4. Creative Destruction

(A) Creation out of destruction

Alexander the Great became great partially due to a military formation called the phalanx, which was perfected by his father, Philip of Macedon. Before Philip there was very little strategy, discipline, or coordination to waging war, but Philip learned how to organize his army so that 1,000 of his men fighting as a team could easily defeat 5,000 opponents fighting as individuals. Straight lines of disciplined solders would carry very long spears. The spears were so long that they had to be carried by eight, sixteen, or even more men. The spears would extend so far that it would allow them to kill the opposition before the opposition could get within striking range. Moreover, the formation allowed many rows of soldiers to participate in the battle at one time, rather than just the front line.

Figure 1—The Greek Phalanx

By F. Mitchell, Department of History, United States Military Academy [Public domain], via Wikimedia Commons

It was the phalanx that helped Alexander the Great conquer the world, but as we all know, the Greeks would eventually be defeated and ruled by the Romans. For most of the Greek world, the recognition that their dominance was over came when the more flexible Roman formations easily defeated the Greek phalanx. Because the phalanx spears were so long the Greek soldiers could not easily turn to defend their flanks and rear, and it is this weakness the Romans now exploited. In 197 B.C., the phalanx and Greek dominance was destroyed, and a new Roman hegemony was created.

There was no way to know for sure that a new empire and fighting strategy was creative until it has destroyed the old way. The creation depends on destruction.

(B) Creative destruction

I wish to exploit this destructiveness of war to introduce one of the most important (and simple) economic concepts: creative destruction. The "creative" part refers to the fact that something new comes along that allows a good to be produced better. It might be a machine that let's one produce a good cheaper, like automatic milking machines which allow one person to milk more cows. Or it could be a new version of the good that is of much higher quality and greatly preferred even at a higher price. New smartphones have made the phones of 1999 obsolete. No one knows in advance what this new technology might be, which is why it's called "creative" destruction. The "creative component also signifies that the change doesn't just destroy jobs but creates new jobs elsewhere. The "destruction" part signifying that as this new product or production system causes some industry to lose business and lay people off. Jobs are loss, and some people are temporarily harmed.

For the automobile industry to flourish and thrive it required the destruction of the carriage industry. As people acquire a greater amount of their information online it necessarily requires an eroding of business for printed newspaper. Fifty years ago most people in the U.S. had artificial Christmas trees, but as regions like North Carolina learned to grow their own varieties well, the use of real Christmas trees in most homes came at the expense of the artificial Christmas tree industry.

It is simply impossible to expect people to spend money on a new product without decreasing their expenditures on other products. I suppose it is possible that economic growth could occur in a way where we increase our spending on every product by the same proportion, and if no new goods are introduced into the market, but this is highly unlikely and does not allow the entrance of new products, an idea that fans of the iPad abhor.

Creative destruction can result from many things. A new product of course. A technology that allows us to produce the same product cheaper. In both cases, jobs are lost in the industries which realize a decrease in consumer demand, but jobs are created in the growing industries.

Opening of international trade allows us to replace domestic purchase of some goods with cheaper imports, destroying those domestic jobs. Since a country cannot import without exporting the same value of goods, this means that the country must be exporting more of something, which creates new jobs.

(C) A helpful analogy: locust swarms

Even if you have never seen one in person you can probably envision a locust swarm (or if your imagination fails you, see the video below). The swarms make it seems as if millions of locusts are working in unison to cause as much destruction over as much land as possible. They might resemble a Zebra herd or a school of minnows, sticking close to their fellow animals for protection, and you might be tempted to believe the locusts swarm for the same reason. Or perhaps you think they are like flocks of birds who simply want to be with birds of the same species. You would be wrong. Locusts are normally solitary creatures, but when their numbers become sufficiently large they begin fearing one another. Locusts, you see, cannabilize one another.

Video 1—Locust Invasion in Congo

The real reason locusts swarm is that they are trying to stay ahead of the locusts behind them, as to not get eaten. They jump and fly ahead to not get eaten. They 'create' new paths of travel to avoid being destroyed.(Y1)

Businesses are under the same pressure. They must relentlessly innovate and evolve to stay ahead of their competitors, producing a cheaper or better product constantly. Indeed, their competitors do want to cannibalize them by luring their customers away. And so firms constantly grow more efficiently, constantly create new and better products, knowing that doing so is their only means of survival, and bestowing up their consumers greater and greater wealth in the form of cheaper and better products.

Eventually all locusts die, to be replaced by their descendants. Likewise, all companies eventually die, replaced by their betters. Of all the corporations that comprised the original Dow Jones Industrial Average in 1896, only one (General Electric) still exists today.

