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Saturday, March 31, 2012

Accelerating Creative Destruction

Not just one, but two liberal friends independently pointed me to a New York Times posting titled "Is This the End of Market Democracy?" I've often been harshly critical of things written by the Times staff, but I think this one actually makes some good points. The most important one is regarding the effects of the "gale of creative destruction" which really isn't being addressed by anyone and I think it may be important to consider when formulating policy.

The phrase "creative destruction" was popularized by Schumpeter as a description of an evolutionary process of continuous innovation. The creation of the automobile destroyed the horse and buggy industry, the creation of the telephone destroyed the telegraph, and in general, the creation of automation and other technologies and business innovations have and will continue to destroy huge numbers of jobs. The job destruction isn't necessarily a problem since when the U.S. economy is healthy, millions of jobs are destroyed every year, but even more jobs are created.

While the creation part of the process makes the general population better off, it's always been true that those who lose their jobs face some or even a great deal of hardship while they transition to something else (or retire or become permanently unemployed or whatever). The next generation always benefits because they don't yet have jobs to be destroyed.

As long as the creation is significantly beneficial and the rate of destruction is not overwhelming (or the cost and effort of transitioning to new jobs isn't too high), significant progress in terms of wealth creation is made without intolerable pain.

The rate of creative destruction has been rapidly increasing over the last few decades, taking us to the point where there's an uncomfortable and perhaps intolerable rate of destruction. While many people like to blame foreign trade (which I lump in with general business innovations), new technology destroys far more jobs than the Chinese. How many bank tellers lost their jobs to ATMs, how many stores have closed due to Amazon's automated order system, how many factory jobs are lost to robots and automation, etc.? Far more than have been lost to the Chinese making cheap widgets. Nonetheless, both technical and business innovations have been aligning to destroy jobs at an ever increasing pace.

Further exacerbating the problem is that the jobs being destroyed are potentially being replaced by jobs that require far more skill and talent and the people whose jobs are being destroyed are simply incapable of filling those new jobs. So they often end up being unemployed for a long time.

I also agree with the article that neither Democrats nor Republicans have discussed the issue of accelerating creative destruction and what, if anything, to do about it. The article is a little short on solutions as well.

So am I.


Hey Skipper said...

Interesting, but IMHO, very flawed article. It seems a particularly egregious mixture of metaphors to lump our dysfunctional public education system or exploding entitlements in with free market capitalism: the only thing they have in common is correlation in time.

Also, the article never mentions that we are still feeling the knock-on effects of communism. Mao and his successors kept the better part of 1 billion workers off the market. Until the wheels started coming off, that is, at which point they showed up in a big hurry. Supply and demand isn't just a good idea, its the law.

But staying on your point, rather than the article's digressions, I have wondered the same thing.

Economics is founded upon scarcity. What happens if many, if not most, things become essentially unlimited in supply, because humans are no longer necessary in their production?

I read an item last week, damned if I can remember where, about a "life in the future" article written in the late forties about life in the mid-1960s.

One surmise was a robotic vehicle to carry a milkman's load.

The point was that we are, by definition, capable of thinking only about doing the things we do now, differently.

What we can't do is what that long ago author also couldn't do: imagine a future without milkmen.

I don't see any alternative to free-market economies Which either means I'm falling prey to the milkman fallacy, or we will muddle through with what we have, because there aren't any alternatives on offer that aren't worse.

Bret said...

Hey Skipper,

I agree with all that, especially your last paragraph about it being tough to see an alternative to free-market economies. I'd only add that's especially so for dealing with rapid change. The article and my Left wing friends are certain that the federal government is the only entity that can "solve" the problem. My bet is that it can only get in the way and make things worse (and I'd claim that's exactly what it's done so far). Unfortunately, if enough people experience enough hardship, there will be calls for the government to loot the productive folk for the benefit of the not-so-productive folk and then things might get a lot worse.

Hey Skipper said...

This is OT.

Perhaps things aren't quite so unprecedented after all. Or we can't know.

Bret said...

It depends how you look at the numbers and whether or not exponential growth means the same thing in all parts of the curve.

I'm not sure that the concept of using GDP growth as a proxy for technological innovation and technological advance is valid, but I could be convinced that it supplies a lower bound.

GDP growth has been exponential (i.e. it compounds) for two centuries now. So on one hand, growth is not unprecedented since it's been that way for a long time. On the other hand, not being linear, it's always unprecedented and accelerating.

Personally, the "other hand" is the better reflection of the reality I experience - ever unprecedented and accelerating advance. Here's one example.

Hey Skipper said...

I'm not sure that the concept of using GDP growth as a proxy for technological innovation and technological advance is valid ...

Perhaps not on its own, but it probably does when paired with the ratio between inputs and production. I'd bet that our economy is far more efficient in all respects now than it was 25 years ago. How else to explain that except for technological innovation?

Bret said...

That's why I say GDP growth (per capita) probably supplies a lower bound. Things like the Internet are both a tool that helps with GDP growth but also are sort of "off book" items in that there're a lot of non-economic uses for them.