Economic Shocks, Creative Destruction, and Their Effects on Nations and Individuals

Economic Shocks and Creative Destruction are Inevitable for Capitalist Societies

Any nation following a capitalist free market economy would need to prepare for the periodic boom and bust cycles wherein it has to both buffer its reserves for the crises so that it has money when recessions strike as well as has to find ways and means of easing the burden and the pain on its citizenry during such crises.

This is because periodic recessions and growth cycles are inevitable in a capitalist system and hence, the countries that have mastered the art of managing such recurring instances are the ones that are the most effective as far as economic management is concerned.

Apart from this, creative destruction or the phasing out of less competitive businesses and less profitable firms and instead, choosing innovative firms as the survivors is another characteristic of capitalism that is endemic to any nation that embraces such models of economic systems.

This means that again governments and private and public sector firms have to learn to survive the brutal and the cutthroat competition for profitability and market share.

Taken together, economic shocks in the form of recessions and creative destruction of industries mean that all entities, whether businesses, governments, or even individuals like you and me have to imbibe timeless strategies such as “saving for a rainy day” and using such savings wisely during crises.

Moral Obligation of Governments and How They are Failing

Continuing on the last point, it means that governments have to create social safety nets and cushions that can shield the most vulnerable during crises by building buffers during high growth phases.

In other words, what this means is that governments would have to invest in pension schemes and employer contributed social security instruments such as Provident Fund endowments and trusts where the average individual on the street can avail of such funds both during growth and recessionary phases.

While this might seem obvious, it is another matter that most nations, including developed Western economies often fall short during crises and leave the taxpayers and the ordinary citizens in the lurch.

For instance, this was what happened during the Global Financial Crisis of 2008 when the near collapse of the American and by extension the Global Economy left a whole generation of professionals and workers without jobs and without any support from the government.

Of course, one can always point to the Unemployment Assistance and the Dole as it is also known as wherein the United States and the European nations use their social security nets to provide assistance to laid off workers.

Sobering Future Trends

Having said that, it is also the case that for a few decades starting from the 1970s and accelerating during the closing decades of the 20th Century, such social safety nets have become thinner and vulnerable to breakages and this has had a direct effect on the working professionals.

For instance, current statistics and data pertaining to the United States show that in a decade or so, social security would not be able to fund itself as is the case with the pension funds and the Medicaid and Medicare, which are all schemes to protect the needy and vulnerable poor.

Moreover, even in so-called Welfare states such as the European Nations, such protections are dwindling by the day which means that working professionals such as you and I have to rely on our means of getting by during economic exigencies.

On the other hand, economic shocks are always not due to recessions alone as the Demonetization experiment in India carried out in November 2016 shows.

Indeed, the Indian Economy was very healthy and robustly growing when the Demonetization policy was introduced.

What more, even the decision of the United States government under President Nixon in 1971 to abandon the Gold Standard is another example of a political decision that can create economic shocks without any underlying economic rationales?

Creative Destruction with Real World Examples

On the other hand, creative destruction means that even profitable businesses can vanish overnight or be rendered loss making in no time due to the convergence of the Digital Revolution and the Capitalist economic trends that favor only those firms which are profitable in the immediate economic cycle.

In other words, creative destruction in the current context can happen to any firm and this is the reason why corporate and business leaders have to ensure that their firms have enough cash reserves and are liquid at all times.

Similarly, even market leading firms such as RIM (Research in Motion) maker of the pioneering original Smartphone found themselves bankrupt within a couple of years of the introduction of iPhone.

This for you is the most telling case of creative destruction where technology does not spare anyone and where the only things that matters are how well prepared you are for the future.

Conclusion

Lastly, as individual taxpayers of nations and as employees of corporates, what we can do is to read the signals and prepare accordingly.

What this means is that one must be on the lookout for their employers going bankrupt or a recession striking and prepare the strategies for coping and surviving such economic shocks.

Of course, one cannot always be prepared since some measures such as the ones cited earlier come like a Bolt from the Blue and hence, the best option here is to study the past, embrace the present, and be prepared for the future.

To conclude, look behind for insights, stays focused on the present, and have a clear view of the path ahead.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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