In a recent New Yorker article Adam Gopnik talked about the evolution of the five-blade razor.

Mr Gopnik points out that in order to sell five-blade razors Gillette had to undermine their existing line of three-blade razors. Although he does not mention it his explanation draws on a process called creative destruction by Joseph Schumpeter, a twentieth century economist.

Creative destruction describes the process whereby firms seeking profit try to innovate, and when they successfully create new products demand for the old products is destroyed. An example is Apple’s creation of the iPod which essentially destroyed the demand for any other MP3. A robust process of creative destruction is often associated with a healthy economy because it brings about productivity increases.

The flip-side of creative destruction is that firms who fail to successfully innovate may engender substantial unemployment. A welfare system may be useful here if it is structured so that it encourages innovation by ensuring there are both large potential rewards for successful innovation and a sufficient safety net for those who fail. Without a sufficient safety net firms will be too afraid to innovate, without sufficient potential reward firms will not be bothered to try.

However, Mr Gopnik goes on to argue that creative destruction will only occur during times of plenty. He makes this argument by appropriating an argument from biology where in times of plenty it has been found that animals innovate more because during other times they can only afford to concentrate on staying alive.

It is not clear to me that this application is appropriate. Birds in a flock are not a reasonable comparison to firms in an economy because market imperfections mean that firms are far from homogenous. Even in times of recession there will be some firms who will be able to access funding, some who will have more intelligent employees, and some who will just get lucky. Indeed, during a recession – with other firms hurting – it may be that the long-term gains from innovation are greatest. For firms who are struggling, it may only be innovation that allows them to survive.

Mr Gopnik’s article makes interesting reading and provides a nice example of creative destruction but his argument that this requires a boom does not seem reasonable without further evidence.

Further reading:
The articles is available at http://www.newyorker.com/reporting/2009/05/11/090511fa_fact_gopnik
although registration is required.

BTW technical problems have kept posts from EconArticles for the past week. These have now been corrected.