Creative Destruction Produces Innovation And Progress

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One of the defining strengths of the American economy is not our ability to keep failing businesses on life support forever. It is our willingness to occasionally pull the plug.

That sounds harsh because it is. When a business collapses, real people suffer. Employees lose jobs, families lose income, and communities feel the pain. Economic reinvention is not painless—but it is often necessary. Telegraphs, buggy whips, and phone booths, all had their day, but are now certainly obsolete.

America has historically understood an unpleasant truth: failure is not always the enemy of success. Sometimes it is the delivery room. Socialists and Communists totally disagree!

Economists call this creative destruction—which sounds like something a toddler does to the living room, but is actually one of the engines of economic progress. When failing companies disappear, capital, workers, technology and talent are freed to move toward enterprises that actually have a future.

Otherwise, we end up with zombie companies—businesses that survive largely because somebody keeps bringing them another financial defibrillator. Eventually, government becomes very good at subsidizing yesterday while preventing tomorrow from being born.

The same principle applies to guaranteed employment. It sounds wonderfully compassionate: Give everyone a job and nobody has to worry about unemployment. This is the downfall of socialist and communist economic systems with the false ideal that eliminating struggle is what produces progress and growth. That which is productive, ends up subsidizing that which is not productive, obsolete, or dysfunctional. But what happens when a job produces little of value? We risk creating a national workplace where the primary qualification becomes knowing where the coffee machine is.

That doesn’t mean we should abandon people who are caught in economic upheaval. Quite the opposite. A compassionate society should help people through transitions with retraining, education and temporary assistance—not permanently preserve the economic structures that failed.

There is a difference between helping someone get back on their feet and building them a permanent chair because we’ve decided they should never have to stand again.

Perhaps our education system should take note. We spend enormous sums protecting institutions from failure while sometimes producing graduates burdened with debt who still aren’t sure how to balance a checkbook. Maybe education needs a little creative destruction of its own.

America has prospered because we have generally been willing to let capital, businesses and people move toward what works. We don’t subsidize failure forever. Failure hurts. Anyone who has lost a job or closed a business knows that. But refusing to allow failure will ultimately hurt even more.

An economy that cannot fail cannot reinvent itself. And an economy that cannot reinvent itself eventually becomes very good at preserving yesterday while everyone else builds tomorrow.

Progress requires the courage to let the obsolete disappear—and the wisdom to help people survive the transition. Socialism, Communism and State-owned enterprises hinder this growth process, has NEVER worked, and never will.