly told. Take this frightening bit of information from Hickel:
So let’s say politicians in Malaysia pass a law that increases the national minimum wage. This means that sweatshop owners will lose some marginal part of their profits, which gives them the right to sue the government of Malaysia for lost future earnings. What’s amazing about this is that it essentially gives corporations the power to regulate democratic states, rather than states regulating corporations. So it’s a total inversion of our existing regulatory logic.
That’s right boys and girls. In the mind of my father’s generation, “capitalism” was the same as “democracy” and “freedom.” But the oligarchs want to create a new kind of system. Feudalism became capitalism, but it seems very much like we are headed to what I call neo-feudalism.
What’s most upsetting about all this is that it has always been a farce. There have never been “free” markets. The system has always been geared to maintain the status quo. On the whole, the rich are not rich because they are smarter or more knowledgeable or harder working. They are rich because they are rich. They are rich because their parents were rich or simply because they were lucky. Being brilliant brings many rewards, but great wealth is not usually one of them. Richard Stallman and Linus Torvalds truly revolutionized computing, but it was the subgeniuses Bill Gates and Steve Jobs who became billionaires.
So unless we stand up and do something about it, we will end up not only serfs, but serfs who are beholden to mediocrities. Kind of like we are now, but worse.
Image taken from The Amendment Gazette, Feudalism Then and Now.