A Bright Future for Destruction

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.


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.


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 editor of Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. 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.

Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

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16 Comments on "A Bright Future for Destruction"

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All very convincing…but…all this product innovation and company development relies on… the end consumer being able to afford to buy what-ever-it-is. Given the cummulative debt load carried forward from the purchasing of the last many innovations, I’m not sure there is the fire power left in the Western consumer to adopt….well…anything new that arrives!


Janet – I agree.

When will debt be low enough to encourage spend / new borrowing to fuel demand. If not a when, then what debt to home equity or debt to GDP will people’s sentiment change and encourage private spending/borrowing?

This decade I hope!

The popular media is pushing China to the rescue………but they also had this to say “Italian Economy Minister Giulio Tremonti said on Thursday that Asian investors are reluctant to buy Italian bonds because it sees they are not being bought by the European Central Bank.” From Reuters “Italy says Asia asking why why ECB isn’t buying bonds”: And; When you talk to Asia they say: “We don’t understand what Europe is,” he continued. “The second point is that they say ‘if your central bank doesn’t buy your bonds, why should we buy them”? So I see a reluctant lender that… Read more »

Sayce gives one example. There are also innovative business models for the indebted and depressed. The Japaneae have already cornered the mfng/retail model for low-cost FMCG. The West is at least 10 years behind and the Japanese have cornered the quality supply chains.

For all you free marketeers, Somalia currently is the only country with a free market and almost no government, a role model for the Sayce ideal. As a result of inadequate government support and administration, Somalia’s private sector has grown considerably, particularly in the spheres of trade, commerce and infrastructure. Private participants have also extended their contribution to the primary sectors, particularly in livestock and fisheries. excellent say the free market gurus, just as we said it would, but. The United Nations, in a 2007 report, stated that Somalia’s service industry is thriving. Despite these favorable changes, Somalia has a… Read more »

Drood, how is that relevant to Schumpeter’s creative destruction? But I guess you’re right. Most people would rather kneel down before a govt to solve its problems (at the expense of others) rather than live free. It’s a natural response but I doubt you will fund the comfort you seek.

The Wolf

Drood has an unnatural and unnerving interest in Somalia…my guess is he has lost several thousand dollars to a “princess” who turned out to be a 39yr old conman called Igbu…


For the defenders of Keynes…and fiat money…



haha Drood- the other side of your coin is Zimbabwe, that rich thriving country completely under Govt rule…

So, which would YOU prefer, Zim where they can’t use their own currency, Govt corruption with break you or kill you, and there is nothing to buy in the shops? or Somalia, where you need the protection of your local Police (sorry, warlord) and you live like any other African in the third world.

Actually, the longer whites ruled an African country the better it is today, so South Africa is the most advanced.

I have yet to see one single argument from you losers to support how a free market would work in reality. You cant continually whine about the status quo without suggesting a credible alternative, its like saying “we need a spaceship to go to mars” without knowing how to build one. JC…. You can live free anytime you like, but you have no idea how. I have done it and found it has good and bad points, but at least i had the balls to try. You just want someone to do it for you. KP….. that just shows you… Read more »

You’re not here to read others arguments or to really listen to someone else’s response your here to be angry
Why not focus that energy in one of these countries and actually help instead of spending this energy tormenting others with your frustrations