Has creative destruction become more destructive?

Pianos and horses were big business about a hundred years ago.  Picture yourself back then, as new innovations like the record player and automobile were showing up.  Without the benefit of hindsight, do you think you would have expected enough new jobs to show up to replace those that were lost due to automation?

How you answer that question is likely to determine where you stand on that same issue today.  Society is facing an exciting yet just as uncertain future.  Computers are becoming more powerful, robots are becoming “smarter”, and we are finding new ways to automate things we couldn’t automate before.

Are we heading for widespread unemployment?  Economist John Komlos argues yes in his paper “Has creative destruction become more destructive”.  Komlos argues strongly that the destructive element of “creative destruction” (the process whereby new industries and occupations replace old ones) is becoming more dominant.  Digital cameras killed Kodak, which at its peak employed 145,000 people.  Facebook only employs about 7,000.  Bloomberg recently reported that a company in China has set up the country’s first virtually unmanned factory – making 650 workers redundant and boosting production of machinery parts by over 50%.

On the other side of the fence, many economists are much more optimistic.  Creative destruction is as old as capitalism itself.  There can be winners (like the person who did a masters in robotics 10 years ago), and losers (like the person who bought a bookstore 10 years ago).  One of the functions of the welfare state in a country like New Zealand is to make sure those who are unluckily or make bad choices have a safety net – and ideally time to retrain.

A recent study by economists at Deloitte concluded that on average technology has created more jobs than it has destroyed over the last 150 years.  However the effect on individual industries varied. Agriculture is the classic example of an industry that has become so productive that is has actually shrunk in terms of employment.  The Deloitte study noted that in England and Wales the absolute number of agricultural labours has fallen by 95% since 1871, or from 6.6% to just 0.2% of the total workforce. At the same time we have more food than we have ever had, and an entire service industry has grown up around agriculture.  Because we have substituted so much machine power for human exertion, the people that operate those machines are more productive, better paid, and can consume a wider variety of goods and services.  New jobs have also sprung up to service the machines.

Another often used example is the automobile industry, where the interactions are more complex.  It is very unlikely that all the jobs that were destroyed by the car were replaced by mechanics and auto factory workers.  Smith is one of the most common western names for good reason, because looking after horses was very labour intensive. 

Yet there are new modern industries that wouldn’t exist or would be much smaller without the automobile industry.  Travel and accommodation, fast food, and many other leisure-based industries can be tied back to the invention of the internal combustion engine.  Again there is also an income effect.  Because people are wealthier they can buy more services people 100 years ago couldn’t, creating more employment.

A key issue for the labour market is how fast these innovations happen, and whether workers have time to adjust.  Arguably the jobs created by technology are more desirable than the ones that are replaced, and many people are currently working in jobs that didn’t exist when they were at secondary school. 

If we do end up with structurally more unemployment then policy responses, like a universal basic income, may become more likely – but that is for another article.  In the meantime if workers are adaptable and invest in building transferrable skills, they can’t go too wrong.

 

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