Creative Destruction and dislocation

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Brad DeLong and Larry Summers say that if Keynes was the most important economist of the 20th century, then Joseph Schumpeter may well be the most important of the 21st.

Also read my post #70 for The Economist's new column called "Schumpter".

From Brad DeLong:
Over the previous two and a half centuries, three different economic worldviews, in succession, reigned. In the late 18th and early 19th centuries, Adam Smith's was the key economic perspective, focusing on domestic and international trade and growth, the division of labor, the power of the market, and the minimal security of property and tolerable administration of justice that were needed to carry a country to prosperity. You could agree or you could disagree with Smith's conclusions and judgments, but his was the proper topical agenda.

The second reign was that of David Ricardo and Karl Marx. Their preoccupations dominated the late 19th and early 20th centuries. They worried most about the distribution of income and the laws of the market that made it so unequal. They were uneasy about the extraordinary pace of technological, organizational, and sociological change, and about whether an ungoverned market economy could produce a distribution of income — both relative and absolute — fit for a livable world. Again, you could agree or disagree with their judgments about trade, rent, capitalism, and machinery, but they asked the right questions.

The third reign was that of John Maynard Keynes. His agenda dominated the middle and late 20th century. Keynes's theories centered on what economists call Say's Law — the claim that except in truly exceptional conditions, production inevitably creates the demand to buy what is produced. Say's Law supposedly guaranteed something like full employment, except in truly exceptional conditions, if the market was allowed to work. Keynes argued that Say's Law was false in theory, but that the government could, if it acted skillfully, make it true in practice. Agree or disagree with his conclusions, Keynes was in any case right to focus on the central bank and the tax-and-spend government to supplement the market's somewhat-palsied invisible hand to achieve stable and full employment.

But there ought to have been a fourth reign, for there was a set of themes not sufficiently explored. That missing reign was Schumpeter's, for he had insights into the nature of markets and growth that escaped other observers. It is in that sense that the late 20th and early 21st centuries in economics ought to have been his: He asked the right questions for our era.

He asked those questions in a book he wrote while working at the University of Czernowitz in his mid-20s: the Theory of Economic Development. Previous first-rank economists (with the partial exception of Marx) had concentrated on situations of equilibrium. In that model, development is a gradual process, in which competition keeps goods high-quality and affordable, and the abstemious owners of capital await the long-term rewards of deferred gratification.

Schumpeter pointed out that that wasn't how market economies really worked. The essence of capitalist economies was, as Marx had recognized before him, the entrepreneur and the innovator: the risk taker who sets in motion new and more-efficient ways of making old or new products, and so produces an economy in constant change. Marx saw that the coming of capitalist economies destroyed all feudal, traditional, and patriarchal relationships and orders. Schumpeter saw farther: that market capitalism destroys its own earlier generations. There is, he wrote, a constant "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. It is what capitalism consists in, and what every capitalist concern has got to live in."

So my question is how do we sustain economic growth and create new opportunities while mitigating the economic dislocation that invariably accompanies creative destruction?
 
It's fun to do the impossible. Change is inevitable however our response to it is not.
 
Brad DeLong and Larry Summers say that if Keynes was the most important economist of the 20th century, then Joseph Schumpeter may well be the most important of the 21st.

From Brad DeLong:


So my question is how do we sustain economic growth and create new opportunities while mitigating the economic dislocation that invariably accompanies creative destruction?

If I'm understanding the last quote from Mr. Delong correctly, the answer is already stated in that quote, because creative destruction creates it's own growth, inherently, supplanting what was pre-existing ("that market capitalism destroys its own earlier generations").

I think a more poignant question is if the act of 'creative destruction' cause too much dissonance like in a wave (think physics wave theory) that becomes so incoherent that it becomes (white) noise? In other words, does there need to be a minimum amount of stability/wave coherence for 'creative destruction' to actually result in growth? If yes, then what would be that minimum amount to seed a growth? And if yes, then it suggests there has to be a meta-cycle during which part of the cycle destruction is minimized to allow for growth, and then destruction is maximized to allow for the advance of new creation.

