Has creative destruction become more destructive?

by on March 8, 2017 at 2:49 am in Economics, History, Science, Web/Tech | Permalink

John Komlos has a new paper on this topic, here is the abstract:

Schumpeter’s concept of creative destruction as the engine of capitalist development is well-known. However, that the destructive part of creative destruction is a social and economic cost and therefore biases our estimate of the impact of the innovation on GDP is hardly acknowledged, with the notable exception of Witt (1996.“Innovations, Externalities and the Problem of Economic Progress.” Public Choice 89:113 –30). Admittedly, during the First and Second Industrial Revolutions the magnitude of the destructive component of innovation was no doubt small compared to the net value added to GDP. However, we conjecture that recently the destructive component of innovations has increased relative to the size of the creative component as the new technologies are often creating products which are close substitutes for the ones they replace whose value depreciates substantially in the process of destruction. Consequently, the contribution of recent innovations to GDP is likely upwardly biased. This note calls for further research in innovation economics in order to measure and decompose the effects of innovations into their creative and destructive components in order to provide improved estimates of their contribution to GDP and to employment.

Think of Uber being a relatively close substitute for taxicabs, for instance.  Speculative, as they say, and the paper does not in fact actually demonstrate these conclusions, but at least we should be asking such questions more often.

1 prior_test2 March 8, 2017 at 2:59 am

Bad link to the paper. The URL is possibly to someone’s personal google dirive –

‘403. That’s an error.

We’re sorry, but you do not have access to this page. That’s all we know.’

2 Anand Kumar March 8, 2017 at 5:53 am

Seems like you can read the new 2016 paper here (in English & Spanish!): https://revistas.utadeo.edu.co/index.php/TyE/article/view/1092/1151

There is also a 2014 working paper with essentially the same abstract, with the PDF available here: http://www.freakonomics.com/media/Has%20Creative%20Destruction%20Become%20More%20Destructive.pdf

3 Patrick March 8, 2017 at 3:11 am

But important to consider stocks vs flows more carefully in considering this…yes lots of investment and very high paper valuations for Uber, etc, but does taxi for Uber substitution really upwardly bias GDP (especially considering lower pricing)

4 mulp March 8, 2017 at 11:41 am

Hey, Uber is reducing the price of cars, capital, fuel, and driver living costs, labor, by competition, where Uber just sets prices lower to gain market share.

And because Uber cuts prices of going to work, every person who works will eventually go to work twice a day and go home twice a day, thus increasing total revenue, and thus gdp.

In free lunch economics, the cost of living is cut by paying workers less.

And the price of luxury Black Cars is cut by cutting the return on investment paid per mile.

And lower prices always increases demand so much total dollar value of consumption increases. For everything in the economy.

Cut the price of going to work and you will go to work two times a day. Lower it more and you will go to work five times a day.

5 Tom G March 8, 2017 at 3:41 am

Probably not “more destructive” so much as concentrating the “creative benefits” on fewer folk.
Consider how movies replaced thousands of vaudeville actors with hundreds of movie stars, and only dozens of super stars.

It’s a form of the “winner take all” network effects of technology. Millions of tiny winners (customers), thousands of small or medium losers (ie those losing their jobs), hundreds or dozens of big winners (new providers of the concentrated substitute).

6 juribe March 8, 2017 at 5:19 am

I sort of agree with you, but all the gains are not to the top. There are significant gains at the lower end.
Think about Uber, there are probably more Uber drivers that taxi drivers (or at least there is the potential for more Uber drivers) and the percentage distributed to drivers is also bigger, but because there are more drivers, then each individual Uber driver will end up with less that the average taxi driver. Also, Uber replaces several taxi companies, so even if Uber receives less than all the companies combined, it will still get very rich. So the “creative benefit” go both to the low and high end.
Or acting, there are thousands of people making a living doing Youtube, Twitch, Instagram.

7 mulp March 8, 2017 at 12:19 pm

How does the “lower end” benefit?

How does the unemployed person who has an old unreliable car benefit from Uber? Will Uber give that person a Black Car and suitable smart phone so he can meet the requirements Uber places on the capitalists who contract with Uber to provide Uber services?

Uber is getting MORE than most taxi companies. Look at the taxis and their condition in most places in the US. They are shabby and the drivers are poor and the people in the dispatch office are as shabby as the cars, as is the office.

