Before we start talking about creative destruction and what it means, it is essential to understand that a market economy inspires hard work and progress, not just because it rewards winners, but because it crushes losers. An example would be the 1990s, which was a great time to be involved in the internet, but bad years to be involved in the electric type-writer.
Taken from the idea of Adam Smith’s invisible hand, Austrian economist Joseph Schumpeter coined the term ‘creative destruction.’ Capitalism can be, and often is, a brutal cruel process. Looking back at great breakthroughs such as the steam engine and the spinning wheel, we talk about such inventions in admiration and awe. But it was the same breakthroughs that made times difficult for blacksmiths and a seamstress.
Creative destruction must happen in a market economy, there is no choice. In the early 1900s, almost half of Americans were farmers or ranchers, now the figure is less that 1/100. But, the American people have not starved to death and neither nor do they have an unemployment rate of 49%. What has happened, however that is the farmers have become more productive, meaning that less farmers need to work to produce the same amount of food. Those individuals, who would have been farming 100 years ago, are now designing new software and teaching in schools, etc.
In the long run, creative destruction is a marvelous positive force, but the problem is that people don’t pay their bills in the long run. The banks are often very strict about getting mortgage payments every month. When a factory or sometimes an entire industry is wiped out by competition, it can take numerous years and generations for the affected communities and workers to recover. An example of this is the north of England after the closing down of mines and some manufacturing plants. The people in these communities are still feeling the effects of events that happened years ago.
Competition leads to losers, which in essence explains why we embrace the idea in theory, but fight it in practice. Competition is always best when it involves other people. Take the industrial revolution for example; weavers in rural England demonstrated, petitioned Parliament and ever burned down textile mills in a failed effort to fend of mechanization. But in today’s society, would we be better off if they had been successful and all out clothes were made by hand?
Competition always creates interesting policy trade-offs. Inevitably, governments are under pressure to help firms and industries under attack from competition and protect workers who might be at risk. Yet many of the ways the pain of competition is reduced-bailing out firms or making it hard to lay of workers- hinder creative destruction.
Ultimately, creative destruction allows a market economy to progress, to grow, to develop and to become more efficient. And as unappealing it is in the short run, it is invaluable in the long run. We might not like the idea of creative destruction but we definitely need it, because in simple terms ‘ no pain, no gain’