Creative destruction

A former student writes:

"I was hoping to get an interview with an economics professor who would be able to give me an educated opinion for my article. The topic is streaming movies vs. DVDs. Huge companies like Blockbuster have declared bankruptcy following the creation of companies like Netflix and Hulu."

While I have very little familiarity with delivery of entertainment (beyond that of an occasional user) I do have familiarity with the work of Joseph Schumpeter. It seems to be that the above question asks for an opinion on the role that entrepreneurship, innovation and discovery play in the process of economic change.

My thinking begins with the costs and benefits of economic change. The evolution or more rapid revolution of change that Schumpeter labeled the gale of creative destruction creates first and foremost anxiety and fear. Thinking about the impact that DVDs had on the marketplace at the time of their introduction I recall my worry about having to replace my small library of videos, replacing my VHS player with a DVD player (I selected a model that was a combo VHS/DVD player) and my concern about all my family videos that were recorded on VHS. I thought to myself, how much will this new technology cost me in terms of time, money and angst. Click here for a 1999 blog posting on this topic. And I am only a small part of the demand side of the market. Think about the supply side - manufacturers of VHS tapes, suppliers of materials to these manufacturers, marketing and distribution.

The example above is a classic one that illustrates creative destruction and the costs and benefits. Schumpeter recognized that often the benefits of an innovation were in the future (in 1999 most of the DVD use and benefit lay before us) while the costs were immediate.

Thinking about the current transformation in delivery of entertainment from a physical media to a delivered media (a process currently underway) it is worth reflecting on the current costs, future benefits and incentives for further evolution or revolution in the delivery of entertainment.

Douglass North explored the nature of change which he called non-ergodic (a fancy word for unpredictable) and I would suggest that considerations of the current and future emergence of delivery of entertainment keep this unpredictability in mind. The pace of change is accelerating - "the cloud", "googlization", and "artificial intelligence" are manifestations of emergent and continual change - the gale of creative destruction that Schumpeter associated with dynamic, liberal society. Larry Page, the quintessential big thinker, sees the day when we will all expand our horizons and knowledge through technology, if a chip can be implanted in our pets to maintain their security and location, Page reasons, why not a chip in humans that connects to the power of information and "wisdom" on the web.

My opinion - innovation and the accompanying change are processes that have costs and benefits, create temporary winners and losers and, most often but not uniformly lead to progress in the future. Entertainment in the 1910s in the US centered around black and white silent film, phonographs, live plays, novels and literature, conversation, and contemplation. Today, many of these modes of entertainment have been replaced by processes such as streaming media. Clearly there are costs and benefits to this gale of creative destruction and, most observers, would agree that the benefits have outweighed the costs and the gains to winners in this evolutionary process outweigh the losses to the losers. That said, we can be confident that our children and grandchildren will not by using current streaming technology for their entertainment, at least in current form.

Relevant works

Cox, W. Michael and Richard Alm. Concise Encyclopedia of Economics: Creative Destruction

Levy, Stephen. In The Plex: How Google Thinks, Works, and Shapes Our Lives

North, Douglass Understanding the Process of Economic Change

Roberts, Russell (EconTalk podcast) http://www.econtalk.org/archives/2007/10/mccraw_on_schum.html