A Bright Future for Destruction

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What drives progress?

The answer is simple. And it probably won’t surprise you.

But it’s hard to focus on progress when all you see is regression.

The Financial Times headlines, “Italy turns to China for help in debt crisis”.

The Age says, “Retailing to go from ‘bad to worse'”.

And Bloomberg News reveals, “BofA [Bank of America] to Slash 30,000 Jobs in Cost-Cutting Plan”.

Every way you look, you see destruction… job cuts, companies going bust and countries borrowing and begging from other countries.

Things look bad. And if we’re honest… it is bad.

But among the gloom, there’s something to look forward to.

It’s this…

No progress without destruction

Progress needs destruction. We know that may sound weird, but it’s true. Throughout history all improvements to human life have come as a result of destruction.

We’re talking about entrepreneurs coming up with new ideas, products and services that replace existing ways of doing things.

It’s destruction caused by creation.

In this case it’s where the destruction hits an established business. Now, the business isn’t necessarily doing something bad. It’s just that entrepreneurs always look for ways to make a profit.

If there’s no way for new firms to make a profit with an established product, an entrepreneur will find a way with another product.

The technology sector is a perfect example.

When new technology is introduced it will typically have high profit margins. This is because it’s new and the firm has invested a lot of money in it. So, in order to make money the firm charges a high price.

It’s a risk, because there’s no guarantee consumers will pay the high price. But if they do, the technology firm is on a winner… and the profits start racking up.

But there is a downside for technology leaders. High profits act as a signal to competitors. This causes competing firms to enter the market to get a cut of the action.

And because the established and new firms want to gain market share (and profits), the inevitable result is a race to the bottom as they undercut each other… prices and profits are slashed. This is, of course, great news for the consumer.

And it’s good news for progress and creative destruction too.

Why?

Searching for profits

Because at some point it becomes unattractive for new players to enter the market. Start-up costs and low profit potential means entrepreneurs will look elsewhere. Simply put, the “high profit signal” isn’t flashing anymore.

But that doesn’t mean progress stops. Entrepreneurs will just look for other ways to make money. And so the search for profits leads entrepreneurs to come up with newer ideas… something else that could shake up the same or a different industry.

Take television manufacturing as an example. The last 10 years has seen the industry go through several phases: old style CRT… rear projection… plasma… LCD… LED LCD… 3-D LED LCD… Smart 3-D LED LCD… what comes next?

For all we know, the “next” may have already happened but we haven’t seen it yet!

As each technology appears you see a wave effect in prices. Plasma TV prices were high until LCD TVs came on the scene… then they dropped. But as soon as LED LCD TVs appeared, standard LCD prices fell too… LED had become the new premium product.

We use this example because it’s the most obvious and visible. But this is what happens all the time. And not just in the technology sector. It happens with any industry.

But in order for progress to advance, you need an environment where entrepreneurs can flourish. Without it progress stops.

For years, Western governments have meddled with the free market. Erecting barriers to entry to keep entrepreneurs from destroying established businesses with new innovations.

That doesn’t mean entrepreneurialism is dead. It’s just harder to find.

But maybe it won’t be that way for long.

Looking forward to the future

A positive from the disaster happening in Europe and North America is the experiment of allowing governments to steer national economies is proving more of a failure as each day passes.

The destruction of national economies in Europe is painful. But the upside is it’s purging economies of welfare dependency and that should result in smaller governments.

And that’s why, in the long run we’re positive about the future.

The reversion to smaller governments will allow an altogether more positive type of destruction to take hold – creative destruction.

Old ways of doing things – ways created by the State – will be cast aside and replaced by the next breed of entrepreneur. One who can make profits without fear of government taxing away their gains.

This won’t happen overnight. But ultimately, we’ve greater faith in the abilities of entrepreneurs than we’ll ever have in the abilities of meddling bureaucrats.

Cheers.
Kris

Kris Sayce

Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It’s where he shares investment insight, commentary and ideas that he can’t always fit into his regular Money Morning essays.

