Creative Destruction

It has been noted by a number of you that it has been some time since my last blog and that in 2017 they have been few and far between. You would be right. 

With two house moves and an office move over the last year and a half and Brexit duties I have been somewhat distracted by other things. However, after a great holiday this year and time spent with family and friends I now feel relaxed and ready to keep you up to date with the world of finance, tax news and how Brexit, Trump and any number of matters might affect us in the coming months and years. 

The biggest question is always, on which subject do I start again. For this one my motivation came from a book I read during the summer entitled: 'Prophet of Innovation: Joseph Schumpeter and Creative Destruction'. 

The reason for picking out this book (not the most obvious read for a beach holiday) was that I was interested in the term 'creative destruction'. I have heard it used a number of times in relation to Brexit (by dubious sources I must admit) and I wanted to understand more of its meaning and if it could be applied to a political process like Brexit and was it a force for good in world economies. 

If you have studied economics you may have heard of the term, or maybe you have just heard it spoken or read it somewhere. It is regularly used by capitalists as a mantra for the destruction of one set of businesses as a way to open the market for creative new businesses to take their place.  

Now, this would be correct in part, but I was particularly interested in how it was applied to Brexit. I had heard a number of Brexit supporters use the term in relation to a positive force for Brexit. I had my doubts and hence why I ordered and read the book. 

WHAT IS CREATIVE DESTRUCTION?

In short creative destruction is the continual and incessant process of innovation in business, innovation that constantly destroys the old structure and incessantly creates the new one.  The process itself is part of a continual improvement in the access to and innovation of new products and services.  As a result it is a process which continually improves our standard of living. 

A 'HORSFALL' EXAMPLE OF CREATIVE DESTRUCTION

I have a great example of this process which is very personal to me.  You will be familiar with my surname 'Horsfall', but you may not be familiar with its significance from a historical perspective. 

In 1812 a man called William Horsfall (a direct line descendant on my family tree!) was killed by a group of people who were opposed to the mechanisation of his textile mills in the Huddersfield area.  That group of people were called the Luddites! This man was the only person to be killed by the Luddites and it started a police campaign to stop their activities at that time. 

There is a point to this story in that despite the loss of jobs through innovation and the justified fear of people losing their income and livelihoods as a result of machines replacing their jobs, at the same time cloth now became mass produced.  More product could be made for a lower cost.  More people could now access new clothes, better clothes, and could afford to replace them more often.  In addition, cloth could now be used in many more different ways as access to it was more readily available.  This process can be bumpy and unpleasant for some, but the trend line is toward progress, growth and higher standards of living.   This is the process of creative destruction at work.  

THE MISUE OF CREATIVE DESTRCUTION AND BREXIT

However, where the term seems to get misused is in the philosophy surrounding decisions such as Brexit. The vote itself was not meant to assist the creative destruction process, but it may put plenty of people out of business. The vote was not a part of an incessant innovative process of changing old for new.  In fact it seems to me that it is a rather destructive decision and not very creative at all.  

In reality, Brexit will likely put a lot of small businesses out of business and allow big business, monopolies and multinationals to flourish. Hardly creative! 

Joseph Schumpeter stated that creative destruction was driven by entrepreneurs, and that this person had a drive not to just grow rich, but because these people have a dream to found a private kingdom, usually a family business dynasty, they have a will to conquer, an impulse to fight, to prove oneself superior to others, to succeed for the sake of it, not for the fruits of success, but of success itself.  Finally there is the joy of creating, of getting things done or simply using ones ingenuity. 

I am sure you know someone who has these characteristics. I can think of clients, friends, colleagues and business people who all fit this description.  

So, if you hear the term 'creative destruction' used to describe Brexit, Trump's decisions, or any other political decisions, understand that it is more about the one person businesses, the person who innovates to stay ahead of others and to feed the family than about political decisions. In that regard I think constant change can be seen as a force for good. 

BRITISH IN ITALY

Of course, for now we bumble along with the cringe worthy and rather 'destructive ' UK/EU negotiations.  If you would like to know the inner details of how the Brexit negotiations affect us then you can join the group British in Italy. Just send an email to britsinitaly@gmail.com and ask to be added to their newsletter mailing list

In my next blog I will tackle some of the tax queries that some of you have been bringing up in the last few weeks and months.