Do Economic Developers know what they are doing? The Curmudgeon in Wonderland!

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“But I don’t want to go among mad people,” Alice remarked.

“Oh, you can’t help that,” said the Cat: “we’re all mad here. I’m mad. You’re mad.”

“How do you know I’m mad?” said Alice.

“You must be,” said the Cat, or you wouldn’t have come here.”

The Curmudgeon knows it is unusual for him to overstate and oversimplify (burp), but maybe just once–to make a point. He is not sure that the profession, as a whole, has much of an idea of what it is trying to accomplish. Every other article or report he reads claims that this city, or that region has been, or is being revitalized–and this very special economic development program-strategy-official is responsible. Is there anyplace left in the USA that has not already been revitalized? What a great profession we are. We never fail and every strategy (except tax abatement, of course) succeeds. Innovation works the best, of course!

The only exception to the reports cited in the first paragraph is the other 50% of reports that scream nothing an economic developer does actually works. The only way an economic developer creates any job at all is if he hires himself. There isn’t a cost-benefit study that actually, indisputably, proves economic development actually can create jobs. Nothing, no where has been revitalized and economic developers are just a bunch of nondescript drones who feed zombie firms and capitalist fat cats. Economic development programs, positive business climates, incentive-deals cited in these reports are nothing but a race to the bottom–a perversion of everything decent in humanity.

Frankly, it seems to the Curmudgeon that he is living in an Alice in Wonderland kind of world. You know what I mean–a rabbit hole with a ton of very weird characters hanging around saying contradictory and implausible things. Such is the Wonderland rabbit hole called economic development!

[The Curmudgeon told the reader to expect exaggeration–you do have to be mad to be reading this blather. But, if you were in the right mood, you might admit the economic development Wonderland is pretty much schizoid or bi-modal, and that a great deal of what we read is bunk and schlock (the Curmudgeon writes blather–not bunk and schlock–he leaves bunk and schlock to others). That bunk and schlock is very much separated from the reality of what actually is going on at the street level of our communities. There is more Alice in Wonderland in our profession than we might like to admit.]

Why is our professional rabbit hole so weird and contradictory? It may sound strange, but the Curmudgeon thinks it is because most economic developers are trying to achieve a set of professional goals which are impossible to achieve. These goals, however, are so important to our community, that our community puts us up on a pedestal and ranks our public policy very high in status and respect. We bask in the sunlight of our community’s glow–until,  of course, the bad moon rises.

Our goals, (or what we say we do) are what makes us important and raise our professional prestige. But can we do what we say we can do?

“I’m afraid I can’t explain myself sir. Because I am not myself, you see?”

Our professional goals invite contradiction, frustration and failure. What are these alleged goals of economic development that are responsible for our weird rabbit hole existence? The Curmudgeon knows some smart aleck in the peanut gallery is likely to respond by screaming that the goals of economic developers are to create/retain jobs and to generate taxes (wages, investment, sales). Sure– that’s what tax abatement, cluster approach, tax exempt financing, convention centers, regionalism and workforce development (to name a few programs) are supposed to do no doubt (whispered sarcasm implied). That’s what we do–We create jobs, generate prosperity and taxes and revitalize cities.

The Profession Lives in an Insane Job Creation Rabbit Hole

Economic developers and everybody associated with economic development typically say job creation most of all is the end result of doing good economic development. In fact, a recently released summary of 2013 Governor State of the State addresses by the National Governor’s Association reports that job creation is the number one mentioned topic of governors in all fifty states. The Curmudgeon surmises that by the next election if any Governor fails to meet his or her job creation goals, their state economic developer is sure to be fired and his or her reputation destroyed forever. And they should be–live by the sword, die by it!

Economic developers must have a screw loose. Why do they allow this job creation lunacy to continue? Promising job creation certainly puts the economic developer in the spot light–but it also means you’re in a hot spot. If you’re at all unlucky you’ll be the most prestigious person in the unemployment line. The Curmudgeon knows; he’s been there.

“Why, sometimes I’ve believed as many as six impossible things before breakfast”

Not only do economic developers think they can create jobs but many claim, and many actually think, they can revitalize cities, counties, regions and states. They bask in the deserved sunshine that only they, the economic developer, can overcome the global trends and macro and micro economic forces that defy Presidents and the International Monetary Fund. We as economic developers possess such powers that we can stop demographic change and population migrations–and currency exchange rates or state business climate? Hey, no problem. National recession, no matter, I, the economic developer can hold those forces at bay and grow jobs and taxes. Create a Silicon Valley in Detroit–sure, give me a week and I’ll get a headline for you. Jobs and Taxes are my meat and potatoes. I eat them up for breakfast, lunch and dinner.