So from that reasoning, I'd guess there needs to be a minimum amount of stabilty/scaffolding for 'creative destruction' to be beneficial. I might look to examples of biochemistry, of protein folding or protein crystallization, to provide an illustration of such in terms of laws of physics (thermodynamics mostly). Not going to, because my education is not so lofty.
EDIT: And perhaps a better illustration in the realm of biology would be cell scaffolding systems that polymerize and depolymerize cyclically.

EDIT: EDIT: And a further question would be what should be the form of the stablization to support growth in a system of 'creative destruction'? E.g. Would it be a partial preservation of a previous generation and/or seeding of projected paths of the next generation?
 
Brad DeLong? Isn't that the arrogant idiot who still doesn't understand the Cambridge capital controversy? Who still bases his opinions on that misinterpretation of Keynes by John Hicks in 1937, which Hicks himself disavowed? Oh, yes, it is.

He probably started his own blog for the sake of "intellectual masturbation" (to turn against him one "argument" he used against a critic) - and manages to fail even as that, the thins is barely readable.
 
Ah but that does not answer the second part of the question GoodGame. As we hear so often around here regarding Wal Mart. Here's what he says about that...
Growth produces progress and wealth, but in unforeseeable ways and in discrete lumps that create many small winners (for example, the people who can now buy their shirts at Wal-Mart for $8.99 as opposed to $12.99 at its less-efficient competitors), a few huge winners (for example, the Walton family of Bentonville, Ark.), and notable substantial losers (the Main Street merchants of the Mississippi Valley, the Great Plains, and the Sun Belt).
 
Such a thing is unavoidable. What we can do is ensure that everyone's basic needs are met and aid in retraining, but there's always going to be winners and losers.
 
Ah but that does not answer the second part of the question GoodGame. As we hear so often around here regarding Wal Mart. Here's what he says about that...

Pretty much what Perfection said. The old failures can become materials to feed into the new successes. To continue the Walmart example, the sadly failed main street store owners might find their expertise re-harnessed in Walmart, or a new creative spin-off of Walmart.

On my own idea of stabilizing part of the economy, would stabilizing the previous generation (e.g.the main street stores ) provide sustained economic growth? Would it be better to stimulate the economy by projecting what the next spin-off of Walmart (going back to when Walmart first emerged as a giant) would be (e.g. e-commerce version of Walmart, warehouse store version of Walmart, or how about an e-commerce warehouse version of walmart ( a kind of e-My Store where I mail order case-lots of merchandise packaging I design) ).

EDIT: Pragmatically, I might guess growth in 'creative destruction' is maintained not by worshipping the previous generation, nor entrenching the current generation, but seeding the supplanation of the current generation by projected growth of the next generation. Curious to see if it would stimulate more growth this way. E.g. What if the failed main street business owners were not sent to the Walton empire, but instead sponsored to supplant Walmart with a future format--to a true next generation concept beyond a wall-store.
 
Maybe a busines like woot.com which concentrates on just one product every day. Their growth has been off the cuff.

I'm looking for what that will be for the boomers. Medical vacations seem reasonably disruptive but extremely fragmented.
 
So you're more interested in demographics and social programs in a system of 'creative destruction'? It seems to me on the individual levels, adaption is the only answer if one finds oneself suddenly a member of the previous generation. Question is, would adaption for a member of the late generation be ultimatelly better if one attempted to advance one generation, or if one attempted to skip ahead two generations.

But I think the generation cycles of 'creative destruction' don't necessarily coincide with population generations. The post-WW2 boomers are more of an oddity than a norm I believe; By their might via their numbers they might have enough pull to be a generation in a cycle of 'creative destruction' but the main definition of generations in 'creative destructive' would be technological or ideological revolutions, I suspect. Sociological for sure, but not necessarily defined by cultural differences/deviations between population generations.
 
The only reason I'm looking at that generation is they tend to do things in a big way whehter it's per capita potato chip consumption, starting businesses or retiring.

I think anyone who's catered to this demographic has been well rewarded.
 
