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14 September 2019


Tag(s): Politics & Economics, Business
Creative destruction is a concept in economics which since the 1950s has been most readily identified with the Austrian economist Joseph Schumpeter, who derived it from the work of Karl Marx and popularised it as a theory of economic innovation and the business cycle.  According to Schumpeter, the “gale of creative destruction” describes the process of industrial mutation that incessantly revolutionises the economic structure from within, incessantly destroying the old one, incessantly creating a new one”.

In Schumpeter’s mind this process would inevitably lead to the destruction of capitalism itself, but in the general popular mind the idea has become more a matter of perpetual renewal. At the individual level it means that no business should ever be complacent and think that their business model is good for all time. They must disrupt themselves or be disrupted.

To me that has always been true. But disruption does not just mean displacement. There may be unintended consequences and that is particularly true today with the modern disrupters. It is clear and obvious that Amazon is destroying the High Street retailers. It is clear and obvious that Google and Facebook are displacing large elements of traditional media and therefore their advertising revenues. It is clear and obvious that Airbnb is seriously damaging the traditional hotel trade. It is clear and obvious that Uber is threatening the traditional taxi cab operators. But in every case there are other serious consequences that are not perhaps so clear and obvious.

In the case of Amazon there is no question that their stop-at-nothing approach to take great swathes of market share from traditional retailers is having a damaging effect on the High Street. (See my blog The Death of the High Street 12th January 2019 ) I listed dislocation of pension funds as High Street property is devalued; depression of the stock market as more and more funds flow abroad; and the loss of local taxes as local businesses fail while Amazon pays a derisory amount of tax to UK authorities.

But I recently became aware of wider consequences. In New York several department stories have failed including prestige flagships stores like Lord & Taylor on 5th Avenue and Henri Bendel. Saks 5th Avenue has closed its women’s store. All across America department stores are closing at a rapid rate including Macy’s, Nordstrom, Kohl’s and JCPenney. But I want to focus on New York because there is the unintended consequence. It’s not just displacing retail from concrete to online. Many people travel to New York from all over the world for the shopping experience. If the shops aren’tthere they won’t go, so it will affect the tourism industry as well. Airlines, hotels, restaurants and smaller stores will all lose out.

There’s another reason why it’s not just displacement. When Amazon put out of business High Street retailers of records and videos, which was one of the first impacts of their presence, that killed a kind of shopping. I used to love going into HMV to browse through records and videos and often bought something on impulse. When that kind of shopping disappeared so did browsing and therefore those markets went into to decline. Yes, in theory you can browse online, but it’s not the same as picking up a physical object and reading the sleeve or cover.

When Google and Facebook came to dominate advertising and eBay and other internet sites displaced classified advertising local newspapers suffered most. In the UK, according to Press Gazette, 245 local titles have closed since 2005. In the US 20% of newspapers have vanished. Social media does not replace the content of local newspapers reported by professionally trained journalists. Every community has its own council, magistrate’s court etc and now much of their activity goes unreported. Those who live in the community no longer have a shared sense of what is going on. This leads to a loss of community spirit and those who try to seek information are more likely to get a polarised, more extreme sense, little of it based on fact.

When Airbnb set out to destroy the traditional hotel business they also created a most undesirable experience in the community affecting the very quality of life. Just read this recent letter to the Times:[i]

Airbnb menace

Sir, I don’t feel that anyone understands the inconvenience and nastiness of the Airbnb invasion. I live in a lovely building In New Town, Edinburgh. There is an Airbnb directly over my head and one in the basement. My quality of life has been destroyed by the one above me. It is rented every night; there is no respite.

Many of the guests arrive late, crashing their cases up the stairs as they yell to each other, in spite of the polite notice asking for quiet. Several times a week someone tries to come into my flat because they do not know what second floor means in the UK. They never apologise. Last week, one actually kicked the door when he couldn’t get in. they leave rubbish on the staircase, they buzz my door at all hours of the night and they bang on the door of my flat asking stupid questions - how does one use a frying pan was a memorable example.

I have complained to Airbnb many times. I get a case number and then I never hear from them again.

Catherine H Gordon

This horrifying experience is not unusual. It has become commonplace. Buy-to-let investors now use Airbnb as a lucrative way to rent out whole properties while avoiding the business rates and safety regulations that apply to hotels and regular B&Bs, and the bother of tenancy agreements. This has hollowed out city centres, pushed up local rents and house prices and ruined the character of neighbourhoods. In the glorious city of Bath residents are suffering non-stop loud music and the smoke of drugs from homes being let on Airbnb as “party houses”. Cities like Paris and Barcelona have taken steps to limit the number of nights hosts can rent out space. Airbnb may be a great convenience for tourists but it is wrecking communities.

Uber has unexpected consequences because there are so many flaws in its business model.  In the UK and in most of the developed world taxis are licensed by the local authority to carry out their trade. In London the system is particularly well regulated and the drivers all have to demonstrate the “knowledge” in a particularly gruelling examination of their knowledge of London’s street and landmarks. It can take years to acquire this. These systems are being subverted by a company that has never made a profit and, according to many financial analysts, never will.

But what is worse is that the drivers who again are unregulated and may drive many hours beyond what is legal and safe have not factored in depreciation of their vehicle into their calculations of income and expenditure. When they do that they realise they are losing money on every ride. So what will happen when Uber and its rivals have put out of business the licensed trade and then go out of business because they can’t make money?

The common thread throughout these cases is a lack of regulation i.e. by the authorities or by themselves. In some areas they have been held to account, Google, for example, paying substantial fines to the EU. But these are just a cost of doing business as far as the perpetrators are concerned. A far more rigorous degree of regulation is required as well as the proper application of Competition Law. But even more than that, they must be held accountable for these disastrous unintended consequences.

I use Amazon to the minimum though I confess that I used its self-publishing service to publish my second book. But then that didn’t sell very well while my first book published conventionally has sold in thousands and was published earlier this year in Chinese! I use Google, though I block their advertising. I do not use Facebook among whose unintended consequences are civil war in Somalia and genocide in Myanmar. I won’t use Airbnb or Uber if I can help it. I feel that the price people are paying for the apparent conveniences of these services is simply too high.

[i] THE TIMES, Thursday  September 5, 2019

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