Why do we allow our profession to be wrapped in such hyperbole?

I’m sure that jobs and taxes are the  promises  made by a typical economic developer to her boss, to the public in a public hearing, to a budget committee over at the legislature and to the media asking for a quote. But come on now. We’re among friends. Do you really believe that is what you are doing? Do you really think you create enough jobs to matter, or enough taxes to pay even your paycheck? Prove it! The Curmudgeon spent more than a generation out there doing economic development and he must confess he didn’t create very many jobs–his region and communities, in fact, lost them in droves. Apparently, like a non-exceptional teacher, he failed to live up to his responsibilities. Well, take comfort, at least he’s retired and out of there.

“The rule is, jam tomorrow and jam yesterday–but never jam today”

But the problems created by implausible economic development goals do not go away simply because the Curmudgeon has left the office. Simply put, economic developers and their programs do not directly create jobs and pay taxes. We kind of, sort of, incentivize, or facilitate, or create the opportunity for others to do these things–maybe. But the fact of the matter is that others create jobs and pay taxes. We just take credit for it. We do a media placement and then count up the firms/jobs that move in over the next year. The population may decline, and unemployment may rise over that year–but our program worked. Seventy-two firms moved in. “Bro, it ain’t me who caused all the bad stuff. Anyway, things would have been worse–but for me”!

Admit it–this is pretty negative stuff. Unfair? I’m not sure. But wait a minute (all right lots of minutes) and let me explain my point. My point is not that we (at least me) are failures and that the profession is a con game. The Curmudgeon spent nearly forty years in some aspect of economic development and he has no intention of being pushed into the crematorium oven thinking it was a complete waste of a life’s effort. On the contrary, he thinks what we do matters to the community–overall helps the community and its residents. The point is the Curmudgeon thinks we have chosen the wrong goals to justify our programs and our profession.  Using jobs and taxes we are trying to accomplish a set of goals we can’t possibly ever prove we achieved–mostly because we didn’t.

How do we get out of this Rabbit Hole?

We are not creating jobs and taxes. Then, what is it we do? We are helping to protect and guide our community, and on a good day helping it grow and prosper. We are helping to protect it from the millions of evil things out there that cause job loss, break up families, and condemn generations to poverty and  cause neighborhoods and central business districts to deteriorate. We are trying to make our citizens and residents believe they are not mere flotsam on the sea of globalism-that they can do things locally which can help stabilize the waves, if only a bit. Sound corny? Perhaps, but it is more realistic than claiming to create something we don’t.

“In another moment down went Alice after the rabbit, never once considering how in the world she was to get out again”

Creating jobs and taxes asserts to the world that we can bring economic revitalization, reverse decline, and achieve growth. We can’t do any of these things. We can, however, make the passengers in our community a bit more comfortable in a very choppy flight. We can defend them from other cities, regions and nations that are trying to steal our wealth, diminish our standard of living and imperil our homestead. We can create opportunities where some can find a job, learn a skill, enjoy themselves at a public sports stadium, and start up a business and achieve their dream not to have a boss. But we can’t create jobs or pay someone’s taxes. We cannot revitalize cities and create brand new clusters in our economic base. We cannot reverse population loss and we are not responsible for the arrival of those people who do move in. We are only economic developers–not Gods or Economists (redundant, I know).

OK! Let’s take this discussion and make it a bit more specific, a bit more intellectual, a bit more useful–and a lot more boring.

First let me explain why jobs and taxes are bad goals for us as individual economic developers and for the profession. Then let me present my idea that our purpose as economic developers is to deal with the reality of modern capitalism–something a guy named Schumpeter called “creative destruction”. Creative destruction is a normal, and overall necessary, feature of modern capitalism. But each community needs someone to protect and guide it from its consequences. That is the real job of an economic developer.

The Curmudgeon must admit he’s been down rabbit holes before, and he has bits of a map and a bit of rabbit warren expertise.  For the best suggestion of how to escape from the old job creation insanity to a more sane Wonderland, we turn to Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York, Harper Perennial, 2008).

“And what is the use of a book” thought Alice, “without pictures or conversation?”

This is an Alice and Wonderland experience so we shall “begin at the beginning and go on until we come to the end; then we will stop”. The reader has entered the mad world of the Curmudgeon Wonderland. “There is a place”, said the Mad Hatter, “like no place on Earth. A land full of wonder, mystery, and danger! Some say to survive it you need to be as mad as a hatter. Which luckily I am.”

