A recent report by the Economic Policy Institute blamed trade with China for the loss of 3.4 million manufacturing jobs since 2001. Don Boudreaux of George Mason University analyzes this claim in detail here, where he points out that innovation and automation are more likely culprits. But whether the jobs are lost as a result of international trade or domestic commerce, his most important point is that this is creative destruction.

Stifled Creativity

It is to creative destruction, a process first properly recognized by Joseph Schumpeter (whose 134th birthday it is today), that we owe much of human progress and wealth creation since the industrial revolution. Old ways of doing things are replaced by new ways that create more wealth for everyone. Oftentimes there is a social benefit as well, with creative destruction forcing radical social change. Computers, for instance, creatively destroyed the typing profession, freeing (overwhelmingly) educated women up to do more creative jobs and compete with men as equals in the workplace.

When the process of business creation is made more difficult, creative destruction looks a lot less creative.

Yet the process will have more negative effects than positive if innovators are not allowed the space to work with the resources, labor, or creative energy released by creative destruction. In that respect, government policies and regulations that deter innovation will artificially create a certain amount of structural unemployment.

This can be seen clearly in the case of the millennial generation. Members of this generation have grown up amidst a rapid pace of technological innovation, and so unlike previous generations, have not planned on careers with just a few companies. In fact, as researcher Jared Meyer points out, 66% of them would like to start their own business, yet under 4% of businesses are owned by people under 25. Business startup rates are lower than in the Reagan era. Meyer argues that government regulation, specifically financial and labor regulation, are to blame.

This is almost certainly the case. Financial regulation makes it hard to access the capital needed to start a business, and labor regulation makes it difficult to hire anyone to work for you. With the process of business creation made more difficult, creative destruction looks a lot less creative.

Policy Interference

So it would appear that whether jobs are lost as a result of trade or from innovation, the best government policy in response to the job loss is not protectionism, or to attempt to shore up failing industries (for why these policies are doomed to fail, see here), but the sort of deregulation that helps stimulate innovators and entrepreneurs to take their idea to market and start hiring people (or, as we like to say here at CEI, “liberate to stimulate.”)

As Henry Hazlitt put it,

The art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.”

Creative destruction was discovered by applying that lesson. While people (right and left) keep looking at the immediate effects of a policy like free trade on one group divorced from the positive benefits for all groups, and similarly look at financial regulation as, for example, keeping bankers in line rather than stopping millennial entrepreneurs from starting businesses, it will be very hard for the American economy to get going again.

And that will not be China’s fault.

Reprinted from Competitive Enterprise Institute.