Sharing the Gains of Creative Destruction

Change. Hero or villain? Love it or hate it? The unequivocal answer is -- it depends.

When it comes to the world’s economies, there is no question that change is the route to rising living standards. The great economist Joseph Schumpeter once called the changes that rip through most economies “a gale of creative destruction”. He was right.

Think about the world’s automobile industries. The once-mighty Ford and General Motors companies are staggering, overwhelmed by change. Ford makes gas-guzzling sports-utility vehicles that Americans don’t want to buy because petrol prices have soared. General Motors is weighed down by costs and obligations it accepted in the  days when unions got what they wanted because GM had the power to pass on cost increases to consumers who had never heard of Toyota, or BMW, or Mercedes, or Hyundai.

Then the world changed, and customers suddenly have a range of choices they could never imagine just a few years ago. Good thing, or bad thing?

Well, if you are a Ford or GM worker who has devoted a lifetime to the company, it is definitely a bad thing. If you are a consumer, it’s clearly a good thing -- more car for the money, more choices.
Or think about airlines. Since America deregulated air fares, millions of grandmas can get to see the grandchildren at Christmas. And since the low-cost carriers entered the European market, trips to pleasant climes are affordable by most people. Great news for grandma and sun worshippers, bad news for airline pilots, who have seen their pay and pensions shrivel.

Then there is China -- and Wal-Mart. Microwave ovens by GE -- in your choice of colour -- for £100. Trainers and t-shirts for a fraction of the price that old-line retailers, selling goods made in the good old USA, charged.

Good news for consumers, bad news for the little old lady who sewed shirts in North Carolina, or the mom-and-pop, village store in the near-by town.

It is this hard fact -- that change creates both winners and losers -- that explains the rising protectionism that has brought negotiations for a new trade agreement -- the so-called Doha Round -- to a grinding halt. Consumers would benefit from freer trade. So would workers in export industries. But many workers and companies would be on the losing side of the ledger.

How, then, to cope with change? The answer is to find some way of transferring some portion of the gains of the winners to the losers.

One way is to fund job retraining programmes for workers displaced by change -- computer and high-tech jobs being the most obvious. Another way is to impose a modest tax on imports, and use the funds to finance early retirement for displaced workers, or retraining programmes that would bring their skills into the 21st century.

But the sure way to prevent improved living standards would be to try to stop change -- to insist that our horse-and-buggies are better than cars, that petrol-fueled cars are better than those running on other fuels, and that high-cost tiny retailers be preserved from competition by big, efficient stores.