Innovation and Creative Destruction
Did you know that at the turn of the last century in 1900, there were over 100,000 workers employed in this country as carriage and harness makers; men and women who made their living solely off of the manufacture and maintenance of horse-drawn carriages. With the rapid rise of the automobile in the early twentieth century, those employment numbers went down to zero – an entire sector of the economy virtually wiped-out overnight. This same type of job destruction was true for other sectors that thrived a century ago; telegraph operators (75,000 employees), blacksmiths (240,000 employees), and milliners (100,000 employees).
But in their place, a quarter million jobs in the airline industry, a million auto mechanics and over four million truck, bus and taxi driver jobs have been created in that same time period.
It was economist Joseph Schumpeter (1883-1950) who first coined the term ‘creative destruction’ to describe this phenomenon. It’s how he described capitalism as “the perennial gale of creative destruction.”
In a 2008 paper by Federal Reserve economists W. Michael Cox and Richard Aim titled (appropriately enough) Creative Destruction, the authors apply Schumpeter’s theories on how innovation and technology have forever changed the economic landscape over the past century:
Transportation provides a dramatic, ongoing example of creative destruction at work. With the arrival of steam power in the nineteenth century, railroads swept across the United States, enlarging markets, reducing shipping costs, building new industries, and providing millions of new productive jobs. The internal combustion engine paved the way for the automobile early in the next century. The rush to put America on wheels spawned new enterprises; at one point in the 1920s, the industry had swelled to more than 260 car makers. The automobile’s ripples spilled into oil, tourism, entertainment, retailing, and other industries. On the heels of the automobile, the airplane flew into our world, setting off its own burst of new businesses and jobs.
Americans benefited as horses and mules gave way to cars and airplanes, but all this creation did not come without destruction. Each new mode of transportation took a toll on existing jobs and industries. In 1900, the peak year for the occupation, the country employed 109,000 carriage and harness makers. In 1910, 238,000 Americans worked as blacksmiths. Today, those jobs are largely obsolete. After eclipsing canals and other forms of transport, railroads lost out in competition with cars, long-haul trucks, and airplanes. In 1920, 2.1 million Americans earned their paychecks working for railroads, compared with fewer than 200,000 today.
What occurred in the transportation sector has been repeated in one industry after another—in many cases, several times in the same industry. Creative destruction recognizes change as the one constant in capitalism. Sawyers, masons, and miners were among the top thirty American occupations in 1900. A century later, they no longer rank among the top thirty; they have been replaced by medical technicians, engineers, computer scientists, and others.
The authors conclude by summarizing the paradox of progress for innovation.
A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order.
Here’s the takeaway: When we talk about innovation and new technology, nary a word is mentioned as to the destructive forces that are also involved. We heap undo phrase on innovation icons Amazon, Apple and Google, yet turn a blind eye to those lost jobs and shuttered businesses that resulted from this innovative progress. Something to thing about as we head into the new year.
Image credit: Mises.org
Patrick Lefler is the founder of The Spruance Group – a management consultancy that helps growing companies grow faster. He is a former Marine Corps officer; a graduate of both Annapolis and The Wharton School, and has over twenty years of industry expertise.
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