During a drive through my old neighborhood in Brooklyn this morning, I passed a building with a “sold” sign plastered over the “for sale” banner that had been affixed to its front. The building used house a steakhouse restaurant, one that I had frequented on occasion in years past. The steakhouse had shut down some time ago. The reasons for the shut down aren’t relevant to anyone but its owners, and even for them, those reasons will fade into history.
The facade was a bit beyond dilapidated, and appeared to be in the early stages of either demolition or refinishing (think: scraped paint and plaster). Someone purchased the building and will repurpose it, either via renovation or demolition/rebuilding. A “thing” that was taking up space but no longer generating wealth for its owner is being improved upon, and will be turned into something of greater value by the application of human effort. That human effort is voluntary and working out of self-interest, and there was no need for some benevolent overlord to bestow wisdom or force the who, what, and when of the change.
This is the creative destruction of the free market. A business failed. It ceased to operate. Why it failed, and whether that failure should be judged in the negative or in the positive (the owners may have decided that their resources, i.e. the residual value of what they owned, the time they had available or were willing to devote, and so forth, would produce better results in a different endeavor), is only of tangential usefulness. Failure is not a value judgment, it is a statement of fact. The business ceased to operate. People lost jobs. A revenue stream ceased to be. However, that failure is not a terminal event. The property will be used for some other purpose. The employees will find other jobs. The assets that were tied up with the business will be put to other uses. History tells us that new wealth will be created, by the old owners, by the new owners, by the old employees, and by the new employees. That wealth will be, on the average, greater than what existed before. Society produces and progresses. This creative destruction clears the inefficient and ill-used or un-used from the playing field, and makes room for the new and the more efficient.
Think of the free market as a natural decluttering system. It doesn’t require any master to decide to declutter things, it simply does so.
Consider, next, the effects of innovation. Consider, as one example, the impact of ride sharing services like Uber and Lyft. In New York City, where I grew up, people who don’t own motor vehicles have traditionally had a number of means of getting from Point A to Point B. Short distances could be walked and somewhat longer distances could be covered by bicycle. For any distance of real significance, the options are public transportation (bus or subway), street-hail taxis, and call-ahead limo/car service. Public transportation is rigid in its routes, meaning you have to go the way it goes, and if your destination isn’t efficiently served by the existing bus and train routes, you either accept that it’s going to take a long time to get to your destination, or you take a car. In theory, yellow taxis serve all 5 boroughs, but in reality, they cluster in Manhattan, and seeing a taxi available for a street pickup in one of the outer boroughs is like spotting a rare species outside its natural habitat. City officials, after decades, came to grips with this reality, and instituted a “fix” by issuing medallions for green taxis that are only allowed to pick up in the outer boroughs. The reality remain, though, that if you’re in the outer boroughs and want to get a car to drive you somewhere, you call the local car/limo service.
Along comes the Internet, and people, without prompting by the aforementioned benevolent overlord, figured out that it could be used to better serve people who wanted cars to drive them somewhere. Thus, Uber and Lyft. These services adversely impact yellow taxis, green taxis, and car/limo services, but they benefit consumers, and if the blend of “costs” i.e. money, time and effort that consumers exchange to have cars drive them where they want to go is a net positive compared to the old way, the wealth of society improves. The taxis and car services must adapt to the new competition, but “adapt or perish” is the means by which things have improved ever since the first amino acids organized into a living organism.
Innovation in a free market clears clutter. It disposes of that which is less useful and/or obsolete of purpose. What happens, though, when the market is not free? In New York City, yellow taxis are both regulated and protected. There is a finite number of taxi medallions established by law, and each vehicle must have a medallion in order to operate. For-hire vehicles that are not yellow taxis are forbidden from picking up street hails, meaning that one must contract ahead of time (traditionally, by calling the car/limo service and arranging a time and place for pickup) if one doesn’t want to stand scanning the street for an available taxi. Such calls are typically routed through a dispatcher, who has to manually manage the movement of cars under his control. It’s not the most efficient of systems, and often it’s quicker to roll the dice on the availability of a street cab than to call one’s preferred car service and wait 30 minutes for a pickup. In other words, it was ripe for the application of innovation. Innovation happened, as it so often does, and without outside decree. People now get served better, and a report from 2014 indicated that a typical Uber wait time in Manhattan was well under 3 minutes.
But, the regulation and protection of the yellow taxis resists innovation. It stands in opposition to the culling of the least efficient. It interferes with the decluttering effect of market innovation. Still, decluttering happened, as the time people had to devote to getting a car shrank. The new competition caused the price of taxi medallions to halve, despite medallion owners demands that the protections they enjoy be expanded to fend off this disruption of their business model.
So it goes with all that the government does and protects. Examples abound. The US Post Office loses billions every year, despite enjoying monopoly protection. AirBnB is stifled in many cities by protectionist rules for hotels. People who want to host private, for-profit dinner parties are stymied by city health departments. Innovations in health care and health insurance, like concierge doctors, urgent care facilities, catastrophic-only health coverage, and the like are either stymied by or the result of massive governmental control of the industry and how money moves through it. Intellectual property laws are being obviated by the digital age and 3D printing. The latter is a true game-changer, as millions of creative minds think of all sorts of new ways to use the technology. 3D printing is also an unregulatable means of working around government regulations. 3D-printed guns are the most famous/notorious, but we can easily imagine 3D-printing a shower head that gets around the government’s low-flow restrictions.
Government is freaked out by 3D printing, for obvious reasons, and it’s already sought to regulate it, but in this it’s like the music industry trying to halt file sharing. Innovation is outrunning regulation.
We should also pay attention to another form of government clutter. Laws and government programs are incredibly resistant to the clutter-clearing effects of market forces.
Laws remain on the books even when their purpose has faded away or when societal norms have changed to the point where no one wants them enforced. One source reports that there are 17 states that still have laws against adultery on the books. Countless silly or obsolete laws remain on the books throughout the country, and even if they’re almost never enforced, it remains that some zealous law enforcement official can use them for less-than-honorable reasons. Those laws are immune to market forces, and will remain there until someone in charge puts in a specific effort to remove them.
Government programs, it has been joked, are the hardest creatures in the universe to kill. I’ve written before about the ineffective money pit called Head Start, just as one notorious example. Ethanol mandates and subsidies exist solely because of Iowa’s inordinate influence on presidential politics, given its first-in-the-nation caucuses. The sugar industry is propped up by a combination of tariffs, quotas and price subsidies that makes American sugar twice the price of sugar elsewhere. Market forces would have resolved this problem long ago, but government’s immunity to competitive pressures gets in the way. Senator John McCain released a report last year that detailed how the government spent $294 billion on expired programs.
There are many reasons that capitalist economies have traditionally far outperformed centrally planned ones. Among them is the creative destruction that is inherent to capitalism and free markets. Bad, inefficient and obsolete ideas go away naturally, without someone having to identify them and do work to excise them. Ideas spawned or protected by the government, on the other hand, persist despite their uselessness or inefficiency. They clutter the landscape, get in the way of good ideas, better use of resources and improved productivity, and make our lives harder and more complicated.
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