If Austrian economist Joseph Schumpeter is the father of creative destruction, then today’s entrepreneurs and inventors are his disciples. The term ‘creative destruction’ was coined by Schumpeter in his 1942 book Capitalism, Socialism, and Democracy. It refers to the dismantling of traditional business and economic models to make way for revolutionary technologies and innovative processes designed to vastly improve living standards. Proof of concept and historical precedents include how 1760s Britain, followed soon thereafter by the US and other European countries, pivoted from an agrarian-based society to one centered on industrial production – thanks in large part to the advent of steam power and mechanization.
Fast forward to the 1980s and 1990s; the computer age, coupled with the internet, boosted the productivity, efficiency, economic competitiveness and wealth of nations worldwide. And in just the past 10 years, another type of disruptive phenomena known as the Fourth Industrial Revolution has accelerated us into the digital age while bridging the gulf between physical and cyber systems.
Whether evolutionary or revolutionary, technology has paved the way for unseen global economic transformations and, more significantly, a better quality of life. Schumpeter’s theory demonstrates how entrepreneurs have historically served as the cornerstone of wealth creation and income equality. The benefits of their new discoveries cascade downward, become democratized, and are then shared by entire societies.
Yet the destructive elements of Schumpeter’s philosophy in the short and medium-term cannot be ignored. There has been an excruciating lag between the introduction of new ways of doing things and labour displacement from the old economy as it struggles to find its way into the new one. This is particularly true when workers lack a formal education or skilled trade that would enable them to seamlessly transfer their talent to the new economy. In addition, the time it takes to retrain workers and help them absorb the cultural shift in business models and ways of thinking cannot be overlooked. Another stumbling block is the reorientation of capital and other resources from one segment of the economy to new industries. In other words, creative destruction does not instantaneously diminish the pain of job losses when upstarts replace the incumbents.
The Darwinian nature of creative destruction is best illustrated by comparing the top 30 companies listed in Dow Jones Industrial Average in 1928 to this year’s market leaders. Not one of last century’s titans of American industry is in the top 30 today (General Electric fell off two years ago). The composition of these companies and the industries they represent (banking/finance, computers, IT, and information communication technologies) underscores the world’s shift away from manufacturing to services and more complex, sophisticated technologies.
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Even risk-averse companies that readily adapt and invest in new technologies and processes encounter hurdles. One example is what is known as the ‘productivity paradox‘, which is when anticipated gains in productivity and ROI are not fully realized straightaway. When Apple, Microsoft and Dell Computer arrived on the scene in the 1980s, computer usage was limited to early adopters or those who could afford a personal computer. They did not receive widespread consumer acceptance until the mid-1990s; now, computers and smart devices are an indispensable part of society.
The benefits of the computer age are difficult to gauge in simple fashion. MIT’s Nobel Prize-winning economist Robert Solow stated during the internet boom of the 1990s: “You could see the computer age everywhere but in the productivity statistics.” Why? One explanation is that GDP is an imperfect measure for capturing meaningful data and translating technology’s impact on productivity, sustainability and overall well-being. The same can be said of the Gini coefficient used to measure income distribution and economic inequality among a huge swath of the population. Like the computer age, the digital wave and its industry laggards are now attempting to catch up, upskill their technological knowledge, and overcome barriers to adoption encountered during previous economic revolutions.
Economic history shows that like the advent of past economic disruptions, the digital landscape must be relentlessly cultivated by continuous education and lifelong workforce training. The linchpin of meritocracy begins with introducing children to the STEM and language disciplines at an early age in order to stimulate their critical thinking skills and intellectual curiosity about future career paths. An acquired culture of learning how to learn is a necessary step to avoid being swept aside by an unforgiving world ruled by computational power, big data, artificial intelligence and robots.
Once filtered downward, creative destruction can lead to income equality and better standards of living. The winner-takes-all approach, which benefits monopolistic corporations and concentrates wealth, is an unsustainable socioeconomic model. But it is difficult to challenge the dominance of Big Tech given how deeply entrenched they have become, often surrounding themselves with lobbyists to serve their narrow interests. Although the self-reforming nature of market capitalism balances out some of its inherent inequalities, it may not come soon enough for the forgotten blue-collar workers who are receiving a dwindling share of corporate profits and falling further behind.
Bipartisanship and impartial public policy should play a better role in resolving income disparities. The question is how to ensure that the benefits of creative destruction can be shared by everyone in a way that closes the transitional gap between new discoveries and their diffusion to the world at large. Proposals include the enforcement of current anti-trust and anti-competitive measures that dissuade incumbents from keeping competitors at bay while limiting consumer choices. Trust and egalitarianism must also be restored in public institutions that have been eroded by special interest groups at the behest of their clients’ self-interests. In addition, immigration reform to solve the skill and labour shortages is crucial to any nation’s economic and national security. Another critical step is creating social safety nets focused on career support and education rather than extended unemployment benefits, generational welfare, and other government transfers that foster dependency.
These policy prescriptions will instill a sense of purpose, pride and self-worth to those seeking to improve their well-being. In the end, equality is what connects us, provides a sense of social cohesion, and cushions the shortcomings brought on by creative destruction and globalization.
This article was originally published in The World Economic Forum.
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