First–Why Specifically Should We Say NO to Jobs and Taxes

It’s not bad enough we believe as a profession that Jobs and Taxes are what we are about. Worse, we are told this constantly by others; most frequently politicians, our bureaucratic bosses and the media constantly tell us–in no uncertain terms–that is what we do for a living. The thing is if we listen to those people, they do not stop with jobs and taxes but usually go on to mention a wide variety of other goals as well–happy families, community pride, creative community, better schools,  kids that stay home and don’t move away, increased poverty values, better quality of life, overcoming obsolescence through infrastructure modernization and demolition. All sorts of stuff.  That’s not helpful but it does strongly suggest that in the minds of many Jobs and Taxes are a proxy, a short hand expression for a lot of other less tangible goals. That could mean people expect us to deliver a lot more than jobs and taxes.

The Mad Hatter: “Would you like some wine?”, Alice: “Yes”, The Mad Hatter: “We haven’t any and you’re too young.”

That might be OK if we could only measure Jobs and Taxes so that we could show them we created 200 jobs and therefore we did our job and let us be. The trouble is measuring job counts is usually bad news and don’t even try to measure taxes generated–especially if a tax abatement is still in effect. Job counts and tax revenues suffer from time lags and business cycle fluctuations. The media distort the interpretation of job counts and so do opposition political leaders, not to mention school districts and labor unions.

In fact, think about it for a second. No matter what economic development program the reader is associated with, consider the following set of questions. How do you measure success of the program. Isn’t it primarily the number of jobs created per unit of resources used–i.e. how many jobs created per dollar lent in a revolving loan fund, IDB or tax abatement, for instance. How many jobs created per unskilled worker trained? How many firms-jobs located in your city per click or lead generated? I suspect not. And no cheating! Think of where would you be if you tossed away the silly multiplier. How many net jobs were created by that waterfront development you did ten years ago–but leave out the jobs that would have gone someplace else in the city anyway? Ugh! The Curmudgeon almost sounds like a newspaper reporter or the crank in the off-ed column. Job counting is a methodological nightmare and frankly, job counts are easily attacked by those with an agenda. By asserting that job counts are the best defense of how well you did your job, you are setting yourself up for an inevitable fall.

Think of it this way. Companies and people, the end units/recipients of our incentive programs, don’t define their success in terms of jobs they create. They have different goals than we do. We cannot assume that they in achieving their goals will achieve ours simultaneously. A successful company, for instance, generates increasing profits, or at least cash flow. Not jobs. When I buy my Slurpee and drink my bourbon after completing my skills upgrade instruction, the Curmudgeon does not take pride in how many jobs he created or taxes paid. He simply wants to enjoy and relax; he may instead just go home and take a nap. The folks we are trying to help (firms and people) are not working with us in creating jobs or paying taxes; it’s not what they do. Jobs and taxes are a byproduct of what they do and there is no automatic reason they will generate the byproducts we desire.

Or worse, for companies jobs and profits can have an inverse relationship–especially if something like productivity (new machinery or efficient processes) gets in the way. Also profits are made by selling goods and services, and for that to happen somebody has to purchase them. Things change, sales fluctuate, increased competition rears its ugly head, consumers get poor all of a sudden–and then all sorts of bad stuff happens to the selling company and the economic developers who are counting their jobs.

We don’t control any of this stuff, yet we, and our programs, are judged as successful or not as the company or the individual rolls their dice. Woe be tide to an economic developer counting jobs and taxes during a downturn in the business cycle or, perish the thought, a recession. Counting jobs is like counting crows–“I saw one a moment ago but he flew away somewhere”. Or worse, “I shot a gun into the air and this crow fell out of it–must be mine”.

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And taxes–how does one count taxes? Today we rely more on intergovernmental transfers than our own-source revenues. Taxes paid by economic development recipients are, for all sorts of good and bad reasons, not clearly identified or isolated for analysis. Leakage is always an issue as helping firms and their workers do not always, maybe ever, correspond to tax jurisdiction boundaries and not everybody pays taxes on time.  Do a sales tax audit? Ask for their income tax forms? Copies of audited financials? Guess what, it’s only a partial picture at best.

So you settle on property taxes, oh boy! Each state and locality often handles and defines what is property (machinery or only the building-fixed improvements) and what is taxed so we cannot make definitive statements which apply to us all. But…. The more the property tax, the less the profits, the less the jobs (unless one is a Progressive liberal and then the word “more” is substituted for the word “less”). The company usually speaks the language of microeconomics and in that case if there are a lot of taxes, then the company is looking for someplace that has less taxes. So if the economic developer finds the firm pays more taxes than maybe he’d better crank up his business retention program. Measuring taxes is a “damned if you do, damned if you don’t” kind of affair. A lot of TIF bonds have been looking rather peaked recently–things sure looked a lot better when they were issued. Anyway …

Both taxes and job counts defy accurate measurement. This is true especially if we combine a lot of projects or a lot of communities into one big database and then correlate it with variables (such as unemployment, tax rate increases, poverty rates, or population growth/decline) which have no clear relationship to individual project-related jobs or taxes. We make loans, issue tax abatement or TIFs one project at a time–often for different reasons.

