Schumpeter's Idea of Creative Destruction: Effects on an Economy

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Explain Schumpeter’s idea of ‘Creative Destruction’ and how it can advance an economy. What issues can arise with creative destruction. Real world examples/analogies will be helpful.

Schumpeter describes creative destruction as the “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” (Schumpter, 1942, p. 83).

In contrast to the more commonly held theory of laissez-faire economics in which economic equilibrium is celebrated, creative destruction focuses on constant churn due to innovation (“new combinations”) as the evolutionary driver of economic change. “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates” (Schumpter, 1942, p. 83). In our predominantly capitalist Western society, profit seeking companies seek to dominate markets with their product or service, and the primary determinant of market success is innovation. Failure to innovate and monetise new ideas and inventions will eventually result in obsolescence, as new goods and services outperform older ones. It is thus that successful innovations are eventually outdated and companies who do not change are ‘creatively destroyed’ by even newer ideas and possibilities. Creative destruction more accurately than any other economic theory describes capitalism; the best price or quality for consumers will always win the market.

Schumpeter divided technological innovation into four phases: invention, innovation, diffusion, and imitation. In Schumpeter’s view, the invention and innovation phases have less of an impact on an economy, and the diffusion and imitation phases have a far greater influence on an economy. During the first few years, any economic effects of a new innovation are difficult to quantify, e.g. the invention of computers had little economic impact in the first few years of its inception. For economic impact, what matters most is not the initial innovation, but the diffusion of that innovation (Śledzik, 2013), which is when any imitators start to realise and invest in the potential profitability of such an invention or new technology (Freeman, 1987).

From Schumpeters point of view it is the creation of a new innovation that causes an economy to advance, and not the destruction of any old technology or way of working. The ‘booms and busts’ of various economies in the past century accurately demonstrates this theory whereby it is not an unbalancing and balancing of the economy that is occurring, but rather that it is the ‘old’ economy being replaced by one born from a new innovation or invention. I would theorise that the larger the disruption caused by the innovation, the larger the boom or bust can be to an economy.

So, how does this creative destruction advance an economy? New technologies and new sub-industries arising from creative destruction have in the past tended to have the knock on effect of creating new jobs and further related technologies. A great many technological advances from new innovations have caused vast improvements in the standard of living that can be enjoyed from such an advance (e.g. medical advances), and progress of this nature can transform entire economies.

The Internet is perhaps the most all-encompassing example of creative destruction of recent times. The availability and accessibility of the Internet and Internet commerce in recent years has created a shift in how an increasingly wide range of industries operates and interacts with consumers. This ripple effect has changed the landscape of jobs currently offered. In the banking industry, there is no longer as great a need for bank tellers; in retail, fewer clerks are required, and in travel fewer human agents are needed to facilitate bookings. Mobile internet in itself has completely changed the way we navigate using almost-live Google Maps rather than cartography-based paper ones, and how we hail taxis is much less manual than it has ever been requiring fewer actual people to be involved in the process.

We no longer have much need to offer jobs for switchboard operators for telephones, VCR repairmen, masons, videostore employees or lamplighters as we did in the 1900s. Through changes introduced by new inventions and innovation, a similar number of openings have appeared for a new range of job functions that never existed before, with exciting new titles as Scrum Master, Data Scientist, Site Reliability Engineer, and Cloud Architect, among others. The entertainment industry was unquestionably affected by the internet, but its need for creative talent and product remains the same or greater. The Internet destroyed many small businesses with physical presence but created the opportunity for many more entrepreneurs to create their own ones virtually through the likes of Etsy and Amazon.

Schumpeter’s point was that any evolution such as would be created by his economic theory would punish less efficient and restrictive ways of organising resources, and would reward innovations and improvements. With creative destruction the trendline is always heading towards improved living conditions and standards of living through the progression and embracing of new innovations.

The transportation industry provides a dramatic and continued example of creative destruction in our collective past and present. The invention of steam power and its resultant railroads in the 19th century enlarged markets, reduced shipping costs, allowed new industries to be built, and provided millions of jobs to the economies that adopted it. The subsequent invention of the combustion engine led the way for the eager and wholesale adoption of automobiles in the early 20th century. Full embrace of this new technology created millions of new jobs over the century to date; even in the 1920s there were already 260 different car makers, some of whom still exist today. With the invention of automobiles came completely new industries and improvements to existing ones such as oil drilling, entertainment, tourism, and retail, among many others. From the humble combustion engine and automobile industry, passenger airplanes were invented, which set off further (thus far) enduring industries and productive jobs of its own.