Meet Joseph Schumpeter

The term “creative destruction” was coined by Joseph Schumpeter, an Austrian economist who lived during a time of technological leaps, including relatively new inventions like electricity, elevators, and trains were creating a revolution in how people lived. Wealth was rising. During his lifetime wealth had more than doubled, increasing more than in the previous two thousand years.

Figure 2—Joseph Schumpeter (1883-1950)

Change was a constant in Schumpeter’s life. Much like Batman, he displayed a double–personality. At night he was a “player”, living large in decadent, hedonistic pleasure, while during the dayhe was an austere and studious economist determined to forever change the course of economics. What he did was to document the obvious: the nations grew in wealth by allowing new technologies, products, laborers, and trade to create new jobs by destroying the jobs of old.

Quotation 1—A new term is coined

“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same 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.”
—Schumpeter, Joseph. 1942. Capitalism, Socialism, and Democracy. Page 83.

(D) Creative destruction in agriculture

Agricultural has undergone a revolution in the last century, where power from animals was replaced by power from fossil fuels, dramatically increasing the productivity of farmers. Each farmer can now produce much more corn, much more watermelons, much more beef. And they did produce more, much more, and not surprisingly, the price of agricultural products fell, causing the most inefficient farmers to go out of business. In 1800 around 90% of American jobs were farm jobs, but it would be absurd if that percentage staged at 90% today. Low crop prices forced some people to give up farming and take jobs in other areas. After all, with cheap food Americans had much more money for other things, like automobiles and houses, and so some people who would have farmed in 1800 and producing these other things today.

Figure 3—Number Of Farmers Over Time(P1)

Creative destruction replaced the horse-drawn plow with the tractor-drawn plow. It replaced farm labor with combines. Many, many jobs formerly performed by people were destroyed, replaced by machines. More jobs were then created to make these machines, and all the other things Americans spent their greater wealth on. This is why only 2% of the workforce is farmers, why they can feed so many people, and why the average farm is so much larger than before. This is not something to lament. The only way there would be workers to make our PlayStations and brew Samuel Adams beer is if these workers are not needed to grow our food.

Video 2—Creative Destruction in Farming (from documentary, King Corn)

(E) Creative destruction is not pretty

We use the term "creative destruction" because the process of destroying some jobs to create others is often very messy business—sometimes violent. When machines began replacing textile workers in 19th century England a group of workers called the Luddites responded with violence. The Luddites fought the British Army, destroyed the machines that took their jobs, and issued death threats.

The threat of the new textile machines actually rose two centuries prior, but Queen Elizabeth I foresaw the temporary unemployment the machines would cause and decided the machines were not worth it—she banned them from England.

Quotation 2—The Queen has spoken

I have too much love for my poor people who obtain their bread by the employment of knitting to give my money to forward [a textile] invention that will tend to their ruin.
—Queen Elizabeth I of England. From Stuff You Missed In History Class [podcast]. July 3, 2013. "The Luddites."

Figure 4—Luddites destroying textile machines

By Chris Sunde; original uploader was Christopher Sunde at en.wikipedia. [Public domain], via Wikimedia Commons

Usually, creative destruction is not fought with violence but with the spreading of false information. When margarine was created as a replacement for butter in 1886 it was not received calmly by the butter industry, who warned Americans that margarine would not deliver the essential vitamins to children, and would result in many infant deaths. The result was a tax on margarine which remained in place until 1950.(M1)

Nobody likes losing their job. Some of them will find better jobs, but some will remain at a lower income for the remainder of their lives. Still, there is no denying that creative destruction is absolutely essential to increased living standards. It is best to not interfere with creative destruction, but to help workers while they look for different jobs, giving workers the financial assistance they need to take time and search for a good job most consistent with their skills.

(F) Don't be a hater

Rarely does one hear of people disparaging technology, except for the Unabomber and the Luddites, and a few politicians like Jesse Jackson Jr. (see the nearby video). This is not true for trade, and yet there is little difference between the two. Both technology and trade provide access to new goods and cheaper goods. It is true that developing new trading relations does often change patterns of employment, yet the same is true for technology. The liberalization of trade with Japan in the 1980's caused automobile production in the U.S. to fall but agricultural production to rise. The rise of the internet caused unemployment at newspaper printers but increased production in Information Technology (computer people).

It is impossible to create jobs in new sectors without destroying jobs in other sectors—like the Greek phalanx, those old jobs become historical relics. When Rep. Jackson regrets the unemployment the iPad caused he does not seem able to understand the new jobs that the iPad creates. Moreover, he does seem able to understand that it is impossible for a society to progress without job loss in some sectors. Most Americans used to be farmers, but now they are less than one percent of the population. Good! Without job losses in agriculture those workers would not be available to produce more modern goods like computers, jets, and artificial hips.

Video 3—Does the iPad kill jobs?

