The Virtue of Discomfort and Disorder

by Reihan Salam

Earlier this month, Kenneth Rogoff fretted about industrial concentration:

There are certainly those who believe that the wellsprings of science are running dry, and that, when one looks closely, the latest gadgets and ideas driving global commerce are essentially derivative. But the vast majority of my scientist colleagues at top universities seem awfully excited about their projects in nanotechnology, neuroscience, and energy, among other cutting-edge fields. They think they are changing the world at a pace as rapid as we have ever seen. Frankly, when I think of stagnating innovation as an economist, I worry about how overweening monopolies stifle ideas, and how recent changes extending the validity of patents have exacerbated this problem. [Emphasis added]

This passage reminded me of Ashwin Parameswaran’s epic post on “Innovation, Stagnation, and Unemployment,” published in November of 2011:

Imperfectly competitive markets are the norm in most modern economies. In instances where economies of scale or network effects dominate, a market may even be oligopolistic or monopolistic (e.g. Google, Microsoft) This assumption is of course nothing new to conventional macroeconomic theory. Where my analysis differs is in viewing the imperfectly competitive process as one that is permanently in disequilibrium. Rents or “abnormal” profits are a persistent feature of the economy at the level of the firm and are not competed away even in the long run. The primary objective of incumbent rent-earners is to build a moat around their existing rents whereas the primary objective of competition from new entrants is not to drive rents down to zero, but to displace the incumbent rent-earner. It is not the absence of rents but the continuous threat to the survival of the incumbent rent-earner that defines a truly vibrant capitalist economy i.e. each niche must be continually contested by new entrants. This does not imply, even if the market for labour is perfectly competitive, that an abnormal share of GDP goes to “capital”. Most new entrants fail and suffer economic losses in their bid to capture economic rents and even a dominant incumbent may lose a significant proportion of past earned rents in futile attempts to defend its competitive position before its eventual demise.

This emphasis on disequilibrium points to the fact that the “optimum” state for a dynamically competitive capitalist economy is one of constant competitive discomfort and disorder. This perspective leads to a dramatically different policy emphasis from conventional theory which universally focuses on increasing positive incentives to economic players and relying on the invisible hand to guide the economy to a better equilibrium. Both Schumpeter and Marx understood the importance of this competitive discomfort for the constant innovative dynamism of a capitalist economy – my point is simply that a universal discomfort of capital is also important to maintain the distributive justice in a capitalist economy. in fact it is the only way to do so without sacrificing the innovative dynamism of the economy.

This “universal discomfort of capital” is a product of low barriers to entry. Incumbents tend to prefer incremental innovation and organizational rigidity. New entrants are more likely to embrace entirely new business models and to create new products, and the most successful of them force incumbents to adapt or shutter their doors. One possibility is that as barriers to entry continue to increase in the advanced market democracies, and as innovative start-ups find it more attractive to be acquired by powerful incumbents rather than to try to grow large enough to compete with them, cost-cutting and process optimization will take precedence over the kind of firm expansion that leads to economy-wide employment expansion. 

Ashwin has been drawing his thoughts together at a new website, All Systems Need a Little Disorder. I recommend taking a look.

The Agenda

NRO’s domestic-policy blog, by Reihan Salam.