Creative Destruction: Technology and Trade

Creative destruction is one of the most important concepts of economics. Creative destruction is the continual process of innovation in which new products and services replace outdated ones. 

This is a boon for consumers—that's the creative part—but many are also left behind—that's the destruction. When a new innovation comes onto the market, consumers benefit, but the old companies that don't keep up may go under, taking the people they employ with them. 

Tyler Cowen and Ian Bremmer break down the consequences on both sides of the coin, and explain why creative destruction is ultimately a good thing. Along the way, we encounter Jaws and movie theaters, Kodak, Polaroid, photo apps, rose farming, tractors, Apple technology, and more! 

About the series:
Globalization and Robots: The Future of Work 
Globalization and robots dominate the discussion of jobs, politics, and more. We’re donning our scuba gear and diving in deep to better understand where the economy is going, how students should navigate it, and how these forces shape our society.

A topic of this magnitude requires a bit more firepower than usual. That’s why we’ve partnered with Eurasia Group Foundation and enlisted two intellectual wizards to help us out: Ian Bremmer, expert political scientist, bestselling author, and Twitter extraordinaire; and MRU’s own Tyler Cowen, expert economist, bestselling author, and iron man of blogging. They’ll lead you on a rollicking adventure that explores the rise of the Avengers, the fall of Kodak, and a graph so famous it has its own mascot!  
 

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Transcript

Narrator: "Infinity War" is known for its spectacular special effects. But we can pretty certain that in a couple of decades. they'll look old and outdated. That's just the way it goes with movies.

Ian: The first adult movie that I ever saw was the original "Jaws" in summer camp. It was terrifying, and now you go back and look at the mechanical shark that jumped onto the boat, the great white, over 20 feet long, thrashing about, and you go, "That is a ridiculous, stupid-looking thing." So, I feel pretty clear that we have come a long way since the '70s in terms of graphics.

Narrator: This constant improvement is not limited to special effects -- sound quality, picture quality, theater seats. You name it, it seems to have improved. Well, maybe not the acting. Economists have a term for this type of improvement -- "creative destruction."

Tyler: Creative destruction was a term in Economics coined by an Austrian economist, Joseph Schumpeter, early in the 20th century. It's really become a central driving idea in Economics. 

Narrator: Creative destruction describes the continual process of innovation in which new products and services replace outdated ones. Take photos -- we live in a world of smartphones, Instagram, and augmented reality. How we got here reveals a long and winding path of creative destruction. 

Ian: When I was a kid, you take a photo, and the Polaroid comes out, you wave it around because you think it's going to make it dry faster. I don't know if that actually worked. And it's several minutes later, and it probably doesn't look very good, but you have it! And 10 years later, it's all faded, and it probably doesn't keep.

Narrator: Before the digital era, you might have a Polaroid or you might buy film, typically from Kodak. You had to pay a few dollars for film, which got you about 20 pictures, and then pay more to get them developed. If, whoops, your eyes were shut -- too bad! You didn't know until days later. And if you accidentally opened your camera, poof, your pictures are gone! 

Digital cameras came on the scene at the end of the 20th century. Entrepreneurs quickly improved the cameras, the software, and the accessories. People increasingly switched away from film. It was cheaper, easier and more enjoyable. These entrepreneurs represent the creative side of creative destruction. But what about the flip side, the destruction? 

Polaroid employed over 20,000 people in their heyday. Kodak dwarfed Polaroid, employing over 120,000 employees and being one of the most well-known companies in the world. The digital age, while rejoiced by consumers, ushered them both into bankruptcy. 

Ian: But let's be clear, the people that used to make the Polaroids and the Kodaks don't like that development because they just lost jobs.

Narrator: Polaroids have had a bit of a resurgence lately as a retro product, but that's actually not the same company that made the originals. That Polaroid is long gone. See, there are two sides of creative destruction. Entrepreneurs inventing new products or ways to save money are how we improve our standard of living. These improvements are the foundation of prosperity, and positively impact generation after generation. But the flip side can make jobs or even whole industries go extinct. 

Unlike the games, that pain typically subsides. People usually find new jobs. Most of those thousands of employees at Polaroid and Kodak went on to other types of work. When you take the long view, these job changes have historically been beneficial. In the 1800s, more than half of the United States was employed in farming. Because of time-saving inventions like the tractor, farmers now make up less than 2% of the workforce.

Tyler: Now you might think, "My goodness! Those poor farmers! Where did they go? What kind of jobs could they possibly have had?" But by liberating that labor, we made it possible for people to do things, like produce automobiles, produce airplanes, for more people to become entertainers or movie stars, more people to become doctors.

Narrator: So in the long run, we have fewer people working with film and more building photo apps and the like. However, in the short run, the transition can be extremely painful. If you've spent your life perfecting the craft of developing film, you're not walking out of Kodak and into a sweet gig at Instagram. You might just be out of a job and out of luck.

Creative destruction comes in many forms. We often think of the transformative technology, like the tractor, or the digital camera, or the smartphone, which fundamentally changes how we do things. Here's a not so obvious source of creative destruction -- trade. 

Tyler: Trading with another nation, it is a kind of technology. It's a way of getting something else more cheaply. You're taking things you used to produce, finding a newer, cheaper way of doing it -- be it with tractors, with robots, or with foreign trade. And they're all technologies enabling us to produce new and better things more cheaply.

Narrator: For example, roses used to be grown in the U.S. raised in heated greenhouses. Now, instead of burning fuel to keep the roses warm, most of our roses come from warm-weather climates. This creative destruction has produced a plentiful supply of affordable roses. But just like with Kodak, not everyone benefits. That rose farmer in Pennsylvania isn't thrilled by the introduction of foreign roses. She might be out of a job. More than ever, better education and training programs are needed so that people can transition to new types of work. 

Tyler: Why is this so important now? I do think there's a very specific reason, and that is the nature of jobs and the workplace is changing at an accelerating rate. So the importance of being able to retrain yourself, the importance of being able to learn how to learn has never been more important than it is today.

Narrator: Why did Tyler say the workplace is changing at an accelerating rate? Remember how the information revolution allowed companies to slice and dice their factories into a global supply chain? That has increased competition in the workplace. 

Take Apple -- they're evaluating every link of their supply chain. Can they make this step cheaper? Can they make this component better? Back in the old days, employees just had to worry about losing their job to someone nearby. Now they might lose it to a person or robot or software that could come from anywhere on the planet. This means that jobs appear, disappear, and evolve more quickly than ever. That sounds intimidating, but remember, this competition drives the frequent explosions of creative destruction that are the signs of a healthy, vibrant economy. But we can't forget the flip side of the coin. There are those that are hurt by these explosions. 

Ian: So there's no question that creative destruction has been a great thing for human beings. We just need to remember that the people that are displaced -- we have to make sure that we don't forget those people. We have to make sure that they have opportunities too. 

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