Question

(e.g. 2-3 well-reasoned paragraphs).

1. Explain the role of creative destruction in both promoting and preventing economic development?

Answer 1

This applies to how capitalism contributes to an ever-changing economic system. Close-down old industries and companies that are no longer profitable, allowing resources (capital and labor) to shift into more efficient processes. Creative destruction means business closures and job losses are beneficial for the economy's long-term well-being. Free-market economics saw creative destruction as a necessary and unavoidable phase of economic development and generally opposed attempts by the government to stop this cycle of decline and renewal. Many economists even go so far as to argue that if banks fail, the government should not interfere because it is better to allow bad banks to fail and to stop artificially helping the financial system by the government.

If a business is unprofitable, it should be shut down so that resources (labor and capital) can shift into more efficient and profitable companies and industries. Without this willingness to change, we may have stuck to the living standards of the Nineteenth Century. The prospect of company leaving is an incentive for companies to adapt with the changing market and keep costs low. Newspapers, for example, need to reinvent themselves with an online presence in an electronic age.

Structural joblessness. When certain businesses close, there is no assurance that the unemployed will be qualified enough to change job prospects. At the very least, in order to give better skills to the long-term unemployed regional unemployment, government intervention may be appropriate. Regional real estate will make the' destruction term' last for a long time in a changing economy. It can be daunting for a city to cope with a large-scale closure and the loss of many jobs. In the economy, new jobs can be developed, but not in high unemployment. This can result in an extended period of low growth and high regional unemployment.