"If capitalism was the most influential single economic and social force of the 20th century (and continuing today), there is no better guide to understanding its power and complexity than famed economist Joseph Schumpeter, says Harvard Business School's Thomas K. McCraw. 'I think Schumpeter is the most penetrating analyst of capitalism who ever lived. He saw things other people didn't see...
Creative Destruction: Failure and Job Loss in a Healthy Economy
"Total nonfarm payroll employment increased by 195,000 in June." So states a Bureau of Labor Statistics employment report.
This number represents the net gain in jobs. What's hidden is the massive amount of jobs destroyed and created in the process. An average business quarter will see seven to nine million jobs disappear, replaced by the same amount plus more.
Why the drastic change? It's all part of creative destruction, the necessary evil of destroying the old in the process of creating the new and better.
Economist Joseph Schumpeter is responsible for the term "creative destruction." In his 1942 work, entitled Capitalism, Socialism and Democracy, he explained how innovation and entrepreneurs were key driving forces in an evolving economy. Society progressed as entrepreneurs developed new ideas, products, and processes that replaced, and thus destroyed, the old ones. "This process of Creative Destruction is the essential fact about capitalism," wrote Schumpeter. "It is what capitalism consists in and what every capitalist concern has got to live in." Side effects of this constant change are job loss and failed business. The positive result is a higher standard of living.
Creative Destruction has been at a peek for the last two centuries. The industrial revolution set in motion the age of machines, which replaced manual labor with factory work. The digital revolution followed later in the 1900s, with high-tech jobs replacing production work.
These changes meant more could be accomplished with fewer workers, which translated into more wealth for society as a whole. For example, in 1900, 40 percent of laborers worked on the farm. Today, only 2 percent of Americans work in farming, yet the amount of food produced has multiplied. At the beginning of the 20th century, conveniences like running water, electricity, telephone, and cars were considered luxuries. In America today, they are practically necessities. Even the average time spent working has decreased from sixty to forty hours per week, while each minute worked earns a greater return in terms of buying power.
Though creative destruction can be beneficial in the long run, accounting for over half of long-term productivity growth, it is painful for those who face job loss or business failure in the process. One response is to protect the old way of doing things. This is symbolized by the Luddites of the 1800s, who destroyed knitting machines that were replacing their craftsmanship. Though they claimed to only be protesting poor quality, their action has come to represent those who oppose advances in technology.
Today, special interests pose a similar threat. Social-theorist Mancur Olson pointed out that as society matured, interest groups could use their size and political power to stall innovation and growth. This is seen even in the federal subsidies and tariffs that industries seek to artificially protect themselves from failure.
One response to job loss and business failure would be government intervention. The government should create new jobs and bail out businesses considered "too big to fail." However, creating jobs does not necessarily create economic growth, and government intervention may actually stall the process of creative destruction. Government intervention can temper the short-time side effects but also drag out the recession in the long run.
A more cooperative reaction to creative destruction is job retraining. This is needed because many of the new jobs replacing the old ones require new skills. For example, a worker losing a job in a basic assembly-line factory may not be able to automatically transfer to a job in a more advanced factory of high-tech machines.
Government has launched programs over the years to deal with job loss. In 1982, Ronald Reagan signed the Job Training Partnership Act, specifically to train workers. He hoped to help the unemployed on "Main Street" develop skill sets that would get them new jobs. More recently, the shift toward science, technology, engineering, and mathematics sector (STEM) jobs has led to the creation of the National STEM Consortium program, which offers targeted training through a grant from the U.S. Department of Labor.
Despite programs like these, retraining is not always successful. Individuals differ in abilities and personal bents, and older workers may find it particularly hard to learn new skills in comparison with technically savvy youngsters. Some researchers suggest parents prepare children for an evolving job market by providing a non-traditional type of education that makes them more resilient.
While the new discoveries and capabilities that result from creative destruction may be exciting and helpful, they also raise functional, legal, and ethical concerns. The boom of technology in the classroom introduces speed and efficiency to the possible detriment of important mental skills. Internet and smartphones offer many information-sharing conveniences, but the same ease of use poses a threat to personal privacy. New inventions like the precise and versatile 3D printer can make everything from musical instruments to bionic ears, promising improved production capabilities and medical advances. They also exude an eerie sense of the superhuman, raising the question of where to draw the line on innovation.
Creative destruction can dramatically change society. Jobs are lost and created. Individual lives are worsened and improved. This topic examines both the positive and negative effects of the process of creative destruction as it works out in an economy.
More About This Topic...
Click thumbnails below to view links