Saturday, August 27, 2011

Apple Computer, Steve Jobs and Creative Destruction

The presence of Adam Smith's "invisible hand" in free market based economies implies, even requires, that there will be "creative destruction," a term credited to Austrian-American economist Joseph Schumpeter.

Creative destruction simply confirms that innovation is an inherent part of capitalism, a process that rewards winners and crushes losers. Although the short term effects of competition are often brutal, creative destruction is a definite positive economic force for the long run.

Of course, the problem is that we live in the here and now. So when factories close and jobs are lost, Wal-Mart's arrival puts the local retail store out of business, cars replace the horse and buggy, typewriters are obsoleted by personal computers, cell phones replace land line phones, and so on, many very real people are affected immediately and negatively. But that's the way competition and innovation work.

Schumpeter taught that an integral feature of market based economies is change, or constant innovation. These improvements inevitably lead to an out-with-the-old-and-in-with-the-new effect, or the utter destruction of the status quo. Creative destruction not only does happen in a competitive market, but in fact it has to happen. Capitalism is sometimes brutal in the short term, especially for those on the losing end.

As an example, Sam Walton of Wal-Mart put lots of small and big retail competitors out of business. Similarly, Apple Computer and Steve Jobs have had a profound impact on the "losers" in the digital revolution with Macs, iPhones, iPads and iTunes, for instance.

The Importance of Jobs says this about what we can learn from entrepreneur Mr. Jobs, "One lesson here is that most successful business leaders often have many failures, large and small, along the way. The difference is that they learn as much from failure as they do from success. Another lesson is that the future belongs to risk-takers, who sense opportunities when others sense only folly or danger." See also Where Some Earn Enmity, Jobs Won Affection.

Later, it goes on, "Mr. Jobs's career is also proof of that classical economics concept known as Say's law--in distilled form, that supply can create its own demand. We live in a time when government, urged on by our most famous economists, has devoted trillions of dollars to reviving growth by conjuring consumer demand....But the real sources of prosperity are breakthroughs that create products or services for which there is no current demand....The current economic malaise has made Americans doubt our ability to grow and prosper as the country always has. As long as we remember that the source of that prosperity comes not from government managers but from restless, relentless individuals like Steve Jobs, we will."

Schumpeter long ago described the driven entrepreneur as possessing the impulse "to succeed for the sake, not for the fruits of success, but of success itself.... the joy of creating, of getting things done, or simply of exercising one's energy and ingenuity." Jobs fits that description well.

In a recent posting, we compared the competing views of Adam Smith the capitalist and Karl Marx the socialist. Smith would have identified closely with Steve Jobs, as would have Joseph Schumpeter.

Karl Marx would not have liked Mr. Jobs at all. Nor, I strongly suspect, would Jobs have thought much of Marx.

Thanks. Bob.

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