If Austrian economist Joseph Schumpeter is the father of creative destruction, then today’s entrepreneurs and inventors are his disciples. The term “creative destruction,” coined by Schumpeter in his 1942 book Capitalism, Socialism, and Democracy, refers to the dismantling of traditional business and economic models to make way for revolutionary technologies and innovative processes designed to vastly improve living standards.
We are living in the early stages of one of those historic periods. The Fourth Industrial Revolution, or Industry 4.0, has accelerated us into the digital age of manufacturing while seemingly boosting productivity, efficiency, competitiveness and the prosperity of nations worldwide.
Yet there is often an excruciating lag and prolonged learning curve between a new way of producing things—which initially displaces labor from the old economy—and developing a workforce with the skills required for the modern one. This is particularly true when workers lack a formal education or a skilled trade that would enable them to transfer their talent to the new economy.
Another obstacle is the prolonged reorientation of capital and other resources from one segment of the economy to the new kids on the block. Simply put, introducing modern technologies does not instantaneously diminish the pain of job losses or suddenly reap dividends when upstarts replace the incumbents.
This is why the benefits of technological innovation (advanced semiconductors and computer hardware) are difficult to gauge right away. In 1987, MIT Nobel Prize economist Robert Solow famously said, “You can see the computer age everywhere but in the productivity statistics.” Why is that? Solow alluded to the “productivity paradox,” where the anticipated economic gains from technology were being not fully realized.
Delayed Adoption and Acceptance
When Apple, Microsoft and Dell Computer burst onto the scene in the 1970-80s, computer usage was limited to early adopters or those who could afford a personal computer. The technology did not receive widespread consumer acceptance until the 1990s when prices came down and quality improved. When this lull in consumer acceptance was overcome, an enormous productivity boom followed.
Historically, we have witnessed the slow adoption, integration and growing pains of other general-purpose technologies such as steam, mechanization and electricity. Despite James Watts patenting the steam engine in 1769, the first significant commercial railway did not debut until 1830. Similarly, it took five decades between Thomas Edison patenting the electric lightbulb (1879) to when they became widely used by U.S. households in the 1930s. The electrical grid and its supporting infrastructure to light up homes was not widely available until then. Like past economic transitions, today’s digital wave and its industry laggards are struggling to catch up, boost their technological knowledge, and overcome similar barriers to adoption. Once they do, productivity will rise sharply as workers shift from lower-value to higher-value activities.
GDP: An Outdated Tool
Another explanation for the productivity paradox is that the Gross Domestic Product (GDP) is an outdated relic from the 1930s that fails to capture the intangible services of our economy that now account for 70% of total U.S. GDP. The GDP may be a proxy of success when reporting absolute income and wealth nationwide but neglects the aggregate nuances of income inequality, wage disparity, and sustainability.
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