Change can be good, but it is seldom painless

While in Colum­bus last week Pres­i­dent Obama sug­gested that those who oppose alter­na­tive energy sources might be con­sid­ered mem­bers of the “flat earth soci­ety,” much like peo­ple who opposed explo­ration by the likes of Christo­pher Colum­bus. In this instance, accord­ing to the pres­i­dent, those who cling to fos­sil fuels and ignore alter­na­tive energy sources are much like ostriches, plung­ing their heads into the ground and fail­ing to under­stand the need for change in any active, grow­ing and healthy economy.

In essence, the pres­i­dent was echo­ing the sen­ti­ments of econ­o­mist Joseph Schum­peter, who spoke of a process he dubbed “cre­ative destruc­tion.” Schum­peter was of the opin­ion that, as time pro­gresses, new pro­duc­tion techniques/methodologies would be dis­cov­ered and as they were imple­mented, prior means of pro­duc­tion would become out­dated and inef­fi­cient. As the new pro­duc­tion tech­niques became more stan­dard­ized, the out­put and employ­ment of the past would be sup­planted. Sadly for those com­pa­nies asso­ci­ated with out­dated tech­nolo­gies which refused to adapt, fail­ure would occur and their pro­duc­tion and employ­ment would be lost. Cre­ative destruc­tion, while a painful process to some, remains desir­able and healthy for an over­all econ­omy as it allows for greater effi­ciency and increased stan­dards of living.

The process of cre­ative destruc­tion and the pain it pro­duces for some within the mar­ket­place, can be eas­ily rec­og­nized today. For exam­ple, con­sider changes which are occur­ring in the field of retail­ing. For most of our country’s his­tory, a per­sonal inter­ac­tion was gen­er­ally required (aside from some cat­a­logue oper­a­tions) as peo­ple pur­chased var­i­ous goods and ser­vices. Today, more and more of that inter­ac­tion is tak­ing place on-line (imper­son­ally) between buy­ers and sell­ers. Every Christ­mas sea­son, a greater per­cent­age of total retail sales are tak­ing place in such an online format.

While seem­ingly mod­est in nature, this move­ment of retail sales is pro­duc­ing huge changes in our coun­try. As bricks-and-mortar stores see sales lost to online activ­i­ties, the phys­i­cal land­scape becomes more and more blighted, as retail out­lets become unprof­itable and some loca­tions are shut­tered. Not only are the unprof­itable phys­i­cal out­lets aban­doned, but the employ­ees who once worked at such estab­lish­ments become unem­ployed. And as more and more sites are vacated, there will gen­er­ally be fewer needs for new out­lets, which means con­struc­tion com­pa­nies and their employ­ees are also at risk. And as all of this eco­nomic activ­ity is dis­rupted, some gov­ern­ment tax rev­enues are also lost (for exam­ple, from per­sonal and cor­po­rate income taxes), plac­ing some social ser­vices at risk.

To be sure, the process of adapt­ing to change is likely to be any­thing but pain­less. But then again, there is the activ­ity asso­ci­ated with the improved technologies/production tech­niques and the new employment/output which is gen­er­ated. So as the unwind­ing of bricks-and-mortar retail oper­a­tions unfold, the on-line activ­i­ties cre­ate new jobs within the oper­a­tions of retail­ers who do adapt, as well as those at Ama­zon, eBay, etc. With the pur­chase of var­i­ous prod­ucts on-line, deliv­ery ser­vices such as UPS and FedEx need more work­ers, which gen­er­ates new tax rev­enues in those local­i­ties where such oper­a­tions are based. In the final analy­sis, the hope is that the ben­e­fits of cre­ative destruc­tion out­weigh the costs. Of course, the ben­e­fits may seem of lit­tle value to those on the los­ing end of this con­stantly occur­ring process.

Per­haps the pres­i­dent is right in label­ing those opposed to the devel­op­ment of alter­na­tive energy sources as being mem­bers of the flat-earth soci­ety. It should be noted, how­ever, that Schum­peter was dis­cussing the process of cre­ative destruc­tion within the mar­ket­place, not with government-sponsored (and taxpayer-supported) activ­i­ties such as sub­si­dized alter­na­tive energy activities.

As well, Pres­i­dent Obama him­self might be viewed by some as a mem­ber of the flat-earth soci­ety. Last year, in a campaign-like speech, he seemed to blame tech­nol­ogy for some of the high unem­ploy­ment over the past few years. Accord­ing to Mr. Obama, “Lay­offs too often became per­ma­nent, not part of the busi­ness cycle. And these changes didn’t just affect blue col­lar work­ers. If you were a bank teller or a phone oper­a­tor or a travel agent, you saw many in your pro­fes­sion replaced by ATMs and the Internet.”

Such are some of the costs asso­ci­ated with cre­ative destruc­tion. But blam­ing high unem­ploy­ment on ATMs and the inter­net makes just about as much sense as blam­ing early auto man­u­fac­tur­ers for dis­plac­ing com­pa­nies asso­ci­ated with horse-and-buggy trans­porta­tion. In the end, while progress is gen­er­ally good, it is cer­tainly not painless.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Mar 28 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.