New Article: Industrial Greatness Requires Economic Depressions
Government saving failing companies slows down technological progress. This is why economists’ recommendation to use stimulus to prevent downturns leads to a more impoverished future.
This article by Ben Landau-Taylor was published on Palladium Magazine on February 21, 2025.
The state’s role in supporting economic growth is critical. Our wealth comes from industry, that is, from the ability to mass produce goods—more goods, better goods, cheaper goods, produced with fewer hours of labor. The biggest advances in industrial production have required massive investments and social transformations so large they can only succeed with the support of the state, including in countries where the state’s support comes largely via market mechanisms, like the United States and modern China. A well-designed industrial policy works by incubating new, better modes of production to move a nation from its current economic equilibrium to a new, wealthier equilibrium.
It is a tragedy, then, that our current economic policy does exactly the opposite. We are vastly poorer because, instead of supporting “infant industries” until they can stand on their own feet, the U.S. government has spent trillions of dollars to keep the most senile and sclerotic businesses on life support. This keeps millions of talented people and tens of trillions of dollars worth of plant and equipment locked up in decrepit enterprises run by mediocrities who specialize in preserving the status quo, or by outright incompetents running their businesses into the ground.
In the words of the economist Joseph Schumpeter, “[T]he problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them.” If the government were willing to let big businesses die a natural death when their time comes, then these resources would be captured by better-managed firms, and our industrial and technological growth would proceed faster. In 2024, the largest 0.1% of businesses, those with over 500 employees, accounted for 54% of private sector jobs in the U.S. Firms with over 10,000 employees accounted for 18% of U.S. manufacturing jobs. Our prosperity, and especially our grandchildren’s prosperity, depends critically on how much of this is in the hands of companies like Boeing and how much is in the hands of companies like SpaceX.
The U.S. Government Keeps Zombie Companies Alive
If you listen to your schoolteachers and economics textbooks and the pundits on television and on Twitter, then you will learn that we live in a capitalist free market society. This means, we are told, that economic activity is a Darwinian contest of all against all. The most effective and efficient firms provide better products at lower prices, taking business away from their inferior competitors. Firms which cannot keep pace with the march of progress wither to dust and are blown away on the wind. In this way, the ruthless logic of the competitive market provides consumers with the best products at the best prices, driving improved living standards, technological development, and economic growth.
This has been roughly true in some times and some places—more on this later. But if you look at the present economy of the U.S. or any major nation, things seem very different now. Major companies simply do not collapse. If bankruptcy threatens, then the government will bail them out at any cost. If there’s a big disaster, then an individual executive might be fired, or not—more likely not. But either way, the company itself will persist. No matter how inefficient a company like General Motors or Boeing might become, no matter how much better and cheaper its competitors make their products, the state will not allow a major incumbent to die.
This is done to avoid the economic and political pain of companies failing. If the collapse of a major company were permitted, hundreds of thousands of people would lose their jobs. In the wake of the 2008 crash, General Motors went bankrupt. If it had collapsed and ceased operations, its 88,000 employees in the U.S. would have lost their jobs, along with probably a similar number of employees at companies directly supplying GM. This, in turn, would have caused devastating ripple effects as former GM employees stopped patronizing restaurants, buying homes, upgrading cell phones, and generally cut back spending.
Of course, these ripple effects are exactly what an economic depression consists of, and GM’s bankruptcy was itself triggered by ripple effects from the collapse of mortgage-backed securities. Rather than let the dominoes keep falling, the U.S. Treasury lent $50 billion to carry GM through bankruptcy and restructuring and preserved about three-quarters of the company’s U.S.-based jobs. Without this and similar bailouts, the 2008 depression would have been far worse than it was, at least in the short run.
In the long run, however, this retards U.S. industry below its potential by preventing badly-needed industrial restructuring. With the support of the explicit government loans and the implicit guarantee of an infinite federal backstop, GM has returned to profitable operations, but they are not actually very good at advancing American industry. Their best-selling cars are all variations of designs that are decades old at least, like the Chevrolet Silverado pickup truck, GM’s most popular product by volume, the first generation of which was sold in 1999.
