Technological innovation, as well as deregulation and trade liberalization, ”fostered a pronounced expansion of competition and creative destruction,” observed Alan Greenspan. ”The result through the 1990’s of all this seeming-heightened instability for individual businesses, somewhat surprisingly, was an apparent reduction in the volatility of output and in the frequency and amplitude of business cycles for the macroeconomy.” Translated from Fed-speak, that means that for the past 20 years, individual companies have prospered or failed, entire industries have grown up while others have vanished and, when all that frantic sinking and swimming in the economic waters is plotted as a graph of overall output, it looks like a gently rising curve. Meanwhile, the periods of economic expansion keep getting longer, while the recessions get shorter and less severe.
That’s the sign of a robust system, says Michael Mauboussin, who is paid by Credit Suisse First Boston to think big thoughts about markets and financial behavior. ”It takes two essential features to make a system robust,” he says. ”You need diversity, and you need interaction. That describes the American economy. You have diversity, a lot of local agents doing their own thing based on local information. And these agents interact in the marketplace; at some point, two agents will meet at a price. Then you have a big diversity in outcomes — some buy, some get bought, some win, some lose — and that makes for a robust, stable system.”