Zoltan Acs
by Zoltan Acs
Mon Feb 9th 2009 at 5:36pm UTC

A Retrospective

It has been over six weeks since my last post to the Creative Class site. I have moved to London and from my new vantage point the world seems a little distant. However, I also now see the world a little more clearly, and what I see is not pretty.  We have had war, elections, financial meltdown, recession etc. What is now clear to me is that whatever your historical perspective, the present situation is different from anything we have lived through. So we are looking at either a 60 or a 100 year event. Take your pick.

That is a long time, even for an economist, who is used to thinking in the long run. What is clear and becoming clearer every day, is that yes growth will return, but it will not happen for a long time. How long? I do not know, but it can be years and years. What is clear to me at this point is that the problem is about the very fabric of society in the U.S. and the U.K. and its global connections. This is not just a housing problem or just a credit problem or just a “Detroit” problem. This is a problem that was years in the making and will take years to unravel. However, how to unravel it is not clear to anyone that i can find.

A few things I know. First, the problem is not a lack of growth. Stimulating the economy to have more growth that we cannot pay for is not the solution. It will just create more problems down the road. Second, the banks are bankrupt. At three percent, capitalization losses are greater than the available capital. How to fix this without giving away the house will take creative energy. Third, the problem is global, and it stems from global flows of technology, goods, and capital of the past decade. The world was flat. This may be the hardest to correct.

How to think about solving the problem is the interesting question. It must start with an examination of the whole question of growth. “Has growth come to an end?” is the wrong question. The right question is “What is the end of growth?” The lack of growth is a mere indicator of what is wrong. The engine that propels America forward is entrepreneurship; entrepreneurship creates wealth; the wealth it creates becomes the fuel to create opportunity. As President Obama stated in his inaugural address: “The success of our economy has always depended not just on the size of our gross domestic product, but on the reach of our prosperity; on our ability to extend opportunity to every willing heart – not out of charity, but because it is the surest route to our common good.”

The present economic crisis is widely understood to have revealed a dangerous imbalance in the relationship between business and government that further fueled the lack of opportunity for most. Without opportunity stability itself disappears. This will take the creative talent of the international community to solve.

Getting it right will not be easy.

8 Responses to “A Retrospective”

  1. Michael Wells Says:

    “The engine that propels America forward is entrepreneurship; entrepreneurship creates wealth; the wealth it creates becomes the fuel to create opportunity.”

    Yes. Drucker defines entrepreneurship as business innovation. He says someone opening a new drycleaning shop isn’t an entrepreneur because it’s the same old model, just a new business (not that there’s anything wrong with that). An entrepreneur is someone who develops a new method of drycleaning or a new business model for the shop.

    Looking at the last two big bubbles, a major difference is whether they actually created anything. The dotcom bubble, for all its silliness, left us with the World Wide Web, thousands of miles of installed fiber-optic, millions of servers, as well as new businesses like Google and Amazon. The housing/derivatives bubble mostly just created price inflation and moved money from one pocket to another (granted, some housing stock was created). Nothing was added to society.

    The imbalance between government and business may be part of the difference, but I think it’s deeper. To the extent government was involved in the ’90’s, it was in setting the tone and rewarding (or not resisting) innovation. Obama can probably help this by his pro-science attitudes and policies, and by replacing fear with optimism, which will have longer range effects than any short term stimulus.

  2. Nikolai Kondratieff Says:


    the problem of growth is a very real one. I think you deftly get to the crux of the issue in several points. 1) that it is inherent in the fabric of society, 2) that we are facing a global challenge, 3) that the imbalances exposed by policies of the last 20 years will take a long time to correct, and 4) that stimulating growth artificially by mortgaging our future will not have the types of outcomes we all hope for. I think these points are spot on. Where I diverge from your argument is your conclusion. It’s not that I don’t think “getting it right won’t be easy.” I believe there can be no consensus on what is “right” so by extension we cannot get it right. Instead, we will create policy responses that either make things A LOT WORSE (which unfortunately we seem to have a proclivity for) or there will be policy responses that help us cope with the contraction and give us mechanisms to keep things from going catastrophic in a hurry. Unfortunately, I don’t think we have the fortitude to do those things.


  3. Buzzcut Says:

    We need deleveraging throughout society (businesses, consumers, and government). We need a return to growth fueled by incomes and profits, not debt. We need a country that works harder, saves more, and consumes less.