The major advances in automaking technology—electric vehicles, self-driving vehicles, and, to a lesser extent, manufacturing process improvements like casting the chassis out of two large pieces rather than dozens of small pieces—are being driven by younger upstart companies without state backing. GM’s own entry into these advanced arenas has been lackluster at best. In 2024, electric vehicles accounted for only 4.2% of GM’s sales. Its foray into self-driving cars got underway with the 2016 acquisition of Cruise, an external startup company building self-driving taxis. Cruise began operating autonomous taxis in San Francisco, but their license to operate was revoked in 2023 after a Cruise vehicle struck a pedestrian, and the company attempted to withhold data on the accident from California officials. Cruise never recovered, and in 2024 GM shuttered the project.
An area related to this, but distinct, is the support of basic research, which can serve as a seed for industry. The U.S. excels at this, and while there is always room for improvement, we should mostly keep doing what we’re doing. Most famously, the Defense Advanced Research Projects Agency (DARPA) and the National Science Foundation housed and supported the projects which eventually became the internet. Or to return to the self-driving car example, the technology got started with DARPA challenges from 2004-2007, which incubated the teams of engineers that would go on to develop the first self-driving cars by offering cash prizes of up to a couple million dollars. That’s incredible bang for the buck, but not very many bucks. Most of the cost of research and development of self-driving cars has been borne by Google, which has probably spent billions on Waymo so far. The tasks of foundational R&D and of economy-scale economic policy are separate. The U.S. government is far better at supporting the former than the latter.
Prosperity Comes From Technology, Not From Full Employment
Much of the justification for our current policy of bailing out companies like GM was laid by the Keynesian economists, who take their name from the school’s founder, John Maynard Keynes. His magnum opus, The General Theory of Employment, Interest and Money, gives an algebraic model which argues that if technology and “technique” are held constant, then business cycles lead to depressions where employment and economic output are low, leading to unemployment and poverty with no purpose. This forms the main intellectual justification for the now-ubiquitous practice of massive “stimulus” spending in the face of economic depressions, where the government spends trillions of dollars on anything and everything in order to preserve employment and mitigate the slump, although the main political justification is simply that it wins votes from the money’s recipients.
Of course, technological improvement is by far the most important economic force in the world today, and any theory which assumes it away in order to simplify the algebra will be useless as a guide to steering a modern economy. Keynes repeatedly specifies that his theory is not concerned with technological development and focuses only on maintaining full employment assuming a static technology level. His theory’s recommendations do indeed help towards that goal.
However, the reason we are prosperous today is not because our forefathers maintained full employment. We are prosperous today because our forefathers developed and deployed better and better technology—cars, antibiotics, forge presses, container ships, cryogenic storage to transport liquefied natural gas, and thousands more. A society with full employment and the technology that existed in Keynes’s lifetime is vastly poorer than a society with high unemployment and today’s technology. Very few people would prefer being gainfully employed in the boom years of the late 19th century Gilded Age over struggling to find work in a sluggish 2020s economy—say, in Canada or Portugal.
In large part, this is because of the greatly expanded social spending and transfer payments, made possible by the gigantic increase in goods produced, which make it so that an unemployed American today consumes far more goods than a hardworking laborer or landowning farmer from the Gilded Age while living in bigger, better housing. Of course, the reason that Gilded Age society did not provide this is not because they were too unenlightened but because they were too poor. Most estimates place the U.S. per capita GDP in the year 1900 at around $10,000 in 2024 dollars.
While comparing GDP across centuries is necessarily a shoddy and incomplete affair due to poor data and the limitations of the concept of “GDP,” it is nevertheless a useful starting point. In 2021, the Medicaid program alone spent $7,593 per enrollee, or about $9,000 in 2024 dollars. This one social program provides the poor with roughly the entire income of an average Gilded Age American, to say nothing of the plethora of other social services and transfer payments which America is wealthy enough to afford today.
