I used to divide my life into two eras: pre- and post-iPod. As a music lover, when the iPod came along and replaced CDs, my life improved greatly: I had access to thousands of songs without having piles of CDs strewn about my car (and getting damaged in the process). I can count on one hand the number of physical albums I have purchased since the day I got my iPod.
Recently, my beloved iPod suffered an irreparable hard drive failure. But I didn’t rush to get a replacement, and I probably never will. Because of apps like Pandora, Spotify, and iHeartRadio, I had only been using my iPod on long road trips, which happen infrequently. Once these new alternatives became available, it made little sense to carry multiple devices when I could just use my smartphone for everything.
The iPod wasn’t the first music player to displace its predecessor, and it won’t be the last to be displaced by something better. People once preferred phonographs, record players, 8-track players, and cassette players prior to choosing the CD players, MP3 players, and streaming services that dominate that market today.
Disrupting through Innovation
Economists use the term creative destruction to describe what has happened in the market for music players. Creative destruction, a concept originated by the Austrian economist Joseph Schumpeter in 1942, describes the process of disruptive innovation that takes place in markets.
Entrepreneurs create a new product, technology, or production process that individuals choose to adopt because they prefer it to what came previously. The demand for these older products and technologies all but disappears, taking with it the businesses and jobs specializing in their production. But from the ashes of a dying industry rises the phoenix of economic progress.
It’s easy to think of many historical examples of creative destruction: electric lights replacing gas ones; the car replacing the horse and buggy; DVDs replacing VHS tapes. In markets, people vote with their dollars and choose which products they prefer to consume. It’s survival of the fittest, and only those products that provide people with benefits that are greater than what they cost to produce will succeed. Even then, success may be fleeting.
With each disruptive innovation comes progress when consumers value these newer products or processes more highly than what came before. Many innovations prevail because they increase productivity, similar to how the electronic word processor improved upon the typewriter. This innovation saved time by eliminating the need to untangle typewriter keys and to use whiteout (or retype the entire document) to correct mistakes. Consumers valued the ability to review and edit a few lines of text before printing them.
Once computers came along, with word processing programs that could identify potential spelling and grammar mistakes and enabled people to read and edit entire documents before printing them, the choice for consumers was obvious. Today, people rarely use typewriters as anything other than a nostalgic bit of home décor. Those who used to work in this industry had to find jobs in other areas.
Creating Economic Winners and Losers
Clearly, this process of creative destruction generates economic losers. Industries become obsolete — businesses fail, workers lose jobs, and resources get reallocated to more highly valued uses. The competitive forces at work in the economy can be swift and brutal, but this process allows markets to direct resources toward activities that generate value for society and away from ones in which the costs of production outweigh the benefits.
This newly generated value may make society wealthier over time, but none of this is particularly comforting to the worker whose job ceases to exist because of some new product consumers prefer. Does this mean that the government should pass policies making it more difficult to innovate, spend millions of dollars subsidizing industries that are not competitive in the global economy, or even restrict our participation in the global economy altogether in an attempt to save jobs?
Policy-makers are quick to pass laws slowing the rate of innovation in the name of preserving jobs. The many government actions taken against Uber are a prime example. Uber’s displacement of traditional taxi cabs has led to several cities to ban the ride-sharing service altogether while other cities have imposed licensing requirements and pricing restrictions that are prohibitively costly for many would-be Uber drivers. All the while, Uber has been hard at work innovating further by developing driverless car technology, which has been met with a similar policy response.
Helping Workers without Stifling Progress
There are alternative policies to consider, ones that don’t restrict consumers’ choices. Instead of protecting workers by stifling technological progress, why not look for ways to make it easier for displaced workers to find a new occupation?
One possible way to do this is to relax some of the barriers to entry into new occupations. Occupational licensing is now required for approximately 30% of jobs in the United States, as opposed to only 5% in the 1950s. In addition, occupational licenses issued by one state are often not recognized by other states.
This system reduces the geographic mobility of displaced workers. Removing licensing requirements for jobs without legitimate public safety concerns is one way to ease the ability of displaced workers to gain access to a new occupation.
For that matter, any policies that increase the cost of labor relative to the cost of capital increase the returns to coming up with new production technologies that substitute human labor for automation. It is not surprising that McDonald’s began testing automated cashiers when politicians began discussing increasing the national minimum wage to $15 per hour. The more we artificially increase the price of labor, the more we can expect the process of creative destruction to result in job loss.
Creative destruction is a natural byproduct of a robust, dynamic, growing economy, and as Schumpeter said, it is “an essential fact of capitalism.” It’s difficult to imagine what life would be like now if important innovations had become discarded ideas made too costly to pursue due to policies passed in the name of preserving the status quo. Instead of limiting the process of creative destruction by making innovation more costly and difficult, let’s make it easier for displaced workers to find new livelihoods.