The sharing economy is the latest illustration of Schumpetarian economics in action. The rise of Uber has threatened the incumbent taxi industry, and many countries have enacted legislation to prevent it from taking over. While alarming headlines dominate, empirical research has shown that such market disruption can be responded to effectively in order to maintain market share (Kim, Baek & Lee, 2018).

Technological innovations have changed the world for taxi drivers and artisans, for example. The nature of these jobs is still the same, but how one enters such professions and the opportunities that they afford are considerably different today than 50 years ago. With rideshare apps like Uber, Juno or Lyft drivers and riders can connect directly without the need for an intermediary taxi company to arrange pickup/dropoff locations. On Etsy and Shopify, artisans and entrepreneurial sellers can set up and open a digital store in as little as minutes and have access to millions of shoppers from almost every single country in the world (Irons and Wise, 2015).

What happened in the transportation and retail industries is not isolated to those. Almost every industry has been turned upside down by innovation, and in some cases, has happened multiple times in the same industry. For example, the invention of videotape was replaced by DVD, which itself was replaced by Blu-ray technology, and after a relatively short amount of time, evolutionarily speaking, was replaced by streaming capabilities. In Schumpter’s world of creative destruction, change is the one constant in capitalism.

In the United States, there were benefits to be had as cars and airplanes superceded horses and other livestock as transportation. Each new mode of transportation opened new avenues for employment, but took a toll on existing jobs and industries.

In 1900, 109,000 Americans worked as carriage makers and harness makers. In 1910, 238,000 were gainfully employed as blacksmiths. Today, those same jobs are effectively non-existent. Railways and canals were largely replaced by cars, trucks and air transportation. In 1920, 2.1 million people in the US were employed by railroads, whereas today fewer than 200,000 are still working in that industry.

Schumpter coined the phrase “technological unemployment” to describe the roiling of job markets caused by his theorised creative destruction. Even seemingly monolithic companies themselves show the same sequence of destruction and renaissance. Of the hundred largest public companies in 1917 only five still exist today. By the year 2000, over 50% of the top hundred companies in 1970 had been replaced.

One reaction to such turmoil is protectionism, both of jobs and of trade. However, an economy cannot accept creative destruction without an understanding that some will be left worse off than others. Protectionism is not something that either laissez-faire economics nor Schumpetarian economics has solved for; in fact, both economic theories make the assumption that interfering will result in economic crises such as happened in the Great Depression.

“The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process,” Schumpeter wrote (p. 82).

Creative Destruction is a concept that has shifted our economic perceptions considerably, and it is likely that the future will be Schumpetarian with innovation the main driver of wealth. It will reward those who are most adaptable to its effects and hurt those who do not transform with it. The evolution of business and business practices will absolutely change in future, but such evolutionary advancements will undeniably be fascinating to witness.

REFERENCES

  • Freeman, C. (1987) Technology Policy and Economic Performance: Lessons from Japan. Frances Printer Publishers, London, New York.
  • Irons, J. & Wise, A. (2015) The Future of Work: Creative Destruction and the New World of Work. [online] Pacific Standard. Available at: https://psmag.com/economics/the-future-of-work-creative-destruction-and-the-new-world-of-work [Accessed 7 Aug. 2019].
  • Kim, K., Baek, C. & Lee, J.-D. (2018) Creative destruction of the sharing economy in action: The case of Uber. Transportation Research Part A: Policy and Practice, 110, pp. 118–127.
  • Schumpeter, J. (1942) Creative destruction. In Capitalism, socialism and democracy825, pp.82-85. Nueva York.
  • Sledzik, K. (2013) Schumpeter’s view on innovation and entrepreneurship. In Management Trends in Theory and Practice. ( Stefan Hittmar ed.), Faculty of Management Science and Informatics, University of Zilina & Institute of Management by University of Zilina.

 

4(b). With the rise of populism what role does voter age have in government elections? What role might inequality play in voter choice and turnout. Explain using data and real world examples.

