November 19, 2008

Creative Destruction

Creative destruction has been posited by many economists.

Joseph Schumpeter popularized and used the term to describe the process of transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.

Prolly the most quoted example was how the invention of the car put the buggy whip manufacturers out of business. We see it over and over again with innovation. "Fulton's folly", the steamboat caused the demise of the sailboat. Trains replaced stagecoaches. The telegraph put the pony express out of business. Those who don't innovate are destroyed and replaced by sumpin' better.

Now we see the Big Three, hats in hands and on their knees begging for gummint assistance. They are dinosaurs. They failed to innovate. They surrendered the small car market to Toyota, Honda and Nissan because there were larger profit margins on SUVs. They had a wakeup call in the 70's, but hit the snooze alarm and went back to sleep.

The best thing that we could do with the Big Three is to let them fail. Let them declare bankruptcy. That would allow them to shed their overpriced union labor. Sorry union dudes, you are paid too much to make inferior cars. Foreign manufacturers use non-union American labor to make better and more reliable cars.

Here's a quick little anecdote about unions. Back in the late 80's or early 90's, in St. Louis, Kroger told its union workers that it couldn't compete with the other grocery chains in St. Louis and would have to have some concessions from the unions. The unions refused. Kroger left St. Louis leaving all those union workers out of work. They didn't realize that 80% of sumpin' was better than 100% of nothing.

In this mornings' Atlanta Urinal and Constipation, in the letters, some booger eatin' moh-ron wrote the following:

I pray that we never enter into another world war. However, should the unthinkable occur, Iím not so sure BMW, Mercedes, Kia and Hyundai would readily open their Southeastern-based assembly lines to help the war effort. Maybe China would help us?

Based on providing for our national security, the Big Three need our help now!

No. They. Don't.

Dude! If we went to war, BMW, Mercedes, Kia, and Hyundai wouldn't have much choice. Their plants are here. We would take them over. On the upside, their plants are more modern than the plants of the big three and they have a much better workforce.

Back to Schumpeter. He was prescient. Here he is on the demise of capitalism.

Schumpeter's theory is that the success of capitalism will lead to a form of corporatism and a fostering of values hostile to capitalism, especially among intellectuals. The intellectual and social climate needed to allow entrepreneurship to thrive will not exist in advanced capitalism; it will be replaced by socialism in some form. There will not be a revolution, but merely a trend in parliaments to elect social democratic parties of one stripe or another. He argued that capitalism's collapse from within will come about as democratic majorities vote for the creation of a welfare state and place restrictions upon entrepreneurship that will burden and destroy the capitalist structure.

Sound familiar? Welfare state. Gummint regulations and unfunded mandates. Overtaxation of business. This dude died in 1950 but saw what's happening today.

Schumpeter emphasizes throughout this book that he is analyzing trends, not engaging in political advocacy. In his vision, the intellectual class will play an important role in capitalism's demise.

By employing the techniques of Antonio Gramschi and taking over the schools and the media.

The term "intellectuals" denotes a class of persons in a position to develop critiques of societal matters for which they are not directly responsible and able to stand up for the interests of strata to which they themselves do not belong.

Was this guy good or what? Did he have a crystal ball?

One of the great advantages of capitalism, he argues, is that as compared with pre-capitalist periods, when education was a privilege of the few, more and more people acquire (higher) education. The availability of fulfilling work is however limited and this, coupled with the experience of unemployment, produces discontent. The intellectual class is then able to organise protest and develop critical ideas.

And elect bonerheads like JHE, Barney Frank, Chuck "the schmuck" Schumer, and Speaker Blinky.

"So let it be written (by Joseph Schumpeter), so let it be done." Capitalism is dying. We are witnessing its death. I'm hoping I'll be gone before the funeral.

Posted by denny at November 19, 2008 01:54 PM  

I found this passage from Wikipedia to be quite interesting:

Schumpeter's most popular book in English is probably Capitalism, Socialism and Democracy. This book opens with a treatment of Karl Marx. On the surface level, this piece seems to support socialism. Schumpeter's reasoning was that an overt defense of capitalism would prompt the book only to be read by those who already supported capitalism. Therefore, he believed that he must masquerade as a supporter of socialism to entice the young socialist to read his work. In the end, he hoped to awaken self-recognition in the reader to the flaws of socialism.

