Creative Destruction, Reification, and Social Welfare

I was prompted to write this post by Mark Perry’s reprise of Walter Williams’s post about creative destruction.

Joseph Schumpeter used the term creative destruction

to describe the process of transformation that accompanies radical innovation. In Schumpeter’s vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies and laborers that enjoyed some degree of monopoly power derived from previous technological, organizational, regulatory, and economic paradigms.

The Wikipedia article about creative destruction (just quoted) offers an elaboration:

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs. Wal-Mart is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, FedMart, Woolworths) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat. Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction in its technological manifestation.

Other examples are the way in which online free newspaper sites such as The Huffington Post and the National Review Online are leading to creative destruction of the traditional paper newspaper. The Christian Science Monitor announced in January 2009 that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. The Seattle Post-Intelligencer became online-only in March 2009. Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.

In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics or kinetics of industrial change: the transition from a competitive to a monopolistic market, and back again….

So far, so good. But then the article implicitly adopts the reification (or hypstatization) fallacy and explicitly endorses the idea of a social-welfare function:

Creative destruction can cause temporary economic distress. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

However, some believe that in the long-term society as a whole (including the descendants of those that experienced short-term hardship) enjoys a rise in overall quality of life due to the accumulation of innovation – for example, 90% of Americans were farmers in 1790, while 2.6% of Americans were farmers in 1990. Over those 200 years farm jobs were destroyed by exponential productivity gains in agricultural technology and replaced by jobs in new industries. Present day farmers and non-farmers alike enjoy much more prosperous lifestyles than their counterparts in 1790.

The reification (or hypostatization) fallacy, which is implicit in the first paragraph of the preceding quotation, is that creative destruction is an actual force which is responsible for good and bad things: better jobs for some workers, worse jobs or none for other workers. But creative destruction is merely a term that refers to the consequences of innovation and entrepreneurship. And these are merely labels for types of activity that are as old as mankind — normal, non-pathological behavior. The results may seem “good” or “bad” to particular individuals, but creative destruction is neither “good” nor “bad.” To evaluate creative destruction in such terms makes no more sense than calling the results of evolution “good” or “bad.” The results of creative destruction, like the results of evolution, are what they are — nothing more, nothing less.

Which points to the second fallacy, which is explicit in the second paragraph of the preceding quotation. The writer attempts to reconcile the “good” and “bad” results of creative destruction by appealing to the net effect of those results on social welfare (“quality of life”). On that subject, I borrow from myself:

How can a supposedly rational [commentator] imagine that the benefits accruing to some persons … somehow cancel the losses of other persons … ? There is no valid mathematics in which A’s greater happiness cancels B’s greater unhappiness.

By the same token, there is no valid mathematics by which the happiness of a group, or nation, can be summed over time, to justify past hardships in terms of present comforts. Individuals can, and do, make such calculations for themselves when they decide whether or not to postpone current consumption for the sake of obtaining a future goal (a house, retirement, etc.). But those individual calculations cannot be summed, because each individual is making decisions for the sake of his or her unique vision of happiness.

The farm laborers of the past, whose jobs went a-glimmering with the rise of mechanization and other agricultural advances, cannot be compensated by the consumers of today. Those jobs went a-glimmering, in the way that species go extinct, and that is that.

If you (or I) choose to think privately of such outcomes in terms of “bad” and “good,” and react accordingly (e.g., with charitable contributions to help the jobless), the thought and action are legitimate, but personal. “Bad” and “good” have no place in characterizations of unintentional phenomena, such as (the badly named) creative destruction.

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