May 15, 2012


Schumpeter in the White House : How to talk about creative destruction (Guy Sorman, Spring 2012, City Journal)

An essential part of the free-market argument is "creative destruction," a theory proposed by the great Austrian economist and Harvard University professor Joseph Schumpeter. If you don't understand Schumpeter's insight--expressed most powerfully in his classic 1942 book Capitalism, Socialism and Democracy--you'll have a hard time understanding why free markets work so well to generate prosperity. Yet creative destruction is a complicated concept, poorly understood by the general public and not always easy to defend. As November nears, the Republican nominee will have to figure out a way to show voters how essential it is to American prosperity.

Schumpeter believed that progress in a capitalist economy requires that the old give way constantly to the new: production technologies in a free economy improve constantly, and new products and services are always on offer. But this creative transformation also has a destructive side, since it makes earlier products and services--and the workers who provided them--obsolete. Today's consumers have little reason to buy an oil lamp instead of a lightbulb, or a Sony Walkman instead of an iPod--which can be bad news for the people who manufacture the oil lamp and the Walkman.

Looking back at the history of Western capitalism, we can see how the discovery of new energy sources, new communications systems, and new financial instruments regularly demolished old ways of doing things. When this happened, the result was typically short-term pain, as certain workers found themselves displaced, and sometimes even what appeared to be economic crises; but there was also substantial long-term gain, as the economy became more efficient and productive. Economists W. Michael Cox and Richard Alm point to transportation as a striking example of the process. "With the arrival of steam power in the nineteenth century, railroads swept across the United States, enlarging markets, reducing shipping costs, building new industries, and providing millions of new productive jobs," they write. Automobiles and airplanes had similar effects. Yet "each new mode of transportation took a toll on existing jobs and industries. In 1900, the peak year for the occupation, the country employed 109,000 carriage and harness makers. In 1910, 238,000 Americans worked as blacksmiths. Today, those jobs are largely obsolete."

Creative destruction can take place not just across sectors of the economy but within particular firms, too. Since the invention of the automobile, many automakers have disappeared, unable to improve their products; those that survived have had to transform themselves radically to stay competitive. Sometimes firms even change their business to stay alive. Think of IBM, which started in 1930 by building calculating machines, shifted to computers in the 1950s, and today is a service company.

Trying to prevent creative destruction brings economic torpor or worse. 

Posted by at May 15, 2012 5:28 AM

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