Sharon Cho
Sun., February 27, 2022
(Bloomberg) -- Demand destruction is the only thing that can stop oil shooting higher after the U.S. and European allies unleashed additional curbs on Russia following its invasion of Ukraine, according to Goldman Sachs Group Inc.
The bank raised its one-month forecast for Brent crude to $115 a barrel, from $95, with significant upside risks on further escalation or longer disruption.
Western sanctions will tighten significantly after the announcement that some Russian banks will be banned from the SWIFT international payment system and that the country’s central bank reserves will be targeted, analysts including Damien Courvalin and Jeff Currie said in a note dated Feb. 27. While carve-outs still likely allow for energy and food trades, the hurdles created for payments should exacerbate the already visible commodity supply shock, they said.
“Commodity markets need to reflect not only these difficulties in paying for Russia’s exports but, with little left to sanction, the risk that Russian commodities eventually fall under Western restrictions,” the analysts said. That’s an outcome no longer being ruled out by the U.S., they added.
The short-term price upside for oil is $110 to $120 should 2 to 4 million barrels a day of demand destruction be required to compensate for a commensurate one-month loss of Russian exports, Goldman said. The price-induced shale supply response would no longer be a suitable rebalancing mechanism for such a potential large shock, with Russia exporting about 7.3 million barrels a day of seaborne crude oil and petroleum products, it said.
The only potential short-term supply response would need to come from the OPEC+ alliance, which is set to meet later this week, according to Goldman. A surge in output from Saudi Arabia and the United Arab Emirates, along with a lifting of U.S. sanctions on Iran may boost daily global supplies by 2 million barrels in the next few months, with an internationally coordinated reserves release helping to bridge the gap, it said. But that would come at the expense of a depletion of spare capacity, pushing prices higher, the analysts said.
Schumpeter’s Theory of Creative Destruction
By David Adler Email
Welcome to the IRLE blog! Here we’ll highlight some topics related to the readings before the Workshop in Aspen just a few weeks away. Today I will be the trumpeter for Schumpeter – talking about Schumpeter’s theory of creative destruction (See: Schumpeter – Capitalism, Socialism, and Democracy" Chapters 7-8; “McCraw on Schumpeter, Innovation, and Creative Destruction,” EconTalk podcast).
Schumpeter argues in "Capitalism, Socialism, and Democracy" that capitalism is never stationary and always evolving, with new markets and new products entering the sphere. He is perhaps most known for coining the phrase “creative destruction," which describes the process that sees new innovations replacing existing ones that are rendered obsolete over time. As an example, in the late 1800s and early 1900s incremental improvements to horse and buggy transportation continued to be valuable, and innovations in the buggy and buggy whip could fetch a considerable price in the market. With the introduction of Ford’s Model T in 1908, however, these “technologies” were effectively driven out by a superior innovation. Over time, newer and better innovations will continue to drive out worse ones, just as the Model T did the horse and buggy and numerous iterations of vehicles have subsequently driven out the Model T and generations of its successors. Parallels in the electric power market are easy to see, where we have seen the first steam turbines replaced, generation by generation, with the current fleet of combined cycle natural gas plants, solar panels, wind farms, and so on.
Schumpeter’s theory of creative destruction links closely with his view of the importance of economic dynamism. Most economic analyses are performed in the static sense, where the economist looks at the world in its current state to estimate the effect of, say, the introduction of a new policy. While this snapshot analysis can frequently be useful, it also risks obscuring an important issue – the effect of a policy on the initial steam turbine may have effects (positive and/or negative) that are unforeseen at the time of the policy on future generations of innovations in the world of electric power generation.
For the regulator, the importance of dynamism raises a series of difficult questions. How should a new technology be regulated? As an example, consider the introduction and integration of renewable power generation and distributed energy resources. On the one hand, regulation to preserve the profits of the incumbent utility and to recover their investment in existing technologies (i.e. fossil fuel fired and nuclear power plants or the transmission and distribution network) may impede the introduction of new and better (cleaner, cheaper at a minimum terms of social cost) technologies. On the other hand, the theory of creative destruction suggests that over time, a newer technology will replace and render obsolete what we consider to be on the cutting-edge technologically today. So regulation that favors the new technology may, in unforeseen ways, hinder the next innovation. How do we identify an invention that is the innovation destined to render the existing fleet obsolete, as opposed to supporting one that in fact prevents a better innovation from replacing it? Or perhaps, how do we design regulation to support new technologies without precluding investments in the next generation of innovations?
