Creative destruction continues today
A very interesting article in the Wall Street Journal (subscription required) by Steve Liesman, the senior economics reporter for CNBC. Formerly at the Journal, he was a member of a team that won the 1999 Pulitzer Prize for international reporting on the Russian financial crisis. And he does a great job of analyzing the boom and the bust...and the role of "creative destruction".
During the tech boom, the works of the late Austrian-born economist Joseph Schumpeter and his ideas of "creative destruction" gained popularity to explain what was happening.
The crazy valuations were justified, the thinking went, because this was part of the age-old capitalistic renewal process in which the new conquered the old. Nothing gives a new idea credibility like the ability to assert that it had been thought of decades earlier by a now-dead economist.
And, indeed, Mr. Schumpeter did describe the creative destruction process. The trouble was that the populist recollection of his writings omitted a critical element: he made no distinction between new and old companies, per se. He was talking about how the process of change "incessantly revolutionizes the old the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.''
...We don't hear a whole lot about Schumpeter these days, but his work helps explain a lot of what is happening in corporations and in the stock market, almost better than it did during the boom. I believe one reason for the continued sub-par performance of the economy and corporate profits isn't that the tech boom was a sham. Rather, it was quite successful in introducing a new set of incredibly disruptive technologies into the economy. The problem is that the disruptions continue even amid a weak economy --- both in the form of the introduction of new technologies and in the absorption of existing ones. As companies desperately try to restructure and return to profitability, the technological landscape keeps shifting beneath their feet at a still rapid rate, making it harder still to restructure.
(And it's not just technology. I would count the rise of China as a manufacturing center as a major ongoing disruption along with technology.)