In the hands of those tainted with an ideology or who oppose such programs or their recipients, measurement assumes the form of a cost-benefit study, which usually amounts to little more than an academic and methodological mugging in a dark ally. And the newspaper looking for its daily meal of stories and outrageous headlines is very glad to digest any offering from any ideological grist mill (excuse me, research institute).  Counter studies by economic developers are simply dismissed as self-serving, if not distorted manipulations if done poorly. Ninety percent of firms can create jobs as they said they would; ten percent do not– and it’s the ten percent that become the focus. Jobs and Taxes are vulnerable to this kind of attack and defense is usually futile.

Often the perspective or reference point of the researcher is not the perspective or reference point of the decision-maker. The research typically looks at the overall “system” not the decentralized individual community level. From their perspective the economic developer is just moving jobs around and not creating jobs. But the last time the Curmudgeon looked, it was the community that paid the economic developer–not the overall “system”. Each community competes with other communities for a limited number of firms and to the victor belongs the spoils. The real problem for the economic developer (and politician)operating at the sub-state level, whatever its merits,  is the need to produce job counts. Moving a firm into a community through economic development incentives is the purest way, the Curmudgeon knows, to produce an unambiguous job count. Defining an economic development success in ways other than job counts and taxes can serve to de-intensify this deal-making bias.

Deal-making has always been and most likely will always be an important element of state and sub-state economic development.  Still academic researchers are right in one sense, deal-making has spiraled almost out of control. In the old days it was smokestack chasing, then chip-chasing, then data storage and now cluster-innovation chasing. The profession increasingly  resembles a bunch of three-legged dogs chasing a Ferrari, with a site selector in the back seat, down an autobahn.  Will capturing the Ferrari really change any dog’s life–will any single firm revitalize a troubled community? With rare exceptions–not really. But listen to the speeches at the ground-breaking for this captured firm. The speeches, more than likely, will cite and praise the new jobs created. That is the underlying dynamic that fuels the deal-making competitive culture.

Finally, many citizens, tax payers and observers are not happy that economic developers, in order to produce either jobs or taxes, offer programs or incentives to greedy mobile capitalist firms which have blackmailed communities into giving up their taxes, thereby denying assistance to the truly needy.  Economic developers are fortunate in that few read or pay attention to these studies once the headline has gone away–but the image lingers on and becomes part of the economic development legacy to be picked up at some future budget session or public hearing or academic research article.

“I can’t go back  to yesterday because I was a different person then”

The thing is– we do so much more with our programs than jobs or taxes. We bring in tourists and create entertainment districts and waterfront attractions. We retrain the unemployed and unskilled and arm them with new skills and credentials. We help start ups and entrepreneurs and work with those who suffer from discrimination and grinding poverty so they too can share the American dream. We cut costs from our resident business operations so they can more effectively compete with firms in other communities across the globe. We tell the world our story–in our own words why we have such a great place to live. We try to find firms with job openings so our children don’t have to move to the ends of the earth to find a job.

We clean up old pollution-filled brownfield eyesores and health hazards. We try to help companies that have been around a long time, now surviving in mature, cost competitive commodity-type production compete and make it even a few days more so they can finance their pension funds. We encourage our creative, sometimes geeky megalomaniac’s to innovate an invention. We look after your neighborhood and do what we can to help your local school. Sometimes we have to “buy a payroll” through tax abatement and sometimes we build a sports stadium or a museum so that we all get to do something we enjoy on our day off. Other times, we take an old commercial strip, waterfront or even the downtown and take a stab at making things more attractive and economically correct. And we help pick up the pieces when something unexpected goes wrong.

But we don’t do jobs and taxes anymore! We never really ever did.

Unless we are all mad hatters why do we let ourselves be judged in terms of two goals we cannot control  or achieve and cannot adequately or objectively measure–while we in real life pursue so many other goals which are less measurable but more descriptive of what we are actually trying to do. Part of the answer is just simply habit. Jobs and taxes have been our alleged goals for more than half a century. Everybody by now has bought into the delusion. There is no push back from economic developers nor from mayors or governors or legislatures and councils. So Jobs and Taxes continue as our principal goals. The second reason (tied with our lack of professional push back) is the subservience to mayoral and gubernatorial hyperbole (excuse me, promises); and the third reason, a close tie with the other two, is the gullibility and lack of push back from the voter-citizen. In other words, if we want to change the goal-structure of economic development we have got a lot, an awful lot of work ahead of us. But you know the old saying “when the tough get going, the going gets tough”–or something like that.

