Are We at the End of Creative Destruction?

closed-factory-Flickr-sludgegulperCapitalism has thrived over the past few centuries due in large part to a phenomenon called creative destruction. This phrase was coined by economist Joseph Schumpeter and refers to the process where new technologies and new industries replace old ones, with a net gain for society.

There are thousands of examples of this through time. In the transportation area alone we’ve moved from horse & buggies and canals to cars, subways, interstate highways, and airplanes. We’ve moved from hand looms to cloth factories to synthetic fabrics (and were able also to replace the ironing board). There is almost nothing from a hundred or more years ago that is still made in the same way.

Creative destruction has always resulted in a net good for the economy and has thus been good for mankind. For every technology that has been displaced something better took its place. Overall there were more jobs created by new technologies than displaced by old ones. Look at the automotive industry as a great example and consider how many jobs there are in car and parts factories, gas stations, repair shops, etc. — far more than were employed taking care of horses and trolleys.

I read an article that said that per capita incomes in the US were 28 times higher in 2000 than they were in 1790. This is largely due to creative destruction, which is why it’s the bedrock of capitalism. Each new technology that has come along has been more efficient than the last, and the growth in wealth has largely been due to this increase in efficiency.

This is not to say that creative destruction is not disruptive. People who worked for industries being displaced have always lost their jobs. This is never smooth on a local level and there are thousands of communities along the way that suffered when their local factory or businesses were supplanted by something new. To a large degree, over the last century the new businesses tend to be in urban areas, which is one of the contributors to the long-term trend of rural populations migrating to cities around the world.

But there are now a number of economists who think that we might have reached the end of creative destruction and that the old paradigm is no longer functional. Economists measure overall efficiency of an economy using labor productivity – the output per hour of the average worker. For example, since World War II productivity grew at an annual rate of about 3%. But starting in 2004 that rate has slowed to 1% per year, and most recently is under 0.5%. This is one of several factors that have led to wage stagnation.

There is still a lot of wealth being created in the country, but a lot of it now comes from information technologies and not from the historic phenomenon of replacing industries with something better. A great example is Facebook and all other social media. They have created tremendous wealth for their creators, but they are replacing and/or monetizing older ways of socializing. Granted they are new industries, but they bring very few jobs. It’s amazing how many of the largest web companies have created billions in wealth with less than a few hundred workers.

Lately, we are also seeing whole industries dying without being replaced by new jobs. The typical example given is photography. There was a huge photography industry that was replaced by digital cameras. Gone are most of the companies that made cameras and film and who processed pictures for people, replaced by one minor component of smartphones. But this has happened to other industries like the music business and the news business. Blogs are interesting, but they really don’t take the place of having live news coverage of worldwide events.

Worse, we are standing at the edge of a time when large numbers of jobs might be permanently replaced. For example, companies like Amazon created a large numbers of jobs in their warehouses, but they are working to automate the whole warehouse process. We see robots starting to take on roles like hospital orderlies, hotel concierge, baristas, and a number of other jobs. The combination of robots and AI is also likely to start replacing scores of traditional white-collar jobs like accountants, paralegals and other information workers.

The big changes we are now seeing are due largely to both the application of Moore’s law and the fact that computers are getting strong enough to be able to mimic human behavior well enough to take over functions that only humans could do.

I always read that there is still going to be room in the world for human creativity. The problem with that is that society probably won’t value a lot more creative jobs than there has been. We’ve always had our inventors and scientists and writers and artists and most people are not able to do this kind of creative work, nor is there going to be a huge uptick in demand for these kinds of skills (meaning somebody willing, or able, to pay for it). It could be that creative destruction is now going to be replaced by plain destruction and that technology is going to replace a lot of jobs that cannot be replaced. If so, the world better get ready to find ways to deal with a lot of people who can’t find paying work. It’s a scary thought.

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