The Beauty of Creative Destruction

Perhaps one of the most misunderstood economic concepts out there is “creative destruction.” The technical definition of the modern version of this concept is:

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destruction refers to the incessant product and process innovation mechanism by which new production units replace outdated ones.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. (http://economics.mit.edu/files/1785)

When referring to the modern concept, credited to Austrian economist Joseph Schumpeter, used in free-market capitalism (as opposed to the Marxist theory that creative destruction is only used to destroy and reorder wealth, and capital) it simply refers to when innovation drives out old ideas and products, and replaces them with an alternative with a higher value, as determined by the market.

Yes, it is a great talking point by President Obama, and the leftists (also, with some on the “right” side of the aisle) to complain about how ‘Suzy Herfenerbler’ just lost her job to a machine! She was a bank teller, and ATM’s drove her out of her position! Now she is out of the job and has no way to feed her 17 children!

Well this is a very sad story, and nobody wants a single-mother with 17 children to be out of work. However, these talking points don’t take into account the opportunity cost of every single person who uses that ATM, and saves time and energy. This adds up, allowing them to use this time and energy in a more productive manner, somewhere that they wouldn’t have been able to before.

This is why Marx’s version of creative destruction is false; with innovation comes wealth creation. The socialist believes the economy is a pie, and if you have more wealth you have more of the pie. While this is somewhat true in a socialist economy, in the free-market economy, you can go and make more pies. And I like pie.

In a free society, people with individual passions and skills use their “comparative advantage” to produce more than they consume, which is where wealth is created. Therefore, when creative destruction results in innovation and change of both ideas and products, both the producer and the consumer end up using less of their scarce resources (which includes time and money) on the original idea or product, in aggregate. Then these scarce resources can be used in another sector of the economy that now benefits from the innovation.

My favorite example of creative destruction is when the horse and buggy was replaced by automobiles. The drivers of these horse and buggy’s would eventually be pushed out of the job. The same would be true for many horse breeders, and those who provide supplies for the horses. However, assembly jobs would be created in another part of the economy over time, along with other jobs to maintain and produce automobiles.

Now in the 21st century, everyone throughout the economy benefits! Distances that would have taken months or even years to travel, can now be travelled in a day or two. (Or even hours with the innovation of airplanes.) This results in an increased speed of transportation for people foods, medicines, natural resources, and any other physical good or product.

Now we can all use this additional time and energy somewhere else!

Of course, there will always be a certain amount of struggle and hardship when the “destruction” portion of the concept happens. However, without these hardships we would not have innovation. Without innovation, us and our children would never grow up in a more prosperous society than the generation before.

This is just one example, and while it is not always as black and white, these concepts represent eternal truths of human nature. Free people, operating within a free society – exchanging goods, time, resources, and talents in exchange for another’s – not through coercion but through mutually beneficial cooperation – creates the most prosperity for the most amount of people.

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2 thoughts on “The Beauty of Creative Destruction

  1. Not to mention, the people that get a job buidling and installing and maintaining the atm. Perhaps Suzy can retrain and learn how to maintain the atms??
    Well, written and explained. Good job.

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