What will central planning look like when central planners dare not speak its name? Carlota Perez may have the answer.
The Venezuelan economist excites people, particularly self-styled progressives. Mary Kaldor, professor of global governance at the London School of Economics, believes Perez's economics contain the seed of a new Keynesianism that will "eradicate poverty and tackle climate change world-wide" while spreading a "new techno-economic paradigm." Strategy+Business columnist Art Kleiner calls Perez the most influential contemporary proponent of "long wave" boom-and-bust cycles, while BusinessWeek's Steve Hamm simply calls her one of the "smartest people in the world." In a very long meditation in this month's U.K. Prospect, Geoff Mulgan envisions Perez' ideas transforming the cities of the West into cultured workers paradises, with "great leisure palaces and sports stadiums; universities and art galleries; water towers and hanging gardens; or perhaps biotech empires."
The praise is not as surprising as the subject. Perez is a follower of Joseph Schumpeter, the economist whose 1942 work Capitalism, Socialism, and Democracy introduced the world to the concept of "creative destruction." Specifically, Perez is a "neo-Schumpeterian," plying a branch of economics that deals with dynamic and novel processes that transform economies.
Perez' celebrated 2002 book Technological Revolutions and Financial Capital: The Dynamics of Bubbles and Golden Ages broke new ground by treating financial evolution in the context of more familiar technological changes in productivity. (The neo-Schumpeterians also draw heavily on the "wave" theory of economic cycles pioneered by Nikolai Dimitrievich Kondratiev, a heterodox Russian economist who was purged and executed by the Soviet government and not rehabilitated until the tail end of the Perestroika period.) An admirer of entrepreneurs, a favorite thinker of gearheads, libertarians, and Sand Hill Road venture capitalists, Schumpeter is an odd figurehead for people who welcome the new era of re-regulation and assertive states.
But there's more here than just the irony that every premise eventually gets used to support every position. The Schumpeter surge reflects the bipolar nature of our time. A few weeks ago Time and/or Newsweek declared, "We are all socialists now," and the most successful business people of our day are working overtime to prove that statement true.
Yet the return of central planning, at least in the Obama administration, is the province of people like the bold and selfless national hero Larry Summers, the sort of planner who acknowledges the effectiveness, if not the ethics, of a free market. Leaders in Western Europe—where opposition to the genocidal horror of neo-liberal capitalism is more common than in the United States—preface international bailout plans with lip service about their preference for free-market solutions. The only form of anti-capitalism willing to come out of the closet is the hybrid socialism apparently being concocted by Hugo Chavez and Mahmoud Ahmadinejad—and that seems unlikely to be a crowd pleaser.
Within this context the popularity of Perez, a fellow at Cambridge and the University of Sussex and a professor at the Technological University of Tallinn, makes sense. In a recent article, Perez wrote that the enfeeblement of the world economy is a "Turning Point," a period of meaningful choice and vast possibility which marks the transition from the "Installment Period" of the tech revolution to its "Deployment Period."
But this excitement doesn't stem from the chance to move away from hated old industries like your cable company or local newspaper, nor from the wonderful, liberating possibility that GM may soon follow the USSR into the grave.
No, what makes this a "time for rethinking" is that job losses and black hole mortgages are creating "enough political pressure for regulation and institutional recomposition." This will enable "the State to come back actively in order to [enable] a shift in the balance of power from finance to production" and "change the focus from the stock market indexes to the expansion of the real economy, and to the increase in social wellbeing."
To accomplish these wide goals, national governments and transnational institutions must deploy not only financial regulation but "a wider package of measures that truly tilt the playing field in favor of real investment in real job creating production within each country and across the globe."
Expanding on this idea, Perez notes that she is seeking smarter rules, not just more regulation. "Sarbanes-Oxley was a bureaucratic obstacle rather than proper regulation," she wrote by email. "Hedge funds and the whole of the shadow banking industry did what they wanted without much supervision."
A free marketer might counter that the shadow banking industry throve, overindulged, and then failed in the area of ultra-sophisticated derivatives for the same reason other gold-diggers have pursued other bubbles in the past: because this was the one playing field where upstarts and small operators could escape domination by apparatchiks and arthritic legacy players. You might even say it's a feature, not a bug, that Bear Stearns and Lehman Brothers eventually decided to jump in and ended up catching the same MBS pox that thinned the herds of IndyMacs and New Century Financials.
But Perez seems unwilling to spill the blood of even the most decrepit and ill managed industries. In the same article, she argues that it "makes sense to save mature industries (such as automotive) while helping them move towards fundamental product change, instead of letting them fall precisely now when they will pull the rest of the economy further down." (In her email, Perez declined to opine on whether "the current US auto-industry should necessarily survive.")
This gentleness of tone extends to her regulatory ideas. "Both the rules and the incentives that would strongly tilt the paying field towards expanding production, job creation and probably clean-tech (including durability, recycling, dis-assembly, materials and energy saving, etc.) would be guided by...consensus and would serve to reinforce it," Perez wrote in her email.
Perez acknowledged that optimism about resurgent state planning, not to mention the propping up of dying industries, at least appear to contradict the idea of creative destruction as a decentralized, distributed, bottom-up process. But she noted, "Schumpeter himself used the term 'abnormal liquidation' when the recession turned to depression and many of the companies that could have survived went under." She also located the phrase "creative destruction" within its historical context: "I think that organizational structures are dependent on the particular paradigm that is providing the basic technologies. Mass production was by its very nature a top-down hierarchical method of achieving complex tasks, especially the production of enormous quantities of identical products at very low cost through routinization."