Essays

Andrew Lu


The COVID-19 pandemic has undoubtedly changed how society functions at a fundamental level. There is widespread agreement that the pandemic has had severe consequences, whether socially, economically, or politically. However, a question remains: how have individuals sustained themselves in such unfortunate conditions? Despite the challenges, it is clear that society has found surprising new ways to endure these difficult times, often producing novel inventions that increase quality of life. The answer lies in creative destruction, which has arguably reduced economic damage through its innovative processes. By functioning as a catalyst, COVID-19 has additionally accelerated the rate at which creative destruction occurs in the economy.


Defining creative destruction


Austrian economist Joseph Schumpeter first coined the term “creative destruction” in his book Capitalism, Socialism, and Democracy. In it, he describes creative destruction as a process of innovation that brought forth new processes and products at the expense of previous processes and products (Schumpeter, 1942). Although this indicates that there may be short-term fluctuations due to job reallocations, failed companies, and destroyed industries, the overall economy would tend towards growth and development. Since then, the ubiquitous process has been an essential component in understanding how society develops. Aghion and Howitt (1990) outline a correlation between economic growth and creative destruction. Caballero and Hammour (2000) explore more technical aspects of creative destruction and suggest that reallocations within sectors increase productivity. The same economists also examine the importance of creative destruction in efficient economies, especially during recessions (Caballero and Hammour, 1996). These pieces of literature link the idea of a healthy economy to the presence of creative destruction.

Since the process is considered an inherent part of economics, there are countless examples throughout history. Perhaps one of the most prominent cases is the proliferation of Uber. The invention of this ride-sharing platform actively threatened the taxi industries in many countries around the world. Figure 1 shows the prices of New York City taxi medallions, transferrable American taxi permits, from January 2010 to August 2015. The prices have consistently dropped after 2014, demonstrating Uber’s “destructive” effects on the industry. It is important here to highlight the relationship between entrepreneurship and creative destruction. Schumpeter believes that entrepreneurs are the ones who introduce new inventions and induce creative destruction in an economy. Furthermore, this would lead to natural competition in the capitalist environment, inevitably causing certain competitors to lose. Within the context of Uber, the original founders were the entrepreneurs who constructed the platform, bringing to life a service that would compete in the multibillion-dollar industry.


The economy during COVID-19


Measuring the damage of the COVID-19 pandemic on the global economy is incredibly difficult, as there are only rough estimates. Szmigiera (2021) identifies several major industries that have been severely impacted by the pandemic, including the travel industry, tourism, and oil industry. These observations are quite intuitive, given that most cities have gone into lockdown in response to the viral outbreak. Flight, hotel, and event cancellations were estimated to be worth around $200billion (Ozili and Arun, 2020). The demand for oil was lower due to the fact that transportation had been halted. Unemployment levels were extremely high, which was the result of the previously mentioned problems. With companies losing revenue, they could not keep their employees, subsequently culminating in such high unemployment rates. A January 2021 Statistics Canada report estimated that minority unemployment levels were up to 20.1% for certain minorities.

Szmigiera also acknowledges that, although food services, commerce services, and healthcare industries have been harmed during the pandemic, they have made certain recoveries. This may initially seem illogical because these industries have theoretically become obsolete in a lockdown environment. The explanation for this phenomenon partially lies with creative destruction.


The effect of creative destruction in the pandemic world


There are two categories of businesses to examine in this section. Firstly, there are the businesses that developed new innovations during the COVID-19 pandemic, which replaced a previous product or process. This type of creative destruction directly occurred as a result of the pandemic and the circumstances it presented. Secondly, there are creative destruction processes that started prior to the pandemic but were simply accelerated due to the pandemic. The vast majority of innovations fall under this category, as they were not developed under the pandemic but were only popularized during it.

Under the first category, there are several case studies to examine. In many tourist-popular locations, individuals who are part of the industry have found new ways to continue working despite international lockdowns. One specific solution was involved virtual tourism (Kwok and Koh, 2020; Rezaei et al., 2021). Through virtual tourism platforms online, tourists from around the world can virtually explore locations of interest. In many scenarios, special technologies may be utilized, such as the 360-degree VR videos and 3D virtual worlds discussed by Kwok and Koh (2020). In the healthcare industry, doctors and physicians have been able to use technological innovations to more effectively treat patients, regardless of the fact that the in-person consulting industry has been reduced significantly. Short and Mammen (2020) explain that AI-based chatbots were implemented online, providing 24/7 care and increasing patient interactions. Moreover, the chatbot includes a self-assessment tool for COVID-19 and can direct patients to other resources if needed. Similarly, education and tutoring services around the world have migrated onto online platforms to adapt to these circumstances (Kodri, 2020). The overall trend in these industries is a shift to an innovative online platform while simultaneously reducing the usage of previous processes. This is a textbook definition of creative destruction, and it is likely why many workers are still able to make money during the pandemic.

In the second category, there are prevalent examples of COVID-19 accelerating creative destruction. Prior to the pandemic, the introduction of the e-commerce industry threatened physical retail industries and blue-collar jobs. Companies like Amazon and Alibaba were created by entrepreneurs who believed in the potential of online shopping, contributing to creative destruction in the industry. More recent literature supports the idea that e-commerce companies have actually grown during the pandemic (Bhatti et al., 2020; Chowdhury et al., 2021). The same is happening to food delivery services. With in-person dining services discontinued through lockdowns, services such as UberEats and DoorDash grew at great rates. Figure 2 shows that the top four American food delivery services saw a collective increase of $3billion in the second and third quarters of 2019 (Sumagaysay, 2020). In contrast, revenue from dine-in services fell considerably (Figure 3). In a way, COVID-19 can be thought of as a catalyst for these recent developments. It has increased the rate at which creative destruction occurs, favouring companies that are more adapted to the COVID-19 environment and have already begun innovating. Companies and industries that have already been on the decline are now further punished by the pandemic.


It is important here to highlight the benefits of creative destruction. By engaging in creative destruction processes, there is a certain amount of economic growth that offsets the overall losses. Two additional benefits emerge from this creative destruction: a) the establishment of efficient practices and b) tangible benefits to consumers. Practices such as online shopping, tutoring, and tourism are likely to exist even after the pandemic because of how convenient they are. The forceful transition made by the pandemic may not necessarily be a harmful advancement in the long term. To add on, new products and processes in the industry elicit more competition. Any form of competition in an industry will yield benefits to the consumer, whether it is that the product is cheaper, more efficient, or more user-friendly. In general, the evidence supports the idea that creative destruction during these periods of time is especially beneficial to the economy.


Conclusion


There is undeniable evidence that creative destruction has a role in the COVID-19 pandemic. It can be thought of as a mechanism of economic growth during the pandemic, but it can also be uniquely thought of as a process that is accelerated by the pandemic. The overall outcomes are economic growth, technological development, and benefits to the consumer. Schumpeter’s paradoxical ideology offers a distinct perspective into the economy—that economic progress and growth are not possible without short-term destruction and innovative entrepreneurs at the helm of society. This core principle is truly a gale, driving the capitalist world forward with its mythical winds.


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Andrew Lu, 6

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The Role of Schumpeter’s Gale during the Pandemic