10 July 2013

Could a Healthy Populace Make the Economy Sick? or - Schumpeter's Gales of Creative Destruction Played Out at the Level of Economies

Imagine that next week, a company announces that they've cured illness. They have developed a new nanotechnology that circulates throughout your blood and automatically detects and repairs illness and injury (from broken bones to ruptured arteries). It cost only $3,000 for the injection and from then on the nanotechnology is - itself - self repairing.

Assuming that it had the capacity, in its first year this new company would do two things. One, it would make  $900 billion for its American market alone, equipping each of the 300 million Americans with its technology. Two, it would wipe out a healthcare industry of roughly $2.5 trillion. (Yes. With a T. American healthcare costs represent nearly 18% of America's $15 Trillion GDP.)

So, in year one GDP would drop by $1.5 trillion and by year two it would be down by a full $2.5 trillion. Lots of great jobs (from biomedical researchers and doctors to X-ray techs and nurses) would be gone.

Here's the question: is the economy better? Is quality of life better?

Schumpeter introduced the notion of gales of creative destruction. Progress does not just create something new - it destroys something old. The automobile puts buggy whip makers out of business as carriages become cars. In the above example, its clear that - economically - an industry has been destroyed. It's less clear what - economically - has been created. Which brings me to software.

Software is an amazing (perhaps inevitable) development in the advance of civilization. Like the nanotechnology that continuously cures us, it has inarguably made life better. What it has done for the economy is less clear. I don't think that people talk enough about how disruptive it is to the labor market. Many of the jobs that were created since about 1900 were jobs in what we could call the Information Economy. Whether using typewriters or computers, telegraph or telephone, file cabinets or big servers, the tasks of creating, analyzing, editing, storing, retrieving, and communicating words and numbers, tasks that go under the umbrella of secretary, stock broker, inventory manager, purchasing agents .... the Information Economy created millions of jobs to replace the Industrial Economy jobs (which replaced the Agricultural Economy jobs).

Charles Babbage's Analytic Engine from 1833, predecessor to the computer (a replica)

Schumpeter's gales of creative destruction don't just work at the level of products, companies, or even industries. They work at the level of economies.

Software - or what IBM calls cognitive systems - is becoming more sophisticated. As it does, it replaces more Information workers.

One (non-trivial) reason that we need to become intentional about hastening the transition into an Entrepreneurial Economy is that software is forcing us to be more creative. It's what we need to do in order to retain market value. And among the many things that an Entrepreneurial Economy could create of value is jobs. There is still no "product" that simultaneously creates value, distributes income, and provides meaning to people the way that a job does. Automation - whether through the machinery that frees us from brute labor or the software that frees us from tedious labor - does not do that.

1 comment:

Lifehiker said...

Well said, Ron.

In a previous life, I implemented "software" and related changes that reduced jobs in my department from over 300 to just over 100, while handling considerably more transactions (business, for us). Good for the company, bad for the larger workforce.

My view is that there will not be enough products of entrepreneurship to bridge the employment gap if individual consumers have to buy them. In the new world, what is really needed are very expensive products that have shared uses and are crowd-funded in some way, either by government or some formal organization that accumulates the capital to purchase them - and pay for the new jobs needed to produce them.

Either that, or something like a revolutionary way to produce and sell or rent living spaces that people love but are also cheaper to build, power, and maintain.

So much of what entrepreneurs are doing today consists of personal services that have little bricks and mortar component and few ongoing maintenance requirements. To dramatically increase employment, I think we need larger projects that have both these components. But what?