Uber is absolutely not giving people an opportunity to work.

Uber is giving people with very nice cars an opportunity to turn their nice car into a shabby car with lots more miles on it than typical for a car of its age. Once your car is a shabby car, you will not be giving the opportunity by Uber to put more miles on your car. You need to buy a new car out of your pocket.

8 juribe March 9, 2017 at 9:34 am

The lower end are taxi and Uber drivers. How are taxi drivers better off than Uber drivers? Whatever cost the car has also applies to taxi drivers, who either own or rent the car, except taxis are much more expensive because you have to buy a license (I read somewhere than cost as much a one million USD in NY).

Ok, so only people with nice cars can drive for Uber. Obviously Uber will not be beneficial for all the unemployed, but it will be for the ones that have a nice car. How is that not an improvement on the current way taxis work? And Airbnb is an improvement for those who own a house.

Uber does not make any money, but I get your point. Uber will make more than most companies but less than the sum of what those companies used to make. I’m 90% sure that taxi company owners are very wealthy. Why would you prefer a company that pays little to its workers over Uber?

Why would anyone work for Uber if the job is so bad?

9 Axa March 8, 2017 at 4:37 am

Uber is still a experiment. I think plane ticket retail internet on the web today is a better example. Anyone remembers the fancy air carrier offices in the best quarter in town? Web sales (alomost) killed the travel agency.

10 juribe March 8, 2017 at 5:25 am

Obvious criticism: if the product are very close substitutes, then why would the “traditional” product depreciate substantially?

We may still don’t know what the gains are, but what I see happening is new technology making it easier for people to leverage whatever asset or skill they have to make money. Unemployed but have a car? Drive for Uber. Have a house? Rent it on Airbnb. Are you good at some random video game? Youtube videos.

11 mulp March 8, 2017 at 12:22 pm

Unemployed and have a very nice, very reliable car, drive for Uber and turn your car into a high mileage unreliable car. Now you are unemployed and can’t “drive” for Uber.

12 Chrizzel March 8, 2017 at 5:26 am

Funny, I though about that exact question yesterday. I now work as data scientist to underwrite insurance and previously at a credit card issuer in fraud detection. The latter has hardly any destructive part as there were never a lot of people employed looking manually for fraud in the first place. The former will more sooner than later displace all those underwriters currently employed.

13 Chrizzel March 8, 2017 at 5:32 am

Meta thought: Maybe Komlos had an influence on me having this thought. I took his classes while he was still at Munich University a decade ago or so.

14 rayward March 8, 2017 at 6:20 am

While I believe the internet has been exploited at the lowest possible level (by what is euphemistically called “tech” but what I call skimming, skimming in processing transactions, skimming in digital advertising, etc.), it has changed the way people work and live in ways that can’t be quantified, some for the better, some for the worse. The better is not being tied to a place or office, not wasting time traveling, not forsaking a good job and career because personal commitments had priority. The worse is the distraction, the inability to think clearly and deeply, to focus and stay on task, the time wasted on group-work and digital worship, the elevation of process over substance. This article about GE provides hope for a far better use of the internet and technology, for creative destruction with an emphasis on creative rather than destruction: https://www.nytimes.com/2016/08/28/technology/ge-the-124-year-old-software-start-up.html

15 Axa March 8, 2017 at 8:43 am

Cisco, Oracle, Intel, Amazon(web services) are not skimmers, they provide the backbone to internet. Skimmers arised because traditional business took a long time to catch up with web retail. Air travel? Expedia and similars are skimmers but you can buy directly from Delta or EasyJet, no intermediaries. Payments? Paypal was interesting until the 3-D Secure protocol (AKA verify by Visa) was implemented for online credit card transactions. I can do transfers and payments using my bank and credit card, I cancelled my PayPal account after I realized I haven’t used it for 4 years. It took approx 10 years, but today any traditional bank + credit card company offer a better service than any flashy newcomer. When traditional business profit from the internet, value is created.

