When Destruction is Good

Media empires are crumbling! Thousands of electronic products face obsolescence yearly! Large, well-established companies are being exterminated by leaner, more innovative competitors! How can the economy possibly survive amid continual danger to its products?

Believe it or not, all this turmoil is positive. Creative Destruction is a term coined by economist Joseph Schumpeter in the early 20th century. It's the process of economic transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs is the force that sustains long-term economic growth, even as it destroys the value of established companies.

Here are a few examples of Creative Destruction from today's headlines:

• NBC Universal Plans Job Cuts, Reorganization as Advertisers Defect to Web: "NBC Universal will announce job cuts and a restructuring at its television network today to help reduce expenses as the unit struggles to rise from third place, people familiar with the decisions said. NBC Universal is likely to eliminate 700 jobs and order a reorganization that will save $750 million. The decision underscores the pressure television networks are under to reduce expenses as rival media such as the Internet and cable television lure advertisers."

• New York Times Co. Losing Advertising Business to the Internet: "The third-largest U.S. newspaper publisher said third-quarter profit shrank 39% as advertising demand waned. Advertisers are shifting spending away from newspapers to Internet sites such as Google Inc. and cable-television networks."

In both cases, new forms of media (the internet, on demand video and cable) are destroying older, less efficient forms of media like network TV and printed newspapers.

Capitalism and freedom have proven themselves worthy catalysts in spurring innovation, continually improving overall standards of living. This can sometimes feel turbulent as we read scary headlines of layoffs and budget cuts. But over the last several decades capital markets and globalization have made even the usurpation of entire industries in context to the aggregated economy. Schumpeter's dictum is truer today than ever: embrace Creative Destruction.

(Source: Bloomberg)