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The Necessity of 'Creative Destruction'

YOUR MONEY | MARKET BEAT / TOM PETRUNO

November 16, 1997|TOM PETRUNO

Schumpeter acknowledged that creative destruction exacts a human toll. The continuing wave of layoffs in the 1990s (in recent weeks, add Eastman Kodak, Citicorp and Levi Strauss to the list) unquestionably creates hardship for the individuals and families involved.

But it's an occupational hazard for the media that news of 10,000 job cuts inevitably makes headlines while thousands of individual hirings across the country each day go unreported.

Schumpeter believed that capitalism's success was not a function of perfect competition, but simply of innovation and constant change and renewal at the invisible hand of market forces.

One clear implication is that if it wants to remain the world's premier capitalist nation, America has little choice but to accept perpetual upheaval in business. Forget the idea, then, that restructurings and downsizings will someday cease. By Schumpeter's definition, such stability is incompatible with successful capitalism and economic growth.

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It would also seem that if Asia's economy is to be revitalized, governments there must accept the process of creative destruction, and even sanction it--perhaps just by stepping away from policies that encouraged banks in Japan to pretend their bad loans didn't exist, Korean conglomerates to invest in industries where world capacity was already excessive, and Thai developers to build office towers for tenants who didn't exist.

As James Flanigan suggests elsewhere in this section, there are signs that Asia already is embracing deregulation and freer markets; as those governments study their alternatives, it's tough to imagine how they could rationally come to any other decision. But that should also be a warning for American companies, entrepreneurs and investors: Creative destruction elsewhere in the global economy will demand much more of the same at home.

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Tom Petruno can be reached at tom.petruno@latimes.com

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