Taking Stock: A brief history of creative destruction

Dear Mr. Berko: In the past 50 years, I've lived through at least seven recessions -- but never one like this, which has economists mumbling to themselves. There are 20 million unemployed; interest rates are zero; home prices keep falling; consumer sales are flat; and wages remain on the decline while company profits zoom.

Simple greed and the housing/mortgage mess can't have caused this recession, which is shaping up to look like it may be with us for a long time. I'd really appreciate your thoughts.

WP, Durham, N.C.

Dear WP: Few folks have heard of Joseph Schumpeter, an Australian economist whose concept of ''creative destruction'' precisely explains today's economy. This recession is the great tsunami that happens once every 50 to 60 years and causes organic and structural disruptions in our culture and society that each time leave us in more pain than the previous tsunami.

Joe explains economic growth in terms of extended periods of technological revolution. He says capitalism is a series of long waves, each lasting about 50 years or so. These waves of technological revolution cause gales of creative destruction in which old industries (i.e. cassette tapes, film cameras, land-line phones and so on) are swept away and replaced by new industries.

In the process, economic activity is ramped up, and more workers become employed -- workers who purchase more goods and services, which in turn increases demand, resulting in the employment of more people.

Joe tells us that the first gale of creative destruction (GCD), between the 1780s and 1840s, was fueled by steam power. The efficiency and productivity of the steam engine grew our GDP fivefold and created a fourfold employment gain.

The second GCD, between the 1840s and 1890s, was carried forward by the railroads, which replaced the wagon train and stagecoach and made it possible for people to move raw materials and finished products more cheaply and productively. During those 50 years, GDP exploded sixfold and employment surged fivefold.

The third GCD, between the 1890s and the 1940s, was supercharged by electrical power. This inexpensive and easy-access energy development increased manufacturing efficiency and labor productivity by orders of magnitude, paving the way for another sixfold surge in GDP and a fourfold growth in employment.

The fourth GCD, between the 1940s and the 1990s, was driven by cheap oil and the automobile. Americans relished their newfound mobility, populations moved to the suburbs and most families had two cars. During those 50 years, our GDP rocketed eightfold, and our workforce grew fivefold.

Today, we are being blown about by the fifth GCD, and that's information technology via the microchip. This wave is sweeping away all other technologies and industries and is transforming our social, cultural, political and economic climate. Today we're on the periphery of that wave.

So imagine, if you will, a letter sent from Paris to San Francisco 150 years ago. It would first travel to the Port of Marseilles; then across the ocean by boat to New York; then overland by stagecoach and Pony Express to California and finally to San Francisco. It would take 10 weeks, and the cost in today's coin would be $26.

Today we communicate by email. At a tap of the keys in Paris, electrons explode across a microchip at the speed of light, and billions of pixels race madly across your monitor, composing your letter and firing it off to San Francisco in a fraction of the time and at a fraction of the cost.

Now, apply this quantum technological leap over the next 20 or 30 years to medicine, chemistry, space and ocean exploration, and communication.

Since the invention of the printing press in 1440, global knowledge has doubled every 15 to 20 years. In the last 150 years, global knowledge started doubling every six to eight years. In the past 35 years, knowledge doubled every two years. In the next 18 months, the amount of new knowledge will exceed by a factor of two everything that has been learned since the birth of mankind.

And that knowledge will double again in the next 18 months. Creative destruction is the effect. Our ability or inability to process this knowledge is the cause.

Please address your financial to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com. COPYRIGHT 2011 CREATORS.COM

Published: Thu, Sep 22, 2011

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