Uber is just another skimmer that arised because taxi companies did not profited from smartphone’s capabilities. But once the idea is out in the wild, Uber has no comparative advantage besides saving on employee’s benefits by offering dumb people contracts as “driver partners”. So far, I can’t book an Uber for tomorrow at 6h30 to the airport while primitive taxi companies can do this. On the other hand, Uber is great for vacations. I won’t get tired of investors subsidizing my rides on a black MB 😉

16 JWatts March 8, 2017 at 10:25 am

“Uber has no comparative advantage besides saving on employee’s benefits by offering dumb people contracts as “driver partners”. ”

No, it allows people to more fully utilize a very expensive capital asset, namely their car. If the average Uber user earns more money than the extra depreciation from the mileage, it’s a win-win. It’s possible that their take home wage is less than another job (when you factor in the additional depreciation), but it’s also likely they prefer driving for Uber over the other jobs on offer.

17 mulp March 8, 2017 at 12:33 pm

Your are arguing that if a person with car earns ten cents a mile above his accelerated depreciation from putting lots of miles on his car, it’s a win-win because $3 an hour is better than nothing, and it drives the incomes AND CONSUMPTION of taxi drivers down, and the less worker in all industries have to spend, the better the economy because lower wages and consumption drives higher gdp growth?

Free lunch economics argues that lower prices will drive lower costs and lower costs and prices will drive so much more consumption of everything gdp will increase. Cut food prices in half and people will eat three to four times as much increasing gdp. When Uber cuts the price of getting to work or airport, people will increase the number of times they go to work or airport per day, thus increasing gdp.

18 JWatts March 8, 2017 at 7:06 pm

“it’s a win-win because $3 an hour is better than nothing, ”

So mulp, you’d rather force them to make the nothing? Maybe you could just round up all those deplorables and create a Federal Labor camp, to insure they aren’t doing anything else that you disagree with, am I right, Comrade?

Also, here’s some facts to counter your mental narrative:

“How much do Uber drivers make? You will find the answer to these questions and more here, but let me back up a little bit: Before I started driving for Uber, I was making $9 an hour at a minimum wage job. It was hard work, I had little to no flexibility in my work schedule, and the pay was only barely enough to survive. So how much do uber drivers make?
Now… how much money do Uber drivers make? As an Uber driver here in Los Angeles, I usually make between $19 and $23 an hour. It pays my bills, while keeping my schedule completely flexible, which is very important for me as an actor. Driving for Uber, I do not need another job.”

http://www.idrivewithuber.com/how-much-do-uber-drivers-make/

19 JWatts March 8, 2017 at 7:08 pm

Also,

“This is how much the driver is paid before any expenses. My rule of thumb (this may not be an accurate number for you) is that I spend about 10% on gas and other vehicle expenses and 10% on taxes on average (after all the deductions). ”

So, that particular Uber driver makes around $18 per hour after deducting vehicle expenses.

20 Lanigram March 8, 2017 at 10:41 am

Axa,

“…dumb people…”

They are not dumb, they are desperate. We should honor their efforts to work to support themselves. They offer a valuable service but they are not compensated accordingly – the skimmers at the top get rich off the drivers desperate efforts to survive. This is the world we live in now – not everyone likes it.

21 Axa March 8, 2017 at 11:33 am

@Jwatts: If I don’t fully utilize a capital asset, then owning it makes no sense, thus I sell it to someone who will fully utilize it. Then, I learn and will rent it when needed. As society we’ve been there, anyone remembers timeshare vacations Vs hotels?

@Lanigram: is desperate the best adjective? Half of them got a college degree. http://fortune.com/2015/01/22/5-surprising-numbers-from-ubers-driver-data-report/ I used “dumb” to reciprocate to Uber drivers. You talk to them and it’s really funny how they feel proud of being “their own boss” while I just smile internally when they rant against dumb salaried people like me.

22 JWatts March 8, 2017 at 7:12 pm

“@Jwatts: If I don’t fully utilize a capital asset, then owning it makes no sense, thus I sell it to someone who will fully utilize it. ”

Axa, yes, you’re entirely correct from a purely logical point of view. However, that completely ignores human nature. How many people fully utilize their boats, riding lawn mowers, RV’s, 2nd, 3rd and 4th TVs and everything boxed up and stored in their attic?

Uber allows people to more fully utilize a capital asset they already own and aren’t going to sell.

23 AlCapp March 8, 2017 at 7:01 am

Yes but driving for uber is a close substitute for driving a taxi too.

Silly paper laying the groundwork to regulate innovation based on weak ass theories.

24 Anon March 8, 2017 at 7:35 am

Driving for Uber is not a close substitute for driving a taxi, at least in the US.

