Tuesday, August 9, 2011

Creative Destruction

"The opening up of new markets, foreign or domestic, and the organizational development from the craft shop 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."

Joseph Schumpeter (1883-1950)

The labeling of free-market capitalism as CREATIVE DESTRUCTION is certainly brilliant! But Schumpeter felt funny about it. Why?

Marx said that the exploited proletariat would rise up and destroy capitalism. Schumpeter thought that capitalism would be destroyed by its own successes.

He thought that as people were left free to think, and innovate, and offer new products for old, this continual reshuffling of "stuff" would destroy the whole system as no product would really take hold. In business school they call that the product life cycle.

Well, Schumpeter was wrong! CREATIVE DESTRUCTION is one of the hallmarks of capitalism!

Imagine this news story on your favorite business news show:


"In a broad effort to save typewriter manufacturing jobs, Congress today took up the plight of those American workers being displaced by the new-fangled word processor, which Congressional leaders say is too difficult to operate and will never take off. Fearing the flight of typewriter manufacturing and repairing jobs to other countries, Congress today will debate a bill to prevent that flight, saving those jobs for American workers."

We laugh of course. But wait! It happened! In 1992!! I know it's hard to believe it was so recently debated!

People use the buggy whip as the best example to show some product that got displaced by technology. But I think the typewriter is the far better, and certainly more modern, example.

What jobs have been displaced by technology?

The automobile replaced the train and carriage for personal transportation. The jobs displaced included blacksmiths, wainwrights, drovers, teamsters, railroad workers and canal men. But the jobs created included assemblers, designers, engineers, mechanics, chemists, oil workers, gas stations and truck drivers. And more.

The airplane replaced the train and ocean liner for distance transportation. The jobs displaced included railroad workers, sawyers, mechanics, ship hands and boilermakers. But the jobs created included pilots, mechanics, travel agents, airport workers and flight attendants. And more.

The computer replaced adding machines, filing cabinets, slide rules and lots of paper. The jobs displaced included assemblers, millwrights, lumber men, clerks and tin smiths. But the jobs created are incalculable! And productivity exploded!

I could go on - fax machines replaced express mail; the telephone replaced mail and the telegraph; email replaced lots of postage; vaccines have replaced lots of medical equipment and technicians; the internet has replaced lots of shopping and even malls and retail locations.

And yes, I could go on and on and on!!

The people needed in these new jobs came from the displaced jobs! Do some jobs disappear altogether? Yes. But completely? No. There is always some demand somewhere for everything - even buggy whips and typewriters!


So, Dr. Schumpeter was incorrect thinking that capitalism would be destroyed, but still brilliant!

Hey, you people, go and creatively destroy what you are doing now, and replace those things with new ideas, products, techniques and more productive ways of doing things.

That is the free-market capitalist, AND AMERICAN, way!

To show that Joseph Schumpeter was human, he said he had three goals in life: to be the world's greatest economist, to be the greatest horseman in Austria (where he was born) and to be the world's greatest lover. Just before his death he confided that he was disappointed that he only accomplished two of his goals. But he didn't say which two!

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