We are not getting our money’s worth from “creative destruction.” For history buffs, the phrase will be familiar. Coined by Joseph Schumpeter (1883-1950) — one of the 20th century’s towering economists — it defines a central characteristic of capitalism. Capitalism expands material well-being by replacing existing technologies, products and business methods with superior substitutes. Though this initially disrupts established industries and communities, it is the main engine of economic progress.
Here is Schumpeter in his “Capitalism, Socialism and Democracy” (1942): “Capitalism . . . incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”
American history affirms Schumpeter. The new obliterated the old. Railroads displaced wagons and canals — and then gave way to planes for long-distance travel. Cars eliminated buggies. Supermarket chains overwhelmed mom-and-pop groceries. (By 1929, A&P had 16,000 stores, notes Marc Levinson in “The Great A&P and the Struggle for Small Business in America.”) Personal computers outmoded typewriters.
There has always been a human toll. Entire occupations have vanished. In the early 1900s, there were 238,000 blacksmiths and 109,000 carriage and harness makers, report Southern Methodist University economist W. Michael Cox and co-author Richard Alm. In the 1970s and ’80s, imports and new technologies devastated the Midwest’s steel industry.
But the price usually seemed worth paying. The new industries created new jobs. In 1900, there were no truck drivers and airline pilots. Living standards rose steadily. Adjusted for inflation, per capita incomes in 2000 were 28 times their 1790 level, according to data supplied by economist Richard Sutch of the University of California at Riverside. Creation dwarfed destruction.
Disturbingly, this may no longer be true — or is less true than in the past. In a recent essay, economic historian John Komlos of the University of Munich argues that the economic value of new technologies has declined over time. A century or so ago, “the incandescent bulb replaced the kerosene lamp, and the value added [to national income] as well as to welfare in terms of reliability, convenience, health and safety [was] humongous,” he writes.
Similar transformations stemmed from many 19th- and 20th-century technologies: steel-making, the telephone, automobiles, airplanes, antibiotics, and radio and television.
The same is not true of much information technology, Komlos argues. Consider Facebook. “While social networking facilitated by Facebook is a popular feature of the Internet, basically it merely replaces older ways of socializing without adding much to our feeling of well-being,” he writes. “It monetized activities that were for the most part left previously outside of the market’s purview.”
The technology may be astonishing; its social and economic value is less so. Examples abound. Though digital photography is fantastic, it’s an evolution of Kodak’s box cameras of a century ago. They were the real breakthrough.
In addition, some innovations — including the Internet — impose social and economic costs that transcend what Schumpeter imagined. We are slowly realizing that electronic hacking can wreak havoc on individuals and society. Hardly a week passes without a major data theft or disruption of routine business operations. Recently, hackers stole records of up to 80 million people from the health insurer Anthem; other hackers targeted the Web sites of defense contractors and financial firms using Forbes.com as a launching pad.
We have become dependent on a technology that makes us vulnerable in new and frightening ways. All in all, concludes Komlos, “the benefits reaped from creative destruction [have] declined substantially over time.” Economist Robert Gordon of Northwestern University has reached a similar judgment.
Their skepticism draws some support from standard statistics. Economists measure overall efficiency by labor productivity — the output per hour of the average worker. After World War II, productivity grew about 3 percent annually for about two decades. Since 2004, annual growth has been about 1 percent; since 2010, it been half that. This matters, because higher productivity is the ultimate source of higher wages and fringe benefits. (To some economists, productivity is poorly measured. Even if true, the mismeasurement would have to be huge to reverse the downward trend.)
There’s a disconnect. We see Internet-related disruptions everywhere, and by the logic of “creative destruction,” this should be good news. It should signal dramatic advances in new technologies and products that more than offset the losses and raise living standards. But evidence of this is slim. Indeed, the case can be made that society has struck a dubious bargain: In exchange for the Internet’s modest benefits, it has assumed huge risks from criminal and governmental assaults on crucial cyber-networks.
It is difficult — and usually undesirable — to suppress new technologies. But Schumpeter’s dictum needs amending. All destruction is not creative; some is just destructive. We need a better balance: less destruction, more creation.
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