Demand Destruction
An Unintended Consequence in the Newest Normal
Harvey Hess
May 11, 2020
The term ‘New Normal’ has been used in the first 20 years of the 21st Century more than it was ever used in the preceding 2 centuries combined. From 9–11 to the great recession to now, the Chinese pandemic, the ‘New Normal’ has morphed into now the ‘newest normal’. And this newest normal has a new phrase that is being bantered around quite a bit by economist, and those who discuss the economy; The term I am referring to is called ‘Demand Destruction’.
There is an old saying that ‘there are decades when nothing happens and then there are weeks when decades happen’. The year 2020 is looking like one of those times, when decades happen in a truly short amount of time.
What is often referred to as the Coronavirus or the Wuhan virus, the world has seen an unprecedented event, the complete closing of the worldwide economy, a sheltering in place event with stay at home orders by all the powers on local, state and federal levels. This unprecedented event now looks to unleash an unintended consequence in changing the normal, habitual activities of billions of people, all at once.
You will hear much in the coming months and years about ‘demand destruction’. It is a term that was first popularized during the early 2000’s when ‘peak oil’ became a mainstream event. The advent that the world had hit its peak in oil extraction, thus driving up the price of crude, increasing the price of petroleum products and then, when the price of gasoline got too high for the general public, demand destruction would occur. The destruction would be the advent of more efficient gasoline operated vehicles, electric vehicles, mass transit or simply driving less, thus lower the ‘need’ for crude and destroying its pricing structure. The old supply and demand economics theory at work.
As far as ‘peak oil’ goes, that theory seemed to work. After a supply issue with OPEC ( Organization of Petroleum Exporting Countries) which caused the price of a barrel of oil to hit the high of $165 a barrel in 2008 and the street price of gasoline in the $4–5 a gallon range, demand destruction (and a great recession) caused a 50% drop in the price for the next 10 years, with the great pandemic of 2020 now seeing that drop at historical lows, even hitting negative numbers for a short time. No work, no school, no airline travel, no bars / restaurants, no socializing, no church, no holidays, no vacations, no visiting grandma, no nothing equals no need for fuel, hence demand destruction.
Human beings are very habitual and very tribal. We tend to do as others are doing, we tend to want to not be seen as bucking the system as we have seen with the pandemic, other than groups of young people, who always believe they are invincible. Most people have dutifully complied with what they have been asked to do. In fact, some are now making a scene if someone is not complying as they think everyone should be and are calling out those who do not ‘tote the line’.
Years ago, I was a Corporate Executive operating thousands of convenience stores. We relied on the habitual nature of ‘us’ to make sure those stores were profitable by having the necessary items always available and in stock, for the habitual masses, think newspapers, coffee, donuts, smokes, chew, soft drinks, beer. We had store managers who had a daily relationship with their customers, and we could rely on these habits to sustain our sales and revenues. Without them, we could not sustain a business. If a new road or freeway would go in thus changing the flow of traffic, our key customers would change their store selection to a different more convenient store and that now weakened store would die. It was just the game of supply and demand.
We are now poised to see demand destruction in a way that has never happened before. It is unfortunate, it will be scary for many, it will cause a rethinking of our institutions, our way of life. We just have no example of such a large-scale change in the habits of millions in the United States and billions of others worldwide, all at one time. We have already seen examples of some of the industry changes which will likely continue thus disrupting the way it used to be.
Here is an example: Movies. What will happen now that the movie producers have learned something during the pandemic? What did they learn? Well, by going straight to ‘On Demand’ and bypassing the cinema’s, they could blast through their profitability models like never before. Case in point, Trolls Worldwide Tour. Universals DreamWorks had planned a theater release for April 6th. That was a ‘no go’ so they went straight to ‘On Demand’ that day. The result: $100 Million in the bank in 2 weeks! No distribution headaches, no dealing with movie theaters, no worries. Speaking of the decision, Universal boss Jeff Shell said: “Universal Pictures has a broad and diverse range of movies with 2020 being no exception. Rather than delaying these films or releasing them into a challenged distribution landscape, we wanted to provide an option for people to view these titles in the home that is both accessible and affordable”.