If we take seriously that technological and industrial growth is the source of our prosperity, the source of the goods which are paid to workers for their effort and given to the poor out of charity, then the main economic questions become those of technological and industrial growth. These were best modeled by Joseph Schumpeter, another of the 20th century’s great economists. He described the process of “creative destruction” which creates new industries and raises standards of living. The act of creating the radio industry destroys the telegraph industry, creating the lightbulb destroys the gaslamp, creating the supermarket destroys the butcher shop, and creating the ridehailing app destroys the taxi.
Businessmen today euphemize this process as “disruption” rather than “destruction,” but it does destroy industries and livelihoods. This naturally provokes political opposition from incumbents, of course. Schumpeter calls economic history a “history of revolutions”—and revolutions are always contested. America’s great advantage, the unique source of its wealth and power for eighty years, is that it is the only place where the prevailing culture and the state do not strangle novel industries at the request of the old. Uncle Sam might not let Boeing die, but he will not kill SpaceX to protect them, unlike his counterparts elsewhere in the West.
The new products and production processes which surpass and destroy the old do not come from theoretical “perfect competition” among near-identical firms offering near-identical products, perhaps with some incremental improvements. Rather, in Schumpeter’s theory, these advances come from “competition from the new commodity, the new technology, the new source of supply, the new type of organization … competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” As Peter Thiel’s influential Zero to One echoed seventy years later, such a decisive advantage—a “moat,” in today’s business language—naturally leads the company to become a near-monopoly because other firms cannot replicate the advantage for years or even decades. For example, today ASML’s moat is the highly skilled and specialized engineers who create its extreme ultraviolet lithography machines, which no one in the world can replicate, and Amazon’s moat is its extremely effective logistics processes and staff.
This dynamic is important not just because the new replaces the old but also because the fear of being replaced can drive incumbents to preemptively improve their own products. The constant, implicit threat from the “perennial gale of creative destruction” means that even corporate giants cannot rest on their de facto monopolies. This mechanism still operates in businesses that lack a blank check from the government, leading to occasional moves such as when Netflix pioneered streaming video and creatively destroyed its own DVD-by-mail service, or when Amazon adopted the strategy of serving as a “marketplace” for third-party sellers directly competing with Amazon’s own offerings, who now account for over 60% of Amazon’s sales. More frequently than supplanting their own core products, functional conglomerates often pursue creative destruction in other fields, such as Google’s foray into self-driving cars with Waymo, or Amazon’s creation of Amazon Web Services cloud computing.
Industrial Greatness Requires Economic Depressions
A clear understanding, however, must bear in mind the serious costs of creative destruction. The most obvious is the jobs of the workers in industries that are creatively destroyed, who must now cope with gradually declining prospects forever or face the wrenching financial and psychological strain of entering a completely new field. While it is eventually better for the economy as a whole, that is little consolation in the moment.
Even more importantly, unleashing creative destruction’s full potential for rapid progress also causes massive economic depressions. It is no coincidence that the period when depressions were most frequent and most destructive, about 1850 to 1945, was also the fastest period of technological progress in human history, witnessing the rapid introduction of electricity, flight, antibiotics, automobiles, cheap steel, artificial nitrogen fertilizer, radio, and television, and countless other transformative technologies which completely overturned patterns of daily life at a pace and scale which eclipses even today’s rapid technological advances.
The Great Depression of 1929 is popularly remembered as a unique catastrophe, but it was actually the last of a series of economic crashes more frequent and more devastating than anything in living memory. Even the term “Great Depression” was originally used for what is now called the Panic of 1873 until the term was repurposed for more recent American mythmaking. Since then, FDR’s New Deal policies cut the rate of major depressions in half, if not further, and the U.S. has seen only two depressions of historical significance, in 1973 and in 2008.
There are two reasons why unfettered creative destruction leads to depressions. The first reason is the weaker of the two, but is still visible today. The bonanzas that come with big economic improvements often lead to wild hype cycles and inflated expectations, which must eventually come crashing back to Earth. The profusion of hustlers, get-rich-quick schemes, half-informed speculators, and earnest projects which simply aren’t very good, all surrounding a core of extremely valuable businesses applying the new technology, is a pattern we have all seen. Eventually the wheat is separated from the chaff, ill-founded companies and financial schemes collapse, and an economic downturn follows. Meanwhile, the core technology which prompted the boom and bust continues to grow and mature with only minor interruptions from the storm and fury of the surrounding business cycle.
