Bravo, Creative Destruction
It’s a rare treat in our media-soaked world to see a manufacturing hero’s star rising. Such seems to be the case with an economist who could be so helpful today but died more than 50 years ago. He was Joseph Schumpeter, and he coined the phrase "creative destruction" to describe the way economies progressed through industrial invention.
I’m told that none other than Fed chief Alan Greenspan uses the phrase often (to balance everybody else’s irrational exuberance?), and former Treasury Secretary Lawrence Summers recently noted that our economy has moved from "Swiftian" to "Schumpeterian." From invisible hands to inventive hands, you might say.
This Austrian-born (1883) economist is best known for his explanation of the effects of invention on economies as new industries and new products transform societies from candles to electric lights, from horses to cars and from mail to faxes to the Internet.
Schumpeter’s vision implied a constant threat of obsolescence in the face of the constant hope of a better mousetrap. It looks as if, according to illustrious citizens like Greenspan, and Summers and others and yours humbly, that the period we are in now is classical Schumpeter.
In the past decade, whole new industries have arrived on the business scene. What was a fax in 1990? What was a PC? A genetically modified food? A cell phone? A Web site?
Or, consider all the new automation in cars and the spread of robotics (after a joker’s fate in the '80s) into all areas of production.
The list could take up my whole page and then some. Suffice it to say that we are living in an incredibly inventive and innovative time and that creative destruction is taking its toll and training us all anew.
So, you might ask, why haven’t we heard of Professor Schumpeter? Well, for one thing, he was overshadowed by the fashionable of his day. In other words, the world, or at least its governing elites, followed people like Keynes, Marx and others of the left.
Those guys were naturally more popular with government types because they claimed that governments were the primary solutions to the world’s economic ills like recessions, depressions and disparities. Communism, socialism, pump priming and safety nets came into the lexicon of the world’s politicians and linger mightily still.
Schumpeter saw a lot farther than the central planners of the 20th century. He saw what more and more of us now see. Technological change revolutionizes economies from within, and competition through innovation is more important than price competition. How so?
As I noted, what are today some of the most dynamic and competitive industries were invented only a relatively short time ago. Other industries were replaced (like typewriters, carbon paper and vacuum tubes) or transformed.
Without the creativity of individuals and teams in research (whether in big labs or small garages), an economy remains prey to price competition alone, and standards of living can only change due to political revolutions. The have-nots take it from the haves, except that what everybody has or had is less and less attractive except to tourists. Non-Schumpeterian economies stagnate. Schumpeterian economies create the future.
Now this is obviously over-simplified, but the point is clear. Schumpeter’s central thesis — that the destruction or radical transformation of old industries follows innovation — is a very useful model for what we are passing though right now. It behooves all of us to consider this brilliant man’s theories before we try to ask the government to intervene.