25 Boris_Badenoff March 8, 2017 at 8:06 am

If the creative destruction of Uber and Lyft ultimately lowers the overall value of the taxi-ride industry, that isn’t the end of it, though. When the costs of a product of service are reduced, doesn’t the consumer win in the end by having more discretionary income at the end of the year? Taxicabs are a heavily regulated industry, especially in the urban areas where most of it occurs. The cost and regulations of taxi medallions in NYC, for instance, run up costs by limiting competition. Much of the “destroyed” value belonged to the rent-seekers (owners of multiple medallions) who fight to keep high barriers to entry to their markets. Perhaps the drivers in the protected sector earn more than the independents, but to the extent they might, isn’t that just the result of overcharging consumers?

If taxis delivered a faster, safer, and/or cheaper service than the independent services, they would easily continue their dominance. To a casual observer, they do not – else the indies wouldn’t have become so instantly popular across so many markets.

26 Rags March 8, 2017 at 8:37 am

Uber is part of it, part of a new ruthless efficiency. You Uber can to Target, or Bed Bath Beyond, or PetSmart in hundreds of cities.

This new pop-up efficiency reduces employment. Inefficient local efforts, with too many salespeople, extra warehouse and distribution overhead, are right out of luck. Even a local cab company has too much overhead. A switchboard? A scheduler? A bookkeeper? A parking lot? A maintenance yard? Why.

This is the automaton and jobs problem, with hidden “robots.” In the case of Bed Bath Beyond, the “robots” manage otherwise incomprehensible inventory and distribution problems, leaving humans to stock shelves and smile at check-out.

In Uber every job but driver is stripped away. The “robots” are already there, handling all the hard work of customer service, scheduling, billing. “Driver” is the last, lowest, but visible job in the whole thing.

27 Lanigram March 8, 2017 at 10:44 am

+1

28 msgkings March 8, 2017 at 12:10 pm

And, of course, even the driver part of the service is soon to be automated away.

29 mulp March 8, 2017 at 2:06 pm

But how Uber get the car makers to take contracts from Uber at rates that yield returns below the cost of the cars?

Or will the unemployed buy cars at $50,000 and connect them to Uber which then pays them $40,000 during the acceptable life of the car?

I guess if the car owner takes the $40,000 as payment for cleaning the cars, and defaults on the $50,000 debt, the $50,000 car will only cost $25,000. The Trump model of business.

30 mulp March 8, 2017 at 2:01 pm

There are NO UBER DRIVERS!

To get a contract from Uber, you must be an Uber capitalist, providing labor for free. Uber pays no workers, thus there is no labor cost paid for Uber services.

31 Rags March 8, 2017 at 9:02 am

As a thumbnail, I think the big pet chains destroying the independent pet shops are a better model of what just happened than Uber. And again, the hidden robots make it all possible. The visible employees are decorations on a mostly virtual enterprise. They just do what the machines say.

32 Mark March 8, 2017 at 9:10 am

Of course, GDP doesn’t measure hedonic improvements or general consumer surplus particularly well, either. Maybe the real answer is to reduce the importance accorded GDP.

33 Rags March 8, 2017 at 9:19 am

On one level yes, but on another no. Ruthless efficiency is good for employees in winner firms. It is bad for those who must work for losing firms, shoestring operations. Worse for those that find themselves unhireable.

34 rayward March 8, 2017 at 9:15 am

In his book, Cowen laments the decline in business start-ups. Well, most business start-ups are in retail, and who in their right mind would open a retail business today. It’s unfortunate, but for many Amazon has shut the door to the American dream of owing a small business. Cowen is no doubt pleased that restaurant start-ups haven’t experienced the same decline as retail, even though likelihood of failure in the restaurant business is even greater today than it was 30 years ago.

35 Lanigram March 8, 2017 at 11:07 am

You are absolutely correct. I read a great deal about the potential of startups to have a monopoly. The dream of the entrepreneur, and the investor, is to have a monopoly business. Google, Facebook, Snap. Size is an advantage, especially for social media.

