By: Douglas J Utberg

Joseph Schumpeter is widely regarded as one of the greatest economic minds in the history of mankind.  One of his principal contributions to posterity is the notion of Creative Destruction.  The premise of this idea is that economic progress often requires current economic entities to be displaced by new competitors that can provide a better product at a lower cost.

It is not hard to see this concept in practice if one looks at a long time interval.  In the 19th century, the railroad companies held a daunting monopoly over transportation.  However, the emergence of automobiles and the trucking industry displaced the railroad monopoly by making it obsolete.  In a similar fashion, the emergence of hand held calculators quickly made the use of ‘slide rule’ instruments obsolete.  The reason why this phenomenon carries such power is that established market players tend to have high profit expectations from financial stakeholders.  This leads to relatively high prices, which gives new entrants a lot of room to undercut and still create a profit.  When new entrants come into the market, they are not beholden to an entrenched business model and can capture efficiencies that are not being practiced by the current market leader.

The importance of this concept lies in the fact it is extremely easy to become resistant to the dynamic change that is needed to keep a market economy moving.  This resistance typically comes from jobs and pensions that are locked-in to a specific way of doing business that may become obsolete over time.  (Please allow me to drop a ‘sledge hammer’ hint and point out that the current market turmoil is being caused by a breakdown of the ‘hybrid’ business-government relationship in free markets that can only be worsened by a perpetuation of this relationship through repeated ‘bailout’ initiatives.)

It is important to keep this in mind that in the current global economy, attempting to protect obsolete business models through political influence will only forestall the inevitable transition to new ways of doing business.  If this protection is carried too far, the new ways of doing business may be suppressed entirely.  This can result in one of two undesirable scenarios.  The first is that the economy becomes stagnant, as entities fight for control of a shrinking pie.  The second is that the creative inertia shifts overseas, and the global influence of our economy becomes obsolete itself.  The key for each of us is to ensure that we are constantly moving toward emerging waves of the economy, instead of clinging to obsolete ways of doing business.