Creative Destruction

There is an element to capitalism, and economics in general, that I feel it is important to bring up in our current economic situation. It is called creative destruction. The concept has two definitive points to it. First, is the point that new innovation will kill off old and outdated products and industries. Think about what Cd's did to cassettes and what the iPod is doing to Cd's. As the new innovation came along, the old process died out. Second, is that when something dies out, other products and industries will pick up the remaining market share. The best example here is the collapse of Washington Mutual and Wachovia. They died out and their customers went to other banks. This is what creative destruction is, and it is a great thing.

It sickens me that our elected officials are so short sighted that they forget about this great feature of a free market economy. I am tired of hearing that if General Motors goes bankrupt, then it will mean millions of people will be out of work and that it will be a death nail to the United States manufacturing industry. I actually heard someone dumb enough to say that "as GM goes, the US goes." There is not doubt that if GM goes bankrupt it will cause a temporary increase in unemployment and a temporary drop in US manufacturing, but this is where creative destruction kicks in to make it better.

If General Motors goes out of business and never makes a car again, (which for the record is not what would happen if they filed bankruptcy) the result would not lead to an equal drop in demand for cars. The reality is that the demand for cars would stay roughly the same in the short term and would be completely unchanged in the long term. As a result, other car companies would have to make more cars to meet that demand and capture GM's old market share. These companies would have to open new plants, buy more parts, hire more workers, etc. The closure of General Motors would spur the growth of other auto makers. Many of the jobs lost by the General Motors closure would be re-created by this growth. In fact, the real reason that the White House and Democrats are trying so hard to save GM and Chrysler is because they know that these new jobs will be created in "Right to Work" states and will probably not be union jobs. Since union workers are such a big part of the democratic constituency, these people must stay employed so democrats can continue to have control of those Midwest swing states.

The other current example of creative destruction not being allowed to run its course is in newspapers. To be clear, the internet has made print journalism largely obsolete. Add in the growing popularity of Kindles and it is easy to see that printing newspapers is not good business anymore. Internet news sources can be more current and offer a wider variety of opinion. It is cheaper for the reader and in most cases, makes more economic sense to the newspaper company than the print copy. This is how creative destruction makes a process better but must destroy an old process in the act. Once again, the liberals in this country do not want to see creative destruction run its course in this instance because it is harmful to them. Liberal ideology runs the print media and has a nice monopoly of information going. However, once the medium for sharing information goes to the internet completely, then competing viewpoints are more easily accessible and widely distributed. Just think about how much liberals hate Fox News. Once upon a time you had to get your news with a liberal bias. Because of creative destruction that is no longer becoming the case.

Creative destruction is a great thing. It makes life better for our nation as a whole. Just remember, you can't make an omelet without breaking a few eggs.

- The Banker