    Deleveraging is not a pretty process. It will cause a lot of pain, especially in the areas that were wildly overbuilt during the credit boom: chinese manufacturing, US and UK homebuilding, automaking across the planet, etc.

    But in the end, having a worldwide society based on savings and work will result in slower, but more stable growth. Less booms, but shallower busts.

    So… where does growth come from? How should I know. You don’t know either. Obama certainly doesn’t.

    But out there there are people that do. They don’t know that they do, but they do. They have ideas, products, processes, whatever that could very well be the basis of the next boom.

    What is important is to let the failures fail. Don’t try and prop up the people and businesses that fail. Let them fail. We have the legal processes to clean up the failures, whether it be GM filing chapter 11 or banks being liquidated by FDIC.

    Take autos. Sales were running at 9M on an annualized basis in January. That is a stupid low number, and itself is not sustainable (the fleet of vehicles would turn over at a 26 year rate if that lasted. How many 1982 vehicles are on the road?).

    But if GM, or Chrysler, or whoever went bankrupt, when the market comes back, someone else will be there to provide the supply to meet demand. Maybe that’s Honda or Toyota or Ford. Maybe its a new Chinese company. Whatever. It’s someone new, and the opportunity for something a lot better (like a Prius) is there.

    We don’t help anyone by trying to paper over failure.

    Now, what works for businesses works for individuals as well. Every homeowner who is bailed out is a home that isn’t available for someone else to buy at a lower price. We’re sacrificing the next generation of homeowners to save the current ones. It’s a zero sum game.

  4. Miles Says:

    I agree that our problems are rooted in the very fabric of society, namely that capitalism demands constant growth and innovation in order to power an economy. There’s nothing wrong with that, but the trouble therein is that the market mechanism does not know how to tell right from wrong; it can only punish incompetence and inefficiency. Because of this inherent limitation, the sub-prime mortgage debacle was allowed to happened. Nonetheless, the market was probably pretty happy it did its job by creating so much wealth for us, and that the resulting “gold” kept its form for such a long time before it reverted back to straw in 2008.

    Unmitigated free markets engender these kind of crises precisely because it is a free market, a one-track narrow-minded growth machine without the capacity to accurately form long-term expectations. Technological and social change occurs in unexpected and dramatic ways, frustrating the best guesses of the cleverest entrepreneurs, not to mention the stodgy decisions of central planners.

    That said, I’m not suggesting capitalism is a failed system. Right now, all we need to do is as simple as pick up as many pieces of our economy as possible and find a new bubble to inflate hehe. Hey that’s just how it works! Hopefully it will be the healthy kind of bubble that won’t bankrupt our financial institutions and can give us some useful innovations in turn (like the tech bubble).

    I also agree that entrepreneurship propels our economy. Up until recently, our enterprising energies have largely been focused on the wealth of Wall Street, something we became dependent on for anything from our culture of consumption, venture capital, or even just making payroll. As it turned out, Wall Street propelled everything by scrupulously spinning gold from straw. Now that the magic loom factory has collapsed, the problem we now face is at least two-fold: we do not have the wealth to fuel entrepreneurship but even if we did, we really don’t yet have any new ideas as to where to focus our entrepreneurship.

    For now, solving both of these problems will unfortunately require the public sector to play a big role. Is it really green jobs? Man I don’t know. All I know is that in the search for answers, I find this Creative Class blog very helpful. The creative (read: innovative) application of our accumulated knowledge and technology could be a way forward. Our post-industrial economy doesn’t produce much of anything anymore, so we Americans really have to start reconceptualizing our economy as an abstract growth engine and reimagine ourselves in it accordingly. But don’t get too abstract or we’ll just get another “credit default swap”-equivalent in some other industry!

  5. Buzzcut Says:

    First you say, “Technological and social change occurs in unexpected and dramatic ways, frustrating the best guesses of the cleverest entrepreneurs, not to mention the stodgy decisions of central planners.”

    Then you say, “For now, solving both of these problems will unfortunately require the public sector to play a big role.”

    So central planners can’t predict the future, but to move forward we need to rely more on the central planners?

    Look, you have a great post, Miles (you write a lot more eloquently that I). You say a lot of great things. Sum it up: markets are not perfect.

    Of course they’re not. But the point is, in a universe of imperfect things, they’re the least imperfect.

    Certainly, we should learn from this latest bust that government is not competant to regulate markets. Securitization was at the heart of the bust, and government created entities were at the heart of securitization.