PART II

So we need some help with changing goals in economic development. At the very least we have got to package our real program goals into a larger “theory” or explanation. One that actually fits what we do would also be good. If we actually can cite that what we are doing fits into a theory or approach, we can then explain why we do something and what we hope to achieve by doing it. A theory also gives us some framework to prioritize our programs and some sense of how to evaluate these programs. In short, it would be easier to change our goals to something else if we could re-frame our initiatives and actions to fit an accepted theory or approach. The Curmudgeon suggests we turn to Joseph Schumpeter and his notion of creative destruction.

“Would you tell me, please, which way I ought to go from here”, “That depends a good deal on where you want to get to”,“I don’t much care where–“ “Then it doesn’t matter which way you go.”
First things first. Who is Joseph Schumpeter?

Schumpeter is an Austrian (born in 1883) who emigrated to the USA just four months previous to Hitler achieving the Chancellorship (1932). His first USA job was at Harvard where he wrote the book we will use in this review: Capitalism, Socialism and Democracy (1942). Schumpeter wrote many other noted works in his day was regarded as a premier economist-sociologist. He taught Paul Samuelson whose textbook introduced the study of economics to many a dismal and brooding undergraduate. Google Schumpeter and get to know him better, if the reader is curious. For our purposes, he, in Capitalism …, made the concept of creative destruction famous and almost a household word. We would add, however, that, even beyond creative destruction, current economic development is very much linked to key aspects of Schumpeter’s approach. Let me explain before we discuss creative destruction.

Schumpeter wrote at the same time as Friedrich Hayek authored, The Road to Serfdom (1944). Both lived and were writing in a time period that we now regard as the Age of John Maynard Keynes–Keynesian economics was the reigning paradigm. Capitalism, Socialism and Democracy was well-received upon its publication, but it was only when Keynesian economics was challenged and appeared wanting in the 1970’s did Schumpeter’s competing approach receive the attention it deserved. At that time Conservatives then tended to embrace Hayek and many liberals discovered Schumpeter (who  ironically viewed himself as conservative). There are many who believe that since the 1980’s we are living in an “age of Schumpeter”. Indeed, Robert Heilbroner, author of the famous The Worldly Philosophers, included Schumpeter as one of the five most famous economists in the history of modern economics (the others were Adam Smith, Karl Marx, Thorstein Veblen and John Maynard Keynes). Schumpeter had arrived–a bit late but none the worse for wear (he had passed in 1950, by the way).

Joseph_Schumpeter_ekonomialaria

Truth Be Told: He was quite the ladies. man.

Keynes employed a “top-down” “demand versus supply” approach to capitalism. Schumpeter had a bottom up, i.e. starting with the individual company and how the aggregate of firms drove the overall economy. Schumpeter tried to explain how capitalism could be driven by what occurred within the individual firm propelled by its corporate leadership, its products, and its strategy. Keynes used government and deficit spending to finance-prod growth through greater consumer demand. Instead, Schumpeter saw the corporation as the source of growth–a growth characterized by disruptive but transformative change. Schumpeter’s model of growth prepared the ground for such concepts as “innovation”, “entrepreneurship”, “strategy” (upon which Michael Porter launched his very distinguished career), as well as creative destruction. His signature concept was understanding the nature and importance of capitalist innovation, the destruction innovation created, and the economic growth that resulted.

Innovation was why capitalism would survive into the future. Without innovation capitalism would likely fail and be replaced by another economic system. What did innovation do that was so great?–it created increased wealth, prosperity and through technology improved the quality of life and furthered what economists describe as “progress”. Innovation was launched by entrepreneurism and corporate strategy through the instrument of the individual, disruptor, corporation. Sound familiar? It sounded familiar to the likes of Romer, Krugman, Lukas and Sokol, among others.

And that brings us to creative destruction. Creative destruction, for Schumpeter, was the reason capitalism was a growth machine and simultaneously the biggest single threat to capitalism’s long-term survival as an economic system. What is this two-edged sword called creative destruction? To approach an answer to this question we should first understand what Schumpeter is trying to do in this book so that we can appreciated the “context” and “role” that creative destruction plays in the preservation of capitalism as an economic system.

Schumpeter argues that capitalism produces economic growth better than alternative economic systems such as Marxism–but…. “its very success undermines the social institutions which protect it [capitalism], and ‘inevitably’ creates conditions in which it will not be able to live and which strongly point to socialism as the heir apparent”. (p. 61). In essence, he is arguing that the “way” in which capitalism produces economic growth weakens the political and social which supports that capitalist system. The weakening of these support institutions tends to predispose the replacement of capitalism with a Marxist system.

