Creative Destruction – The Demise of GM and Chrysler
General Motors Corp. sent some 1,100 U.S. dealers letters Friday telling them they won’t renew their franchise agreements when they expire on October 31, 2010.
Apparently, the dealerships didn’t meet the requirements of GM’s sales and service agreements. With the state of the economy and the condition of the auto industry, this is certainly understandable.
GM plans to cut its dealer network by 2,600 locations. That’s an astonishing 40% by the end of 2010.
Chrysler LLC is under Chapter 11 bankruptcy protection. It sent its dealers special delivery letters on Thursday, telling them which ones will survive and which ones won’t. The bankrupt automaker also released a full list of the 789 dealerships receiving the sharp blade of the axe. Incredibly, this is about 25% of their U.S. dealers. How the once mighty have fallen.
Creative and non-creative destruction is causing the demise of both GM and Chrysler.
Creative Destruction
The great economist, Joseph Schumpeter coined the term “creative destruction”. In Schumpeter’s “The Theory of Economic Development” he begins his chain of reason by describing the evenly rotating economy of the stationary state. Within this imaginary state there is no room for innovations and innovative activities, because these activities would disturb it, causing it to no longer be a stationary state.
Now this is just a logical tool economists use to comprehend change in the economic system. It isn’t reality. Reality is the dynamic economy populated with humans who live, act, create change and finally die. Under the marvelous capitalistic system, the hero is the entrepreneur.
The entrepreneur disturbs this equilibrium and is the prime cause of economic development. We can thank the entrepreneur for all the good things in life we currently enjoy.
Creative destruction occurs when something new kills something that has grown old. You’ve seen this many times. The auto industry killed the supremacy of the horse and buggy industry. Personal computers replaced old-fashioned typewriters. New brands of products and services replaced old brands. Foreign automakers captured business from domestic ones. Internet news is replacing the newspaper.
Entrepreneurs make our lives much easier by developing new, unheard of industries or improving existing goods and services.
The process of creative destruction is an essential feature of capitalism. Without it we would suffer in a world that predates the renaissance.
We must allow any business that isn’t up to the task of supplying the consumers’ most urgent desires to fail—and that includes the ones financial and political leaders claim are “too big to fail.”
Non-Creative Destruction
Some of GM’s and Chrysler’s problems were caused by government interventions on the marketplace, specifically their heavy-handed interference with the domestic auto industry. Not surprisingly, it would require a treatise to explain what happened, so I will supply a short explanation of the non-creative destruction caused by government interventionism.
Consider this. Most government interventions gain the support of the masses because they are presented as “soak the rich” measures. However, the day arrives when the most productive citizens of a society can no longer finance the amount of public expenditures. Ayn Rand’s prophetic book “Atlas Shrugged” explains what happens to the producers in a parasitical society—one that cannibalizes its best. Well, our progressive tax system caused that to happen long ago.
I do not know if you realized this, but our latest artificially created economic boom attracted charlatans and all forms of predators. Although some admirable and honorable entrepreneurs remain, most of the beneficiaries of the largess of the Federal Reserve System were people completely unfit to accumulate wealth under the honest social system of Laissez faire capitalism.
Here’s the bottom line. Through bailouts, the progressive tax system, burdensome government regulations, too many people are living at the expense of the productive and inflicting non-creative destruction on our economic system. On the other hand, the destruction of the capitalistic system is obstructing the ability of entrepreneurs to open up new frontiers through creative destruction.
Robert A. Meyer
http://libertarianway.com/