“We hope and believe that people will still go to the movies in theaters where available, but we understand that for people in different areas of the world that is increasingly becoming less possible.”
Not sure about that last piece, at least in the near future. How many people will be comfortable in environments of close proximity with others? Movie theaters, sporting events, theme parks, airplanes? Time will certainly tell, but in the near term, these businesses and industries will need to change, they will need to rethink their proposition and they will need to reevaluate their profitability model. Will it hurt? Yes. Is it possible jobs and careers could be on the line? Yes.
The travel industry, air travel, hospitality, cruises are all in immediate jeopardy both in the short term and long term. After 9–11, and then the great recession of 2009, we saw a significant reduction in the number of routes the airlines would operate. In all, around 40% of the routes were taken offline. Think about the last time in the past 10 years that you have been on a plane with an open seat, most likely not many. So, what happens now?
Obviously, the airline industry is the biggest concern. In fact, Warren Buffet is so concerned that he just sold ALL his stakes in four major airlines, American, Delta, Southwest and United. When Warren Buffet bails on a stock, a company, or an industry, it is a good bet that recovering back to previous highs is most likely not on the horizon. We will see some of the US airlines file for bankruptcy, as we have already seen in other areas of the world, and we will see most looking for additional bailout funding. There will be pain here until at least 2022, if not later. Will it hurt? Yes. Is it possible jobs and careers could be on the line? Yes.
The cruise industry looks like major contraction for a long, long time, maybe forever. In fact, Norwegian Cruise Lines Holdings has already warned its investors that it might be forced to go out of business. The constant news in February, March and even into April 2020 of cruise ships left out in the ocean with no place to port, no way to get the sick off the ship, were upsetting at the very least. You had to feel for those who were stranded, locked in a tiny room at sea not knowing what was next, or when and where they could debark. Do you feel the public will go cruising in the near future, say 2, 3 years? Not likely. Will it hurt? Yes. Is it possible jobs and careers could be on the line? Yes.
And what about the theme parks? Resort hotels within those areas? Time will tell, but for the short term, pain.
As we discuss this newest normal of demand destruction, let us look closer to home, right in your community.
How about bars and restaurants? Well, this one becomes a two headed monster, new social distancing guidelines and less traffic due to habit change.
As is the case in all retail stores, the success of a business has fully to do with foot traffic. The more foot traffic, the more sales, and revenues. I have often used an analogy in my hometown of the locally owned 90-year-old grocer with 100 stores and what happened when Wal*Mart started expanding greatly and selling food. The local Company saw foot traffic collapse and filed bankruptcy, closed stores, repositioned others to a new community minded brand and today are just limping along. With minuscule margins to work with, losing foot traffic is the whole game. And that is the same with restaurants. In that industry, since you are dealing with fresh food exclusively, margins are extremely tight. The way to make it work is to turn the tables repeatedly. Reduced revenues, with a significant amount of fixed costs, with smaller margins, are resulting in much less operating profit. Many states have insisted that for restaurants to come back online, they must reduce their allowable seating at any time to be at 25%. Many of them cannot survive with that number. They will not survive with 50%, even 75% capacity numbers.
The other variable here, and one that will not be completely understood for a while is the stay-at-home orders basically causing individuals and families to learn a new skill… food preparation. That is right, people have figured out how to cook. What affect will that have on the number of times a family or individual goes out to a restaurant? We do not know that answer, but the answer is not back to the way it was.
There is already numerous analysis being done in this industry and the number being bantered around is somewhere between 20–25% of the current restaurants not being able to survive this newest normal. Will it hurt? Yes. Is it possible jobs and careers could be on the line? Yes.
Let us take a quick look at a few other variables. How about hair salons and barber shops? Who learned a new skill while at home of cutting the spouse, the children, and/or significant others hair? Some people did, just check out all the social media clips about learning this new skill and how much fun people had cutting hair at home. Now I doubt this will have a big effect, but I imagine there may be an effect.
