Creative Destruction

A couple of weeks ago I posted an article about “The Declining Return on Humans”. It was a serious follow-up to my tongue-in-cheek take on self-driving vehicles. As I thought about the Declining Return on Humans article, something kept gnawing in my brain. The ideas in that article were familiar and related to other stuff I’d read before. Maybe it was in college or on a long plane ride. But these ideas are connected to old ideas.

After digging around a bit I found it. And “it” is the Theory of Creative Destruction, a theory popularized by the early-20th century economist Joseph Schumpeter. “Popularized” might not be the right word. His version got the most coverage and he gets the credit. But, it wasn’t and still isn’t a very popular idea. At least not in it’s pure form. It’s been adopted and twisted by libertarian, free-marketers as the most direct pathway to progress and the efficient deployment of capital. And it’s always a great excuse for closing factories and putting people out of work.

Schumpeter defines Creative Destruction as:

“The process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.".

If we just stop there, it doesn’t sound all that bad does it? (Unless it’s your job that is being eliminated.) Read Schumpeter’s classic work “Capitalism, Socialism and Democracy” and you get the bigger picture. Schumpeter uses a lot of Karl Marx’s ideas (which probably made him even less popular) to build out his theory which essentially says that the ongoing process of creative destruction eventually undermines and inhibits capitalism as we know it.

Schumpeter saw the value of entrepreneurs and innovation. It takes these “disruptors” to keep the economy growing. And with each disruption there are winners and losers. Most of us get that and accept it. Even when we are among the losers. But Schumpeter saw this process as eventually undermining itself. And this was very much in line with the thinking of Karl Marx. Schumpeter concludes that somehow in some fashion capitalism survives or whatever we’re left with is better for having gone through the evolutionary process of capitalism’s creative destruction. Marx had a darker vision and ultimately those who followed him thought it better to kill the capitalist monster before it killed them. Schumpeter essentially saw “Too Big To Fail” looming on the horizon. Capitalism would lead to “corporatism” and a shift in society away from free-market entrepreneurism toward the welfare state. Schumpeter also predicted that “the intellectuals” of our society would lead the way in restricting capitalism and eventually replacing it with some form of socialism. (He’s looking pretty good on that prediction, unfortunately).

However, Schumpeter did not account for “The Elites”. These are the powerful forces in business and government who pull the strings and stay one step ahead of the next wave of Creative Destruction. They are the perpetual winners. If the winds below them are blowing toward socialism and increased government control, no problem. Give the people what they want. When they’ve had enough of that and the pendulum swings the other way, change the game again. The challenge for “The Elites” is maintaining a productive “middle class” that can afford to purchase goods and services whether in the free market (via disposable income) or from the government (via taxes). Even The Elites understand that they cannot just keep borrowing from each other and printing new money to pay for it. At some point someone has to produce something of value. And getting to that point from where we are today will take a lot of Creativity and certainly a fair amount of Destruction.