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Sunday, August 15, 2010

The Forces of Creative Destruction

Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary. ... The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. ...The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation - if I may use that biological term-that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about  capitalism.  It is what capitalism consists in and what every capitalist concern has got to live in.

Joseph Schumpeter, Economist, 
Capitalism, Socialism, and Democracy, 1942

I can hardly pick up the newspaper or scan the news online without seeing an article about the stagnant economy, our so-called Great Recession.  Unemployment figures remain stuck at an official 9.5% with broad agreement that the real unemployment level is somewhere between 15 and 20 percent if you factor in people who have quit looking for work.  Unemployment benefits have just been extended to 99 weeks in recognition of the persistent lack of hiring by business.  The stock market is up as corporate profits recover but businesses remain cautious about adding back workers, preferring to sit on piles of cash to tide them over if another dip occurs. Many articles suggest that the displaced workers will never be called back to their old jobs.  What is going on?

I would suggest that we are in yet another significant phase of Schumpeter's Creative Destruction.  We are seeing one economy (call it the White Collar Economy) being dismantled before our eyes and a new, as yet undefined era beginning.  Creative Destruction is not new.  It has always been part and parcel of capitalism.  Newer, cheaper, more automated means of getting any job done will displace older, manual methods of production.  It doesn't matter if you are talking about making steel or producing business invoices.  If a task can be economically automated, it will be.  And the people who did those jobs will be gone, never to be recalled.  

This is not news.  To illustrate the point, I came across a video on the Internet Archives that was made back in the 1930s. It laments the closing of the old steel mills in favor of new, more automated mills.  The people in the steel town were the victims.  They lost their jobs as the factories and their skills became obsolete.  This little documentary (produced by the Economics Department of New York University) is interesting to watch.  If you can hang in there for the full 28 minutes of the film, you can even hear a pathetic song written about a housewife's lament when her husband remains persistently unemployed.  Corny, yes. But substitute office cubicle for old steel mill and the story still rings true.


Technology creates and newer technology destroys.  It goes on and on.  We are seeing the destruction of so many white collar jobs by newer technology.  Some of these are the straight automation of tasks that real people used to do - such as telephone answering machines replacing receptionists.  Others allow people to do jobs for themselves that once required another person's skills.  Word processing software basically made obsolete the secretary and the typing pool.  Now we have EZ Passes for tollroads displacing toll booth operators, automated phone trees displacing whole product support functions, and self-checkout at the grocery story displacing cash register clerks.  Bank tellers are becoming an endangered species.  Most people (unless they live in New Jersey) can't even remember gas station attendants.  Real estate is now almost entirely a web-based activity making real estate brokers another vulnerable occupation.

So what are the people who used to do these jobs supposed to do?  Where can they still get a good job?  For any one individual, it is a tough question.  For our society as a whole it is The Big Question.  How many options do ordinary workers really have? Most job training programs are now seen to be ineffective.  The curriculum usually covers a few basic computer skills and some tips on writing resumes.  But those aren't going to cut it for companies looking for specialized technology skills or in an economy where there are five applicants for every opening. Many people lack either the education or the aptitude for technology jobs.  I read a lot about the opportunities to create Green jobs but it seems to me that most of these jobs will require the same skills as other technology jobs.

There are no easy answers.  Major shifts caused by Creative Destruction almost always leave a generation or more of economic carnage in their wake. The sad truth is that many people will never recover their old jobs or incomes. But there is no going back even if we wanted to. Somehow, we have to improve our educational system and support the entrepreneurial companies that create half the new jobs in this country. People have an amazing ability to be creative and resilient.  We need to support ideas with every tool we have at our disposal and create new ones we haven't tried yet.  Why can't micro-loans be as useful in our economy as they have been in Third World countries?  Why can't we offer more mentoring by both working and retired entrepreneurs on how to start a business?  Why can't we teach people to use more advanced technology tools like computer-controlled machinery that might give them a shot at a job?  Why can't we create a web-based Suggestion Box or forum within communities where people can contribute their ideas on how to create employment?

Next time I pick up the newspaper, I would like to read about some new ideas for dealing with unemployment,  I would like to read where our elected leaders are doing something constructive to address the problem instead of bickering with each other over political ideology.  I would like to read about people who are finding ways to re-enter the workforce, or about employers hiring people again in jobs that work in the new economy.  

Creative Destruction.  We need more Creative and less Destruction.  We can do this.  We must do this. 




[Picture credit: Ludwig von Mises Institute]

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