Firms today truly see workers as human resources, and are creating work environments that foster problem solving. An important part of productivity growth comes from firms that are innovative replacing those that are less so. Obviously, over time, productive firms tend to prosper, while less productive firms lose market share and eventually shut down. The resulting resource allocation leads to productivity improvements for the whole economy. So although some firms shrink or even disappear, the process of creative destruction helps increase overall productivity in the long run.
Recent years provide numerous examples of creative destruction.
These include traditional industries, such as steel. The steel industry used to be dominated by enormous plants employing tens of thousands of workers. The erosion of markets served by these large integrated mills and their replacement with innovative mini-mills is a classic example of creative destruction. Although a very different industry, similar forces are at work in the provision of financial services. For the past three years, we have heard promises that the Internet would provide banks with competitive advantage, improved customer service and access, revenue generation and expense reduction.