Posted by: PeggyU on November 19, 2008 03:31 PM

Schumpeter and Friedrich Hayek both had the right idea. Unfortunately, it's not good news. I hope I'm gone before you, too.

Posted by: John in May-retta on November 19, 2008 03:42 PM

I know the point is about the demise of capitalism - BUT - Did you see how arrogant the CEO's from the car companies acted towards congress.

That was after they flew into Washington on private jets that cost $20,000 each for the flight.

How many cars was that for 2 hours of flying?

They are of the wrong mindset and need to go.

Mitt Romney wrote a great article about letting the Big 3 Go Bankrupt.

He would have made a great president, esp. in these times of economic woe.

Posted by: Willie on November 19, 2008 03:45 PM

I have more faith in people and capitalism....thse closet commies will try their best to destroy the nation but will be seen off by peoples natural desire to advance...a little taste of European socialism goes a long long way.

Posted by: thud on November 19, 2008 04:51 PM

"I pray that we never enter into another world war. However, should the unthinkable occur, Iím not so sure BMW, Mercedes, Kia and Hyundai would readily open their Southeastern-based assembly lines to help the war effort. Maybe China would help us?"

Good grief, that guy must be on the UAW or Big 3 marketing squad. Heard a radio spot this morning on the local news station citing exactly that (paraprhasing a little) -- "The Big 3 helped us win WWII, we can't let them go out of business now!" Of course, the "sponsor" of this ad was some advocacy group with a Michigam mailing address.

Posted by: Grumpy Old Ham on November 19, 2008 05:29 PM

You have to remember that the country took a HUGE hit when Studebaker, Packard, Hudson, and Nash failed. Oh wait, no it didn't.

Posted by: Alan on November 19, 2008 05:55 PM

As long as the major corporations don't need to produce anything to make a profit; as long as they can keep the same management teams afloat and in power by getting money from us, the taxpayers, why make product or innovate? Trickle down welfare. Let'em go. Let the current MBA's live on craftsman's or clerk's wages for a while and reality may teach'em about getting ahead by being better than others in the same business.

Posted by: Old Guy on November 19, 2008 10:27 PM

was at an interesting thing yesterday with a pretty big time economist. He had an interesting point. said that Obama can be like either: Roosevelt, Carter, or Clinton.

Made a case that Roosevelt was a white mans Hugo Chavez. Nationalizing stuff, trying to load the supreme court, kept running term after term and helped to assure the continuance of the depression. Carter he said was: incompetent, scared, fatalist. Clinton he said tried national health care, got bitch slapped by Newt and ran for the middle with tax cuts and said in 1995 state of the union "the welfare state is over".

said if he is a Clinton not a carter or Roosevelt we have a chance. fascinating.

Posted by: patrick on November 19, 2008 10:58 PM

I wonder is Schumpeter's ideas were the spark for Atlas Shrugged by Ayn Rand. Sad to see how a work of fiction turned out to actually be a prophesy of the way things seem to be going. I am not all doom and gloom about this yet but I certainly don't have the optimism I had a year ago.

Posted by: Titan Mk6B on November 20, 2008 08:52 AM


Weíre kindred spirits. I just turned 79 which means that I grew up in the depression. Iíve also been around for 79 years of economic churning. I have been saying, for some time now, that I thank God that I was not born one day later, because that would diminish my chances of being gone during Americaís final days. I was fortunate to experienced the Ď50s, the best times in the history of this country. The mood was optimistic, we had an abundant economy, crime was at its nadir.

But, as declared in The Fall of a Republic by Alexander Tyler (Google it) abundance marks the apex in the life of a democracy. The stages following abundance are: selfishness, complacency, apathy, dependence, and finally bondage.

You cannot be held responsible without acquiring authority. The more we make the government responsible for our personal welfare and the more we become dependent on the government for jobs, health care, housing, etc., the more power we give to the government to direct our lives. This is called bondage.

If you produce more than you consume, you have abundance and expansion. If you consume more than you produce, you have shortages and contraction. If you reward something you get more of it, if you penalize something you get less of it. We are rewarding consumption and penalizing production. Income taxes penalize production, government welfare programs reward consumption.

In the history of mankind, no government has ever been a producer of wealth. As we grow government with more welfare programs (and the bureaucracies created to administer them) we reward, therefore increase consumption. As we raise income taxes, we penalize, therefore reduce production.

