"Unsustainable" economic activity

Allister Heath wants more "good" GDP growth:

Good growth is sustainable in the strict sense of the world: it is the kind of activity that would continue in the absence of subsidies and if the cost of money rose again to properly reflect the supply and demand of funds, long-term output expansion, expected inflation and other risks.

This, though, under-rates the benefits of "unsustainable" economic activity. I'm not just thinking of the trivial fact that a temporary income is better than none, but of other mechanisms:

 - Temporary booms can leave positive legacies, as Daniel Gross has pointed out; they can leave us with a useful infrastructure of railways, broadband connections and (sometimes) housing that we wouldn't otherwise have.

 - Even "bad" businesses can be useful learning experiences, which equip entrepreneurs to go onto success. Thomas Edison said: "I have not failed. I've just found 10,000 ways that won't work."

 - Apparently "bad" businesses might become good ones, if there are learning by doing effects. "Fake it till you make it" isn't a great business strategy, but it's a possible one.

 - Temporary spells of employment can improve workers' skills and working habits and so make them productive later, thus avoiding hysteresis effects whereby the temporarily unemployed can become permanently deskilled.

But there's another issue here. How can we distinguish between "artificial" economic activity created by loose monetary policy and that arising from over-optimism, bad business plans or plain bad luck? In normal times there is a massive amount of creative destruction; on one estimate (pdf), the UK economy created and destroyed around 50,000 jobs each week between 1997 and 2007. How can we tell how many of the 50,000 jobs created are "sustainable"?   

You might think we can't, until after they've disappeared: as Warren Buffett said, it's only when the tide goes out that you can see who's been swimming naked. But even this won't do. In their study of the 1990-91 recession Paul Gregg and Paul Geroski point out that there was little correlation between firms' pre-recessionary efficiency and their vulnerability to recession. There is, they say, a "large random component" affecting who gets hurt in a recession. The best way to ensure that firms are efficient is to ensure vigorous competition, not to hit them with occasional recessions.

Worrying about "sustainable" or "unsustainable" economic activity is, therefore, pointless. We can't distinguish the two, and it doesn't matter.

I say all this to raise a paradox. Mr Heath is generally seen as a man of the right, whilst I'm a Marxist. But it's Mr Heath who looks like a Guardianista fretting about "good" and "bad" activity whilst the Marxist is reminding him of the virtues of tumultuous market activity.

This is, of course, not simply a matter of his and my idiosyncracies. If you're looking for people who believe in old-style central planning, you'll find them among CEOs who think they can manage sprawling multinationals from a head office, and among fund managers who think - contrary to most facts - that they can spot good investments better than the market. We Marxists, however, have learned from our mistakes and are interested in ways of decentralizing economic activity. A belief in central planning these days is to be found in boardrooms and in fund managers' offices  more than on the thoughtful left.

Comments

[Luis Enrique]

"... if the cost of money rose again"

this is a weird one. The BoE is trying to push down costs of funds to help ease the recession.

consider the marginal restaurant that is only surviving because it is being helped in two ways: it's debt servicing costs are lower and demand for its food are higher than they would otherwise be in absence of BoE policy.

when the economy recovers, demand for restaurants will improve and this restaurant will survive when interest rates rise.

in what sense is this restaurant undesirable because it is only surviving thanks to temporary stimulus?

[Anonymous]

Hmmm. I suspect "good" growth, according to Heath and his ilk, can only occur under a Tory chancellor. Growth under a Labour chancellor is for them "bad" growth. Only this morning, an obviously right wing economist was asserting to the right wing presenter on Radio 5 Live, that the pre-crisis (ie under a Labour government) growth was artificial!

I must remember not use fertiliser in my garden. The growth it stimulates is artificial and not good growth.

[Ralph Musgrave]

The fact that a firm or multinational is in effect mini planned economy is not an argument to centrally plan the economy as a whole. A firm is almost by definition a clump of economic activities or decisions that are best conducted on the basis of “CEO says do this, so do it”.

But there are other economic decisions best left to the market. There is actually a large literature on this subject.

[Mat]

Well, the only problem with your conclusion is that the thoughtful left is pretty much just you and louis enrique. Sadly a penchant for managerialism still rules the roost on the actual, political, left.

[Broilster]

Presumably given that multinationals like say Sony or Toyota or a thousand others have been around and making profit for decades, planning works, at least on some level. Or are they profitable in spite of their planning?

[Anonymous]

@ Mat

Well, that's two more than comprise the thoughtful right :-)

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