Gyms / workout facilities. There was an ad on the social media platform Nextdoor in my area recently that said, and I paraphrase ‘ Does anyone have a stationary bike like peloton available for sale, I have a few other pieces of exercise equipment and have decided if I add a Peloton or something similar, I will not have any need to go back to the gym’. In fact, during the pandemic, at home exercise equipment was selling out online. How many gym memberships will be given up? How many people just will not be comfortable in that setting for the time being at least? We shall see.
Malls? It will be interesting since malls have been dying a slow death for years now with Ecommerce growing every year in every category. The pandemic brought a few more Chapter 11 filing to major mall anchors, JCPenney and Neiman Marcus as well as announcements from other mall anchors of additional store closings. Smaller mall retailers, such as J Crew also announced bankruptcy and there will be more to come. This one will be bad for the commercial real estate market for some time.
When you begin to think about all the businesses, especially the small local businesses, dry cleaners, yogurt shops, car washes, and so many others, you have to feel for all the blood, sweat and tears they endured over the years to establish a viable business, only to have it wiped out by a worldwide pandemic.
There are so many other businesses, companies, industries that will be affected by the newest normal, demand destruction, that it has to be a major concern as we move forward into some semblance of a return to order in the months and years ahead.
The unfortunate timing of this pandemic cannot be overstated. The USA was, for the first time in our lifetime at full employment, industries and business were humming right along. We had not seen over 160 million actively employed individuals ever before. Wages were going up for the first time in about 20 years.
And now? Well you cannot have a 20–25% reduction in major industries, the energy sector, hospitality, restaurant, and airlines to name a few, and recover very quickly. It will take a herculean effort by all, both private and public entities working together to patch it all back again. It will take reorganization of jobs and job types, many to totally new industries. We will see a much-needed evaluation of everything we do, make, and buy to understand fully our current liabilities.
The term ‘Buy American — Hire American’ should not be just a political slogan or partisan issue. It should be our new mission.
The next few years will be one of the most important tests this country will have seen in the past 100 years, or more. Even the World Wars, always seen as times when we Americans showed up big, will not be a close second to what we have in front of us right now with this pandemic. Again, it is totally unprecedented. We are moving into completely uncharted waters. It will be the test of our lifetime.
Are we up to passing the test? Only time will tell.
Harvey Hess is an author / speaker and owner of Everydays a Saturday LLC. His book ‘Income Innovations’(2015) is being followed by ‘An Automated World’(2020)
Creative Destruction
By Richard Alm and W. Michael Cox
Joseph Schumpeter
(1883–1950) coined the seemingly paradoxical term “creative destruction,” and generations of economists have adopted it as a shorthand description of the free market’s messy way of delivering progress. In Capitalism, Socialism, and Democracy (1942), the Austrian economist wrote:
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that 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. (p. 83)
Although Schumpeter devoted a mere six-page chapter to “The Process of Creative Destruction,” in which he described capitalism as “the perennial gale of creative destruction,” it has become the centerpiece for modern thinking on how economies evolve.
Schumpeter and the economists who adopt his succinct summary of the free market’s ceaseless churning echo capitalism’s critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system. The saving grace comes from recognizing the good that comes from the turmoil. Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.
Herein lies the paradox of progress. A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order.
Transportation provides a dramatic, ongoing example of creative destruction at work. With the arrival of steam power in the nineteenth century, railroads swept across the United States, enlarging markets, reducing shipping costs, building new industries, and providing millions of new productive jobs. The internal combustion engine paved the way for the automobile early in the next century. The rush to put America on wheels spawned new enterprises; at one point in the 1920s, the industry had swelled to more than 260 car makers. The automobile’s ripples spilled into oil, tourism, entertainment, retailing, and other industries. On the heels of the automobile, the airplane flew into our world, setting off its own burst of new businesses and jobs.
Americans benefited as horses and mules gave way to cars and airplanes, but all this creation did not come without destruction. Each new mode of transportation took a toll on existing jobs and industries. In 1900, the peak year for the occupation, the country employed 109,000 carriage and harness makers. In 1910, 238,000 Americans worked as blacksmiths. Today, those jobs are largely obsolete. After eclipsing canals and other forms of transport, railroads lost out in competition with cars, long-haul trucks, and airplanes. In 1920, 2.1 million Americans earned their paychecks working for railroads, compared with fewer than 200,000 today.
