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techniques/methodologies would be discovered and as they were implemented, prior means of production would become outdated and inefficient.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 Sadly for those companies associated with outdated technologies which refused to adapt, failure would occur and their production and employment would be lost.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.