67. What Is Creative Destruction?

Sometimes the old ways of doing things have to be destroyed to make way for new and better ways. We see this all the time in our economy when innovation replaces outdated practices. This “creative destruction,” as it is often referred, is what helps fill our world with an endless variety of goods and services that are always improving to meet the needs of consumers like us.

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Links:

• Joseph Schumpeter
• Millennials Aren’t Killing Your Favorite Business

Here’s a transcript of our conversation:

Brittany: Hi Connor.

Connor: Hey Brittany.

Brittany: You know, when I was a kid, I remember my favorite part of the weekend was going to the video store after school with my parents, picking out a VHS or two to rent, and then going home and just watching ’em and eating popcorn all weekend. And I know you can probably relate to this memory of mine, Connor, because we’re both a little bit older, I think, than many of our young listeners, but I know that to a lot of you guys, what I just said probably sounds like gibberish. Cuz these days, if you wanna run a movie, all you do is go online, see what Netflix has, and if Netflix doesn’t have it, you just go to Amazon Prime and rent it. But when we were kids, we used to have to go to a physical store and rent these big bulky videotapes and later DVDs. And then I don’t think, actually, I don’t think I even rented a DVD, to be honest with you. I think it was just VHS tapes. But nowadays, we don’t have video stores anymore, right? These are a thing of the past and we don’t have them because we don’t need them anymore. I have really good memories of what was called Blockbuster Villa Video and Hollywood video, right? But now I don’t need that, right? All I have to do now is pick up my computer, go on my smart tv, click a button, and I have everything. I mean, it’s pretty cool, right?

Connor: I, this reminds me, I got a photo from my best friend just a couple of weeks ago, and he was going through and cleaning out all of his supplies, like in the basement. They’re getting ready to move. And he sent me this photo and it was this folder of CDs, right? with the plastic covering like, you know, four and a grid and flip it over. There’s four on the other page. And I had burned him all of these DVDs even, you know, what does that mean, burning CDs, excuse me, all these CDs of music, kind of this little mix tape playlist kind of things. And that was like our fun road trip music one year that we did. And even seeing that brought back so many memories of driving in a car. And I would have this big fat, thing sitting under my chair that I had to slide out, flip a page, flip a page, flip a page, find the CD I wanna listen to. I get a kick out of watching movies these days and pointing out to my kids and having to explain to them what these different things are. Like that telephone with a chord, right? Like that’s how it used to be, right? You used to be like glue to the wall where you could only stretch so far. I remember it. Even if you look in certain applications like Microsoft Word or things like that, there are little icons that have analogies or they’re made that way based on the way things used to be. So the save icon is this little like, square-looking thing. And you know, kids have grown up today, just saying, oh, I guess that’s the save icon, but not realizing that is designed in a way to look like a floppy disc, where, you know, yeah, back in the day when we were kids, you’d have to load Oregon Trail onto the computer and it was these, these big discs that had like one megabyte if you were lucky. And, you’d put that in. And so the save icon is a way to resemble like saving it onto your floppy disc so that you can, you know, save your place in Oregon Trail or whatever your game is, But the interesting thing for me with all this, Brittany, is like, things move on. Obviously. Like, you know, any, old person can share stories like this. I’m sure some of the parents

Brittany: Back in my day, right?

Connor: Yeah, we’re all giggling. Like, oh, remember how things used to be. But I think the more interesting point here is like, there are some people, right, who want things to stay the same. They’re worried when the way things used to be kind of get, ruined or, undermined. and there’s a term for that, Brittany, we’re gonna talk about creative destruction. So what does that mean and how does it relate?

Brittany: Yes. Well, I love that term and it’s one of my favorite cool, I consider it an economic term, but it really isn’t. You could use it for everything. So creative destruction is when you destroy something outdated and instead you build something new or better. So video stores, we don’t need them anymore. They’re literally being torn down because now we have Netflix, it’s creative destruction, right? We’ve destroyed something. But with creativity, we’ve brought something new to the table and we’re seeing this, I mean, everywhere, especially now, especially as, technology has kind of taken over everything. I mean, look at audiobooks and eBooks. You know, there was a time when you had to bring books with you on an airplane. Physical books. I don’t do that anymore. I don’t know about you. I just bring, you know, my Kindle or even my, my audible, I do the audible app on my phone and I have, you know, books read to me. So it’s not that I’m not reading, it’s not that I don’t like books anymore, it’s that we found a better way to consume them. So it’s interesting all the different ways that we’ve seen this happen in our modern world.

