Undergraduate Economist

Perspectives of an economics student

Creative Destruction

Posted by Alex M Thomas on August 8th, 2006

Where have all the cycle rickshaws gone?
Where have all the type writers absconded along with the typists?

So many call centres have materialised!
SEZs are sprouting out!

Well, the economy has undergone many changes, though all for the better. But the predicament is that, not all have gotten better. This has resulted in increasing disparities of income (Which is bound to happen in a meritocracy like India). I have been intrigued by this phenomenon.

Then I came across Joseph Schumpeter. And when I read through his works, I realised that he had already talked of this phenomenon, long back in 1942.

This is what creative destruction means- “Creative destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones.”
This restructuring process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment and the functioning of factor markets.

Davis, Haltiwanger and Schuh (1996) concluded that over ten per cent of the jobs that exist at any point in time did not exist a year before or will not exist a year later. That is, over ten per cent of existing jobs are destroyed each year and about the same amount is created within the same year.

So be on the look out for such changes. I could pen down only two of them. If you have recognised others, please comment.

Do you feel that the creation outweighs the destruction? Does this contribute to rising inequalities? Is it not that the negative externalities from creative destruction do more harm than good?

11 Responses to “Creative Destruction”

  1. Deepa Says:

    ufffffff

    u confused me

  2. Deepa Says:

    all that i can say is that our quest for material wealth is leading do a destruction of nature , which will ultimately destroy us
    :|

  3. alexmthomas Says:

    Bingo! Deepa…And those who know this fact must do all they can to save the planet Earth.
    Creative destruction is a concomitant to Capitalism and in a meritoctacy like India, this is bound to increase the inequalities.

  4. Dweep Says:

    Alex,
    I’m more familiar with this term in the context of business strategy & innovation as a subject within management. It relates to how smaller companies create new innovations that replace long-held technology. Examples include Google creating new web-technology that challenged Microsoft.

    In this context, creative destruction is a positive development. It is argued that large companies generally innovate through gradual improvement of existing technologies. However, real innovation requires new technologies/process that replace existing ways of doing things. By their very nature, larger companies avoid such disruptive technologies, which must come from smaller, unestablished rivals.

    This concept has been applied to ‘bottom-of-the-pyramid’ & sustainable business – which relates to strategies that target particularly the poor. Since there is little competition at this level, companies can innovate with the innovations able to replace or threaten existing technologies.

    For more on this, read:
    Global Sustainability and the Creative Destruction of Industries, Hart & Milstein (MIT-Sloan Management Review).

  5. alexmthomas Says:

    Dweep,
    Thanks for the link. It proved informative.
    The case for creative destruction in the emerging markets is a moot point while i agree that when innovations and inventions are made so as to reduce ecological damage, it is laudable.
    In the mature and developed markets, it can have positive externalities.
    Creative destruction is a part of the evolving economy, and it is necessary for the development of economies and people.
    What should be of concern is the rate at which this process takes place in developing countries! The pace of this process must not grow in high proportions vis-a-vis to the economically and socially growing population. This will lead to negative externalities.

  6. harsha Says:

    alas, you forgot to mention the good old post card! nothing related to subject, but sounded a good correlation in the context.

  7. alexmthomas Says:

    In The Hindu of yesterday, there was a write up on creative destruction.
    It talked about Digital orchestra posing a threat to human creativity.
    You can read the full article here.

    @Harsha, Actually with the advent of the elctronic mail most of the mediums of personal communication seems to have vanished.

  8. shromon das Says:

    Alex,
    The “winds of creative destruction” are definitely a positive development. Of course, it may seem to be unfair since a few people may lose out in the short run (Reliance Fresh), but well, I guess we all need to reinvent ourselves continuously…
    Maybe the Fed needs to go over “Capitalism, Socialism and Democracy” all over again. I feel the financial and banking sector in the US needs a major restructuring…What say???

    http://shromondas.blogspot.com/

  9. Alex M Thomas Says:

    Shromon,

    Well, i think any development per se will be unfair to some and fair to some. And its the ‘survival of the fittest’.

    Yeah, constant reinvention is essential for growth.

    It would be good for most of the countries to go over ‘democracy’ all over again. :)

  10. Gideon Mathson Says:

    Alex,

    Great article. I didn’t know it was called ‘creative destruction’. And this has always fascinated me, especially in the context of libertarian economics. Given the primacy of the libertian idea, that eventually technological progress will oust workers and displace them and then finally re-intergrate them, it makes for an interesting study into basic morality.

    The question is, does one care that people are being displaced, and secondly how long are they displaced for.

    For example if one considers the enclosures in england, and the landlords buying off land to create larger and more productive farms, one has to agree that England’s industrial progress was pivoted on this change. The argument is that larger farms meant less workers, all of whom shifted to industrial work and it also meant industrialization of the farms, which caused progress in agriculture. In fact one could argue that the Indian Zamindars inability and incapacity to do the same is one of the reasons why Indian farmers are forced to work on small farms with low productivity and why the shift to industrial work has been so slow.

    But to go back to England. What about the dispalced farmer. How long did it take for them to recover. Did they recover in their lifetimes? Is the sacrifice of one generation of people justifiable for the next generation’s benefits?

    Also can I blog about this? If you dont mind? I’m going to post an article about this up on spontaneousorder.in

  11. Alex M Thomas Says:

    Gideon,
    Like you point out, Libertarian economists maintain that though technology displaces people, it also creates jobs. Is it so? To cite two examples, the cases of typists and of hand loom weavers. Again, the time gap between jobs also need to be taken into account.

    Take a look at the following authors’ works on the issue we are discussing:
    Harry Braverman: on deskilling
    Krishna Bharadwaj: on size and productivity of Indian agriculture (EPW)

    Division of labour at the macro level is a wonderful idea, because it creates more kinds of ‘work’, which means more employment. As Adam Smith points out, division of labour in manufacturing increases the “extent of the market” through an increase in incomes as well as commodities. However, at the level of the individual, division of labour may not bring about advantages.

    Is the sacrifice of one generation of people justifiable for the next generation’s benefits?

    Exactly! Libertarian economists pose the same question when it comes to government borrowing.

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