The social dislocation associated with the loss of employment is an external cost passed on to the state, and to the public – transfer payments in the form food stamps, AFDC, health care (Obamacare subsidies) and lost taxes and consumption. When you consider the amplifying effects due to long term unemployment, which I believe is under-reported, despite Tyler’s excellent video on the accuracy of employment statistics, the external costs are even larger. Long term unemployment or underemployment leads to reduced consumption, taxes, loss of social networks, a lower quality of life for the family, mental health issues, alcoholism, opioid abuse, divorce, early SS, long term disability payments – complete destruction of the individual with a negative impact to the family and even to the remnants of the social network. I have seen this play out multiple times – an ugly tragedy.

36 mulp March 8, 2017 at 2:32 pm

Amazon has slashed the cost of being a small business. It out competed eBay.

But because business analysts and economists want reasons to claim things are going to crap because of liberals (who have been out of power for decades), Democrats, and especially Obama, the person, ordering stock from China shipped to their home and then selling it by way of Amazon with an online account at FedEx and UPS with printer on the net to print shipping labels, can not be defined as a small business startup.

If the person using eBay or Amazon or etsy is a small business startup, the Obama spurred an explosion in small business startups by cutting the paperwork and overhead of starting a business by outsourcing market regulation to private jack boot thugs at Amazon who put their boot on the neck of small business innovators.

Oh, wait, anything done by the private sector can not be credited to Obama.

But still, it’s Obama’s fault that a small business doesn’t need any employees because the capitalist can order from China and have it shipped to Amazon which stocks it in its warehouse so robot order pickers can full fill orders from a shopping mall of small businesses without land, real estate, employees, to do all the labor small businesses once had to do themselves paying workers locally.

It’s Obama’s fault Amazon eliminates the workers small businesses once hired, but the ability to get everything from anywhere in the world from your chair almost instantly is absolutely not from Obama’s terrible economic policies. Obama’s policies of making Internet available to everyone equally is a disaster, because only when the economically weak are charged so much they can’t afford the Internet can individuals be spurred to innovate as an Amazon marketplace seller. Only when customers can not afford Internet access will the poor benefit from everything delivered over the Internet.

But it is Obama’s fault that the poor start small businesses selling individual cigarettes from a pack they bought from thee store retail. That is criminal business activity deserving of being taken down by several policemen.

37 Rags March 8, 2017 at 9:26 am

Yes of course Amazon, but also Costco, Walmart, Target, right down to PetSmart. Ruthlessly efficient national chains.

I have a question, when was the last time everyone went into a (non-restaurant) non-chain store?

For me, an independent lumber yard a couple months ago?

38 msgkings March 8, 2017 at 12:12 pm

Actually if you live in a city (not a suburb) or rural area, you do get to frequent many small, independent businesses. It’s part of what makes the suburbs unappealing for many, the big box homogenization.

39 Rags March 8, 2017 at 12:56 pm

Perhaps, but if big box homogenization covers a significant part of the economy, it does a lot explain why “business starts” is a poorer metric today. Big boxes backed by big distribution backed by automated (or foreign) manufacturing.

40 mulp March 8, 2017 at 4:40 pm

Business starts are so cheap and easy, the grand poobahs of political economics can’t see the millions of small businesses created during the past decade.

Every Uber ride is delivered by a small business. It was started by registering the car paid for by parents or spouse with Uber and the moving the car around with paying passengers. A small business is thus putting a capital asset to work. SMALL BUSINESS!

Airbnb let’s people living with their girl friend rent out the apartment his parents are paying for to get some cash without explaining to his parents what he’s spending it on. He’s a small business providing hotel service. SMALL BUSINESS!

Hiring people is too costly. Paying people is too costly. Every economist except leftists know that the best economy is the economy with zero labor costs and 100% return to capital, which has zero labor to produce.

High profits creates wealth and wealth causes consumers to spend more.

Only leftists think consumers spend only what they get paid in labor costs. Workers are not consumers, but just deadweight losses to the economy swallowing up profit. Consumers are not workers, but infinite sources of cash from tax cuts and wage and labor cost cuts putting moneyes in your pocket. Working never puts money in your pocket because the government steals it all, calling the theft taxes.

41 JWatts March 8, 2017 at 10:39 am

“Has creative destruction become more destructive?”

Isn’t this effectively a zero-sum gain? IE any shrinkage at the commercial level will be compensated with gains at the consumer level.

So, how is it more destructive?

42 Lanigram March 8, 2017 at 11:21 am

It’s not working because there is little consideration of the social costs, which become real financial costs via redistribution and taxation.