Connor: Yeah, I still bring paper books,

Brittany: I have friends who are paper-book people. I, can’t do it anymore.

Connor: So what’s interesting to me here is that there are people who resist this. There are people who do not like, technology, they don’t like automation, they don’t like improvements because they perceive, and we’ve talked about this before, they perceive that machines, computers, automation are a threat to people’s jobs. They, fear that you know, when McDonald’s replaces the cashier and the, you know, the cashier with the touchscreen that, customers can use themselves to order their food. Or even now, you know, the lion chefs flipping the burgers are being replaced by robots who can

Brittany: That’s right. Yeah.

Connor: Make hamburgers all by themselves. And so there are people who look at that and say, that’s bad because it’s replacing someone who has a job, to which I say, we used to ride around on horses and carriages, right? And now we have computers. And you might have said, oh, all the little carriage drivers, they’re gonna lose their jobs, and the poor horses, they’re not gonna have anything to do. But there’s no one today who would say, we should go back to the way things were. Because even the curmudgeons, even the people who are like, you know, creative destruction is bad cause it’s still destruction, it’s, you know, removing someone’s job. You give them a few years to kind of get off, used to the new world, the new way of doing things, the efficiencies, the cost savings, uh, the conveniences, right? Give it a few years. And even those same people then look back and are never gonna try and argue to go back to the way things were because these new things just improve everyone’s life. I remember in fact, Brittany just the other day, I was driving with, my family on the freeway and we drove by a department store. And you know, the kids listening are like, what is a department? right? This is like, Sears or JC Penny, or Dillard’s. There’s these different big box stores. There’s another term for them where in decades past, the thing that we did was we would go hang out at the mall, we would go blow all of our money and you know, we’d go clothes shopping there and, everything. That’s, was the place to be. It’s the place where you got all your stuff. You know, I remember my mom would take me every year for our back-to-school, you know, clothing purchase, and we would just spend hours walking through these big box stores, finding all the right outfits and mix and match and, coordination and all that kind of stuff. And that’s, what dominated these companies had catalogs, mail, order catalogs where they would mail them out to that

Brittany: About catalogs. You had to call. Did you call in, did you mail in? How did you do it?

Connor: Yeah, early on you could, you could mail in or call. And then eventually it was over the web, where you could do it as well. And, it was extremely successful because before then, people were just going down to their little store down the road that had a very poor selection. Maybe they didn’t have the clothing in their size, they didn’t have the latest fashions. And so when the big box stores arrived, people loved them because they had so many different things and it was all in one place. You know, you could get appliances and a pair of jeans in one trip, right? And so it was an amazing improvement that everyone loved, until Amazon came around, right? And now you have, Amazon,  putting these companies and smaller ones out of business and you have people lamenting the past or, in other words, you know, they’re sad for the companies that are being, to use your term, you know, destroyed. These, companies are being destroyed and people are losing their jobs. And the way we’ve been used to it for so long is no longer what’s happening. But man, I gotta tell you the fact that I can click a button and then literally the same day sometimes, if not the next day or two days later, I get that thing. It’s amazing. I ordered this little gizmo for my door. My, kids swung the theater door open too far, and it’s starting to hit the wall. So I wanted to buy one of those little, like, hinge cushions so they can’t open the door all the way. So it kind of cushions the door. I went on Amazon, I found one for $2, literally the next day it showed up. I didn’t have to leave my house. I didn’t have to drive anywhere. Like I got this. And pretty soon it’s all gonna be by drones cuz Amazon got clear to start doing drones. How can anyone say that? That’s not amazing to have all of this convenience in your life? I don’t know, but there are people like that, that continue to make those arguments, right?

Brittany: Well, this is what I laugh about. So millennials, and I know a lot of our listeners are probably what’s considered Gen Z, or they’ll give it a new name and break it up again. But for people like you and I believe you’re millennials, well, we’re both millennials. We get blamed a lot for destroying things. rest chain restaurants, chain restaurants like Olive Garden or Red Lobster, things like that, or even paper napkins. So what happens is millennials stop using these items or stop buying these things, and then they go outta business, right? People don’t, buy napkins anymore. You know, this is a silly comparison, but I promise I have a point. So people instead, millennials buy paper towels, right? They do this because paper towels are cheaper. They’ve learned from the mistakes of their parents that hey, maybe I can save two or three bucks every time I go to the store by buying paper towels that use, you know, that can, I can use multiple for multiple things instead of napkins. So this is kind of what I see as creative destruction because we’re taking something that we realize just doesn’t really serve a purpose anymore. And we’re saying, you know what? We’re not gonna do it anywhere. We’re gonna do this better option. But what’s funny about this to me is there was three or four publications that wrote an article that said, millennials are destroying the napkin industry. They’re not buying napkins. And I’m sitting there laughing and I’m thinking like, is this a bad thing? We’re not buying napkins, but now we have more money to put in our savings account. You know, that’s two or $3 we’re saving every time we go to the store. So it’s funny things like that, it’s always interesting to see what people choose to get upset over. People just love to cling to what they know, but they won’t give up that there’s an option that maybe is even better than things that they know today.