Already, I am sure the Curmudgeon has both confused the reader and told them more than they wanted to hear. I can’t really help with the latter situation, but perhaps can help with the former. Schumpeter believes very simply that capitalism’s greatest asset is that it produces economic growth better than any other economic system. The way capitalism produces that growth, he describes as ‘creative destruction’ and creative destruction will weaken the support systems of capitalism (public acceptance and political/institutional vigor) so that the Marxist system will seem a better economic system than it actually is.

Shiva: The Hindu God of Creation and Destruction

Shiva: The Hindu God of Creation and Destruction

This possibility that Marxism may replace Capitalism is a worry to Schumpeter–he is not a Marxist and does not want a Marxist system. Rather Schumpeter is concerned that creative destruction, while leading to great economic growth, is a two-edged sword which can also lead to the destruction of the Capitalism system–unless somehow it is tempered or its negative effects mitigated. The dilemma in his mind, however, is that if one tempers the negative effects of creative destruction, does one also tamper with the positive effect (greater economic growth). Capitalism is a very fragile economic system–because of creative destruction.

So Schumpeter does not “advocate” creative destruction; rather, creative destruction is why Capitalism is best system to produce economic growth. Creative destruction is simply the engine powering economic growth. So, the reader asks “what is this creative destruction”? And the Curmudgeon counters with “please be patient”. He’ll explain eventually–but not yet.

His first task is to prove to his satisfaction at least that Capitalism has a proven track record in producing unequaled economic growth. In describing the history of capitalism and its linkage with both economic growth and improved quality of life, he notices that he can demonstrate that Capitalism did produce fantastic economic growth–but in an uneven, choppy manner. The growth pattern is like a roller coaster with ups and down–although the trend line is up (higher highs and less lower lows so to speak). There are periods of inflation and busts with great unemployment and social misery which accompanies unemployment. With each upward spasm of economic growth and quality of life, one can expect a regrouping and a period of consolidation characterized by unemployment. Some of the gains of the upward spasm are lost–but far from all. Eventually, a new upward spasm occurs and the process reoccurs. Higher highs followed by consolidation, followed by even higher highs etc.

Obviously, in the retrenchment period, Capitalism will not look good to those who are negatively impacted and they will want systemic change–to some variant of Marxism which will seem most attractive in these lean periods. The reader should remember that Schumpeter is writing in 1939-1942 and has just lived through the Great Depression–that is his reference point and why he fears system change–it produced in his mind Stalin and Hitler (and FDR). In particular, he is concerned that “people” do not understand the true nature of Capitalism and how it works and then in misery and frustration in Capitalism’s inevitable downturn-consolidation periods turn to an alternative.  How does Capitalism actually work: creative destruction. So now he is ready to explain “creative destruction”.

Please allow the Curmudgeon to employ a poor and strained metaphor at this point. The reader is quite aware that a lawnmower, a motorcycle, a compact passenger car, a sports car, a SUV, a pick up truck, and a semi are all forms of transportation (oh, shut up with the lawnmower). They all share one thing in common that propels them forward: an internal combustion engine. There is no mistaking the lawnmower for the semi–it is structurally different, looks different and even does different things. Capitalism is not the lawnmower or the semi–it is the combustion engine. As the engine “increases its power output” the vehicle it powers changes. The vehicle (society and the economy) change appearance and even function, but aside from size and power, the engine still does the same thing it always did–it produces creative destruction. Capitalism is the engine, not the vehicle.

Creative destruction is “the Capitalist (engine) process” but the vehicle is different over periods of time. It can move from pure competitive capitalism, to oligopolistic capitalism, to even monopolistic capitalism and back again. One sector of the economy can be oligopolistic, while another is monopolistic–and then later both can reverse themselves. People look at the vehicle that they are riding at any point in time and equate it with capitalism but they forget that Capitalism is change personified (thanks to creative destruction). Capitalism in Schumpeter’s words is “evolutionary” and if you think there is too much concentration or monopolistic tendencies–wait awhile, it will change at some point. Why? Creative Destruction.

