Creative Destruction

[Music]

Hello. I'm Philip Coelho,

I'm an economic historian at
Ball State University.

Today, I'm here to talk about

creative destruction.

Economists talk a great deal
about the term

creative destruction. Creative destruction

is a centerpiece for modern thinking

about how economies evolve, but

what is creative destruction?

It seems somewhat of an oxymoron.

[Shattering glass] [Quiet music]

Well, not quite. Creative destruction is

an economic principle

that an economist, Joseph Schumpeter,

observed in 1942.

The opening up of new markets, foreign

or domestic, the organizational
development

from the craft shop and factory

illustrate the same process of industrial

mutation that incessantly
revolutionizes the

economic structure from within,

incessantly destroying the old one,

incessantly creating a new one. The

process of creative destruction is the

essential fact about capitalism.

It is what capitalism consists of

and what every capitalist concern

has got to live in. What do you mean
by that?

Step back a second and see if

what Schumpeter said over

70 years ago can still be applied today.

Take the ice industry in the
United States,

for example. Ice production has had

a very interesting and unique history

over the past several hundred years. Today,

Americans consume tens of thousands

of tons of ice every day.

Ice consumption has become a regular

part of the American daily life, as ice

has hundreds of uses, including

keeping food and drinks cold and icing

injuries. Ice has not always been

this readily available to the
average person.

Back in the 16th century,
wealthy individuals

would build personal ice houses

on their property, cutting ice from

nearby lakes and ponds in the
winter months

and transporting them to ice houses,

storing it for use during the
summer months.

The commercial ice trade then began around

1800 in the United States. Large-scale

ice mining operations sprang up,

concentrated mostly in New England.

These ice producers transferred ice

throughout the United States and much

of the Caribbean. By 1818,
ice was fetching

nearly 25 cents per pound in the

United States. That seems kind of

affordable, 25 cents per pound. Well,

compare that with what ice costs today.

Ice currently costs about
10 cents per pound,

even though we've seen inflation

approximately 1,800% since then.

The average income per capita

in the United States in 1818 was

$1,919 per year. Comparing that with the

United States today it is

$49,965. What does it mean?

Well, if we look at the price

of ice as a percentage of income today

compared to 1818, we found that one pound

of ice took more than 65 times

more income in 1818 than it does today.

That is, if you buy ice commercially.

In-home ice production is even cheaper.

This means that in 1800's, ice

could only be afforded by the wealthiest

of individuals, and even then, only in a

limited capacity.

Well, now that we've established how much

cheaper ice is than it was 200 years ago,

let's look at how many people are employed

in the industry over the years.

In 1914, near the height of the commercial

ice industry, there were more than 2,500

companies producing ice, employing

approximately 30,000 Americans.

Then, in 1950, the automatic ice maker was

developed. By 1965, its use was widespread

throughout the United States.
This innovation

dramatically changed ice production in

the commercial ice industry.
Today, the ice

industry is vastly different. The majority

of ice is now being produced by personally

owned ice makers. With the onset of home

ice makers, thousands of ice workers lost

their jobs. Today, there are about 500

commercial ice producers

that employ just over 7,000 workers.

That is more than a 75% decrease
in employment

in the ice industry from 1914 to today.

This is creative destruction on
full display

in the modern day. The massive ice

industry of the early 1900's would

be replaced through innovation,

and now we enjoy a much higher standard

of living because of it.

Consuming more ice at a lower price

and a higher quality than we ever have

had before. Even though thousands

of jobs were lost in the process,

society as a whole has been made

better off. Schumpeter knew that

at times the process of
creative destruction

on society would be painful,
especially in the short run.

Creative destruction occurs in all

kinds of industries today,

and some individuals might be
made worse off,

not just in the short-term

but perhaps throughout their lives.

But he also knew that without creative

destruction that our economies

would stagnate and we would never

experience the growth and

higher living standards

that this process enables.

[Music]