Creative Destruction

"Economic progress, in capitalist society, means turmoil."

Joseph A. Schumpeter

Yesterday I used the words "creative destruction". I did not realize that this phrase originated with Karl Marx when he claimed that economic development arises out of the destruction of some prior economic order. I was introduced to the term via the work of economist Joseph Schumpeter who adapted the phrase and popularized it as a theory of economic innovation whereby progress is limited unless new products replace (destroy) old products and services. For example, if your new car lasted 20 years, there would be far fewer car sales and a much smaller automotive industry. We've gotten used to the idea of cars wearing out frequently. One car ad said the average person buys 12 cars in their lifetime.

Industries and companies are also subject to being obsoleted and replaced. (Hence I object to the very dangerous concept of "too big to fail". Don't try to block progress by saving companies who are unable to adapt with the times.)

What is being "destroyed" and replaced now-a-days?

1. The Post Office
There will always (?) be packages for Fed Ex, and UPS to ship but when was the last time you wrote a letter? My wife has embraced online bill paying and we send eCards to relatives so very little goes into our mailbox anymore.

2. The Personal Check
It costs the financial system billions of dollars a year to process checks. Plastic cards and online transactions will lead to the eventual demise of the check.

3. The Newspaper
Some "papers" have moved online and stopped publishing a paper copy. I expect this trend will continue, especially as iPad, Kindles, etc become more common for reading during the morning commute.

4. Paper Books
Why carry a heavy book (and fill book shelves) when it can be stored on your Kindle? I used to collect reference books but now turn to the Internet for current facts.

5. The Land Line Telephone
We keep ours for emergency preparedness and Internet. The telephones that plug into the wall often work during emergencies when cell towers are down or overwhelmed. But there may come a time when landlines are discontinued.

6. Music CDs
Too many people get fixated on the medium instead of the content. Music has existed and been sold on phonograph rolls, LPs of various sizes, 8-track tapes, cassette tapes,etc. The CD is just the latest and perhaps the last of the physical means of buying music. iTunes has shown that music can exist profitably in pure digital format on the Internet.

7. Television and Cable TV
Why pay someone to watch content when there are free alternatives online?

8. Camera Film
I have not used film in years.

9. Travel Agents
I do all my travel arrangements online.

Bottom Line

What other goods or services do you think will be replaced?

Private Property

“We're all pilgrims on the same journey-but some pilgrims have better road maps.”- Nelson DeMille

When the stock market fell last year there were many who blamed the evils of capitalism. Somehow people keep falling into the trap of thinking that socialism is "good" for people and private property capitalism is "bad". Yet history shows repeatedly that the reverse is true. For example, The Volokh Conspiracy has a Thanksgiving article entitled How Private Property Saved the Pilgrims.

"The Pilgrims nearly starved to death because of collectivism and eventually saved themselves by adopting a system of private property. Economist Benjamin Powell tells the story here:"

In 1620 the Plymouth Plantation was founded with a system of communal property rights. Food and supplies were held in common and then distributed based on equality and need as determined by Plantation officials. People received the same rations whether or not they contributed to producing the food, and residents were forbidden from producing their own food. Governor William Bradford, in his 1647 history, Of Plymouth Plantation, wrote that this system was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. The problem was that young men, that were most able and fit for labour,did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. Because of the poor incentives, little food was produced.

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This change, Bradford wrote, had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been. Giving people economic incentives changed their behavior. Once the new system of property rights was in place, the women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability.

Once the Pilgrims in the Plymouth Plantation abandoned their communal economic system and adopted one with greater individual property rights, they never again faced the starvation and food shortages of the first three years. It was only after allowing greater property rights that they could feast without worrying that famine was just around the corner.

For a more detailed account, see this 1999 article by Tom Bethell.

Bottom Line

Russia experience a similar problem under the rule of Stalin. The collective farm fields were not producing enough food to feed the country. So families were given a small plot of land for their own use and these small plots kept the citizens alive.

Time for a Tea Party?

“In the 20th century, the Soviet Union made the state’s role absolute … In the long run, this made the Soviet economy totally uncompetitive. This lesson cost us dearly. I am sure nobody wants to see it repeated.” – advice from Russian Prime Minister Vladamir Putin to US President Obama at recent World Economic Forum

How topsy-turvy is the world when the leader of Russia must warn the leader of the US to avoid “excessive intervention in economic activity and blind faith in the state’s omnipotence.” How ironic that Putin is promoting capitalism when the West is vilifying it! “Nor should we turn a blind eye to the fact that the spirit of free enterprise, including the principle of personal responsibility of businesspeople, investors, and shareholders for their decisions, is being eroded in the last few months. There is no reason to believe that we can achieve better results by shifting responsibility onto the state.” - Putin

Bottom Line

I fail to understand why anyone would ever trust the government to do things better. Consider the DMV for licensing, the abuses of the welfare system, FEMA, regulation failures at the FDA, airport security, bad Freddie Mac loans, and other government bureaucracies. Is there even one government organization that is a model of efficiency and effectiveness?

Consider the new NY State budget. In a time of massive unemployment the state is “only” raising the budget a “modest” 9%. State employees won’t feel the pain. No salary freeze, no layoffs. The rest of us will pay with higher taxes.

If you agree that bigger government and deficit spending is wrong, join the Tea Party protests that are springing up everywhere. There is a nationwide protest scheduled for April 15, tax day.

Party Invite by Newt Gingrich http://www.youtube.com/watch?v=1vKr95e5aIE

Listing of events: http://taxdayteaparty.com/

How to Create New Jobs

“One of the consequences of such notions as "entitlements" is that people who have contributed nothing to society feel that society owes them something, apparently just for being nice enough to grace us with their presence.” - Thomas Sowell (American Writer and Economist, b.1930)

When Capitalism (US) is compared to Socialism (Russia/China) we think of factory owners and managers versus the “workers”. But I just read a fascinating story from Knoxville, Tennessee, where unemployed workers and managers worked together to convince companies to open new factories to hire the workers!

Knoxville Sign Workers Respond Creatively to Company Closing

When the sign making company, Image Point, abruptly closed down in Knoxville, the 270 laid off workers didn’t say goodbye and drift apart. They created a Facebook account to share tips on navigating through the unemployment benefits system, how to fight depression, and how to find another job. Managers shared contact lists to find out the unmet needs of Image Point customers. They discovered that "literally, dozens of supply companies in the area would be affected if we did nothing."

Realizing that Knoxville "had become the sign industry capital of the country," the laid-off managers and regional economic developers were able to obtain promises of industry contracts for local work. The local Chamber of Commerce called up other sign companies and invited them to take tours of the Knoxville-Oak Ridge Innovation Valley and hire the local talent to fulfill the promised contracts. Five companies opened shop in the “Innovation Valley” and five more have committed. Nearly half of the ex-Image Point employees have been rehired.

This is an amazing win-win-win story. The workers are happy to be working, the regional planners are happy to have more local industry, and the other signage companies “appreciate the proactive, economic development effort.”

Bottom Line
A few years back Hillary Clinton publish the book, “It Takes a Village to Raise a Child”. The story told here could have been titled, “It Takes a Village to Support an Industry”. This sounds rather Socialistic: more power to the village of workers but note that there was no mention in this story of federal or state government intervention or bailouts. No mention of the workers unionizing or opening a factory of their own. Rather local business developers discovered a need for new signs by local businesses and then won the support of distant sign makers by appealing to their profit motive. Capitalism, not Socialism, created new jobs for these workers.