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Schumpeter Gone Wild

The economic landscape is littered with examples of creative destruction.

11:00 PM, Nov 28, 2005 • By IRWIN M. STELZER
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And why traipse to a Blockbuster store to rent a video when hundreds of movies are available from multi-channel television providers and on DVDs mailed to your home by companies such as Netflix? Result: Netflix recorded 3.6 million subscribers, up 61 percent year-over-year and third quarter revenues of $174.3 million, up 23 percent. Meanwhile, the much larger Blockbuster saw third quarter revenues drop 1.7 percent to $1.39 billion and gross profit fall 8.3 percent to $790.5 million, forcing a financial restructuring.

Which brings us to General Motors, which is in the process of being destroyed by a combination of what Schumpeter called "new consumer goods" (higher-quality and more attractive imports), "new methods of production" (the lower-cost plants of Toyota and others), and "new type[s] of organization" (shorter drawing-board-to-production-line times)--not to mention inept management and the cost of benefits lavished on workers when those costs could be passed on to consumers. Investors responded to the company's survival plan by selling off its shares, already down 42 percent in the past year. Fortunately, it is not the case that what is bad for General Motors is bad for the country.

Competition of this sort, wrote the man who never succeeded in becoming Austria's greatest horseman, "strikes not at the margins of the profits . . . of the existing firms but at their foundations and very lives." Good news for creative destroyers and consumers, bad news for hidebound managers and their shareholders.

Irwin M. Stelzer is director of economic policy studies at the Hudson Institute, a columnist for the Sunday Times (London), a contributing editor to The Weekly Standard, and a contributing writer to The Daily Standard.