Creative destruction makes the world go around

Is it a selfish desire that drives individuals to seek new ways to make life easier, more enjoyable, and more rewarding? Does this selfish desire require a God-like presence to steer it and manage it so that whatever developments take place become available to everyone in the country? Or should it be left to the creative instinct of ‘man’ to satisfy the needs of his fellows?

Consider, for example, what happens when people decide they want to lead a healthier lifestyle. Essentially, they will choose to eat better and exercise more. To satisfy their need to achieve their goal, they will require different foodstuffs and different kinds of clothing and equipment to the ordinary man in the street. As they pursue their aim, it is likely that they will think of other kinds of food to fortify and sustain themselves, and work out what accessories will help them more comfortably along the way. Just think of the plethora of new products that enter the market almost daily in order to burn fat faster, build muscle, increase energy and reduce recovery times. What about all the gadgets and equipment that make exercising more convenient? Today, supermarkets stock a vast array of new foods, brought in from all around the world. No longer do we have to settle for ‘takkies’ but instead have hundreds of styles of running shoes, rugby boots, soccer boots, etc to choose from. And then there are the t-shirts with sweat resistance technology or light reflectors, etc, and all the other items of clothing all especially designed for one purpose or the other.

The list of products and services required to meet just this one aspect of life are enormous, and there are myriad fads taking place. Essentially, it is the entrepreneurs who recognise potential demands for new or improved commodities. They identify the gaps in the market and do what needs to be done to meet the demand. And an enormous number of people get sucked into or redeployed within the market in order to meet the demand.

But what makes sure that this new demand by consumers is met and who makes sure that the actions of entrepreneurs do not conflict?

A popular answer currently is that the government should know what we need and make such decisions; that in order for everyone to benefit, we should all live in a ‘planned economy’. But no one individual or government can possibly have all the necessary information to make such plans on behalf of a whole nation. No one can see the whole economy. They can see and understand only the sections of the economy that touch on themselves. Individuals need to be free to watch what happens in their little section and to make decisions that are relevant to their particular situation, be it as an entrepreneur, employer or worker, and do whatever they can to fit their endeavours in with the rest of the market.

Governments simply do not have enough information in order to plan an entire economy. Attempts to centrally plan an economy are entirely predictable and equally as tragic.

Many people fail to recognise and cannot believe that a market economy does not operate entirely unplanned. An amazing aspect of a market economy is the amount of planning that does go into it. Planning conducted incessantly by millions of individuals seeking to maximise their own interests to get what they want and to deliver all of the goods and services that people demand.

And ‘prices’ are the ‘secret weapon’ that makes all of this work without anyone or any group of individuals having to oversee the entire economy and steer it in the ‘right’ direction. As prices adjust, they steer resources and knowledge from one sphere of the economy to the next, redirecting scarce resources from unproductive to productive sectors.

As competition increases, firms may need to cut costs or profits or both in order to stay competitive and continue to provide the best good at the best price. Unfortunately, for some businesses, the new path being cut by consumers makes it impossible for them to continue and they are no longer able to compete. Think of the millions of businesses that have gone under because of the wave of ‘modernism’ and consumer choice: for example, typewriters have made way for personal computers, old fashioned TVs have been replaced by flat screens, photo developers have had to make way for digital photography, bookstores are giving way to e-books. There are literally millions of examples of products and occupations that have fallen victim to this “creative destruction”.

As this process unfolds, job losses are bound to occur in certain sectors of the economy. A market economy relies on the division and specialisation of labour to produce goods and services that maximise our unique potentials. Take your own life as a case in point. If everyone had to first make their own toaster, kettle, and geyser, it would be a long time before they would be able to enjoy a warm breakfast or shower, let alone get much further in life. But, thanks to the redirection of resources and the creative drive of entrepreneurs, there will always be a market opening up and requiring labour. Provided people are prepared to face new challenges, learn new skills or even completely change their working direction, if business is left to steer itself according to the demands and desires of the masses, there will be work to be done and money to earn.

The lesson we all need to learn is that no company is too big to fail and no industry is worth protecting because it provides jobs to hundreds of people. If big business was never allowed to fail, we would still be travelling around in horse-drawn carriages, and bashing out letters and reports on typewriters, and many of the thousands of visible and invisible advancements that we enjoy would simply not have occurred. The market must be free to operate, it might not be perfect but it is, without a shadow of doubt, superior to government meddling and a planned economy where one sector is promoted at the expense of another because government has deemed it to be ‘strategic’.

AUTHOR Jasson Urbach is an economist with the Free Market Foundation. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Foundation.

FMF Feature Article / 18 October 2011

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