The Internet and Creative Destruction

Many years ago one of my aunts lamented how the budding computer industry was causing a lot of occupations to become obsolete, and she thought this a bad thing because people were losing their jobs. I remember replying, "Well, with that logic, we'd still be delivering mail using Pony Express." We now know, of course, that the jobs created by the computer industry have far exceeded those that it eliminated, but as my aunt's lament accurately reflected, it wasn't a painless process. Real people lost their jobs, which is why government programs need to be in place to help those who are unable to translate their skills to new industries.

Economists often use the term, creative destruction, which was first coined by the Austrian economist, Joseph Schumpeter, in order to refer to how new technologies replace old ones and in the process create new jobs while eliminating others. It's destructive in the sense that jobs are lost and industries fade away, but it's creative in that it ultimately creates more jobs than before and is therefore better for the overall health of the economy in the long run. As the economist Charles Wheelan puts it (Naked Economics: Undressing the Dismal Science, p. 47):

We look back and speak admiringly of technological breakthroughs like the steam engine, the spinning wheel, and the telephone. But those advances made it a bad time to be, respectively, a blacksmith, a seamstress, or a telegraph operator. Creative destruction is not just something that might happen in a market economy. It is something that must happen. At the beginning of the the twentieth century, half of all Americans worked in farming or ranching. Now that figure is about one in a hundred and still falling... Note that two important things have not happened: (1) We have not starved to death; and (2) we do not have a 49 percent unemployment rate. Instead, America farmers have become so productive that we need far fewer of them to feed ourselves. The individuals who would have been farming ninety years ago are no fixing our cars, designing computer games, playing professional football, etc. Just imagine our collective loss of utility if Steve Jobs, Steven Spielberg, and Oprah Winfrey were corn farmers.

Creative destruction is the subtext of a recent Freakonomics podcast, "Regulate This!," which explores the "sharing economy," namely companies such as Airbnb, Uber, Lyft, and Eatwyth that facilitate peer-to-peer transactions through the Internet. Such companies have been growing rapidly, but they are getting into more and more fights with government regulators, who are seen by many as protecting old and increasingly obsolete industries. The podcast can be downloaded from iTunes or you can listen to it at the Freakonomics website ("Regulate This!") where the audio transcript is also available.