A similar phenonemon is taking place in the manufacturing sector, where every year the U.S. produces more and more goods, but every year employment in the manufacturing sector falls.3 This has led many to proclaim, "American doesn't make anything anymore," but they are wrong. Total employment in manufacturing has been falling over time but total manufacturing output has risen. This is possible because each worker is more productive than their counterpart in years prior.

Figure 5—Manufacturing in U.S. has risen despite employing less people

Source: Perry, Mark J. July 17, 2010. “Increased Worker Productivity Has Destroyed Millions of Jobs, and We Should Be Grateful.” Carpe Diem [blog].

If it takes less workers to produce goods than it did ten years ago, shouldn't we expect employment to fall (as a percent of the labor force, at least)? Instead of grieving over this loss of employment we should rejoice in a dynamic economy that moves workers from one sector to another where labor has greater value. The American worker used to make T-Model Fords. Now they help us fix our computers, manage data, and operate MRI machines.

Technology and trade don't destroy jobs, they change jobs. Unemployment was low in 1850, and it was low in 2000, despite remarkable differences in technology and trade. Employment occurs when an employee finds an employer who wants their services at an acceptable price. Such negotiations took place in ancient Athens, and take place today.

We should pay homage to the difficulties unemployment can cause a family, but we should also take heart that we live in a society that provides unemployment compensation. Disturbances in employment patterns are unavoidable, if we are to progress.Both technology and trade, if their effects on an economy are sustained and not temporary, require a one-time adjustment but provide a permanent increase in income. A nation would be a fool to not benefit from them both.

(G) Progress takes many forms

Most people readily agree that we should not prevent technological innovation, even if it temporarily displaces workers. It is obvious to us all that the car is better than the horse, and some people suffered harm as the demand for horses and carriages fell as the demand for automobiles rose.

Technological innovation can create new products but can also make the production of existing goods less costly, reducing prices for consumers. Most people are not opposed to this type of technology either, as we would rather pay less for our food than more.

What we do not recognize is that many other things that also reduce prices differ little from technological innovation. Free trade is good because it makes many goods cheaper. Just as technological innovations in oil extraction makes gas cheaper, so does free trade with the Middle East.

Immigration also makes many jobs cheaper, but people have trouble equating immigration with technology. There isn't much difference between an immigrant replacing an American on the assembly line than a robot, yet we oppose the former while accepting the latter. Both the immigrant and the robot make producing some goods cheaper, leaving consumers more money to spend on other things, and the jobs needed to produce those other things provide employment for workers displaced by immigrants and robots. The TV show South Park parodied this when a new method of production threatened the lives of many citizens of South Park: workers from the future!

Video 4—They Took Our Jobs! (From Episode, "They Took Our Jobs" In Season 8 Of South Park)

In the last two hundred years this countries has assimilated masses of immigrants, increased trade with the world, and adopted technology like no other country. Yet, we maintain a lower unemployment rate than most countries, while also giving these workers more wealth than most countries. The success of our labor force is due to the fact that we embrace immigration, trade, and technology. If we decide to oppose these three sources of progress, we will harm those very workers we seek to help.

Video 5—ReasonTV Video on Immigration, Trade, and Technology

Creation, destruction, and unemployment

There is no economic law that says the jobs created as industry evolves will equal or exceed the jobs that are destroyed, but we have to remember that people who want jobs will usually accept the best job they can get, even if isn’t their ideal job. Consider how many jobs have been destroyed since the 1920’s: carriage maker, train builders, horse and mule trainers, and the like. Think of all the ways machines have replaced humans. Fossil fuel provides cheaper muscle than that of humans. Even cows are milked by machines. More mail is delivered electronically than through the mail service, and much of the construction of cars is now given to robots instead of people. Yet, despite all these changed, the unemployment rate today is about the same as it was in 1920, and 1940, and 1970, and almost every decade except during touch economic times like the Great Depression during the 1930’s.

How does unemployment remain so low despite all these jobs destroyed? Because of all the new jobs created.

Figure 6—Unemployment doesn’t rise as some jobs are destroyed


(M1) Mangu-Ward, Katherine. October 2011. “The Butter Battle.” Reason magazine. Page 72.

(N1) Nasar, Sylvia. 2011. Grand Pursuit. Simon & Schuster: NY, NY.

(P1) Perry, Mark. July 27, 2011. “Creative Destruction of Jobs Makes Us Richer.” Carpe Diem [blog]. Accessed August 14, 2013 at http://mjperry.blogspot.com/2011/07/creative-destruction-of-jobs- makes-us.html#links.

(Y1) Yong, Ed. May 8, 2008. “March of the locusts—individuals start moving to avoid cannibals.” Phenomena: Not Exactly Rocket Science [blog]. National Geographic.