Global Market Commentary

October 10, 2015

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Creative Destruction: Is This Time Different?

Many readers are probably familiar with the term “creative destruction.” It was coined by early 20th-century economist Joseph Schumpeter, who used it to describe how capitalism creates growth and technological progress by ruthlessly eliminating ideas, companies, and industries that no longer serve our best interests and no longer further economic progress. Any large, secular change in the economy will be destructive as jobs will be temporarily lost, and familiar patterns will be disrupted. However, this destruction will make way for new growth — clearing the ground like a forest fire and making room for new, vigorous saplings to grow. Schumpeter was talking about the 19th century Industrial Revolution, which in its first phase was incredibly disruptive. Hand workers were thrown out of employment. Farmers were thrown off the land. Cities in England and Germany grew large slums, and public unrest and agitation rocked Europe throughout the second half of the 1800s.

Yet, after the dislocation and suffering phase ended, when all was said and done, people were better off. The shift from a society based on agriculture to one based on industry ended up creating far more jobs and far more wealth than was lost — by many orders of magnitude. There may be a few romantics who think they want to return to the agrarian lifestyle that predated the Industrial Revolution, but we think if they could really pay a visit to Europe in the 1700s and early 1800s, they would likely change their minds.

Industrial Revolution: Round Two

The same process happened again in the 20th century. The so-called “second Industrial Revolution” was the next phase. What resulted was as different from the first as the first was from the medieval society that preceded it.

While the first Industrial Revolution was characterized by steam power, railroads, and factories, the second was driven by electrification, assembly-line production, mass communications, and the automobile. It was also hugely disruptive and painful in its first phases — and it also ended up creating a tidal wave of general prosperity that lasted from the end of the Second World War until the 1970s.

Now, we have are in the middle of a period of rapid acceleration in the “third Industrial Revolution.” This industrial revolution was inaugurated in the 1970s and 1980s with the rise of cheap computing power.

Why Round Three Is Hitting So Fast

Even though it’s been underway for a generation, the exponential rates of global economic growth is the key to understanding why this digital revolution only now seems to be coming to a head.
Think of anything that grows exponentially as doubling in size in a given amount of time. For example, if a population is growing 10 percent each year, that population will double every seven years. The psychological problem with exponential growth is that observers are often taken by surprise when this doubling seems to suddenly overwhelm them.

That is what’s happening now with computing power. We were comfortable with home computers getting smaller, cheaper, and more powerful, but all of a sudden, the periodic doubling of computing power has launched us to the brink of things that were thought of as science fiction only a decade or two ago. We remember reading in the 1990s that self-driving cars were a distant fantasy. Now, almost every major carmaker is pursuing the commercialization of autonomous driving vehicles.

We have reached a technological tipping point, the automation that disrupted prospects for the factory worker in the 1970s and 1980s is poised to start disrupting many white collar workers that were long thought to be immune. Do you think no computer or robot can do your job as a clerk, lawyer, writer, or even physician? Think again.

So this imminent wave of “creative destruction” is prompting the same fears that it prompted during rounds One and Two of the Industrial Revolution. “The jobs are going away, and will never come back. The people who are put out of work by this change will end up in the impoverished class, and an elite of owners and geniuses will rule over us all.”

Will It Be Different This Time?

We simply note that these fears have always risen to the surface when the forces of “creative destruction” were at their strongest. And these fears are always proven to be wrong. In the end, new technologies have always ended up creating more jobs than they destroyed, and creating more wealth — by increasing productivity. As the digital revolution continues to mature, it will cross a threshold where it starts to become really transformative of our lives, and not just a useful addition. Those benefits are now really beginning to appear. For years, skeptics asked about information technology — “Where are the productivity gains?” The answer is that they can be slow to appear — but when they do, they are transformative. The grains of truth in the fear are that the process of accommodation to these changes can be long and painful.

The Aim of Technology

The digital revolution is one more step in humanity’s march from a life of subsistence to a life of abundance. At each step, real freedom was increased when humans used ingenuity and technology to reduce the investment of physical labor they needed to make for survival.

Dreamers at the turn of the 20th century imagined a world where machines would provide for human needs, and humans would be freed for all kinds of other pursuits — artistic, cultural, and scientific. We could joke that those dreamers were about a hundred years too early — but it wouldn’t entirely be a joke.

We are confident that if human beings are given liberty to pursue their enlightened self-interest, they will ultimately take advantage of the new productivity of the digital age to allow the flourishing of a whole range of new occupations. This transitional and transformative time will doubtless be disruptive as society adjusts to the new reality of a cybernetic economy and the dominance of automation and artificial intelligence. Perhaps we need to look beyond the generation of pressure on today’s middle-class, white-collar workers. It is possible that the creative geniuses of the tech world will be inordinately rewarded while the disrupted will only struggle, but it is not probable — and if so, it is only in the short run.

Optimism Is the Key

As investors, we believe optimism is the key. No investor successfully rode the tremendous growth of the initial phases of the First and Second Industrial Revolutions by being a pessimist. There will be pessimists aplenty as the digital disruption continues and reaches a new phase of intensity. You may be tempted to give credence to their fears and think that this time really is different — that this shift means misery, poverty, or inequality. History suggests strongly that you would be wrong to do so.

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