 

1,460 Words

 

In this essay, I will define the term populism as referring to the relationship between “the people” and “the elite”, and will discuss this from the frame of reference that “the elite” are the incumbent political parties with the most voting support, and “the people” are those who want a political leader that appeals to them and who feel that the established elite groups disregard their concerns.

 

Populism is widely claimed to result from a periodic growth and legitimation crisis, creating rising economic inequality and cultural backlash.The word populism itself has been used frequently since Donald Trump’s election to the office of President in the US, and since the inception of Brexit in the UK, both of which occurred in 2016. Since both of these unexpected and momentous events occurred in the same space of time the result was that the word itself was inextricably linked both to the policies of border protection (as in Trump’s proposal for a wall to halt immigration), and to Brexit wherein the retention of British sovereignty became paramount. The bulk of the commentariat has identified the orientation of such insular policies as ‘right-wing’. Populist parties evolve, either left or right-wing, from a sense of disenfranchisement and alienation by a significant proportion of citizens and the impression of a privileged, elite class.

 

When Germany, under the leadership of Angela Merkel, opened its borders to Syrian refugees this acted as tinder to a spark for other countries that were already worried about the prospect of uncontrolled immigration. As a result, the number of parties with immigration as the primary concern of their supporters began to grow. Even liberal havens such as Sweden and Finland experienced this reaction. This extraordinary chain of events and perceptions created a bias in the public mind that all populist parties are concerned with nationalist agendas and border protection and must therefore be to the right of center at best, and far-right at worst.

Since the European Union allows free movement of its citizens between member states, there is no way to protect the borders of any single EU country from immigration that may be directed at the EU level. Citizens and political parties such as the Brexit Party that are concerned about the maintenance of their national identity and sovereignty have been unilaterally branded as racists and fascists, further disenfranchising and alienating them from their fellow citizens.

Young people today have grown up with a global environment of neoliberalism and populism does not resonate with them. This neoliberalism has conditioned them to seek success above all else. Young people will not conform to hard power and duty norms but by soft power and engagement norms. They are accustomed to being inventive, faster, and self-accountable to achieve the highest pinnacles of success in the kind of competitive world that exists today.

Globalisation and its ensuing effects and anxieties differ considerably between the generations. Younger generations are most anxious about missing opportunities for development and personal success offered to them by global neoliberalism. Older generations have had to go through several economic crises and are anxious that the democracy and better living that they may have fought for during their lives are being challenged by undemocratic foreign influence and forces. Populism appeals to older generations by reminding them of a quieter more harmonious past where they recognise the predominant values and have not had them swept away by the tide of change.

The predominant image of a voter of a populist candidate in political elections is that of a middle-aged, working class, suburban or rural male. However, the image of the typical populist voter does not apply in every country or situation. Perhaps surprisingly, the demographic it represents differs depending on which country you are looking at. According to Rooduijn (2018), there are no detectable socio-demographic characteristics shared by voters of 15 populist parties (both left and right) from 11 Western European countries.

Stockemer et al. (2018) concluded that, according to the quantitative models used in their meta-analysis, only sex and education were even remotely good demographic predictors of whether a voter would cast their vote in support of the populist right. They concluded that no demographic characteristic was an infallible predictor of a vote for the populist right, and most in their analysis were uncertain predictors depending on what country was observed.

Anduiza & Rico (2019) of the Autonomous University of Barcelona widened the scope of their analysis to see if there was a link between demographic characteristics and anti-establishment sentiments (as opposed to electoral support for right-wing parties) in nine European countries. In Germany, they concluded that a lack of education was not consistently linked with populism. In France, they found that being a blue collar worker was not linked to an anti-establishment position. Education-based gaps and income-based inequalities in political participation can however be reversed or reduced by populist attitudes (Anduiza & Rico, 2019).

This is all supported by common sense thinking. Just being a blue-collar worker does not necessarily mean that one is unhappy with their life or livelihood. Anduiza & Rico (2019) found that unhappiness and pessimistic outlooks were more closely related to populism.

Thus, we can conclude that age is not a good predictor of whether someone will be a proponent of a populist party; rather, an individual’s feelings of pessimism and disenfranchisement are.