The cry of the left is: We need to have compassion, we need to tax to care for the needy. I agree that we need to have compassion and we need to care for the needy. However, where in scripture does it say give to Caesar so that he may care for the needy. My understanding of scripture is that caring for the needy is our job despite Caesar not because of Caesar.

Some satire. Chicago no longer exists. In October 1871 Chicago was destroyed by fire. There was no FEMA to rebuild it, consequently, no more Chicago. San Francisco no longer exists. In 1906 San Francisco was destroyed by an earthquake, There was no FEMA to rebuild it, consequently, no more San Francisco. Galveston no longer exists. In 1900 it was destroyed by a hurricane. There was no FEMA to rebuild it, consequently, no more Galveston. New Orleans was struck by a killer hurricane in 2005. We have FEMA. New Orleans not only continues to exists, but is thriving.

Our Founders recognized that government was necessary. But, they saw government as a problem, not a solution and tried to keep it small and limit its power. By the end of the middle of the 20th century government was well on its way to inexorable growth.

When the people find that they can vote themselves money, that will herald the end of the republic.-- Benjamin Franklin

As the percentage of people dependent on, or employed by the government grows, the percentage of people employed for the production of wealth shrinks. In time, economic collapse is inevitable. Have we reached that point?

Posted by: Art on November 20, 2008 11:40 AM

Your comment about Kroger in St. Louis was fascinating. Almost the exact same thing happened in Pittsburgh (maybe all of Pennsylvania) when I was about 12 years old. After all the Kroger stores closed or were sold off, the union declared "victory." Even as a kid, I could see how stupid this was. This was probably the first time I realized how destructive unions could be.

Years later, the same thing happened with Pittsburgh's biggest newspaper, the Press. After a prolonged strike, they just gave up and closed shop. Now Pittsburgh only has one major paper. You would think the union members would prefer a job with some concessions to no job at all, but apparently that is not the case.

Posted by: Uncle Bill on November 20, 2008 12:18 PM

Nice essay, Art. Looks as if you got into the hard drive of my old Dell before it crashed. Any way you could send me the stuff I didn't save and now can't retrieve from it?

One of the things I lost was a rework of "O Holy Night" that I wrote the day after the election. on my wife's old Compaq which then got a virus and died 'cause I never upgraded the security package since we never went on-line with it. Remember the first stanza, but can't put the rest of it back together:

Unholy night! Michelle is darkly smiling.
It is the night of the Anti-Christís birth.
Long had her boy been publicly beguiling
The media with his false sense of worth.
A speech of hope, and the left wing all rejoices,
For with him comes a Marxist free for all.
Hide all your cash, O hear the taxing voices!
O night bizarre, O night of our downfall.
Unholy night -- O night -- O night absurd.

As I've said on this and several other blogs, I was a teenager all thru the 50s and agree that they were the best of times . . . mostly downhill since then. Ergo, I've had my taste of the best, but I weep for my grandchildren, whose chances of living a better life than I did are essentially nil.

Posted by: ET on November 20, 2008 02:37 PM

Art: I believe I read that the federal government is the country's largest employer, and about 2% of the US workforce are federal employees.

Posted by: PeggyU on November 20, 2008 05:10 PM

I'm nearly 50.
We are watching the convergence of all the left has been laboring for. The stage is set and myself, my friends and you are watching it collapse. We are yet strong enough to resist. I am hearing those of like mind in my generation using the word revolution. I am still healthy and strong and have become politically active. I've had it. I do not want in twenty years time be too old to do anything about the encroachment of a Socialist state. I imagine in my though the old men being lead to the gas chamber in the 30's by the Nazis, and do not want that happening to me. Also, want to provide for a better place form them and their children to live.
2010 I will be fifty, but and converted from a get a long personality into a fist shaking, fed-up, tired of being bullied, guilt free white American.
Global Warming...BS!
Share the Wealth...BS! ( I work really hard )
Financial Crisis...BS! Manufactured
Fairness Doctrine..BS! Silence the opposition
-Ooh I am afraid I'm becoming a Grouchy middle aged man

Posted by: MaGosine on November 20, 2008 06:47 PM


Add to that state and municipal employees, teachers, universities receiving grants to study if fish fall in love, those receiving one kind or another government hand out, etc. and I think that you will find that it is much, much more than 2%. And remember, the more there are, the more vote Democrat creating more government programs creating more Democrat voters and on and on till we reach the tipping point, if it has not already been reached.

Posted by: art on November 20, 2008 07:54 PM
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