Joseph Schumpeter is credited with the theory of the creative destruction of capitalism, previously discussed in my August 7, 2012 posting. Schumpeter based the theory on the teachings of Karl Marx, who first focused on the destruction aspect: lost jobs, bankrupt companies and vanishing industries. Schumpeter and his followers acknowledge the destruction, but emphasized the long-term benefits of the process: economic growth, enhanced productivity, improved products, better jobs and economic wealth.
The destructive aspect of capitalism means that some individuals will be worse off, not only in the short term but maybe forever. Schumpeter’s followers caution, on the other hand, that attempts to preserve jobs and protect industries will have an adverse effect on economic growth and result in stagnation.
Schumpeter coined the phrase “technological unemployment.” This is unemployment that results from technological changes. Take, for example, a large law firm. When I started practicing in 1982, there typically were two secretaries for every lawyer, and some partners insisted on not sharing. Secretaries answered the phone, made appointments, created “distributions” (sets of photocopied documents distributed by Federal Express) and typed on memory typewriters. We sent lengthy documents down to Word Processing (or the “typing pool”), where typists used a mainframe and proofreaders stood by to blackline documents. For immediate written communications, we used telex. Although ubiquitous faxing was still on the horizon, the big development in 1982 was the linkage between the telex terminal and the mainframe. This meant that you could review the telex before it was sent, thereby avoiding catastrophic typing mistakes. (There are many historical legal cases about a telex that omitted a “not” or added a zero.)
In 2012, our law firm has no secretaries, typists or proofreaders, although it would be helpful to have an admin. We do our own word processing and blackline documents using comparison features included in an off-the-shelf version of Microsoft Word. We can schedule and track our appointments and maintain our contacts using one of many platforms (I use Apple); they all work well. And of course, we can communicate instantly through the Internet (or texting), and can distribute documents by attaching them to emails as Word documents or PDFs. I have sent maybe 5 FedEx packages over the past two years.
Consider the role of computers in a law firm over the same 30-year period. The mainframe facilitated word processing and accounting. Soon PCs appeared on the secretaries’ desk. Then associates (and younger, or tech-savvy partners) demanded them. Significant word processing was still handled by a mainframe (linked locally to PCs), until desktops had enough processing power. Only after the implementation of email, facilitated by the Internet, could computers communicate beyond the law firm’s network. As late as 2006 one of my former partners – who was a technology lawyer! – required his secretary to print off his emails and type his responses.
One of the primary drivers of rapid technological change was first described by Gordon Moore in 1965 and is attributed to him. Moore’s Law postulates that the computing power of integrated circuits (chips) doubles approximately every year and a half, at no increase in cost per integrated circuit. Although there are many different formulations of Moore’s law, think of it as computational power doubling every 18 months at the same cost. (Some have noted that computational costs had been decreasing for several decades prior to 1965, from relay computers in the 1930’s, to vacuum tube computers in the 1940’s, and transistorized computers in the 1950’s.)
This phenomenon has continued, virtually unabated, for decades. It helped fuel the dot com boom, but it continued after the technology bubble burst. The Great Recession didn’t slow it down.
And therein lies the problem. One effect of the technological change predicted by Moore’s law is the creative destruction of jobs.
Unemployment statistics are, as the name implies, static. A recession causes economic contraction, leading to layoffs and hiring freezes. When the economy recovers, the American public expects companies to re-hire employees, or hire new ones, to replace the lost jobs. When this doesn’t happen we have a “jobless recovery.” And yet somehow corporate earnings increase, often exceeding pre-recession levels. Politicians may blame it on “evil” offshore outsourcing. And there is some of that. Or maybe a lot of that, as companies seek lower-cost labor alternatives in a global economy.
But one of the leading factors is that some of the eliminated jobs no longer exist. The functions performed by the employees have been automated. Companies facing declining revenues look for ways to reduce costs, and often a reduction in force is one of the most effective ways. Many of the functions performed by the terminated employees must still be performed. The company looks to automation, often through software driven by the increasing computer-processing power predicted by Moore. Some of the terminated employees will never be rehired.
This posting is not intended to be a downer. Over time, the economy (if not overly shackled) will generate new jobs. And they are usually better jobs. According to economists W. Michael Cox and Richard Alm, with the adoption of computers, we saw the decline not only of adding machines, calculators and slide rules, but also assemblers, millwrights, clerks, and tinsmiths. Ultimately, the economy gained jobs for programmers, computer engineers, electrical engineers, software designers and developers, graphic designers, among others. These are better jobs, but they require new skill sets.
Where will the new jobs come from? It’s hard to say. But if I get any insights I will let you know.