Creative Destruction

Schumpeter framed the phrase “creative destruction” into the economic discussion around 1940 in one of his publications.
Creative destruction is often shared with innovation when something new kills something older, or when a depression takes place.

A great example of the first is personal computers. The industry, destroyed many mainframe computer companies, but in doing so, entrepreneurs created one of the most important inventions of this century. Other examples from the recent past are: Xerox copiers or Polaroid instant photography that have seen their profits fall and their dominance vanished when rivals as Canon and Minolta from Japan launched improved designs that cut prices in the process.

So Wal-Mart on its turn revolutionized in achieving a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products.

In a different area owing to the Internet: the music, movie and publishing worlds have been seriously impacted, and many more industries are expected to change dramatically in the future.

But in the event of an economic depression: Schumpeter goes as far to say that the "process of creative destruction is the essential fact about capitalism." Layoffs of workers with obsolete working skills can be one price of new innovations that are valued by consumers. Creative destruction can cause severe hardship in the short term and in the long term for the ones who cannot acquire the skills and work experience necessary in the new environment.
Though an innovating economy generates new opportunities for workers to participate in more creative and productive enterprises, it still requires acquiring the necessary new skills.

On the other hand officials in charge claim there is not need for creative destruction. Three month ago the Federal Reserve Chairman, Ben Bernanke, remarked that the “green shoots” of recovery had become evident. That phrase captured the hearts and imagination of the public in general. No matter how dismal the actual economic news came out, green shoots seemed to be shooting out up everywhere.
Every economic data point, no matter how horrible, provided yet another opportunity to exclaim, “Aha! This is another green shoot!”
Seeds usually take root in fertile soil and flourish. What sort of green shoots have been sprouting from the soil of the U.S. economy?

Don’t believe in the green shoots that so many analyst claim to see, they can’t see. They claim it is “Less bad” but that is not good enough, and never will be. “Less bad” might throw off a greenish shade for a short while, but never do seeds grow.

Green shoots need roots, and those are missing in today’s economic climate. The underlying economy is still sick; it cannot provide very much nourishment to resurgent economic activity. Almost all essential “root systems” of economic activity remain impaired, diseased or compromised in some way or another.

Unemployment all over the world continued to soar, home prices continued to slide, and industrial production continued to contract, but things could have been much worse. And since the bad news has not been as awful as it could have been, the economy must be recovering, is the common sense. But, with the world in severe financial downturn, every day more obvious, more businesses are prone to the phenomenon of creative destruction. Yesterday, Bloomberg reported on the progress of the depression: "Earnings Drop Worldwide," says a headline. “In the United States, dividends are going down faster than at any time in the last 50 years. Businesses are earning less and paying less in dividends because shoppers have stopped buying. The recovery may be "long" and "fragile." Maybe "L" shaped, rather than the “V” we were hoping for.”

In other words the existing economic model is finished. It's over. Consumers are not going to go further into debt consequently Chinese factory workers cannot add more money to their savings. Instead, saving-rates in the US and elsewhere are soaring. As a result the Chinese are out of work and are facing riots that yet are described as "ethnic riots" leaving over 156 people dead in a remote west-Chinese province, urging today its President, attending the G8 summit in Italy, to return home immediately. The question arises: How much effect did the world’s financial downturns have on this civil insurrection? China - is "trapped," say analysts. They are thought to have "no choice" but to back the United States and its dollar. "China - with 80 different car makers to bail out, tens of thousands of huge socialist-era factories, and 100s of millions of workers to support - has a big problem," "Much bigger than they're letting on."

"But when you are trapped, you spend all your time trying to figure out how to get free," said another analyst. "Sooner or later, they'll find a way. Then, watch out."

“The world is currently undergoing an economic shock every bit as big as in the Great Depression of 1929-30. Looking just at the U.S. leads one to overlook how alarming the current situation is even in comparison with 1929-30.”

However with vision even in this era of creative destruction, great opportunities are within reach. It's a pity the Obama crew has missed out on those and continues to do so. As a clear example GM should have been left on its own to go into Chapter 11, offering entrepreneurial industrialist the chance to take over the ‘good’ bits and pieces once the judge has done his work, separating the bad and the good parts. Private industry is more efficient and cost effective than politicians even can imagine. Government is wasting valuable time and taxpayers' money with their bailout of $50 billion; they could have provided part of this money as a conditional loan to the new owners. Look at Germany where a similar deal is provided by the government for the new owner of GM’s OPEL- factories. This approach also should have been applied in relation to the banking industry, let them fail and turn into Chapter 11 treatment.
Moreover: don't forget that the people involved in the governmental bailout arrangements first have thought about their own (former) company interests, because those were owed a lot of money by the ones that received the taxpayers' bailout money. Paying Geithner and his cronies the bonuses from it is comparably to this, peanuts as government officials later disclosed. This issue would not have occurred once dealt more effectively by entrepreneurs.

Because of the absence of vision, entrepreneurs for sure would have used their professional insight more cleverly and would have taken additional advantage of the deflation now under way. Look at Japan 20 years in the doldrums and no way out yet. Most likely the US Government won’t be able to do a better job in this respect. Observing what has been done so far, the worst still might be on its way to come. The climate for new opportunities is improving by the day in this process. Companies and people without debt will grab their chances without any doubt. The time ahead will be of great interest and fabulous challenging. As good example is referred to The Smart Energy Grid project that should have been listed by the government as one of the first creative investments for the stimulus money, that will employ many people and making long lasting valuable improvements to society that also support and contribute to future generations.