Brad DeLong and Larry Summers say that if Keynes was the most important economist of the 20th century, then Joseph Schumpeter may well be the most important of the 21st.

From Brad DeLong:


So my question is how do we sustain economic growth and create new opportunities while mitigating the economic dislocation that invariably accompanies creative destruction?

Each nation individually has to have a very high level of capital investment. And that should be primarily from domestic sources. Tax laws should not be written to allow such, because that will never produce enough investment. Instead, tax laws should be written which strongly penalize insufficient investment.

If capital investment is high enough, than anyone displaced by creative destruction can fairly easily find new jobs. If unemployment is low enough and firms can not do an end run around tight labor markets, then they much invest in constant productivity growth. Physical, intellectual, and human capital must all be of primary importance to a company that intends to survive.

The Philips Curve needs to be dead and cremated once and for all. Governments should target an unemployment rate so low that employers become price takers instead of price setters.

Inheritance taxes should be much higher. And antitrust laws need to be rewritten to prosecute market concentration. The irony of creative destruction is that industry organization, while sometimes thriving on it, in the end typically seeks to put an end to it. Walmart uses creative destruction to dominate it's markets, but does not want it to continue after it has become dominant. It wants to get to the top and then stagnate the market.

Creative destruction will only continue to breed prosperity so long as companies are not allowed to reach, or stay at, a place in which they can rest on their laurels.

Investment is risk: Their is an inherent drive to minimize the risk of investments. Mergers, acquisitions, monopolies, oligopolies, all of these exist to reduce the risk of investment.

We have a Wall St schizophrenia: Schumpeter can be used to create vast fortunes, but to protect vast fortunes requires that Schumpeter be shown the door. We don't as often see big firms "bet the company" on something new. And we can't afford that when there are only one or two companies left in that industry. Not unless the technology is such that standing still is not an option.

But standing still should not be allowed to be an option anywhere.

If you are going to embrace Schumpeter as the core theory for the 21st century, half measures will not do.
 
No overall theory in my mind regarding how to deal with it, but I can think of a couple of small things (rules of thumb, really) off the top of my head.

As a geographer, I can't help but suggest that increasing the proportion of renters significantly would increase the ability of people to physically relocate as the economic geography morphs. I mean, it doesn't LITERALLY have to be rent vs. buy, but somehow increase people's economic locational flexibility. Perhaps better communications can help alleviate the social costs of relocating as needed to supplement this economic flexibility. Of course this suggestion assumes that physical immobility or rootedness won't someday be an advantage in some future economic paradigm (the way it may or may not have been in a manufacturing economy).

The other aspatial suggestion is as much education as possible. Teach as many people who are intellectually capable as much academic knowledge (including wisdom building ventures such as history) as possible. The underpinnings of science, mathematics, philosophy, and other pursuits tend not to be rendered irrelevant as economic paradigms shift. This is to be contrasted with technical skills that, while possibly advanced, may become obsolete if they are too rooted to certain economic/technological structures.

Physical mobility + Education = Adaptability

Furthermore, society must always be mindful of long-standing issues such as inequality and injustice. It is difficult to forsee an economic paradigm that is resistent to the potential problems of large segments of society perceiving themselves to not have a stake in the social system. Having a fair and viable stake in the social system encourages cooperation Harmony requires cooperation... always. The best societies operate mostly on the honour system. If enough people are excluded they will (and probably should) undermine the social order.

@Cutless: Schizophrenia is NOT the same thing as split personalities. The popular use of schizophrenia in analogies is almost always wrong.
 
Actually, I should say more about the mobility. I just sort of glossed over the social aspect of it with "communications", which is kind of BS when I think about it.

The strength and flexibility of social ties within their personal, broader "community" (whatever that is) is key. Case in point: Jews. This group of people seems to be able to prosper everywhere, not only because of a strong investment in education, but because of the portability of their social ties. The group has prospered through adversity and many economic paradigms by picking up and re-embedding themselves within the Jewish community elsewhere, and the wider community as a whole.

