From the Ashes

By Manyika, Susan Lund James; Auguste, Byron | Newsweek, August 30, 2010 | Go to article overview

From the Ashes


Manyika, Susan Lund James, Auguste, Byron, Newsweek


Byline: James Manyika, Susan Lund, and Byron Auguste

The most dynamic economies rely on creative destruction to grow.

As the world continues to recover from the Great Recession, governments and businesses are focused on how to spur economic growth. But if they really want to create jobs, raise incomes, and lift living standards, they should devote more energy to figuring out how to generate economic dynamism over the long term.

At times like this, governments tend to champion particular sectors like manufacturing, or industries like green technology. But true dynamism flows from continuous innovation, experimentation, adaptation, and change, all of which raise productivity over time. Those productivity gains, in turn, lift incomes and drive consumption. This fuels more innovation--and a dynamic economy thus expands in a healthy, sustainable way.

Unfortunately, economic dynamism can also cause dislocation and turmoil as workers lose jobs in failing companies or in fading industries. Change in the ranking of companies has accelerated in many countries, including the United States, over the last century. The 90 names listed on Standard & Poor's index of major U.S. companies in the 1920s remained there for an average of 65 years. By 1998 a company listed on the S&P 500 could expect to stay there for an average of only 10 years.

The distress caused by such turnover causes many people to resist change. But this process, famously labeled "creative destruction" by economist Joseph Schumpeter, frees resources for new uses that can vastly improve life over time. We may have fewer farmers, coachmen, and switchboard operators today than in Schumpeter's time, but we have software engineers, EKG technicians, Google mapmakers, and a host of other occupations people couldn't have imagined back then. The "productivity paradox" is that while we may need fewer workers in certain occupations in the short term, improved productivity leads to a stronger economy as a whole. Over the past half century, in fact, three out of every four dollars of new U.S. GDP per capita have come from gains in labor productivity. So policies to spur economic dynamism are essential elements of any strategy to create jobs.

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