Connor: And, there’s part of the term creative destruction that I’m only now realizing its power. So typically when we use the word creative, we’re thinking like, oh, my daughter was drawing, you know, all these different animals. She’s so

Brittany: Creative. Like art, like artistic, almost.

Connor: Yeah, artistic. Very, thank you. That’s a good synonym for what I’m thinking. We often use the word creative as a synonym for artistic, but creative has another meaning and that is tied to creation, which still works for the artistic site. If you’re, you know, drawing things, you’re creating, art and that makes sense. But creative destruction, one, company going under Sears and JC Penney going under, or CDs, you know, and VHS and all these things going under these things aren’t just dying and then no longer existing out of the destruction of that old way of doing things or the old technology or whatever. You have creation. And, that’s a twist on this term. I’m, only now as we’re talking, starting to realize I’ve used this term many times, but I’ve never really honed in on the importance of the word creative because it’s almost like the phoenix rising from the ashes, right?

Brittany: Yes, exactly.

Connor: You, you’re not just going around and people are losing their jobs and companies are being demolished and, capital or money is being, you know, malinvested. In other words, a lot of people are losing money and they bought stocks in a company that went under. Well, those resources, you know, if you think of like a home being demolished, if it’s demolished or taken apart the right way, a lot or most of those resources, the floorboards and all that kind of stuff can be reused.

Brittany: Oh, that’s a good point.

Connor: Something completely different. I had a friend who took his family’s old barn and out of all the wood was able to make these dinner tables, for the different family members.

Brittany: That Is awesome.

Connor: Yeah, I thought it was super cool. Like a little family memento. And, so he created something that was creation, born of the destruction of something else. It lives on. It has a different use, it’s improving people’s lives. They never would’ve visited the barn before, but now they have this, you know, wonderful experience. So I really like thinking about that people who criticize all this just focus on the destruction side. They look at the McDonald’s cashier and they look at that and they say that person’s losing their job. What they’re not paying attention to it’s a principle you and I have talked about before on this podcast. It’s like Frederick Bastiat says that which is San and that is unseen. What, people who focus on the destruction see is the McDonald’s workers losing their job, what they struggle with. Cuz they’re not very good economists, as Bastiat would say. What they struggle with is the thing that they can’t see, which is the new job that was created or multiple jobs for the company that’s producing these new little touchscreen things that those jobs didn’t exist before. That wealth didn’t yet exist, the technology didn’t exist. But we have all these new amazing things that yes, unfortunately, that particular cashier is gonna have to figure out a different job. But when you kind of look at the, at the bird’s eye view of the whole world or the whole economy, those people end up finding different jobs, maybe even a far better job. They learn a new skill. And now there’s a successful company over here making touch screens for restaurants that customers are way more happier about. Cuz you know, maybe they’re an introvert and they don’t like talking to people, including cashiers. and so I really like that, the creation side, we have to be a good economist. Like Bastiat said, we have to think about that which is unseen. What is, the unseen creation when you know, CDs are gone and Sears is gone and McDonald’s cashiers are gone, we can focus on the destruction or we can focus on the creation. I think that’s much more positive, but also, frankly, it’s a very real aspect of all of this.

Brittany: Yeah, absolutely. I think there’s two, one thing I wanna say before we do wrap up, I want people to know who coined the term. So a man named Joseph Schumpeter who I think is really important. He was not necessarily the same kind of economist as maybe bastiast, even Hyatt, who we’ve talked about before. But because he had such a strong belief in creative destruction, he understand how important it was or understood how important it was to the free market. I think he’s a really interesting person to look up. So I’d very much encourage our readers, and I’ll link something in the show notes, to look up Joseph Schumpeter

Connor: And we’ll link to that as well as, an article Brittany mentioned about, the idea that millennials are destroying everything. It’s a fun article to read. Head to Tuttletwins.com/podcast to make sure you’re subscribed. We’ll see you in the next episode. And until then, Brittany, always great chatting with you.