The Jews educated themselves (largely through the efficient sharing of community resources) and this helped them succeed as professionals (finance, law, medicine, whatever). However, it was this education in combination with their social networks that helped them become so successful in whatever they pursued. Even in wide-ranging economic situations, they thrived. In the Soviet Union, they comprised a significant portion of the political + academic classes. In the United States, not only did they succeed in old standbys, but through their social network in the urban ghettos also conquered new industries such as music. While they were connected to classical western music tradition, they also were able to commercialize new forms of black American music. When WASP America wouldn't let them in the movie business in the northeast, they transported their social network to Hollywood and just made their own movie industry. While competing with each other to some extent, the Jews also cooperated to adapt to new economic realities, just as they always had.

Italians as well. Their diaspora has gone from being relatively poor and working class to being extremely prosperous due to the strength of family and community ties that don't weaken, even after people move half a world away.

Chinese come to mind, as well as the Ismailis. My god are the Ismailis good at it. Their economic geography is centrally planned by the community.

Mobility(Economic + Social) + Education = Success
 
While I agree that locational mobility has some value, I think that locational stability has community benefits as well. What I am seeing is that an awful lot of people do not have ties to their community, and that makes the community itself a poorer place to live in. People who don't care, or are not connected, to their towns and cites do not take the steps necessary to make a community flourishing and safe.
 
Too long; did read; not worth it.

Brad DeLong? Isn't that the arrogant idiot who still doesn't understand the Cambridge capital controversy? Who still bases his opinions on that misinterpretation of Keynes by John Hicks in 1937, which Hicks himself disavowed? Oh, yes, it is.

He probably started his own blog for the sake of "intellectual masturbation" (to turn against him one "argument" he used against a critic) - and manages to fail even as that, the thins is barely readable.

Excellent points throughout :goodjob:

Otherwise...New paradigm for the 21st century? Seriously? Nothing here seems remotely adapted to the modern world specifically - it's all theorizing about capitalist economies. It seems obvious to me as that Schumpeter doesn't have a clue/care about the fact that "creative destruction," however it exists today, is simply leading to more concentration of wealth in the top few percent of society, and more impovershed people than ever before.

If I was expecting to read something that suggested a new approach to the 20th century, I would expect it to at least, you know, consider things like the vastly growing third-world populations, trade and the emergence of economies like China and India, and the much more advanced technologies we have today (combined with the fact that we also face environmental troubles and a heavy dependence on nonrenewable energy). Heck, we potentially face ten times more drastic challenges in the advent of robotics technology, genetic engineering, and fundamental changes in human life and ideology. Human-armchair hybrids not so much, though.

So, yeah, in the end I find nothing interesting or worthwhile at all in this theory - unless you're already committed to free-market, American style capitalism. "Economic growth," implied as some sort of holy grail, is not necessarily a good thing, many people's lives may be wrecked in the process - again unless you want to argue that no matter what the ends justifies the means. Even just making America richer while much of the world suffers is hard to argue as moral. In fact, at face value I don't even see any sort of "creative destruction" happening at all in the past few decades - instead there has been a single trend of large, consolidated companies controlling all services/production/employment (government is still a big contributor too, in some sectors).


Edit: Wow, this is really, really laughable. I mean, considering how even the stupidest things can get somebody to write a decent Wikipedia article...You'd think highly educated economists could do better with this info on "Creative Destruction." Looks like it was written by a 15 year old.

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs. Wal-Mart is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, Kmart, Sears) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat. Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction.

Other examples are the way in which online free newspaper sites such as The Huffington Post are leading to creative destruction of the traditional paper newspaper. The Christian Science Monitor announced in January 2009[3] that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.[4]

In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics of industrial change: the transition from a competitive to a monopolistic market, and back again.[citation needed] It has been the inspiration of endogenous growth theory and also of evolutionary economics.[5]

Creative destruction can hurt. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.
 
No trend of creative destruction? Really?

Google supplanted Microsoft within 10 years of its startup date.
Netflix has pretty much handed video rental outlets their death stamp.
Blogs and online newspapers have supplanted regular print newspapers.

etc etc etc
 
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