Creative Destruction Strikes Again


Tim J. Smith, PhD
Founder and CEO, Wiglaf Pricing

Published May 9, 2016

Market economies are beautiful in their ability to unleash human creativity to address human needs.  Markets have demonstrated their ability to reduce acid rain caused by sulfur dioxide pollution.  They have demonstrated their ability to reduce costs through competition.  Their dynamic nature makes them better than any centrally planned economic system in getting humans what they want, when they want it, and in the form they want it.  Yet, they are also destructive.

Schumpeterian Forces Are Alive and Well

Long before Clayton Christensen tried to own the term “disruptive innovation” in his 1990’s book “The Innovator’s Dilemma,” even before Blixa Bargeld named his 1980’s band Einsturzende Neubauten which translates into “Collapsing New Buildings,” there was Joseph Schumpeter.  An Austrian economist, Schumpeter noted the creative destructive nature of markets in his 1942 book Capitalism, Socialism and Democracy.

What is this creative destruction Schumpeter would refer to today?  Just look at some of the winners and losers in today’s tumultuous markets:

  • While Hon Hai is buying a big share of Sharp in response to the growing mobile computing market, 12,000 people are losing their job at Intel due to the decline of the PC and the rise of mobile and server computing.
  • Solar power generation in Germany, China, Jordan, and others have helped grow global capacity at 26% just last year. Simultaneously, fracking in the U.S. has led to the growth of natural gas powered electric plants.  These two trends and others are reducing the global demand for coal and simultaneously reducing the growth of carbon dioxide emissions.  While this is great news for most and probably beneficial to our environment, it means something else for the coal mining industry.  If you are an employee in this field, you are facing job losses of between 13,000 and 17,000 in the U.S. alone as firms like Peabody Energy, Arch Coal, Alpha Natural Resources and others go into bankruptcy.
  • While Uber and Lyft are growing like weeds and valuations have risen from non-existent to $62.5 billion and $5.5 billion respectively in 2016, taxi medallions in NYC and Chicago have fallen from $1.05 million to $500K and from $360K to $50K respectively between 2013 and 2016. Taxi services globally are in retreat while taxi drivers are in protest as ride sharing services advance.
  • While Amazon and Alibaba continue to grow, Borders is history and Barnes and Noble is a fraction of what it was a few years ago.
  • Quinoa is the new super food while sales of white bread is falling in the west. This is great news if you are a Bolivian farmer.  This isn’t so great if you used to work for Interstate Bakery, the past makers of Wonder Bread.

We celebrate the winners.  We lament the losers.  And the creative destructive force unleashed by markets marches forward with complete indifference.

(For a discussion on the benign indifference of natural forces, I suggest you read the works of Stephen Crane or Emile Zola).

Globalism and Technology Revolution

Since the middle of the last century, two mega trends have been driving the creative destruction engine more than most. These are globalization and technological improvements.

On one hand, almost every sane economist would agree that the increases in global trade and technological improvements have improved human life.  We have more variety in goods and services, more access to them, and lower priced goods and services thanks largely to these two mega trends.

On the other hand, no sane economist would deny that globalization and technology have created losers.  Once safe jobs in manufacturing in the west are gone or dwindling (In the 1950’s, manufacturing jobs accounted for 34% of the U.S. workforce.  By 2015, they accounted for less than 9%).  Likewise, the need for accountants, secretaries, and mid-level office managers has been replaced with a demand for accounting software, office productivity software, and business process re-engineering efforts.

Political Failure

The fact that economic progress creates winners and losers appears to be lost in political discourse on both the left and the right.  Political discourse seems to believe we can all be winners all the time.

From protectionist plans to tax imports to anti-immigrant plans to restrict worker mobility, political groups have been trying to turn back time to simpler, less dynamic economy.  The beauty of market economies is the freedoms they offer.  Restricting those freedoms runs directly counter to the value of being free.

Other political groups suggest massive redistributive taxes which could alleviate some of the pain of economic transitions and leave us better off.  Unfortunately, too often the specifics of the plans offered have been repeatedly proven to harm the economy, not make it better (Unless you define better as “Before we had rich people and poor people, now we are all equal, albeit, very poor.”).  Better approaches to mitigating the destruction in creative destruction can be defined, yet they receive little political merit compared to the mantras of “tax the rich” or “free education for all.”

This isn’t just U.S. political discourse.  We see similar discussions in Venezuela, Brazil, Hungary, France, and Thailand.  Across the globe, the economic turmoil created by globalization and technological improvements has been receiving a political backlash of protectionist, anti-immigrant, and punitive taxation policies.

We can’t have the economic progress created by markets and punish those markets at the same time.

Business Success

In contrast, the fact that economic progress creates winners and losers appears to be ingrained in the business community on both the developing and developed nation side.  Knowing that markets create winners and losers, naturally businesses compete to be on the winning side of that equation.

Global supply chains have been developed to harness comparative advantages between regions across the globe.  Software and hardware design in Silicon Valley are matched with software coding in Hyderabad and manufacturing in Szechuan. Manufacturing firms in high labor-cost countries have increased their focus on highly-engineered and high-precision products while leaving lower value-add activities to lower cost countries.

Innovation has become a major thrust in many globally leading firms.  Innovation in power generation.  Innovation in utility metering and the smart grid.  Innovation in pharmaceutical therapies.  Innovation in pricing technology.  Innovation in agrochemical.  Innovation in oil exploration and recovery.  Innovation in commercial aircraft.  Innovation in green technology.  Innovation in driverless cars.  Innovation in the “Internet of things.”

And while big business may seek to avoid unexpected events, entrepreneurs embrace them.  When surprise events occur, entrepreneurs see opportunity.  Surprises lend to an entrepreneur’s belief in their own ability to apply imaginative thinking, and transform the unexpected into new opportunities.

Embracing Creative Destruction

To embrace creative destruction is a choice.  We can either lament that we fell on the destruction side of market forces, or we can throw ourselves into the creative side of market forces.

When market forces destroy your industry, embrace it as the opportunity to create a new path — don’t wait for some third party to have pity on you and fix it for you.  Fix it yourself.

Unless you are suffering from a serious disability, I believe you can do it.  And, even if you have a disability, you may be able to find something wonderful to create.  Just look at BraunAbility.

Embracing the creative destructive nature of markets is a choice.  A difficult choice.  A tumultuous choice.  And a hopeful choice as well.

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About The Author

Tim J. Smith, PhD, is the founder and CEO of Wiglaf Pricing, an Adjunct Professor of Marketing and Economics at DePaul University, and the author of Pricing Done Right (Wiley 2016) and Pricing Strategy (Cengage 2012). At Wiglaf Pricing, Tim leads client engagements. Smith’s popular business book, Pricing Done Right: The Pricing Framework Proven Successful by the World’s Most Profitable Companies, was noted by Dennis Stone, CEO of Overhead Door Corp, as "Essential reading… While many books cover the concepts of pricing, Pricing Done Right goes the additional step of applying the concepts in the real world." Tim’s textbook, Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures, has been described by independent reviewers as “the most comprehensive pricing strategy book” on the market. As well as serving as the Academic Advisor to the Professional Pricing Society’s Certified Pricing Professional program, Tim is a member of the American Marketing Association and American Physical Society. He holds a BS in Physics and Chemistry from Southern Methodist University, a BA in Mathematics from Southern Methodist University, a PhD in Physical Chemistry from the University of Chicago, and an MBA with high honors in Strategy and Marketing from the University of Chicago GSB.