Need I mention there are unintended political costs?

43 JWatts March 8, 2017 at 11:36 am

“It’s not working because there is little consideration of the social costs,”

I believe it’s a benefit because the taxi cartels are being broken up and allowing people to compete in a competitive market.

44 Lanigram March 8, 2017 at 12:14 pm

Yes, I agree, Uber has some beneficial effects. Is it a net benefit? We won’t know until the consequences are known. Ironically, Uber drivers may be replaced by self-driving cars very soon. Then what? What happens to those drivers, for whom, for some, Uber driving has been a fallback position, a tenuous grip on solvency? I love the benefits of technology, there is no turning back. Is technology changing the lives of people faster than they can adapt? Should we expect people to solve that by themselves? Should we rely on cultural values for an answer? Do we need policy solutions? Is it ok to just let the experiment run it’s course? So many questions…

45 JWatts March 8, 2017 at 7:17 pm

“Ironically, Uber drivers may be replaced by self-driving cars very soon. Then what?”

Well, then it won’t matter, will it. It’s hardly a knock against Uber that it might not be needed 20 years from now.

46 mulp March 8, 2017 at 4:49 pm

“Isn’t this effectively a zero-sum gain? IE any shrinkage at the commercial level will be compensated with gains at the consumer level.”

Ie, when your pay is cut 50%, your now have 50% more to spend?

Or is it, when your pay is cut 50%, you can now buy 50% more stuff?

How about this definition of zero sum: income – spending – savings = 0

Thus if your income is cut 50% then your spending must be cut by at least 50% unless you have lots of savings to “unsave”.

The logic of economics since 1980 has become increasingly fantastical free lunch. Zero sum has been discarded as part of dismal economics.

47 Ray Lopez March 8, 2017 at 10:46 am

Another thing we should be asking: since around 1973, when exchange rates, interest rates were floated world wide and the dollar became more fiat (Brenton Woods gold linked dollar abolished) we’ve had a series of banking and financial crisis, in both developed and developing countries. Source: Figure 13.3 in GM Rogoff’s tome This Time Is Different. Coincidence? Probably but a little price stability probably would not hurt. Paging Dr. George Selgin.

48 PavJ March 8, 2017 at 10:56 am

“Admittedly, during the First and Second Industrial Revolutions the magnitude of the destructive component of innovation was no doubt small compared to the net value added to GDP.”

That is one hell of a claim to make so offhandedly. The Industrial Revolutions went hand in hand with colonialism, slavery, and mercantilism. It greased the wheels of industrial development by providing dependent markets for colonial powers and cheap raw materials, but it also immiserated the vast majority of humanity for the benefit of a small minority of Western Europeans and Americans and brought low several of the world’s great civilizations, putting them in a social, cultural, and economic hole that they are only now beginning to claw their way out of.

49 Lanigram March 8, 2017 at 11:37 am

True. This time around there are no Americas, Australias, New Zealands, or South Africas to raid and plunder abd occupy. What will we losers do? Where do we go? Do we turn inward? Do we turn on our neighbors just before we are priced out of our communities?

“… a vast image out of spiritus mundi troubles my sight…a shape with lion body and head of a man, gaze blank and pitiless as the sun …” – Yeats

50 Turkey Vulture March 8, 2017 at 11:32 am

This seems to point to a problem in using GDP as such a central indicator of economic health and growth. An innovation could completely replace a current technology, but if everything about its manufacture and price is the same as the replaced technology, there may be no net impact on GDP, even if consumer surplus increases dramatically.

It is total surplus that matters, not GDP. If we focus too much on GDP because it is comparatively easy to measure, we incentivize policy choices that focus on increasing GDP rather than total welfare.

51 Lanigram March 8, 2017 at 11:40 am

The sharing of the GDP matters. Knowledge of the GDP is not sufficient to make policy. It may not even be necessary.

52 Dallas Weaver Ph.D. March 8, 2017 at 12:57 pm

The link didn’t work.

However, the thesis that “THIS TIME IS DIFFERENT” is pure nonsense.

In the revolution created by automobiles, the number of stable boys and people to clean up the horse shit in NY just weren’t counted in the history books.

Without all the modern social scientists making carriers on the government dole focusing only on the people who are in the “destructive” part of “creative destruction”, we wouldn’t even be aware of any difference.

