Saturday, May 28, 2005

Creative Destruction

Creative Destruction

During the days, you may have heard too much about "creative destruction". However, the process of "creative destruction" is very much alive in today's economy.

The term was first used by Joseph Schumpeter. The easy way to understand the idea is through example. Today, cell phones and VoIP phones are killing the old land-line phone business. Consumers are gradually replacing high cost phone service with more convenient cell phone service or very low cost VoIP service.

Over the next few years, a merger of cell phone service and VoIP service will make high cost land lines a thing of the past. No doubt, the late adopters will hold onto land lines for a long time and land lines will be offered in bundled packages at shapely discounted prices, but in the majority of cases the land lines will be replaced.

Verizon, SBC, BLS and other land-line phone companies are currently spending billions to build high speed internet service capacity. Again, land-line service will be offered as a part of a package of services but the days of paying $25 or more per month for traditional "local" phone service is on the way out.

Americans lead a blessed existence. We often fail to appreciate that our free economy allows us to adopt new products and services with relatively little pain. Other more protectionist economies, allow old inefficient services to bleed to death slowly. America is a more efficient economy because we are open to change.

Fortunately and unfortunately the ground rules of our economy are often slow to change. There are many times when old laws prevent the forces of creative destruction to work. Our governmental system of checks and balances works well but is very slow at times. The recent compromise in the Senate will have consequences that are impossible to forecast. The net total effect is going to lead to some outstanding changes.

It is hard to appreciate how the compromise will benefit the country. What the compromise will do is allow for legislation to pass without it being forced through by one party. The resulting legislation will be weakened in some ways but improved in others. Yes, even in our government, the US practices the art of creative destruction. The old is going to be replace by the new.

There will be many discussions about the process in the years ahead. Politics will obscure the power of the compromise. But, again, legislation will pass and judges will be confirmed as a result of the compromise.

Let me leave you with an example of things to come. Depression era legislation to "protect" community power control needs to be over-hauled. Check into the acronym PUHCA. You will find that big changes are under-foot. Warren Buffett is investing 9 Billion in power generation partly because the "new deal" antiquated laws are likely to be changed. Profits will be made by efficient power companies and small inefficient companies will go away. This is good for America. It is good for consumers. Creative destruction is a good thing.