What occurred in the transportation sector has been repeated in one industry after another—in many cases, several times in the same industry. Creative destruction recognizes change as the one constant in capitalism. Sawyers, masons, and miners were among the top thirty American occupations in 1900. A century later, they no longer rank among the top thirty; they have been replaced by medical technicians, engineers, computer scientists, and others.
Technology roils job markets, as Schumpeter conveyed in coining the phrase “technological unemployment” (Table 1). E-mail, word processors, answering machines, and other modern office technology have cut the number of secretaries but raised the ranks of programmers. The birth of the Internet spawned a need for hundreds of thousands of webmasters, an occupation that did not exist as recently as 1990. LASIK surgery often lets consumers throw away their glasses, reducing visits to optometrists and opticians but increasing the need for ophthalmologists. Digital cameras translate to fewer photo clerks.
Companies show the same pattern of destruction and rebirth. Only five of today’s hundred largest public companies were among the top hundred in 1917. Half of the top hundred of 1970 had been replaced in the rankings by 2000.
“The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process,” Schumpeter wrote (p. 82).
The Power of Productivity
Entrepreneurship
and competition fuel creative destruction. Schumpeter summed it up as follows:
The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. (p. 83)
Entrepreneurs introduce new products and technologies with an eye toward making themselves better off—the profit motive. New goods and services, new firms, and new industries compete with existing ones in the marketplace, taking customers by offering lower prices, better performance, new features, catchier styling, faster service, more convenient locations, higher status, more aggressive marketing, or more attractive packaging. In another seemingly contradictory aspect of creative destruction, the pursuit of self-interest ignites the progress that makes others better off.
Producers survive by streamlining production with newer and better tools that make workers more productive. Companies that no longer deliver what consumers want at competitive prices lose customers, and eventually wither and die. The market’s “invisible hand”—a phrase owing not to Schumpeter but to Adam Smith—shifts resources from declining sectors to more valuable uses as workers, inputs, and financial capital seek their highest returns.
Through this constant roiling of the status quo, creative destruction provides a powerful force for making societies wealthier. It does so by making scarce resources more productive. The telephone industry employed 421,000 switchboard operators in 1970, when Americans made 9.8 billion long-distance calls. With advances in switching technology over the next three decades, the telecommunications sector could reduce the number of operators to 156,000 but still ring up 106 billion calls. An average operator handled only 64 calls a day in 1970. By 2000, that figure had increased to 1,861, a staggering gain in productivity. If they had to handle today’s volume of calls with 1970s technology, the telephone companies would need more than 4.5 million operators, or 3 percent of the labor force. Without the productivity gains, a long-distance call would cost six times as much.
The telephone industry is not an isolated example of creative destruction at work. In 1900, nearly forty of every hundred Americans worked in farming to feed a country of ninety million people. A century later, it takes just two out of every hundred workers. Despite one of history’s most thorough downsizings, the country has not gone hungry. The United States enjoys agricultural plenty, producing more meat, grain, vegetables, and dairy products than ever, thanks largely to huge advances in agricultural productivity.
| New Product | Labor Needed | Old Product | Labor Released |
| Automobile | Assemblers | Horse/carriage | Blacksmiths |
| Designers | Train | Wainwrights | |
| Road builders | Boat | Drovers | |
| Petrochemists | Teamsters | ||
| Mechanics | RR workers | ||
| Truck drivers | Canalmen | ||
| Airplane | Pilots | Train | RR workers |
| Mechanics | Ocean liner | Sawyers | |
| Flight attendants | Mechanics | ||
| Travel agents | Ship hands | ||
| Boilermakers | |||
| Plastics | Petrochemists | Steel | Miners |
| Aluminum | Founders | ||
| Barrels/tubs | Metalworkers | ||
| Pottery/glass | Coopers | ||
| Potters | |||
| Colliers | |||
| Computer | Programmers | Adding machine | Assemblers |
| Computer engineers | Slide rule | Millwrights | |
| Electrical engineers | Filing cabinet | Clerks | |
| Software designers | Paper | Tinsmiths | |
| Lumberjacks | |||
| Fax machine | Programmers | Express mail | Mail sorters |
| Electricians | Teletype | Truck drivers | |
| Software designers | Typists | ||
| Telephone | Electronic engineers | Postal workers | |
| Operators | Telegraph | Telegraph operators | |
| Optical engineers | Overnight coach | Coach drivers | |
| Cellular technicians | |||
| Polio vaccine | Chemists | Iron lung | Manufacturers |
| Lab technicians | Attendants | ||
| Pharmacists | |||
| Internet | Programmers | Shopping malls | Retail salespersons |
| Network operators | Libraries | Librarians | |
| Optical goods workers | Reference books | Encyclopedia | |
| Webmasters | salespersons | ||
Resources no longer needed to feed the nation have been freed to meet other consumer demands. Over the decades, workers no longer required in agriculture moved to the cities, where they became available to produce other goods and services. They started out in foundries, meatpacking plants, and loading docks in the early days of the Industrial Age. Their grandsons and granddaughters, living in an economy refashioned by creative destruction into the Information Age, are less likely to work in those jobs. They are making computers, movies, and financial decisions and providing a modern economy’s myriad other goods and services (Table 2).
