Creative Destruction is Healthy

Lynne Kiesling

On Sunday Irwin Stelzer had a column in the Times (UK) interpreting the ongoing financial troubles at General Motors, airlines, Kodak, etc. through a Schumpeterian lens:

This process ?incessantly? destroys the old economic structure, and creates a new one. ?This process of creative destruction is the essential fact about capitalism. Every piece of business strategy acquires its true significance only against the background of that … perennial gale of creative destruction,? Schumpeter concluded.

This is the process that is now accelerating in the American economy. The future of newspapers is threatened by new technologies that multiply the methods of delivering news and advertising to consumers. Hardest hit are those, like Knight Ridder, that relied for their profits on monopolies of local advertising. If Google, its share price soaring as media companies? shares languish, succeeds in creating a jobs market that replaces classified advertising, the old method of spreading ink on dead trees will face an even greater threat.

A good read. He doesn’t push as hard as he could on the evolutionary aspects: although he says at the end that the losers will be hidebound managers and their shareholders, he doesn’t firmly plant the puck in the net by saying that managers and shareholders who anticipate and adapt to these changes can survive, and even thrive. Remember the saying in the “go-go” dot-com days, “innovate or die”? Looking through the Schumpeterian lens makes it apparent that the maxim applies to all firms and industries, not just technology industries.

We see this problem a lot in the culture of the electric utility. Deregulation (if it would ever really happen in the US …), competition, movement away from profits being determined by historical cost recovery, all threaten the existing utility business model. And I think I can say, uncontroversially, that the regulatory environment and the culture of the utility combine to produce “hidebound managers and shareholders” in many instances. Those who can loosen the binds, who can adapt, need not wither at the hand of creative destroyers. Such adaptation requires foresight, anticipation, leadership, and courage. Unfortunately it also requires a certain willingness to bear risk, which usually runs counter to being “hidebound”. There’s the evolutionary challenge here: you see the way to survive, but can you accept the risk?

Thanks to Masden Pirie at the Adam Smith Institute for the link.