Saturday, March 15, 2008

Evolutionary Progress

Among the first lesson I teach my money and banking class is Joseph Schumpeter's insight on economic change: creative destruction. It's a strange term but economics is strange itself and sometimes requires language that on the surface doesn't make sense.

Schumpeter understood that economies grow by creating new ideas while simultaneously destroying others. It is not a stationary process but one of constant change. Creating many ideas means society has many options and thus many good innovations. But destruction is equally important. It allows the market process to move resources from bad or obsolete ideas and move them to desirable ones. We not only get the good stuff, we get a lot of it. But that means destroying the bad--or just not as good--options.

People generally recognize the importance of creation. The role of destruction is much harder to grasp. And so it was today when Lou Dobbs once again expressed concern for a loss of manufacturing jobs. He was confused how officials from the U.S. military could defend free trade and building equipment abroad while these jobs are destroyed. But employees are fired, not murdered, and they will go on to do other things. It is from this destruction that breathes new life into the economy and allows the world reinvents itself once more, as it has done before anyone alive today walked the earth.


Blasphermour said...

"But destruction is equally important. It allows the market process to move resources from bad or obsolete ideas and move them to desirable ones."

I like this part. This situation
can change world to another great level.

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Jenny said...

I guess it's a lot like geological cycles and astronomical events. Things are always being destroyed (plants, rivers, mountains, caves, stars, galaxies, etc.) so that new things can form and replace them.

Anonymous said...

I agree with the idea in its main principle, but there's something that it doesn't address.

A lot of the people fired from the jobs lost in destroyed industries don't possess the skills to go on to the newly created much as they may like to.

Since manufacturing jobs rarely paid well enough to be able to afford training in new, more advanced skill sets, and especially not after someone is fired, this presents a huge problem to the average blue collar Joe whose just lost his job at a car plant in Michigan.

It'd be great if everyone planned with enough financial acumen to deal with this sort of issue, and great if the jobs they had allowed them to do such planning.

Unfortunately, that's generally not the case.

So, where does the money to re-train the folks who lost their jobs come from?

David said...

People often assume that those rendered unemployed cannot adapt to new economic conditions. That's how it's portrayed in the media and it make some sense. At the same time, that's about where the evidence stops. Recall that these individuals have more job experience than most--tremendously valuable because it demonstrates responsibility, dedication, and hands-on learning. Any manager would tell you that finding good people and keeping them rests at the heart of what they do and so firms sometimes pay for training. The experienced person has a leg up in getting that training.

I'm not saying this is the norm--no one to my knowledge has any data on this--but even if it isn't the point is those workers will do something else. It could be a lower paid job or a high paid one or just spending more time with their grandkids. But the logic of creative destruction does not change even if autoworkers become grocery baggers.