How Capitalism Will Save Us (17 page)

This is what economists refer to as “churn,” which is always taking place. Economists Clair Brown, John Haltiwanger, and Julia Lane report that from the mid-1990s to the mid-2000s—a period encompassing the 2000–2001 recession—private-sector job creation and job destruction rates each have averaged almost 8 percent of employment per quarter.
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About one in thirteen jobs is destroyed every quarter. But a slightly
higher number of jobs are created on average, resulting in relatively moderate increases in the overall number of jobs.

The economists believe that the media’s tendency to emphasize the negative—even in good times—may result from the fact that more than two-thirds of job destruction occurs in blocks, i.e., mass layoffs at companies that downsize by more than 10 percent in a quarter. Job creation occurs in blocks, too. But the media are predisposed to write about conflict. And in those terms, job loss makes for the better story.

This churn is part of the economy’s process of reallocating people and capital. As economists W. Michael Cox and Richard Alm put it, the job loss that results is “the way the macro economy transfers resources to where they belong.”
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What happens then? People take new jobs in high-demand sectors. Entrepreneurs emerge to meet the needs in underserved markets. Innovations are developed. More jobs are generated. The economy recovers.

What does that mean for us today? As we’ve noted, the 2008–2009 recession was the result not of the economy’s normal creative destruction brought about by new technologies, but destructive government decisions. Nonetheless, spontaneous reallocation of resources still takes place. Two areas of the economy where, according to the Bureau of Labor Statistics, jobs continued to be created in 2008: education and health services.

Whether or not maximum growth occurs in the future will depend in large part on what the government does, such as creating a strong and stable dollar, lowering taxes, enacting sensible regulation (no more mark-to-market distortions, for example), and instituting positive systemic reforms of health care and Social Security.

As Alm and Cox explained in a 2003 op-ed in the
New York Times
, “It is the paradox of progress: a society can’t reap the rewards of economic progress without accepting the constant change in work that comes with it. Efforts to soften the blows, by devising policies or laws to preserve jobs or protect industries, will lead to stagnation and decline, the biggest threat to American workers.”
¹⁰

Alm and Cox’s intent was to reassure people that job growth would resume after the 2001 recession. It did. And what they said back then is just as true of the current downturn: “Facing unemployment and rebuilding a life can be hard on families, but the United States today is
better off for allowing it to happen. … Job growth will come, as it always has in the past. The economy, meanwhile, is as busy as ever in shifting labor from one use to another to make the country richer and more productive.”

W
hat doesn’t Google dominate? In just ten years, the company, which grossed almost $17 billion in 2007, has become a power in Internet search, online advertising, and media. It has helped to remake the news business through virtually inventing the concept of content aggregation, providing readers with the best offerings of a wide range of new media on a single page. Along with selling its own ads, the company in 2008 expanded its reach with its $3.1 billion acquisition of DoubleClick, the largest online ad agency that brokers advertising across the Internet. Google has entered the hardware business with a touch-screen handheld to compete with the iPhone. It is also making deals with computer makers such as Toshiba to provide its desktop search software.

Little wonder that software makers, telecommunications firms, advertisers, book publishers, and others have expressed fears of this growing power. Indeed, Google seems to swallow everything in its path. Doesn’t its domination of the Internet attest to the brutality of free markets, where big companies crush their competitors and keep getting bigger?

This thinking lay at the heart of antitrust legal actions that are the price of success for many of the nation’s biggest companies, which each year spend millions of dollars diverting—indeed, wasting—valuable intellectual resources on defending themselves and sometimes paying penalties, in federal, state, and private antitrust cases.

We discuss in our chapter on regulation that antitrust actions usually
have less to do with issues of corporate power and more to do with retaliation by other competitors. As for the notion that big companies like Google and others can gain “too much market power,” it may be true that some companies can for a time dominate their markets. But in the competitive Real World economy this dominance never lasts.

Free-market opponents and antitrust supporters fail to appreciate an essential principle of Real World economics:
so-called monopolies are almost always temporary
. Sooner or later, smaller, more nimble competitors enter the market and supplant established players. This competition can come not just from within an industry, but
from competitors with previously unforeseen new technologies
.

The
Forbes
500 list of best big companies is a powerful illustration of the vulnerability of big players to market forces: of the top 500 companies in 1983, only 202 were on the list twenty years later. The rest were outgrown or, in some cases, put out of business by competitors.

In the early 1960s, General Motors was so powerful that it decided to scale back production of its cars and trucks to avoid a federal antitrust suit. Once the world’s most powerful company, the automaker by 2008 was a hobbled giant that had to plead for a bailout from a hostile Congress, only to later be forced into government-orchestrated bankruptcy. At one time, no one could have possibly imagined that the initials of the great GM would years later stand for “Got Money?”

In his classic analysis
The Innovator’s Dilemma
, Harvard professor Clayton Christensen explains that in the Real World economy, “seemingly unaccountable failures,” like those of GM and others, take place all the time. In fact, they’re inevitable.
¹¹
Why? Christensen makes the seemingly counterintuitive point that great companies almost always fail not because they did something wrong but because they do everything right. They focus so heavily on serving their customers that they become myopic, failing to perceive competitive threats.

Christensen cites the classic case of Sears. The retail chain at one time accounted for 2 percent of all retail sales in the United States. The chain was a vibrant innovator, in many respects the Wal-Mart of its day: “It pioneered several innovations critical to the success of today’s more admired retailers: …supply chain management, store brands, catalogue retailing, and credit card sales.”
¹²

Sears was doing a great job serving its market. The problem was that
it did not see a new threat emerging from a new type of retailer—discounters. “Sears received its accolades at exactly the time—in the mid-1960s—when it was ignoring the rise of discount retailing and home centers, the lower-cost formats for marketing name-brand hard goods that ultimately stripped Sears of its core franchise.” The company was also losing its lead in the use of credit cards in retailing to two emerging players—Visa and MasterCard.

The computer industry is rife with similar cases of huge players being usurped by smaller newcomers. Few people today have heard of Digital Equipment, Commodore, Tandy, and other big names that were prominent in the 1970s and ’80s but have since lost out to subsequent waves of innovation.

IBM, “Big Blue,” was at one time the world’s leading computer innovator. The company dominated the market for big mainframes. But Christensen says that it “missed by years the emergence of minicomputers, which were technologically much simpler than mainframes.”
¹³
IBM became a leader in the market for personal computers. But it was slow to market laptops, fell behind competitors, and eventually sold its PC business to a Chinese company. It was overshadowed by innovations from companies like Apple and Microsoft. Big Blue managed to survive after a brush with insolvency in the early 1990s and today is a large, profitable company. But it is proportionately far less powerful than it was in its heyday.

The problem with industry leaders like IBM, Christensen says, is that
they tend to work on improving their existing products and services, rather than trying to anticipate the next big thing
. This emphasis is not due to a lack of foresight. To a big industry leader, cutting-edge products can appear less attractive, at least at first: “disruptive products are simpler and cheaper; they generally promise lower margins, not greater profits.” That’s because

A prime example: the failure of Xerox to anticipate the rise of desktop copiers.