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mix of inputs, reflecting their new relative prices, during which time productivity growth will be inhibited.
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6.
Incentive effects.
Supply-siders claim that we have been taxing work, saving, and output while subsidizing consumption, leisure, unemployment, and retirement. The remarkable economic growth of Japan and the four "tigers" (Hong Kong, Singapore, Taiwan, and South Korea) has been based on allowing free markets to operate—permitting entrepreneurs to reap the fruits of their risk and labor. This experience has led many economists to believe that, although the supply-siders' incentive effects may not have much impact in the short run, they can be of considerable importance in the long-run-growth context.
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6.2—
The Productivity Growth Process
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Unfortunately, the process by which productivity increases are incorporated into the economy is not a comfortable one. In 1942 economist Joseph Schumpeter described the essence of capitalism as the continuous mutation of the firm and market, as old industries prospered and then died, and were replaced by new industries. He named the process
creative destruction.
It is sometimes referred to as the
churn.
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New technology invariably destroys many more jobs than it creates. Indeed, this fact is the essence of how productivity increases are injected into the economy. Fewer workers are needed to produce the same output, with the surplus workers put to work producing a bonus (extra output) that would not be possible without the new technology. This process can be far-reaching. In 1800 nearly 90 percent of the U.S. population was on farms, but today that figure is less than 3 percent. An unfortunate side effect of this process is that new technologies usually require workers with new skills, so that those with old skills become unemployed. For example, blacksmiths cannot easily get jobs as auto mechanics. These unemployed find that sweeping technological and institutional change has wiped out firms and entire industries, revolutionized products and human skills, and altered dramatically the nature of the workplace itself. The past few decades have seen dramatic growth in videotape rental, software, carpet cleaning, and movie production businesses and significant decreases in activity associated with fur goods, barbershops, leather products, and drive-in theaters. Railroad employees, cobblers, and switchboard operators have diminished dramatically in numbers, while occupations like medical technician, computer programmer, and professional athlete have mushroomed. Understandably, workers find it difficult to adapt to such changes, producing long-term unemployment, recession, and slow growth.
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Although this process is ongoing as a continual stream of innovations occurs, some innovations are of such importance that they exaggerate any subsequent recession and growth slowdown. The industrial revolution is the best-known example. More recent examples include the period between 1880 and 1930, with the development of electric power, chemicals, the internal combustion engine, and the assembly line; the period between 1940 and
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