February 26, 2010

Up in the air and Schumpeter's creative destruction

Writing about web page ataraxiasocial.blogspot.com

"Companies rising and falling would unleash innovation and in the end make the economy stronger"

Joseph Schumpeter


The movie Up in the Air (Jason Reitman, 2009) describes the routinary life of Ryan Bingham, played by George Clooney. His job consists in travelling all across the countryfiring employees whose companies do not want to do it directly, either because they are cowards or because they do not want to deal with potential violentreaction of their now ex-employees. In his years of experience, Ryan has become quite efficientin his work and using carefulpersuasion techniques, manages to get employees to accepttheir firing, at least with some complianceand arguable"dignity".

Things get complicated when a new employee comes to Ryan's office(Natalie Keener, played by Anna Kendrick) with innovativeideas about improving the efficiency and productivity of the firm. The solution? Use technological tools such as video conferencing to conduct layoffs. This methodcan improve the efficiencyof the company, but ruins Ryan's plans for three reasons that he considers particularlyrelevant.The first is a woman, Alex Goran (Vera Farmiga), who met at one of his many journeys and because of his work must alsotravel constantly, with the possibility thatthey can coincidein a city and meetthere. The second is a personalgoal related to travel: Ryan wants to be the seventh person in the world to achieve10 million miles travelled, which among other benefits he will have a planenamed in his honour by the airline. The third is relatedtothe other two and is one ofthe premises of the film: travel is the natural state of Ryan; constantly moving all across the country, enjoying frequent flyer privileges and applying his travel experience in conferences is the way he feels in control of his life.

For the purpose of this blog'sentryit is necessary to focus on just one of the issues raisedby the film and applyit to the concept of 'creative destruction'.In the first instance, it is necessaryto givethe definition of that term. The 'creative destruction' is a theory popularized by the economist Joseph Schumpeter in which he argues that a radical innovation (good or services that are able to createa new category) makes that the previousgoodsor services become obsolete,and therefore,its useis dramatically reduced. A typicalexample is relatedto the audio devices. One of the first large-scaleused was the vinyl recordwhich was thenaccompanied by the tape. With the advent of Compact Disc (CD), sales of cassettes and vinyl records were reducedto negligiblelevels and now, at least in the case of vinyl, their few consumers do so as part of a nostalgic collection. Howeverthis does not stopthere. With the invention of the MP3,the CDioutdatedand itssales are now diminishingThis case can also be applied to the video and its players (VHS or BETA, Laser Disc, DVD and Blue Ray now) as well as computers. Obviously this processis not limited only to electronic devices. What happens is that in this sector this process is carriedout at an expeditious pace.

This theory proposes that the 'creative destruction' is inherent in the production process,and it is part of the development of any product.This not only relates to elements of product features but also with marketing elements that determinethe "destruction" of a product. For example, a cell phone camera that has a certainamountof megapixels. When you get a new cellto increasethe megapixels capacity, consumers feel the urge to buythis new product even if the functions provided by the previousmodel are essentiallythe same. This is knownas incremental innovation (amending a portion of a goodor service) and also generates the obsolescence of the previous product. In this case, an effective marketing strategy can convince consumers to buy a product that they do not actuallyneedand,as a result,"destroys" the past.

In the film, Ryan becomes a victim of a radical innovation. Video conferencing threatens his way of life and he could becomein the future another jobless similar to those he was responsible for announcing their dismissal. The issue here is more complicated because what is being "destroyed" is a human being or at least the purposeof his existence. Obviously in a metaphorical sense, but he could be considered as part of a process or production systemin a company that becomes obsolete. The point here is that the 'creative destruction' theorydoes not deal with ethical concerns. It is not goodor badin itself,but itis simply a processthat can lead to some benefits andcan also cause damage.Un exampleis Kodak company and its nearlybankruptas a result of the newdigital cameras. Consumers have been highlybenefited by cameras whose pictures can be edited and modified and they do not have to geta roll of the film, but many companies that were not able to keep up with this innovationbecame obsolete and disappeared. In other wordsthey were"destroyed".

There are other films that presentthe same issue but with a different approach. Some do it explicitly as Blade Runner, I Robot, Matrix and Terminator (replicants, robots and machines are radicalinnovationprocesses, which in the case of the lasttwo movies makehumans obsolete, this time in a literal). Other films doit subtly and withmuch more tangential approach.However, it is possible to find traces of this theory and its approaches (perhaps the Godfather, Vito Corleone, was madeobsolete by not wanting to be linked to the new drug businessand thus became necessary his "destruction").The fact is that the 'creative destruction' is an issue that raises questions about its renewalprocess and howits benefits can be exploited while minimizing its negative effects.Finally, one element of the filmthat is also part of this theory is that the motivationto makehim obsoletewas not a deliberatedecisionin order to harmhim. Simply, he was a collateral victim of a process of radicalinnovationthat in turn generated a process of "creative destruction".



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