The internet dot-com bubble around the year 2000 is the clearest of several cases in living memory. This also happened many times in our ancestors’ days, most notably with railroads. This is of limited importance, however, because an economy always contains local collapses which, if the underlying conditions are right and the local collapse is big enough, can set off a chain reaction and depress the economy as a whole. Underlying conditions matter more than an additional source of booms and busts.
The other, far more fundamental reason that these are connected is that depressions do not destroy businesses at random. Those which go bankrupt are disproportionately the ones which were most precarious and marginal in good times, whereas those which normally are comfortably profitable and well-run are more likely to weather the storm. The effect is similar to the pop science idea that predators make a herd healthier by disproportionately removing the sickly and selecting the population for those with better health, although it is a much stronger effect because when an inefficient firm collapses, the resources it uses—such as engineers, laborers, real estate, and machine tools—are not devoured by lions, but are eventually redeployed either to old businesses which survived the depression or to newly-created businesses. This is an ugly process, involving mass layoffs, desperate scrambling, emergency sales of assets at fire-sale prices, and everything else that economists euphemize as “transaction costs,” but the end result is more of our industrial resources controlled by men like Thomas Edison and Elon Musk, and fewer resources controlled by men like James McNerney and Jack Welch.
One error of most economic theories, including Keynes’s, is that they assume firms making similar products using similar assets are more or less interchangeable, that economic productivity is a sort of fluid which can seamlessly flow from one container to another until efficient markets have leveled them off at the same height. In fact, there are immense differences between firms. The difference between Boeing and SpaceX today, or the difference between Henry Ford and his initial competitors like Buick and Oldsmobile, is not a matter of marginally higher profits which can be modeled in financial and algebraic terms. It is a fundamentally different industrial logic—one that, in extreme cases, can do more cheaply what the competitor cannot do at any price. These advantages can persist for years, even decades, but eventually they diffuse throughout society and are surpassed in turn. Henry Ford’s assembly lines would be considered crude and poorly organized today.
There is a good deal of talk about the psychological disciplining force of market competition and how having “skin in the game” causes people to make better decisions. This effect is real but should not be overstated. There are many, many people who will not make excellent decisions no matter what pressure they’re under. The main way the market produces progress is not by psychological force but by selection, by shrinking or destroying the institutions which do not measure up and reallocating their staff, equipment, and other assets to those which overperform. When government policy keeps inefficient megacorporations alive, it ipso facto retards industrial and economic progress. This is why the best government policies do not single out individual firms to be kept alive by arbitrary bailouts but intervene on the market broadly and let those who are most competent win the resulting contest.
If we want our descendants in 2125 to surpass our living standards the way we surpass our ancestors from 1925, then we will have to permit economic transformations at the scale that our ancestors did, including bankruptcies, job losses, and the cascading depressions that result. The individual pain of depressions does not have to be quite so severe as it once was. Because we are richer, we can and do spend vastly more on welfare, but this should be directed at individuals rather than at megacorporations. But there will always be some pain.
If we do our jobs, then during depressions, our grandchildren will still complain that they can only afford a 4,000 square-foot house, that they can no longer justify taking a one-hour trip from Austin to New York City every weekend and must cut their visits home back to once a month, and, of course, that they must abandon the career they poured their heart and soul into to find another. If they do their jobs, then their grandchildren, our great-great-grandchildren, will complain about maintaining their Moon estates, how long it takes a middle-class family to save up for their own geoengineered private island, or who knows what strange new wonders. But if we want to see this new wealth created, whether the unpredictable dreams of the distant future or just building out proven prototypes so we can all have unerring robots drive our electric cars for us ten or fifteen years from now, then we must accept the short-term costs.
Ben Landau-Taylor studies industrial economics and works at Bismarck Analysis. You can follow him at @benlandautaylor.