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Creative destruction

Economist Joseph Schumpeter coined the phrase “creative destruction” to describe the way innovation in the manufacturing process increases productivity while destroying the old way of doing things as a new efficient way is developed. This idea has been expanded to many other contexts as we find solutions to problems that cause us to eventually come out ahead of where we were before the problems arose. It is good to remember as we tackle the problem of the COVID-19 pandemic. It has temporarily caused us to radically change the way we live, and the solutions we develop will have impacts on our lives going forward.

In Jared Diamond’s Guns, Germs, and Steel, he asks the question: how did it come to pass that Europeans became the center of power for much of the past 500 years?

In his analysis, he argues that it was firstly the good fortune of Eurasia having 14 different native species of domesticable animals. The rest of the world had only the elephants of Africa, which are difficult to breed in captivity, and the llama of South America. Eurasia has a climate conducive to agriculture and mountains that range East-West rather than North-South. As such, agricultural innovation spreads widely across a latitude that shares a similar climate and seasons. However, the downside to this good fortune was large human populations clustering together in close proximity to animals also entails greater exposure to disease. Yet, in what shall become a trend in this discussion, this problem led to a solution, and this disease exposure brought future disease resistance among the people of Eurasia.

Regarding Europe in its geographic position relative to Asia, Diamond notes that Europe has the “problem” of having many more natural barriers such as rivers. This caused the creation of many smaller nations whereas in the more expansive Asia, people were able to consolidate under the nation of China. Yet again, the European problem became a solution as these many nations brought many unique and differing views into conflict with each other and were driven to innovate, lest they be conquered by their neighboring rivals. In short, good fortune got the ball rolling with agriculture but also brought problems and conflicts, which led to more solutions and progress for Europe. An extension of this thought is that bigger conflicts tend to lead to bigger solutions, and perhaps the biggest conflict in recent history was World War II.

World War II is not an event anyone should wish to redo. However, out of the need for long-range weapons during the war, Germany developed V-2 rockets, which paved the way for the invention of modern space rockets. On the Allied side, the Manhattan Project propelled the development of nuclear weapons and nuclear power. The power that was unlocked by both developments is truly frightening, but also it unlocked great potential. Additionally, upon seeing Germany’s ability to mobilize its military by using the Autobahn, President Eisenhower set forth the post-war development of the US interstate highway system. The interstate highway system, despite being built in part to provide mobility in case of an emergency, provided economic growth and greatly reduced traffic as the fast, continuously moving traffic was separated from the local stop-and-go traffic.

In the 1960s, the US Department of Defense needed a way to time-share mainframe computers, which led to the creation of what later became known as “the internet.” The energy crisis of the 1970s led to the increased development of energy sources and energy efficiencies. The Dot Com bubble burst cleared the way for viable online businesses to develop, making the internet a legitimate place of commerce. The terrorist attacks of September 11, 2001 changed the way we travel, and while the process was initially turbulent, we fly safer today. The Great Depression of the 1930s and the Great Recession of the late 2000s showed specific ways financial markets can speculate to excess, and we improved the banking system in response.

So today we face a global pandemic of COVID-19, and it is a big problem. It is scary and the progress from this point on will not be a straight line. However, the strong odds are that a decade from now, we will look back proudly on the solutions we will develop. One of the other challenges we face today is climate change. Research suggests there is a link between climate change and the energy consumption of fossil fuels. Well, today we are learning how to live efficiently and travel less. We will begin to travel normally again, but this new normal level of travel may be done on a lower, more deliberate level. We also will come out of this having tested our economic infrastructures to see where we need to deploy capital and where we can operate with less.

I don’t like problems and the struggles they bring. However, they also bring solutions and progress is the aggregation of these solutions. So, let’s bunker down and get through this while thinking about the progress we can make not just against COVID-19, but across other facets of the way we live.

The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital, Inc., a registered investment advisor.

Tagged: Market perspectives, Dan Williams, COVID-19

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