ECONOMICS AND TRADE | Achieving growth through open markets
07 April 2008
Creative Destruction
Empowering individual choice ensures growth and prosperity
(The following article is taken from the U.S. Department of State publication, USA Economy in Brief.)
With a large land mass, natural resources, a stable government, and a relatively well-educated workforce, the U.S. economy has some competitive advantages in the world marketplace. Importantly, it also has a willingness to endure, even embrace, change.
The U.S. economic system reflects what 20th-century Austrian economist Joseph Schumpeter described as free-market capitalism's "creative destruction." Jobs, companies, entire industries come and go.
Even cities and regions expand and, if they cannot adjust to change, contract – some old industrialized cities in the "Rust Belt" of the Northeast and Midwest and some agricultural states in the Great Plains have lost lots of people to other cities and regions over decades.
In a free market, decisions about what to produce and what prices to charge for products are made through the give and take of independent buyers and sellers – sometimes a few, sometimes millions – not by government or powerful private interests. Prices set this way best reflect the value of goods and services and best guide production of what is most needed.
Americans also view free markets as a way of promoting individual freedom and political pluralism and opposing concentrations of power. The U.S. federal government renewed its commitment to market forces from the 1970s on by dismantling regulations that had sheltered some industries – such as trucking, airlines, and telecommunications – from market competition for decades.
Vigorous competition and a regulatory system that embraces technological change have made the U.S. economy productive and provided American households with relatively high incomes. U.S. productivity went up briskly in the 1990s, with a peak 4.1 percent gain in 2002. This widened a lead over the European Union and Japan, mostly by more effective application of information technology. Since then, productivity gains have fallen off, only 1.6 percent in 2006.
A dynamic economy implies the freedom to fail. In the United States, business failure does not carry the social stigma it does in some countries. Failure, in fact, is often viewed as a valuable learning experience for the entrepreneur, who may succeed the next time.
In 2005 the U.S. government recorded the creation of about 671,800 businesses and the demise of about 544,800 others. Many small, little-known businesses start up each year; some succeed, some fail.
Tens of thousands of businesses enter bankruptcy each year, and some of them shut down permanently. In 2005 more than 39,000 businesses filed for bankruptcy.
In the United States even well-known big businesses fail. Trans World Airlines, United Air Lines, Delta Air Lines, Northwest Airlines, US Airways, Continental Airlines, Eastern Airlines, and Pan Am are just some of the major commercial airlines that have filed for bankruptcy since air travel deregulation in 1979 led to more vigorous competition. Some have re-emerged; others have disappeared forever, their assets scavenged by surviving competitors.
Another measure of the U.S. economy's dynamism: Of the 12 companies that Dow Jones listed in 1896 when it created its famous stock index to represent the industrial sector, only one, General Electric, remains on the index now. Others disappeared from the index as they were acquired by other companies, split into smaller companies, became relatively smaller players in the economy, or simply dissolved. Some of the companies that replaced them started out as small businesses.
So does the large number of small businesses help explain the U.S. economy's dynamism?