Every new Idea/business/innovation takes resources from existing areas in the economy. The new only has to be about 10% better than the existing areas to win (a 10% profit advantage over direct and indirect competition, you win) and that means that for every dollar of per capita economic growth, you need about 90¢ worth of failure. Without destruction, creation can’t exist on a per capita basis. You can get the illusion of growth without destruction with an increasing population but only per capita growth is relevant to the citizens. The lack of “destruction” with all our NIMBYism, regulations, etc. is why we aren’t seeing rapid economic growth with the rapid advance of science and opportunities for creation. We are preventing creation by preventing the destruction.

For a specific example, I produced ornamental fish in a declining industry that lost the competition for discretionary dollars to video games and computers. I stayed alive for 4 decades by outcompeting (lower production cost) local and international (Asian) producers who went out of business first.

53 Jake March 8, 2017 at 1:06 pm

>Admittedly, during the First and Second Industrial Revolutions the magnitude of the destructive component of innovation was no doubt small compared to the net value added to GDP.

It was no doubt huge, but it only affected people who didn’t matter.

54 Lanigram March 8, 2017 at 1:52 pm

“…people who didn’t matter…”

Much like today. Deplorables…

55 Dallas Weaver Ph.D. March 8, 2017 at 5:09 pm

In 1900 agriculture was 40% of the economy and a higher % of employment. Much of that labor was for keeping the “horse power” in the form of draft animals alive and well and that labor was all lost to the tractor. Unlike a tractor, you had to feed and care for that horse all winter providing jobs.

56 Dallas Weaver Ph.D. March 8, 2017 at 5:15 pm

If you consider going from 40+% to 2% of employment small, I may find your definition of small a bit strange.

When you use net value added to the GDP, you have to ask whether the rapid spread of “free” non-rivalrous goods (google, wiki, etc.) which don’t show up on GDP actually add “value” to the society. I say yes.

57 Floccina March 8, 2017 at 5:23 pm

As labor saving capital comes on the incumbent owners tend to reap gains as they lower their prices slower than labor expenses fall, but that is not a bad thing because we all gain some and time lower those rewards. An example: I had an acquaintance once tell me that the PC allowed his insurance company go from 3 people to 1 producing the same income.

58 Troll me March 8, 2017 at 11:06 pm

maybe a lot of industries have dynamics like this, and it’s one I know well, so I think it’s an interesting case. Possibly instructive for a lot of thing, because everyone knows language.

I do translating and editing.

Various machine translations assistants and online or offline computer reference sources make it easier and faster to do more work.

1) In the present situation, this means that overall demand is MUCH MUCH higher, because so many people are aware of the possible benefits of offering services or information in multiple languages. There is downwards pressure on prices per unit content, but per unit time, things are still quite OK. Also, the new competition? Ha! Forget that. Not even in the same market.

2) But computers are getting better. Every few years, I’ll be consulting with Google transalte for some ideas and realize “Wow! that’s a lot better than a few years ago!”. So I start marketing more editing and consulting value than translation. But what of the translation market?

3) In time, computers will take over for almost all low end work (maybe in 10 years a computer can reliably translate better than a low grade translator who now enjoys access to the enormously larger overall translation market).

4) Anyone here believe that the dollar value size of the translation market will be larger in 50 years than today?

So, like many things, as costs come down, overall demand can rise rapidly, allowing people to earn more money, even under situations of lower margins per transaction. (Say, making 5c per $1 widget which you sell 10 million of instead of $1 per $100 widget that you sell 200 of).

So, I think a lot of industries are facing situations that aren’t much different.

Say, all those mathies who get really high IQ scores. When thy’ve succeed in replacing themselves with machine training algorithms, what more use will we have for those geniuses?

59 Peldrigal March 9, 2017 at 6:28 am

Does in the USA really an Uber ride cost less than a taxi ride?
Because in Italy it costs more, and people prefer it because the service is better and you know beforehand how much are you going to pay. And a better service and certainty in transactions is added value for the consumer.

60 don bumpass March 9, 2017 at 11:17 am

http://www.nber.org/digest/feb17/w22953.html argue that, while creative destruction plays a vital role in driving economic growth, it is not the dominant force. They find that creative destruction only accounts for about 25 percent of growth, with most of the remainder coming from refinements that established firms make to their own products.

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