In this podcast, Seth discusses the example of how a disruptive event can trigger creative destruction and invite us to think hard about what we should do in those situations.
Karl Marx was an economist who thought very deeply about a lot of critical issues on the free market and creative destruction. Marx surmised that one function of capitalism is to pay interest (or give a return) to a capitalist who is willing to take a risk on an investment. If we have acquired capital money and we are eager to invest it in a venture and use it to make things more efficient, we will get rewarded for taking that risk by earning a return on our investment.
This school of thought means that in one industry after another, there will be capital at work trying to make things more efficient. And sooner or later, we will reach a point of diminishing return. At that point, some entrepreneurs or innovators will seek out a new process, that will undermine the old, existing one to gain more efficiency.
More efficiency means that there will be more capitalists who are always looking for a couple of extra basis points and more return on their money. They do that because, if they do not get more return on their money than their competitors, their money will shrink in value.
Looking for the opportunity of efficiency leads to the insight that markets are excellent listening devices. Markets are effective at listening because we can always find some capitalists or entrepreneurs who are willing to figure out a way to squeeze more return if it makes sense for them. Markets are useful, at least in the short run, when there are free and open markets.
Often, when we have a shift in culture, the change creates opportunities, and the market responds to the prospects. It happens in every industry. When it happens, the change in the market might destroy a stable business that was already in place. One after another, innovation comes along, created by someone who is under pressure to reward capital with a more significant return, and it ends up destroying what came before.
The cycle of creating, destruction, and replaced by something new makes up the central thesis of creative destruction. With each cycle, some people worked hard to bring something to the market before something more innovative come along. The innovation may cause those people to stumble, and they might even fall. But this destruction opens the door for the next change.
Before we jump to the conclusion that creative destruction is always a good thing, we should be mindful of two things. First, destruction is painful. It hurts, and it can lead to dislocations that further leads to tragedy. At the minimum, it leads to a lot of discomfort for each of us.
Second, creative destruction is not new. We have seen it before, and we will see it again. It is built into the very nature of using capital to create assets. Right now, we are in a slog, a long and painful slug. But we always will come out on the other side of that slog.
The question each of us must ask is, what will we learn, who will we connect, who will we choose to lead, and how will we show up in the world as someone that others want to work with to connect with?
We need to ask ourselves questions about how we can use the market as a useful listening device to serve people. Not just the people who have the most to spend but perhaps to the people who need something or want something but have been ignored. With the current event, we have the chance to use the connection and production tools to create the change we want to make.