“My dear, here we must run as fast as we can, just to stay in place. And if you wish to go anywhere you must run twice as fast as that”

Creative destruction is” … mutation… that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in”. (p. 83). How does capitalist growth occur with Creative Destruction? “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates”. (p. 83).  What happens when Capitalist growth occurs? “… the competition from the new commodity, the new technology, the new source of supply, the new type of organization … strikes not at the margins of the profits and outputs of the existing firms but at their foundations and their very lives”. (p. 84). “The problem [of creative destruction] is how it creates and destroys [firms]’. (p. 84)

And there you have it! At any point in time creative destruction means that existing firms are “attempt[ing] to keep their feet on the ground that is slipping away from under them”. (p. 84). Schumpeter constantly refers to the “perennial gale of creative destruction” that is capitalism. Beside the firm itself, who or what is the agent of creative destruction? The Entrepreneur. “The function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or, more generally, an untried technological possibility for  producing a new commodity, or producing an old one in a new way, by opening up a new source of supply of materials or a new outlet for products, by reorganizing an industry and so on”. (p.132).

But again, all this change, destruction, and growth can, frequently does, undermine the social foundations of society and government–the pillars holding the capitalist system in place. The growth machine that is capitalism is very, very fragile. Whenever that growth machine is perceived by a critical mass as being hostile to their interests and well-being, a demand for its replacement or modification intensifies. Every modification will usually reduce the ability of the Schumpeterian system to grow–modifications, in effect, put a governor on the combustion engine. Create enough change and disruption and most may want to change the engine entirely. Capitalism is, we repeat, a very fragile growth machine.

Economic Developers should replace jobs and taxes with dealing with creative destruction!

“Who in the world am I? Ah, that’s the great puzzle.”

In the Curmudgeon Wonderland, the tasks-goals-end result of our economic development activities should be either  to facilitate the growth component of creative destruction OR to clean up, manage, and triage its destructive aspects–as both occur in our individual community or jurisdiction. We do not need to count jobs or somehow increase tax receipts.

Given current program alternatives, the menu for creative growth communities could range from educational initiatives, small-young business growth, entrepreneur, pursuit of disruptive technologies, cluster enhancement, modernization of infrastructure–and frankly just about anything in practice at the moment. The strategy-program mix for a community that desires to deal with the destruction evident in the community is likely to be more complicated. It is quite likely that such a community will embrace some mixture of the two goals, i.e. some level of growth initiatives will no doubt be funded (my guess is that infrastructure modernization, broadly defined will be selected and, sadly, attraction as well) while other programs will be targeted to those firms and workers in need of assistance. Given that most economic development programs operate at the margins (an RLF, mentoring program, skills enhancement simply touch too few firms or people), the real difference between strategies will be over infrastructure and business climate programs.

Lewis Carroll: Self Photo

Lewis Carroll: Self Photo

The Curmudgeon’s guess is that using creative destruction as our goal-set will change the existing mix of programs and initiatives very little. First, the existing mix of programs has been, for the most part, the results of jurisdictional decisions and secondly, most strategies and economic development tools can be tweaked to serve either creation or triage (change of eligibility for instance can shift the direction of most any program). What will change is less the “what of economic development”, than the “why” of economic development. In other words our proposal is not a proposal for a world turned upside down, but more a restatement of why we do what we do and a precision as to what our political leaders and residents can reasonably expect from our efforts. Equally important, by abandoning job counts and delinking economic development from population movements, sector change, and business cycles we can better measure through relevant indicators what works and what doesn’t. We no longer have the responsibility of saving the community or being the prime force for its future.

As such, state and sub-state economic developers are “place-based”. Economic developers serve firms and people in a given geography. It is the responsibility of the federal government to do what it can to address, from its overall perspective, the twin tasks of creative destructive. State and sub-state economic developers can use federal programs when useful, and ignore those which are not. State and sub-state economic developers are not required to mirror a national perspective or serve the goals of national government. Each geography looks to its own knitting.

This federalist schism of perspective permits some geographies in “destructive trouble” to make modifications to capitalism–modifications which will not be of such scale that the overall economic system is transformed. These programs and amelioration  may provide some sustenance to those people and firms adversely affected by creative destruction. Other geographies in the federal system, however, will be free to pursue growth creation and disruptive change in their geographies, if they so choose. In this manner, state and sub-state economic developers can inhibit overwhelming the social and political change which trigger Schumpeter’s fear that the growth machine of capitalism could be replaced by an inferior economic system.

Each state or sub-state jurisdiction could decide for itself which path or set of needs is most suitable for their geography. No longer would there exist “magic bullet”, one-size-fits-all economic development strategies. There would in practice be a diversity of goals within the profession and the nation–and local decision-making (and democracy) could well be enhanced so to provide a brake in the current trend to nationalize local economic development. The current tendency of  economic development toward “herd behavior”, the exact opposite of our proposed Schumpeterian goal-set, would be headed off at the pass. After all, herd behavior, in large measure, is chiefly the defensive consequence of every economic developer attempting to count jobs or increase taxes. In our Schumpeterian Wonderland (rabbit hole, if you will), state and sub-state economic developers have different goal-sets relevant to the firms and population needs of their respective geography.