Read more about Publisher and Investment Director Kris Sayce.

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17 Responses to “A Bright Future for Destruction”

  1. sledger@iinet.net.au'

    Drood

    2011-09-14T14:15:40+00:00

    SG…….very enlightening

  2. bobby_mager@yahoo.com.au'

    Bobby

    2011-09-14T15:09:25+00:00

    It does seem that people have ventured off the main ideas in the article. There is some truth in the progress needs destruction in technical terms where old machinery and processing systems are replaced with new and people are retrained in new tools and achieve better results with new technology. However at the moment we are seeing the good old classic gunboat diplomacy in Africa and the Arab world (to replicate the success of the East European Spring in the late 80’s). This “liberation” drive will open up the area to western products in order to offset their oil exports. Democracy will be delivered with capitalism whether they like it or not.

  3. wolframtrader@yahoo.com.au'
  4. shaun@weddell.com.au'

    shaun

    2011-09-15T13:09:02+00:00

    Wow I see this site is really just for the bears, the suckers who wait and wait until everything is stable and looking dandy.. THEN, put all your money in the market. Short this, destruction that, sell, sell.. Can see a theme running here.. the world will come to an end, but definitely not while retail investors are in on the game.

  5. BeardustChris@yahoo.com.au'

    Chris Chalkley

    2011-09-21T23:21:28+00:00

    This article ha a great start, but it took quite a leap to go from Creative Destruction to smaller governments. Ironic that a site that encourages buying gold and discourages borrowing to buy real estate would cheer the progress of Creative Destruction. If ever there was a product of ‘the old ways’ it is the value of gold. Yes we are in a gold bubble now, but it won’t last. Gold was an important permanent store of wealth in ancient agricultural economies. It still is in today’s third world economies. Gold has lost 95% of its value since the middle of the Industrial revolution. As an example, in the 1850s Melbourne had its first land sales. A block of land in what is today’s CBD cost five shillings, or about 3 ounces of sterling silver (a quarter of a Troy pound sterling), or about one third of an ounce of gold. Anyone who decided to keep gold and wait for the property collapse would now be able to afford a few weeks’ car parking in the CBD. The fiat currency hasn’t been so bad.

  6. authorhans74@hotmail.com'

    Hans-Dieter von Senff

    2011-09-22T17:48:53+00:00

    Laugh, if you want to, but communism could be just around the corner.

    In the 2008 Global financial crisis, caused by the United States of America, remember it was caused by Banks who got too greedy. These Banks were bailed out by the public purse, who assumed the debts run up by the private sector. The Private sector was given new money to proceed with the same
    nonsense, while the governments assumed the debts and the Taxpayer got the rough end of the pineapple.

    Assume for a second, that businesses in the near future, and it has happened before, can no longer make profits. Witout profit, workers, hence the Taxpayers get sacked, while the Government scratches around in order to raise the money to pay for the public debt it so willingly has assumed to bail out private investors in all kind of businesses. So, back to the printing presses to print the trillions of U.S. Dollars to pay the public debt…

    But, it is not only the United States, this time it will be the whole capitalist world that will be affected, markets will be protected by necessity,to hell with the level playing field, domoinated by a few countries who rely on exports, trade wars will start again in order to protect their markets. while the ordinary Tax payer, if he is still employed, will have to fork out more and more to subsidise the economic criminals who caused this in the first place. How long does one wait to the hip pocked nerve to react, before a Taxpayer notices, that he is being fleeced for the private sector by the government.
    A government that is seen to wage economic warfare against its own people will wait not long, before it is overthrown. Not by the ballot box, oh no, but by the anger and need of its own people to get rid of the representatives of private enterprise. How long, before a people will demand from the private sector, to return the money so freely given, to those, to whom it belongs.

    Remember, without profit private enterprise ceases to exist and government enterprises will be forced to fill the void. No private enterprise without profit.

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