The political scientists Verba et al (1995) conclude that voting participation in the US is strongly correlated with income levels. It costs little in terms of resources such as time, money or education to vote, as opposed to the effort required to direct contact a politician, and should be more open to wider participation than we observe in real life.

Voter turnout rates have fallen In the UK in recent years, and this has had serious ramifications for social and political equality in general. The decline in voter turnout in itself is not of concern so much as the growing impact on inequality it has had on representation of the impacted demographics. The inequality gap is widening between the older generation who continue to turn out to vote in greater numbers and are less likely to default on casting their vote, and a younger and less affluent voting demographic who are less likely to participate in the voting process.

Since the 1970s, the gap has nearly doubled in UK elections between the turnout of the under-24s and that of the over-65s, and in 2010 the turnout for the general election there was a 36 percentage point gap between that of  a typical 70 year old versus a typical 20 year old. All available evidence suggests that voter turnout indicates that the age gap will not close and will in fact worsen.

Duff and Wright (2015) published an article in The Independent in which Shadow Justice Minister Sadiq Kahn of the UK said:

“If you speak candidly to a campaign manager of any of the mainstream parties they will say that they concentrate their energies disproportionately on those they know are going to vote. […] If you’ve got a candidate with an hour spare and a choice to go to an old people’s home or a sixth-form college, 99 per cent of campaign managers will say you’ve got to go to an old people’s home. That’s because 94 per cent of them are on the register and 77 per cent of them will vote. That is not true of the younger generation.”

Since politicians tend to respond to the interests of voters over those who do not vote, this trend has profound consequences.

If politicians and political parties favour the interests of mainly their largest voting groups it results in a chain reaction of continued resentment and marginalisation from those who are not members of such a group. As policy less frequently favours such groups the marginalised group becomes and more disillusioned and are less likely to vote in future elections, let alone vote for their originally preferred political candidate or party. Equality of representation and acknowledgement of each group of citizens, allowed to cast a vote or not, matters in a democratic society that wishes to effectively serve the interests of its citizens.

Richer people also tend to vote more than their less affluent counterparts, which can have serious consequences if public policies are enacted disproportionately in favour of the wealthy. Griffin and Newman (2005) concluded in their fascinating empirical research that the composition of voting participants has direct significance on who is elected, and the subsequent policies implemented by the elected candidate (Griffin and Newman 2005).

I can conclude that inequality – at least that of income inequality examined here – has a direct and profound effect on voter choice and turnout, and the repercussions of such inequality has considerable consequences to democracy.

REFERENCES

  • Anduiza, E., Guinjoan, M. & Rico, G. (2019) Populism, participation, and political equality. European Political Science Review. Cambridge University Press, 11(1), pp. 109–124.
  • Duff, O. & Wright, O. (2015) Young people are neglected by politicians – and this is why. [online] The Independent. Available at: http:// www.independent.co.uk/news/uk/labour-mpsadiq-khan-admits-young-people-are-neglectedby-politicians-9956943.html [Accessed 12 Aug. 2019].
  • Griffin, J.D., & Newman, B. (2005) Are voters better represented? The Journal of Politics 67(4): 1206-1227.
  • Rico, G. & Anduiza, E. (2019) 54: 371. Economic correlates of populist attitudes: an analysis of nine European countries in the aftermath of the great recession. Acta Politica,54(3), pp.371-397.
  • Rooduijn, M. (2018) What unites the voter bases of populist parties? Comparing the electorates of 15 populist parties. European Political Science Review, 10(3), pp. 351–368.
  • Smyth, P. (2019) European elections 2019: Voters turn to populists and the Greens. [online] The Irish Times. Available at: https://www.irishtimes.com/news/world/europe/european-elections-2019-voters-turn-to-populists-and-the-greens-1.3905250 [Accessed 11 Aug. 2019].
  • Stockemer, D., Lentz, T. & Mayer, D. (2018) Individual Predictors of the Radical Right-Wing Vote in Europe: A Meta-Analysis of Articles in Peer-Reviewed Journals (1995–2016). Government and Opposition, 53(3), pp. 569–593.
  • Verba, S., Schlozman, K. & Brady H.E. (1995) Voice and Equality: Civic Voluntarism in American Politics. London: Harvard University Press.

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