    And markets don’t require growth. We could have a perfectly functioning market society with periods of no-growth, or negative growth. The pre-Great Depression period was one of constant boom-bust cycles, where there were depressions lasting years. The market economy survived, and in fact it was the period of greatest technological change ever.

    Periods of no-growth are needed to clear the deadwood of the economy. Companies retool for the next boom. Government meddling just impedes that process from happening.

  6. Howard J Says:

    Yes Michael, some real Druckonian measures would be most opportune right now, ones that create lasting value, not the gold from straw alchemy that leaves behind only dross (stated so well by Miles). A reorganization would help. I recall Drucker advocating for a healthy economy that has a place for government, non-profit and for-profit sectors. Each sector is needed to do what it does best. Some of the financial sector companies (the too big to fail ones)should act more like re-regulated utilities. We went way too far toward a free market model. “To every thing there is a season, and a time to every purpose” . . .(and every type of organization and economic sector) “under the heaven”. Ecclesiastes 3:1 via Wikipedia

  7. Miles Says:

    Hey thanks for the encouragement, but I’m still a rookie at “writing” altogether and sorely lack skill in brevity that you have in abundance, so please forgive me for these long posts..

    What I was trying to say is that between market allocation VS central planning, we really have very little choice but to rely on government right now. There is just too much debt out there and too little growth prospects for the private sector to mobilize even if taxes were abolished altogether. Besides, no one is spending any money right now because there is no money to spend (thanks Wall Street), and the banks are totally bankrupt for the time being. So for now, the public sector needs to step up because it’s the only quasi-economic entity that has access to any prospective money. Government meddling, unfortunately, is something we forced upon ourselves until the private sector can pick itself back up with new prospects for growth. Doubtless this will happen in time.

    I really like what you advocate about creating an economy based more on savings and hard work as opposed to debt. I think this will inevitably have to be the case. Of course, with our economy the way it is right now, we can’t even be thinking about what’s next just yet. First we need something to just get us through the next few years.

    I agree with you, the markets were incompetently regulated. Hey, when you refer to government-created entities being at the heart of the bust, you’re talking about Fannie/Freddie right? If so, then I’d say that they’re certainly a manifestation of our troubles, but I wouldn’t say they’re the root cause. To me, the root cause was really that we just got too damn wealthy. Savings from all over the world were flooding into our markets because our economy was so strong, and so we were entrusted with this enormous pool of money with the expressed purpose of earning even more money with it. It’s not like Chinese savers were blind enough to trust their own government with their money! Anyway, the problem with that was we just didn’t have enough productive borrowers for all that money and yet we were expected to generate interest for our creditors anyway. And so we made out loans of all sorts, to poor people and others in the sub-prime housing category, and all that being predicated on the notion that home prices will inexorably rise forever. Well.. unfortunately they didn’t. So, it wasn’t just Fannie and Freddie, everyone in the private sector was thinking the exact same thing too and participated in the same bubble.

    Yes the market is imperfect, but it isn’t necessarily the “least imperfect” in terms of economic sustainability; it has the potential to be just as imperfect as any other political economy, as evidenced in our latest debacle. I read a very succinct characterization of this: “if moral rot has taken hold of a society, the market mechanism will take it to hell faster and more efficiently than any of the alternatives.” Of course, this commentator was talking about greed on Wall Street, but you can catch his general warning: markets can do as much good for an economy as it can bad. As things are today, it’s pretty hard for me to say that the market is the least imperfect mechanism as an economic engine. Let’s just say my confidence has been temporarily shaken.

    Now, I don’t want to sound like I’m anti-market or anything like that, but I feel we need to be mindful of the fact that the market is not inherently better at foretelling the future than any other mode of production. That is to say, the success of capitalism is incidental rather than deterministic, that it is the people that made markets great rather than the concept of markets itself. After all, it is the people that run the markets. When things go awry, it’s usually because the markets end up running the people! With free markets, that’s the danger we face and wittingly accept when trying to perfect an imperfect formula.

    That said, I agree with you that preemptive regulation of the market is probably not the ultimate answer. This crisis is part of a normal boom/bust cycle albeit of cataclysmic proportions, but this is no time to be doubting what makes us Americans. Yes, there needs to be more public spending right now, but this new spending needs to be geared toward “legitimate government priorities that would have been carried out in the future anyway.” That’s what Mitt Romney said today in a CNN op-ed. It’s a bit vague but I’d have to agree with him.