As long as we operate within a capitalist economy our tasks are to service the agents of creative destruction: firms, entrepreneurs, start ups, disruptive technologies and the “people” who work, or will work, in such firms. We can help mature firms regain their creativity and dynamism or assist them to compete with other firms that cause disruptive change. and who potentially can create firms (technology, innovation, productivity, etc.).  Having earlier compared economic developers to stewardesses, I now follow up and think of us as janitors–cleaning up after a day’s work is done and preparing for new production on the next day. Is this conception a “step down” for the profession? Depending on one’s point of view–maybe, maybe not. Admittedly no one takes the janitor out to lunch or golf. Nevertheless, an economic developer is the custodian of creative destruction.

“You used to be much more…muchier. You’ve lost your muchness.

Therefore, switching the goals of economic development away from job counts and taxes to creative destruction does not much affect WHAT we do but it might change HOW we do economic development  and WHY we do what we do. But make no mistake, changing goal-sets as we propose will certainly change how we measure our success or failure, and, most importantly, it would go a long way to tone down the revitalization-Messiah complex that has become a signature characteristic of the profession. By dispelling the fiction that we revitalize cities and create jobs, we could calm expectations so that we can better help firms, workers and entrepreneurs in our communities as they wade through the troubles and opportunities unleashed through the systemic-level and cyclical creative destruction. We could offer both comfort and programs so the community is doing what it can to maintain its place in the hierarchy of cities amid the “perennial gale” of creative destruction. March-hare

Knave of Hearts: You’re all mad.”

The March Hare: “Thanks very much.”

Comments

Radical innovation as “creative destruction” is the mandatory requirement for economic development to create jobs and taxes. However, the fourth generation (4G) of innovation theory and practice is a requirement to be able to effectively create radical innovation. Robert Gordon’s analysis that innovation has permanently stalled will remain true until 4G is adopted and practiced. 4G R&D is described in a 1998 book, Fourth Generation R&D, and 4G innovation is described in Chapter 21 of Wiley’s Encyclopedia of Technology and Innovation Management. There are twelve principles of 4G which include creating the new position of Chief Innovation Officer that was first described in the book, Fourth Generation R&D. 4G changes the linear model of innovation which begins with R&D to a nonlinear process which begins with discovery of a market and business need, integrates open innovation, and has iterative feedback. The lean start-up movement at its core has adopted a few of the twelve principles and practices of 4G but is suffering limitations by not adopting all twelve.

Comment by William Miller on June 25, 2013 at 3:01 pm

What I take away from this engaging essay is that the job of development planner would better be focused on the goals of community adaptability and resilience.

Granted that even a wide-ranging essay such as this could not cover everything, it notably omits mentioning that development planning today is riven by at least three competing policy agendas, of which traditional economic development is only a subset. I characterized them with three colors:

# Green: “sustainability” and such.
# Blue: “homeland security,” public safety, emergency management, etc.
# Red: taking off from the red ink that has afflicted public budgets in recent years, collaterally reflecting the robustness of the economy or lack of same.

Increasingly, the political imperatives for each of these legitimate missions conflict and compete for resources and attention.

For more on how this happens and what needs to be done about it, see my presentation here: http://j.mp/SJwUzn.

The latter addresses “infrastructure” specifically, but that can be interpreted to include the community infrastructure of social and economic processes as well as physical assets.

My conclusion in the latter reinforces and perhaps extends what is suggested here: There is a need for a new, coherent doctrine of community resilience that is effective, efficient, affordable, and politically realistic.

Comment by Lewis J. Perelman (@LewisJPerelman) on June 25, 2013 at 9:48 pm

I know that in just 20 years of E/D work I have not seen it all. But, I’ve visited with a lot of fellow E/D “curmudgeons”. Our consensus is it is not the E/D curmudgeon that is steering the boat toward ever increasing job creation and jobs associated with high tech “innovation Diety” [oh yes, and they must be “green” jobs]…it is the governors, mayors, city councils, industrial authority members that set the goals for all us poor E/D “curmudgeons”.

The poor E/D curmudgeon that doesn’t deliver on the expectations of the “boss”, soon find themselves applying for a greeter’s job at Walmart. Maybe you can do this for all us poor E/D curmudgeons. Just explain to the King, (Queen) that they are “wearing invisible clothes”. For me it is a career limiting discussion. Cecil

Comment by Cecil Carter on June 25, 2014 at 8:00 pm

Trackbacks

  1. Do Economic Developers know what they are doing? The Curmudgeon in Wonderland | Entrepreneurship Matters
  2. Articles of Interest June 28, 2013 « National Creativity Network

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