Joseph Schumpeter thought he was referring to a process of vitality in capitalism, when he wrote that entrepreneurs were animated by “creative destruction”. As innovators, they would deliver sustained growth, crushing obsolete firms and clearing the field for newcomers with the Big Ideas that would translate into profits.

According to the World Bank, world-wide wealth to the tune of $34 trillion has now been wiped out in the latest phase of destruction. This means that, if you believe its chief economist, Justin Lin, we have some way to go before the orgy ends.

Twelve months ago, in the summer of 2008, in a Renegade Economist documentary – http://www.youtube.com/watch?v=1nttuh8oHYw&feature=channel_page – We forecast that the wipeout of wealth would reach $45 trillion.

Carry on Crushing

According to Lin, the World Bank’s first Chinese official to serve as chief economist, the West should accelerate the destruction of its capital base.

 ”Excess capacity has built up and unless this issue is addressed, we will face a deflationary spiral,” he warns. The West, apparently, should demolish more factories, adjusting the industrial base to accommodate economic reality.

But here’s the problem: if China continues to invest in capital formation (which it is doing), and if China’s labour costs remain lower than the wages paid to western workers, the trade balance between East and West will continue to be lopsided in favour of Mr Lin’s homeland. So how do we stop the downward spiral?

China has an advantage over the West: its command control in Beijing is determined to boost growth even as the West continues its toboggan ride into depression. At the last count, China was growing at an annual rate of 7.9%, and rising.

Eastern Promise

What if the West accepts Mr Lin’s advice, and demolishes more of its manufacturing capacity? Disgruntled French workers apparently find this strategy appealing, as a negotiating tactic: workforces are now rigging factories with gas canisters, to blow up the capital equipment if they do not receive improved redundancy pay-offs.

But if we carry on crushing the West’s industrial base, the ratio between the West and the East’s capacity would have to be adjusted on a continuous basis, until everything that we consumed was Made in China.

Do we have to allow the Chinese to specify the terms for the next business cycle? No! The appropriate tax reform would reduce western labour costs (without reducing living standards), while raising incentives to invest in the innovative firms that could lead the West out of depression. Instead, conventional economic wisdom urges us to accelerate the destruction of capital. It seems that our forecast – the wipeout of $45 trillion worth of wealth – will be realised in 2010.

 Was that a laugh, I heard, as I last strolled past Marx’s mausoleum in Hampstead?

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