    There are those who argue that our markets weren’t free enough, and that’s why things went so terribly wrong. Now, I disagree with this in principle, but they do have a point. In their peak form, free markets need to be an economic system in which parts of it CAN fail without bringing down the entire system along with them. As things turned out, our large commercial banks had actually been operating with the implicit guarantee of the US Treasury. When our banks got into a hole, the Treasury guarantee became explicit and proceeded to float the banks out of the hole with several trillions of dollars of actual and prospective taxpayer money.

    This is not my idea of a free market. It was as if Wall Street subconsciously realized their absolute importance to our economy and developed a sense of invincibility in playing tricks with our money. In such a genuinely un-free market setup, our helpless reliance on Wall Street for all things economic is no different from relying on state banks in the most centrally planned economies. This is what really bugs me.

  8. RS Says:


    Timely post… and spot on. I think you’re absolutely right in your idea that the problem is not just a housing problem or just a credit problem or just a “Detroit” problem. The problem at its heart involves the very fabric of society in the U.S. Yet, what does that even mean? Does it mean that the very structure of our society is incorrect? Does it mean that capitalism is fatally flawed? Does it mean that we are doomed to suffer a global upheaval with no historical precedent?

    I think not. To me the problem involves the very fabric of our society because we are all at fault. We are all a part of the problem. We have become ungrateful, unsatisfiable, unhappy and simply to pessimistic. We want to have our cake and eat it too.

    Just look at this post and its comments. I for one, acknowledge that I have suffered a recent spout of pessimism that is a microcosm of the larger problem. I am on the verge of finishing my Phd from a decent school and I haven’t been able to get a job. So i started telling myself, ahh screw this university, screw this scholarly field, screw this economy, screw everybody… why can’t someone as seemingly “educated” as me get a frickin job and have a nice house… blah blah blah boo hoo boo hoo.

    But you know what. I went outside late one night this weekend and had an ahh ha moment. I noticed that the sky wasn’t falling. Unemployment is at 7.5% scarcely 2.5% above mere frictional unemployment… and this is the worst economy we have suffered through in decades! I have plenty of access to credit (I can still use my credit cards, I can still get a student loan, I can still borrow to buy a car, ect. ect.), I have new clothes, a useable car… on and on.

    So what’s the problem? The problem is… ME. I want unending growth. Perpetual booms. I am unhappy living in a 3 bedroom row house in the richest county in America. I want a 4 bedroom house, a six figure income, a pool, a flat screen TV with a PS3 and Wii in every room. I want a yard and a new car… And I want it all before I reach the age of 30.

    WTF is this. What is wrong with me? Why do I whine and moan, yet live in a nice place, with a great family, with food in the fridge, a TV with high definition service, phones with all the bells and whistles, clothes, fun times, ect.

    This got me thinking. The problem is us. We want to much more than we need and we want it before we have even earned it. We want creation without its shadow, destruction. We want only the positives of capitalism and we complain about the negatives. We want job creation but we want to inhibit the loss of jobs overseas. We want cheap energy but no pollution. We want fine foods without growing or hunting for anything.

    The problem lies in our selfish wants. Me me me. now now now. We have become a nation of pessimists when we live in conditions that are better than any generation before. We are so focused on our problems that we fail to see the opportunities just around the corner. Think about it… sooner or later we are going to figure out how to create energy without petroleum. We are going to figure out how to create plastics and fertilizers without petroleum. These things are going to create untold wealth… we will have our next bubble soon enough.

    In the mean time, let’s all take a deep breath and realize that we are suffering a bit… but we dont have double digit unemployment. We dont have hyper inflation. We are still creating new knowledge. New companies are still emerging on a daily basis. Our families are still fed, we still party like drunken frat boys on a weekly or monthly basis.

    In short, life aint that bad. We dont have psychotic nazi’s roaming offshore. We dont have bread lines and hoovervilles in our cities. We arent burning our furniture for heat.

    Lets all breath and be thankful for what we have and for the fact that we are living today instead of in the depression or in feudal times. Lets remain optimistic and see the opportunities we have instead of focusing on jobs going overseas and the like.

    This is the problem with our society. We want to have our cake and eat it too. We want uptopia instead of real life. We want everyone to have their own home with a chicken in every pot… and when we dont get it we all talk about the end of capitalism or the death of the American dream or the decline of the world economy.

    We have become a boo hoo nation of pesimists… and I am as guilty as any. That, to me, is the problem with the fabric our of society.