COVID-19 could be the catalyst – not the cause – of a painful but useful economic transformation: Don Pittis


As people are laid off, businesses fail, and the oil and housing sectors weaken, there is one branch of the economy that insists that anything can have a silver lining.

Retailer Pier 1, familiar to many Canadians, dropped out last week refinancing attempts and announced that it is closing its doors permanently. Almost simultaneously, the venerable Canadian fashion channel Reitmans went into bankruptcy protection.

These are just a few on the list of famous names who are having financial problems during this COVID-19 foreclosure, including J.Crew, JCPenney and Cirque du Soleil.

As people stop flying, the Boeing chief hinted that a large US airline might fail, and worldwide, many small carriers are on the verge of death.

As the CMHC is concerned Canadian real estate prices will drop 18%, the oil industry struggles to recover from negative prices and rising unemployment towards depression levels, it is difficult to see the bright side.

But according to the theory of creative destruction derived by the German economist Joseph Schumpeter in 1942 from the ideas proposed by Karl Marx, economic and technological progress requires that companies die and that industries and paradigms be swept away to make room for new ones. .

Pier 1 had 50 stores in Canada at the last count, which will all be closed. (Luke Sharrett / Bloomberg)

Canadian economist Peter Howitt, recently winner of the Knowledge Frontiers Prize for his work proving Schumpeter’s principles in the real world, said that while the process of creative destruction occurs all the time, economic crises accelerate the process.

“When old companies or technology or skills or anything clings together, they can last a long time until things go really wrong,” said Howitt. “It is usually during a recession that a lot of destruction takes place. “

The implication is that, although those in the retail, petroleum or real estate industries may insist that the COVID-19 lockout was the cause of their failure, the economic crisis could rather be a trigger, a catalyst for a process already underway.

We already knew the traditional retail was disputed by tech giants Shopify and Amazon or by big-box discounters like Costco, but it was the downturn that pushed struggling companies like Pier 1 to the end.

Part of a reset

Many have suggested in the past that over-indebted housing market was an accident that had to happen. In a broader sense, some economic thinkers argue that the current backlash against China and against globalization or even against the social structure of the rich and the poor is part of a reset for which the pressure is already mounting.

According to Stephen Williamson, an economist at Western University, it can be dangerous for governments to try to push too hard against the economic forces operating in dying industries such as the fossil fuel sector.

“It doesn’t seem, at least the exploration and extraction part of the industry, to be really viable in the long run,” said Williamson. “It seems difficult to justify a huge bailout for these guys. “

From small businesses to larger ones, the rigors of the recession can serve as a test of torture.

For companies like Sean Davey’s, who, after losing his job at Royal Bank as a stock analyst in 2016, turned his math skills into founders Rithmetic Math Clubsurviving the recession can mean prosperity afterwards.

Slipping into the language of his old job, Davey said his idea was to create “a low-risk, positive cash flow business” that could grow slowly.

In converting his after-school sessions to Zoom, Davey said that the vast majority of his approximately 100 clients remain on board and he expects business to grow despite the disruption.

“What is clear is that the COVID-19 crisis, which has shaken the lives of so many people, will ultimately produce many business opportunities,” said The Economist magazine. earlier this month in his column Schumpeter, named after the famous German.

Put a happy face

Responding to a complaint from some critics that creative destruction is just a way to put a smile on economic destruction, even as a promoter of the idea, Howitt does not downplay the notion that economic change is a painful process.

“Since the industrial revolution, people’s lives have been destroyed by new technologies,” he said, and although there are winners, workers and investors in the so-called “declining industries” Such as dying retail pay a price.

Williamson and Howitt say that while paving the way for future innovation, a recession also hurts innovators as private equity dries up and lenders withdraw from the risk.

Turning science into business

At the University of Toronto Creative destruction laboratory, this dark view cannot stand in the way of Mara Lederman, who is firmly focused on the creation side of the dichotomy of creative destruction.

Founded by pioneer of artificial intelligence Ajay Agrawal At the University of Toronto’s Rotman School of Management, the CDL has turned the “deep science” generated by academics into businesses that are helping to transform the economy.

Lederman said the motivation for the nonprofit laboratory was that Canadian universities were doing incredible science that only other scientists would see.

“What we need to do is take the science that is discovered and turn it into businesses, products and services for the good of humanity,” she said.

The development of a bracelet called Halo that alerts employees when they get too close has been accelerated by a new division of the University of Toronto’s Creative Destruction Lab that has been launched to address the health or economic recovery challenges created by the COVID-19 crisis. (Proxxi / Halo)

As an economics professor, Lederman is familiar with Schumpeter’s ideas, but sees today’s volatile times as an incentive to develop new ones. This is why the group founded a new division called CDL recovery to meet the health and economic recovery challenges created by the global COVID-19 crisis.

The group has already helped speed up projects, including a bracelet to determine if employees are unable to maintain physical distance, a system for monitor long-term care in an age of pandemic and technology that uses the vision of artificial intelligence to track the care of residents who tend to wander, to name a few, said Lederman.

“Are we in the kind of situation that will trigger creative destruction? I think the answer is yes. “

Follow Don on Twitter @don_pittis


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