I first heard of the term “creative destruction” about 25 years ago as my company at the time was moving a production division from a union shop in Minnesota to a non-union shop in Tennessee. It seemed all quite logical as the company could not have survived structured as it was around the union wages. I guess it was logical as the company returned to health and grew rapidly from there, eventually employing many more people producing more and better goods and services.
Creative destruction is inevitable in companies and capitalist economies. It is a necessary part of the markets that provide capital to hire people to produce goods. It is ultimately good until it is turned upside down by securitization.
Securitization is the structuring of deals and financial instruments in such a way as not to support the production of goods and services, but to transfer wealth from large numbers of people – and the future - to fewer people - using debt as a tool. It has been seen in the acquisition of companies, the use of those companies to secure debt, and the transfer of substantial cash wealth to those who orchestrate such things, followed by subsequent liquidation of the company – and the end of production of goods and services.
In this case, creation of debt is not used to build the production of goods and services, which would employ and build a middle class, but to convert an asset to cash and move the cash out of production. Securitization was also seen in the housing boom where homeowners took debt – future income - to realize a dream – encouraged by big financial concerns – and public policy. That debt was restructured into derivatives and sold to pension funds and others – again securing the substantial cash for the orchestrators of such things. When the bubble burst, the orchestrators were too big to fail and remain so – even after even more cash was taken from the future and transferred their way. The shareholders of those who orchestrate such things did not suffer heavily – but the middle class did, and shrank.
Securitization is being seen again in student loan debt, where our children are borrowing from their futures to bring their future earnings into the here and now, again to be securitized and sold – securing cash for those who orchestrate such things. But slow job growth means many kids will be in a state of debt servitude preventing them from buying goods and services – and houses.
Now be assured, I am a committed capitalist. Capitalism is the engine that drives the general good and the well-being of the people and our republic. I have no beef with wealth – none whatsoever – if it is used in a capitalist fashion to employ labor to make goods and services. I am filled with disgust, though, that people who call themselves capitalists are actually those who orchestrate such things, titans of finance rather than titans of industry, failing to capitalize the production of goods and services. There is a gap in public policy that rewards innovations in securitization and the management of money as much or more than innovations in products, services, and production. Our best minds are designing innovative derivatives rather than innovative consumer products, drugs, software, and goods and services for a growing middle class. We need public policy that will redirect that talent to enterprises that will support the growing billions on the planet.
Labor and capital need each other if goods and services, a collective increase in standard of living, and better future for all of our children, are the goal. If the goal is mere accumulation of cash, this is not creative destruction, it is just destruction as it does not employ people. This is not capitalism – this is capitalism upside down.