Home >Opinion >Columns >Opinion | How creative destruction could yield new market opportunities

Literary sensibilities often provide unique insights into our economic problems. One reading of Shrilal Shukla’s great novel, Raag Darbari, can tell us more about the political economy of rural India than a dozen academic papers. The 1968 work’s Shivpalganj is a fictional town. Great writers sometimes write about real places as well. Two such examples of reportage would be useful in the midst of the ongoing pandemic, especially to think about what lies ahead.

The first example is a brilliant description of one small area in the industrial heart of England during some of the worst months of the Great Depression. The writer’s longest stay during his travels was the three weeks he spent in a town named Wigan. “The train bore me away, through the monstrous scenery of slag-heaps, chimneys, piled scrap-iron, foul canals, paths of cindery mud crisscrossed by the prints of clogs. This was March, but the weather had been horribly cold and everywhere there were mounds of blackened snow. As we moved slowly through the outskirts of the town we passed row after row of little grey slum houses running at right angles to the embankment," George Orwell wrote in his 1937 classic, The Road to Wigan Pier, bringing to life the devastation faced by the industrial working class.

Three years before that, J. B. Priestley travelled not to one town, but across England. His book was titled English Journey. Priestley described the old industrial England much in the same way that Orwell did: “A cynically devastated countryside, sooty dismal little towns, and still sootier grim fortress-like cities." But he spotted something else—a new economy emerging amid the pain of the old. “This is the England of arterial and bypass roads, of filling stations and factories that look like exhibition buildings, of giant cinemas and dance halls and cafés, bungalows with tiny garages, cocktail bars, Woolworths, motor coaches, wireless, hiking, factory girls looking like actresses, greyhound racing and dirt tracks, swimming pools, and everything given away for cigarette coupons." Priestley described this as the new England emerging from the ruins of World War 1, and as a contrast with the industrial England of the 19th century and the older England—“the country of the cathedrals and minsters and manor-houses and inns".

Economists have two radically different ways of thinking about business cycles. One way is to see economic gyrations as the result of what is happening within an economic system. So the Great Depression can be explained by the collapse in aggregate demand across the world. The genesis of the North Atlantic financial crisis can similarly be traced to what happened within the US economic system. The primary task of economic policy is then to bring the system back to its old ways.

The other way of looking at an economic crisis is to link it to something that has happened from outside the economic system—a new technology, natural disaster or a virus released from a wet market in China. Climate change can be an even bigger shock. These are exogenous shocks that profoundly alter the way people go about their lives. There are new ways of doing things. The task of policymakers then becomes more complicated. There will always be pressure to stabilize the old system, but also encourage entrepreneurs to grab new opportunities.

At the cost of simplifying the message, Orwell could be seen to be writing on the first type of economic change, while Priestley could be seen to be writing of the second variant. Orwell focused on the immense pain in the industrial towns of North England as the British economic system tottered close to the edge. Priestley did not turn a blind eye to the devastation that Orwell saw, but also detected new possibilities.

Some of these themes came back to me when I read a recent essay by Barry Eichengreen, one of the finest macroeconomic historians in our times. Eichengreen argues that the ongoing economic crisis will affect the ability of economies to grow in four ways—three negative and one positive. The three negative forces he mentions are that education will get temporarily suspended, public investment will be weak and global supply chains will get disrupted. Each will bring down potential growth.

However, Eichengreen also mentions a fourth force. The disruption of existing ways of doing things “will open up space for innovative new entrants, through the process that the early 20th century Austrian economist and social theorist Joseph Schumpeter referred to as “creative destruction".

That could be the silver lining in the dark clouds hovering over the world. The old ways of working, travelling, healing, eating and living will not totally go away. The world will eventually limp back to normal. But there will be new opportunities as well. We see some glimpses of it right now in the use of digital payments, demand for oximeters, and growth of the personal protective equipment industry. Will there be even more profound changes ahead? It is hard to say, and much depends on how long the virus forces people to stay at home. The more it fundamentally alters human behaviour, the greater the opportunities for entrepreneurs to create new markets.

Niranjan Rajadhyaksha is a member of the academic board of the Meghnad Desai Academy of Economics.

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