Creative Destruction

Wednesday, May 25, 2016

You may or may not have heard of the term "creative destruction" before and I promise I will not get too "wonky" on you.

The term can be attributed to Joseph Schumpeter in 1942 who considered it the essential fact about capitalism. Schumpeter was an Austrian-American economist who developed the concept of creative destruction in reference to capitalist development and the business cycle.

Some believe that his theory supports the idea that creative destruction will lead to the eventual failure of capitalism as an economic system. The term currently refers to the unappealing choices that are considered necessary for business sustainability. Okay, I know I'm getting too "wonky."

In its simplest form, creative destruction is a process through which something new brings about the demise of whatever existed before it.

I was thinking about this idea the other day as I was reading a couple of news articles and again this morning when Best Buy announced its earnings and prospects for the future.

When was the last time you walked into Macy's, Best Buy, or any other brick and mortar retailer to purchase something as opposed to just ordering something on Amazon and having it arrive at your door?

One of my sons needed to get a new cord for his headphones and I told him to just go to Best Buy and pick one up. In my day it would have been Radio Shack, but that is another story. He laughed at me and said he would just order it on Amazon, use my Amazon prime, and it would be delivered to my door in two days. For under $5, the new cord was in his hands within two days.

To me, that is an example of creative destruction. Do any of us actually want the traditional shopping experience that my generation grew up with or should businesses pay attention to this younger generation that has grown up with smart phones?

Schumpeter would argue it is the beginning of the end of capitalism because of all the jobs that will be lost when all the brick and mortar stores close. If there are no jobs, no one has any money to buy anything and capitalism fails. The business community would argue technology has enabled huge leaps forward in efficiency and cost reduction while opening up endless opportunity for the next generation.

Another news item caught my eye involving Wendy's. It was reported that Wendy's would begin using self-serve kiosks (order screens) in approximately 6,000 of their locations in the near future. This is in direct response to the push toward a $15 per hour minimum wage that has been mandated in certain communities by regulations.

So what do you think about this?

I go out to eat frequently and notice that most people sitting at tables in almost any dining place are on their smart phones doing whatever everyone does on their smart phones. Americans have certainly gotten comfortable using their touch screens. If Americans have a choice of now paying $13 for their whopper combo because of a $15 dollar per hour minimum wage or using a touch screen placed right in front of them to order the less costly number one combo, which one do you think they will choose?

Is this the creative destruction that leads to a better society or does it lead to the end of capitalism?

Think about the choices that we have when it comes to our next presidential election this fall.

One side says the unemployment rate is only 5 percent, in other words we are at full employment. The other side says that rate is fiction and the real unemployment rate is a double digit figure.

The IRS says that 48 percent of Americans pay no federal taxes at this point. One side says a certain group of people are going to pony up a lot more in taxes and one side says it will reduce taxes. Neither side says they will cut government spending.

Is creative destruction destroying the middle class or are government policies destroying the middle class? Is creative destruction the heart of free market capitalism? Is government the answer or the problem?

Author

Wesley Lentz Wesley Lentz

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