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It’s Called “Creative Destruction” for A Good Reason

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Commenting on this post [2], Bret Wallach writes [3]:

Change nearly always produces both winners and losers, and while innovations heavily favor the winners, especially over the long run, libertarians willfully ignoring the real pain of those whose lives are badly damaged or even destroyed by economic changes are a major turn off to vast swaths of the populace.

The ideology that it’s perfectly okay, indeed a wonderful thing, to allow and encourage serious destruction of some people’s lives for the greater good is not widely shared by your fellow americans.

Mr. Wallach here is mistaken on at least two fronts, and, in addition, he misses the larger point.  In this post, I’ll deal only with one of his errors.  Follow-up posts will address the other problems with his comment.

Mistake #1: “[I]nnovations heavily favor the winners, especially over the long run.”  This claim is the very opposite of the truth.

Ignore the ambiguity of the meaning of the word “winners” when used in such contexts.  If we can take Mr. Wallach to mean by “winners” those people who are are, at any given time, among the wealthiest in modern market economies, these “winners” are among those who are most likely to be harmed, or those who are helped the least, by market-driven innovations.

Examples are legion, even when viewed from the perspective of producers and investors.  Rich taxi-medallion owners in New York City are now suffering the loss of significant wealth because of Uber [4].  Prosperous local butchers in the 19th century saw their markets creatively destroyed by centralized butchering in Chicago (combined with the advent of refrigeration).  Railroad tycoons saw their market shares and their fortunes take a hit from, first, motorized trucks that carried freight and, second, increasingly affordable air transportation of both passengers and freight.  Large shareholders of Sears were none too pleased by the innovations of Jeff Bezos.

Where, today, are the victorious owners of steamships, of telegraph companies, of factories that produce Pullman cars, and of the retailers F.W. Woolworth, Borders, and Circuit City?  How have shareholders of A&P and Blockbuster ‘won’ from recent innovations?  How have shareholders of General Motors and Ford ‘won’ from innovations in foreign trade and production technology that enabled carmakers in Japan and Korea to successfully offer to sell more cars to Americans?  What victories from recent innovations are the one-time shareholders of Western Electric celebrating today?  How much additional wealth have owners of America’s major television networks ‘won’ from innovations in telecommunications over the past 35 years?

Some firms, of course, manage to survive, and even to prosper, by successfully responding to innovations or by innovating themselves in efforts to remain profitable – for example, AT&T and Sears still exist.  But these firms survive only because they adapted to innovation and competition, not because innovations bestowed upon them some ‘victory’ independently of how much prosperity they produce for society.

The error in Mr. Wallach’s claim is even more evident from the perspective of consumers.  Market-driven innovations succeed only if they improve the lives of consumers.  And the greater and more widespread is this improvement, the greater and more prominent is the success of the innovators.  A recent example: American billionaires had little to ‘win’ from Fred Smith’s innovations that made affordable overnight package delivery possible: multi-millionaires and billionaires in the 1960s and ’70s could already afford to ship and receive packages overnight.  Only with the arrival of FedEx, however, did this possibility come within reach of ordinary Americans.

Look now at a wider span of history – the long run to which Mr. Wallach refers.  Agricultural and transportation innovations improved the diets of middle-class and poor people.  The rich in the past seldom went hungry, and always had meat to eat and spices to enjoy.  Not so for ordinary people.  Innovations in food production and delivery produced much greater relative improvements in the diets of ordinary people than in the diets of plutocrats.  Ordinary Americans today routinely vacation in the Caribbean and in Europe; only rich Americans did so prior to major innovations in transportation.  Ordinary Americans regularly send their children to college; only the upper-crust regularly did so prior to WWII.  Ordinary Americans today have closets full of high-quality clothing and shoes; only rich Americans in the past could afford such a quantity of clothing to stuff into their closets.  Ordinary Americans today, without even thinking about it, regularly talk on telephones (or face-to-face on Skype!) to people 3,000 miles away; in the past only rich Americans could afford the luxury of care-free long-distance calling.  Ordinary Americans today watch movies on command in the comfort of their own homes; until very recently, only rich Americans did so.

As readers of this blog know, this list can be greatly extended.

It is wise to remember Joseph Schumpeter’s 1942 observation, made in the course of his discussion of “creative destruction” in Capitalism, Socialism, and Democracy [5] (pages 67-68):

Queen Elizabeth owned silk stockings.  The capitalist achievement does not typically consist in providing more silk stockings for queens but in bringing them within the reach of factory girls in return for steadily decreasing amounts of effort….  [T]he capitalist process, not by coincidence but by virtue of its mechanism, progressively raises the standard of life of the masses.