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Monday, February 27, 2017

Don’t Call It Creative Destruction, Call It Creative Renewal

The steel industry wasn't destroyed, it was renewed, and we all benefit.

Back in December, I wrote a music column for the Guardians website on Songs About Iron and Steel. It was part of a weekly game called Readers Recommend. The blog posts a topic every Thursday and readers recommend songs that are about that topic. A volunteer “guru” listens to the nominations and compiles a playlist, writing a column to thread the songs together.

Between 1974 and 2000, American steel industry employment dropped from 521,000 to 151,000.

As usual, I did not know most of the 300 songs nominated. And I was surprised that there were quite a few of them lamenting the decline of the steel industry in the UK and the USA. One of them was Bruce Springsteen’s “Youngstown.” With ten or so songs about declining steel towns, I decided to look into the history of the steel industry. What I discovered is nothing short of astounding.

Springsteen’s Inspiration

Youngstown, Ohio, located halfway between Cleveland and Pittsburgh, became a thriving steel town in the late 19th Century. Steel became an ever more important industrial metal, and Youngstown grew fast, its population peaking at over 168,000 in 1950. No wonder the Boss sang the praises of industrialism early in the song. “Taconite, coke and limestone fed my children and made my pay. Then smokestacks reachin’ like the arms of God into a beautiful sky of soot and clay.” When the decline began, accelerating into the 1970s and beyond, the steel industry in Britain and the United States was decimated.

How severe were the job losses? Between 1974 and 2000, American employment in the steel industry dropped from 521,000 to 151,000 (in the U.K., employment dropped from 197,000 to 29,000). By 2010, the population of Youngstown had declined to less than 67,000 people, a phenomenal drop of 60.2 percent.

Casting about for a villain to blame, Springsteen laments that “them big boys did what Hitler couldn’t do.” That old villain, the American businessman, the tycoons of the steel industry, the modern day descendants of the Andrew Carnegie foisted destruction on industry. But the story is more complex than just a simple blame game.

Production Innovation

Pure iron is too soft for industrial use. Steel is an alloy made up of iron and other minerals, primarily carbon. The manufacture of steel was commercialized in the 1850s with the development of the Bessemer process. This process removes impurities from molten iron ore by blowing air through it, the impurities oxidize and are separated as slag before carbon and other alloying agents are added.

Old blast furnaces take 10 to 12 hours to turn 400 tons of iron ore into steel. The modern oxygen furnace takes 40 minutes.

The industry was advanced even further by the invention of the open hearth furnace in the 1860s. This led to what has been called the Second Industrial Revolution. Industrial use of steel boomed. It made the modern railroad possible, as well as the eventual development of steel-girder skyscrapers.

The steel industry played a huge role in the Second World War as women went to work in factories building ships and planes and tanks. These women were celebrated in song and film, such as the iconic Rosie the Riveter.

But shortly after the war, in 1948, a Swiss engineer named Robert Durrer successfully tested a new steel-making process that would revolutionize the industry — the oxygen furnace. The old blast furnaces blew air through molten pig iron to remove impurities. Durrer’s simple innovation was to replace air with pure oxygen. It was commercialized in 1952-53 by the Austrian company VOEST and OAMG (now known as Voestalpine AG). Durrer’s LD Converter process resulted in reduced costs and increased labor productivity. According to Wikipedia, “between 1920 and 2000, labour requirements in the industry decreased by a factor of 1,000, from more than 3 worker-hours per tonne to just 0.003.”

The old blast furnaces take ten to twelve hours to turn 400 tons of iron ore into steel. It takes only forty minutes with the modern oxygen furnace.

Resisting the Inevitable

Since steelmaking is a capital intensive business and the cost of a blast furnace is high, both the United States and Britain resisted adoption of the new process.

Since 1967, worldwide production of steel has tripled.

The British Labour government took the industry out of the hands of so-called greedy capitalists in 1967. According to economic historian, Alasdair Blair, this just exacerbated the industry’s problems. Paraphrasing Blair, Wikipedia notes that the British Steel Corporation had major problems “including complacency with existing obsolescent plants (plants operating under capacity and thus at low efficiency); outdated technology; price controls that reduced marketing flexibility; soaring coal and oil costs; lack of capital investment funds; and increasing competition on the world market.”

New plants, of course, were eager to use the new process and this was especially so in the third world and developing economies. It wasn’t until Margaret Thatcher re-privatised British Steel that it once again became competitive in the international marketplace. By 2000, 60 percent of steel plants were using the LD Converter.

But while the combination of increased productivity and greater international competition led to the severe declines in the British and American steel industries, the worldwide production of steel has not declined. Since 1967, worldwide production of steel has tripled. China’s production alone has grown from 2.8 percent to 50.3 percent in 2015. Meanwhile, American and British production have dropped by 31.4 percent and 55.3 percent respectively. (Wikipedia has a table of steel production by country that is too large to reproduce here, but please check it out.)

A Destructive Misnomer

This story is significant because it highlights in bold relief the phenomenon that economist Joseph Schumpeter called creative destruction. Schumpeter’s choice of words is unfortunate. Destruction has a strong negative connotation, and it doesn’t match the wealth-creating benefits of the concept.

While the revolution of the oxygen furnace did eliminate a lot of jobs, it also enhanced the production of steel. It enabled the world to triple its output over fifty years. It enabled relatively poor countries to become active in steel production. Marginal producers in 1967, countries like China, India, Brazil, Turkey and Mexico, became major players by 2015. It increased the world’s overall wealth.

Despite the gloom and doom mindset that sometimes accompanies technological changes, innovation increases overall wealth.

Capitalism rewards risk-taking and innovation, and it increases overall wealth in doing so. It is indeed unfortunate that sometimes innovation displaces some workers. The scale of the technological revolution in steel was nothing short of mind-boggling — productivity increased by a factor of 1000. And one can certainly empathize with people affected by such a drastic change. Nevertheless, such change means creative renewal, not destruction.

Henry Ford’s innovation of the automobile assembly line was a creative renewal of the personal transportation business. It put horse breeders and buggy makers out of business. Today the surge in alternative, internet media is a creative renewal of the journalism industry. Traditional media like newspapers and commercial television broadcasters have suffered as a result. But even as broadcasters are losing revenue, they are innovating as well. Video on demand is common now, but it was an act of creative renewal that put Blockbusters out of business and put a new spring in the broadcast industry’s step.

New Age Fears

Recently, there have been rumblings about the coming robotic age, fear that workers will be displaced. But with every innovation, new opportunities arise. New jobs are created. The economy is renewed.

Despite the gloom and doom mindset that sometimes accompanies technological changes (especially when those changes directly affect you), technology and the market economy work to increase overall wealth. Without it, we would still be riding in horse-drawn buggies and reading by kerosene lanterns. We’d still be splitting wood for fuel to heat our homes. Capitalism is in a constant state of creative renewal. And thank goodness for that!