Sunday, July 24, 2011

Schumpeter, the 70s & economic growth- Part 2

Fotomat boothRecently, on an episode of HBO's Real Time with Bill Maher, Entrepreneur Mark Cuban started to mention Schumpeter's theories of innovation as a spur to economic growth. Unfortunately, that's only half of the discussion...

Schumpeter held that innovation did two things: created new wealth by increasing the types of goods in demand by consumers. But, it also made obsolete jobs by either minimizing labor required for manufacture, or making the products obsolete.

Obsolescence runs through the economy of the last fifty years. And it manifests in myriad ways. You used to develop exposed film by dropping it off at the drug store or camera shop, where it would be sent to a commercial developer and the prints would arrive a week later. Then, there was the Fotomat booth, with a rapid delivery service and 24 hour processing. The Polaroid SX 70 made instant photos widely popular. After that, the drug store or camera shop was able to buy and install automated developing machines that would provide finished prints within hours. After that came the digital cameras, making film processing unnecessary.

You have the results of the Visicalc revolution, with the development of spread sheets, word processor, and other office applications for the PC. Suddenly, the demand for management personnel trained in the new technology boomed. Then, that same management staff was incrementally decreasing. Accountants for book keeping or Intuit Quickbooks? Which would be cheaper? The major reveal that the IRS tax code was indistinct, with many possible outcomes, and that the IRS was only paying attention to 'red flag' items, made the use of Tax filing software more attractive. After a while, some States offered online tax filing sites, and free software from popular commercial vendors.

The drastic change in retail operations, from many brick and mortar department stores to only a handful of Big Box stores, has to do with changes in distribution methods and increased competition from catalog retailers with no overhead for store maintenance, changes in logistics, and the introduction of Amazon.com, EBay, and online sales. There are actually shady deals made by municipalities to attract stores, due to the tax benefits. Yet, these same deals often render the real estate useless for anything other than retail.

Public Libraries and bookstores both saw their attendance drop due to Amazon.com. Magazines and newspapers have seen subscription rates drop due to the Internet. And now, the E-Reader is putting the finishing touches on the drastic changes the computer has made to the publishing world.

Banking, with the introduction of the bank card, the ATM, and online banking services, has made "banker's hours" a quaint relic of a phrase, and reduced the need for tellers, and even loan officers...

All this innovation, and the economic upheaval in society it causes, is what Joseph Schumpeter called "Creative Destruction" , and is the major problem with Capitalism as he saw it. Innovation can create jobs and opportunities for growth. In doing so, however, it must also destroy the old order of the economy.

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