The Nobel in Economics – Creative Destruction?

Reading over descriptions of the discoveries on which the newest Nobel awards were based, I was struck by two things. 1) The “discoveries” were pretty obvious. 2) The frequent use of the term “creative destruction” in describing those discoveries was a mistake.

As to the first point, let me hasten to add that economists often win awards for nailing down with mathematical precision the necessity and significance of things that are obvious. There’s nothing wrong with that. The publication being cited as critical to the current argument appeared in 1992. It's been around for a while, and has proven its worth..

But my dad, who spent almost his entire career as an analytical chemist at 3M, told me decades ago that 3M envisioned a three-year window of profitability for the new products it developed. From that point on, the Japanese or the Chinese would have figured out how to make the same thing cheaper. Hence the need for ceaseless innovation. In the business world, it falls under the category of "common knowledge."

On the other hand, the application of the term “creative destruction” to this process is simply a mistake. New products don’t “destroy” older products. They merely render them less popular, and sometimes obsolete. In many cases the older products retain a niche market among those who are nostalgic, or more interested in quality than in saving money.

The phrase “creative destruction” has a long history. Schumpeter popularized it in the field of economics almost a century ago. But the first time I can recall hearing it was in an episode of Northern Exposure (1992) during which Chris in the Morning hatches a plan to fling a cow. He later wimps out on the project and Maurice (the astronaut) gives him a dressing down for doing so. In the course of the discussion, Chris is reminded of Picasso’s oft-quoted remark: “Every act of creation is first an act of destruction.”

And that’s about the level of culture at which the phrase should remain, I think. It sounds bold, and the idea of destroying things appeals to many, especially those who aren’t very creative.

But what’s really going on when things develop isn't destruction but transformation.

It’s too bad Marx so badly misunderstood, sullied, and besmirched the concept of dialectic, because that’s the concept at work here. Maybe it's time we revived the associated concept, so dear to Hegel, of “aufheben.” Here’s how Wikipedia defines it:

Aufheben  or Aufhebung  is a German word with several seemingly contradictory meanings, including "to lift up", "to abolish", "cancel" or "suspend", or "to sublate." The term has also been defined as "abolish", "preserve", and "transcend". In philosophy, aufheben is used by Hegel in his exposition of dialectics, and in this sense is translated mainly as "sublate."

One analysis of the recent Nobel’s laureate’s work that I read goes like this:

 Economic growth in industrialised nations such as Britain and Sweden has been remarkably stable in recent centuries. However, below the surface, the reality is anything but stable. In the US, for example, over ten per cent of all companies go out of business every year, and just as many are started. Among the remaining businesses, a large number of jobs are created or disappear every year; even if these figures are not as high in other countries, the pattern is the same.

Aghion and Howitt realised that this transformative process of creative destruction, in which companies and jobs continually disappear and are replaced, is at the heart of the process that leads to sustained growth. A company that has an idea for a better product or a more efficient means of production can outcompete others to become the market leader. However, as soon as this happens, it creates an incentive for other companies to further improve the product or production method and so climb to the top of the ladder.

The process itself is easy enough to understand. The fallacy here is in imagining that things are being destroyed to make room for new things. Yes, people lose their jobs, companies go out of business. But the important thing—the expertise those workers possess—remains alive and active in the workers themselves, who make use of it when they get rehired at the start-ups that have been driving the less innovative firms out of business.

As Hegel envisioned it, this is a process of negating and rising above, while retaining and expanding on whatever remains useful of the older process or vision. Plenty of other phrases could be used, and would be more appropriate, than "creative destruction," to describe this process, though they would have quite the same journalistic zing. 

I suspect our newest Nobel laureates would agree.