| *. Fewer than 5,000. | |||
| Job Destruction | Now (2002) | Then | Year |
| Railroad employees | 111,000 | 2,076,000 | 1920 |
| Carriage and harness makers | * | 109,000 | 1900 |
| Telegraph operators | * | 75,000 | 1920 |
| Boilermakers | * | 74,000 | 1920 |
| Milliners | * | 100,000 | 1910 |
| Cobblers | * | 102,000 | 1900 |
| Blacksmiths | * | 238,000 | 1910 |
| Watchmakers | * | 101,000 | 1920 |
| Switchboard (telephone) operators | 119,000 | 421,000 | 1970 |
| Farm workers | 716,000 | 11,533,000 | 1910 |
| Secretaries | 2,302,000 | 3,871,000 | 1980 |
| Metal & plastic working machine operators | 286,000 | 715,000 | 1980 |
| Optometrists | 33,000 | 43,000 | 1998 |
| Job Creation | Now (2002) | Then | Year |
| Airplane pilots and mechanics | 255,000 | 0 | 1900 |
| Auto mechanics | 867,000 | 0 | 1900 |
| Engineers | 2,028,000 | 38,000 | 1900 |
| Medical technicians | 1,879,000 | 0 | 1910 |
| Truck, bus, and taxi drivers | 4,171,000 | 0 | 1900 |
| Electricians | 882,000 | * | 1900 |
| Professional athletes | 95,000 | * | 1920 |
| Computer programmers/operators/scientists | 2,648,000 | 160,613 | 1970 |
| Actors and directors | 155,000 | 34,643 | 1970 |
| Editors and reporters | 280,000 | 150,715 | 1970 |
| Medical scientists | 89,000 | 3,589 | 1970 |
| Dietitians | 74,000 | 42,349 | 1970 |
| Special education teachers | 374,000 | 1,563 | 1970 |
| Physicians | 825,000 | 295,803 | 1970 |
| Pharmacists | 231,000 | 114,590 | 1970 |
| Authors | 139,000 | 26,677 | 1970 |
| TV, stereo, and appliance salespersons | 309,000 | 111,842 | 1970 |
| Webmasters | 500,000 | 0 | 1990 |
Over the past two centuries, the Western nations that embraced capitalism have achieved tremendous economic progress as new industries supplanted old ones. Even with the higher living standards, however, the constant flux of free enterprise is not always welcome. The disruption of lost jobs and shuttered businesses is immediate, while the payoff from creative destruction comes mainly in the long term. As a result, societies will always be tempted to block the process of creative destruction, implementing policies to resist economic change.
Attempts to save jobs almost always backfire. Instead of going out of business, inefficient producers hang on, at a high cost to consumers or taxpayers. The tinkering shortcircuits market signals that shift resources to emerging industries. It saps the incentives to introduce new products and production methods, leading to stagnation, layoffs, and bankruptcies. The ironic point of Schumpeter’s iconic phrase is this: societies that try to reap the gain of creative destruction without the pain find themselves enduring the pain but not the gain.
About the Authors
W. Michael Cox is senior vice president and chief economist at the Federal Reserve Bank of Dallas. Richard Alm is an economics writer at the Dallas Fed. They are coauthors of Myths of Rich and Poor (1999).
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