To Destroy or to be Destroyed?

Mary Claire Bracken

Creative destruction, a term coined by economist Joseph Schumpeter, “refers to the incessant product and process innovation mechanism by which new production units replace outdates ones.” Schumpeter considered this process to be “the essential fact about capitalism.” Although it generally occurs within microeconomics, creative destruction is an essential component to macroeconomics because “the process permeates major aspects of macroeconomic performance, not only long-run growth but also economic fluctuations, structural adjustment, and the functioning of factor markets.” [1] In Naked Economics (chapter 2), Charles Wheelan describes creative destruction as “not just something that might happen in a market economy,” but “something that must happen.”[2]

Although, this economic reconstruction does reap benefits for the long-term economy, we must consider the effects of creative destruction on employees and firms. Do the benefits of creative destruction outweigh the destruction of outdated firms and jobs? Take the example of “the Netflix Effect.” Netflix started fifteen years ago and has become a digital success. By “taking advantage of rapidly evolving mobile technology and ever-improving internet speeds,” Netflix made its mark as “one of the largest video distribution networks on the planet.” While Netflix has become incredibly successful, it has destroyed numerous multimedia industries—the video tape/disc rental industry, traditional media companies, and cable TV to name a few industries that have been “Netflixed.” The Netflix Effect has left massive amounts of people out of work. For example, the video-streaming service has caused employment in the video/disk rental industry to plummet from 153,000 jobs in 2005 to 11,000 today.[3]

Another example of creative destruction is Wal-Mart. Wal-Mart is popping up all the time in almost all areas of the country, forcing small grocery, hardware, and convenient stores out of town. This is because Wal-Mart offers a wide variety of items for lower prices than any of the other stores in town. Naturally, Americans flock towards these low prices, eventually knocking the small stores out of the market because they simply cannot keep up.[4]

Netflix has become so popular to consumers for simple reasons—it’s cheaper than alternatives, it’s easily accessible, and it offers the services of the rental industry and cable TV all in one. Consumers have the same, if not better, resources, and save some money. The same is the case in the Wal-Mart example. The prices are cheaper, so consumers are able to get the products they need and save some money, and who couldn’t use a little extra cash in their pocket?[5]

While this effect may seem detrimental to society and the economy, this competitive system “is a tremendous positive force in the long run” because it encourages societal advancement and innovation.[6] Not only does creative destruction help consumers save money, but it also encourages economic growth. “Over the long run, the process of creative destruction accounts for over 50 percent of productivity growth.” Without creative destruction, we would be “limiting the economy’s ability to tap new technological opportunities and adapt to a changing environment,” leading to “institutional failure…dysfunctional factor markets, resource misallocation, economic stagnation, and exposure to deep crises.”[7] Essentially, yes, the benefits of creative destruction (economic growth, consumer saving/accessibility, and innovation) outweigh the temporary loss of jobs for those in outdated firms. Without creative destruction, our economy would be less productive than possible, leading to economic downfall for the nation.

[1] “Creative Destruction.” Economics.mit.edu. MIT, n.d. Web.

[2] Charles Wheelan, Naked Economics: Undressing the Dismal Science (New York: W.W. Norton & Company, 2010), 46-48

[3] Perry, Mark J. “The ‘Netflix Effect’: An Excellent Example of ‘creative Destruction'” AEI, n.d. Web.

[4] Charles Wheelan, Naked Economics: Undressing the Dismal Science (New York: W.W. Norton & Company, 2010), 46-48

[5] ibdb

[6] ibdb

[7] “Creative Destruction.” Economics.mit.edu. MIT, n.d. Web.

Photograph: “What Happens When We Lose A Video Store? – Planning Jargon.” Planning Jargon. N.p., 31 Mar. 2012. Web. 20 Oct. 2016.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s