Historical street in the United States with horses and carriages

Creative destruction: transforming a country

The U.S. Economy

In a macro (ie aggregate) perspective, this idea of creative destruction explains the transformation of an economic system over time. Consider for instance the U.S. economy.

Between the early 1900s and early 2000s, GDP per capita in the US increased by approximately 12 times. This remarkable economic development was accompanied by a dramatic change in the structure of the economy.

  • Employment in farming decreased from 11.5 million to 700,000.
  • Employment in railroad similarly declined by almost 2 million units.
  • Professions like carriage and harness makers, telegraph operators, milliners, cobblers, boilermakers, blacksmiths, and watchmakers (which together employed approximately 800,000 people at the beginning of the 20th century) almost completely disappeared.

At the same time:

  • 2 million jobs were created for engineers
  • more than 4 million jobs for truck, bus and taxi drivers
  • 3 million jobs for computer programmers and operators
  • almost 1 million jobs for electricians.

All of these professions simply did not exist (or were very small) in the early 1900s (find more data via Creative Destruction: The Concise Encyclopedia of Economics).

In a sense, America’s labour was “recycled” from some declining sectors and professions to other emerging sectors and professions. This recycling was crucial to support the growth of GDP.

How creative destruction can impact individuals

The problem, and policy challenge, is that this recycle was most likely only partial; that is, not all those workers who lost their job in the farming sector went on to become engineers, bus drivers, computer programmers, or electricians. For many, the process of creative destruction, so essential to the development of the economy as a whole, involves permanent losses.

In other words, to be able to develop, the economy must be ready to accept that some, perhaps many, individuals might be worse off. This obviously poses a dramatic policy challenge: how do we strike a balance between the winners and the losers of creative destruction? Before we tackle this question, we need to understand a bit more about the mechanics of creation and destruction, which we will look at in the next activity.

Your task

Do you know of any other examples of countries whose economy has undergone transformation due to creative destruction? What about examples of individuals you know of who have been impacted? Share these examples in the comments below.

Reference

Cox, W.M & Alm, R. Creative Destruction: The Concise Encyclopedia of Economics. Retrieved from http://www.econlib.org/library/Enc/CreativeDestruction.html)


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This article is from the free online course:

Exploring Economics: Will the Next Generation Be Worse Off?

Griffith University