Destroy the myth of creative destruction

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Joseph Schumpeter argues that capitalist economies are not stagnant and calcified but, on the contrary,

by nature a form or method of economic change and not only never but never can be stationary.

Joseph A. Schumpeter, Capitalism, socialism and democracy, 1950

He believed that rooted in capitalism is an engine of change that

revolutionizes the economic structure from within, ceaselessly destroying the old one, ceaselessly creating a new one. This process of Creative Destruction is the essential fact of capitalism. This is what capitalism consists of and what every capitalist enterprise must live in.

Joseph A. Schumpeter, Capitalism, socialism and democracy, 1950

Schumpeter was undoubtedly influenced by Charles Darwin’s theory of evolution. Darwin wrote that “the extinction of old forms is the almost inevitable consequence of the production of new forms.” Likewise, Schumpeter believed that capitalism continually creates new companies that win battles for the survival of the strongest with old companies.

Today, the productive vitality of capitalism would be demonstrated by the explosion of startups generously funded by venture capitalists and the impressive turnover in the lists of the largest American companies. For example, only 52 Fortune 500 companies from 1955 were still on the list in 2020, which led the American Enterprise Institute to conclude that “the fact that nearly nine out of ten Fortune 500 companies in 1955 have disappeared, merged, reorganized or contracted shows that there has been a lot of market disruption, churning and Schumpeterian creative destruction over the past six decades . They continued,

The consistent turnover of the Fortune 500 is a positive sign of the dynamism and innovation that characterize a dynamic consumer-driven market economy, and this dynamic turnover is accelerating in the hyper-competitive global economy. today.

Mark J. Perry, “Comparison of the Fortune 500 of 1955 to the Fortune 500 of 2019” To Foundation for Economic Education

It’s an engaging story – and it may have been true once – but now it’s largely a myth. We are not living in an era of creative destruction led by vibrant young Davids using new, highly productive technology that is killing old Goliaths and increasing our income. In fact, there has been a clear and persistent slowdown in productivity growth over the past 80 years, as Robert Gordon’s study shows. The rise and fall of US growth. This slowdown continued, with the The 2010s being the worst decade for productivity growth since the beginning of the 19th century.

Additionally, a close look at the Fortune 100 shows that the top line of America’s largest corporations has little or nothing to do with creative destruction fueled by technological innovation. Admittedly, only 17 companies on the 1955 list were still on the list in 2020 but it’s not because young startups are replacing old arthritis sufferers. In fact, the average age of the top 100 companies increase between 1955 and 2020, from 63 to 100 years old. For example, the roots of today’s major banking and insurance companies date back to the mid-19th century, some before the American Civil War. GoldmanSachs was founded in 1869, MetLife in 1868, Wells Fargo in 1852, and NY Life in 1845. Citigroup can trace its roots back to the formation of Citi Bank in 1812. Cigna started out as the North American Insurance Company in 1792.

Another problem with the creative destruction argument is that the changes in the top 100 are due more to the shift in the US economy from manufacturing, mining and oil to services than innovative startups. – and this development has been accelerated by foreign competition and mergers and acquisitions. As shown in the table below, the number of large manufacturing, mining and oil companies has increased from 94 to 29, while the number of finance / insurance, ICT, healthcare and retail companies is increased from 6 to 62.

The only change consistent with the creative destruction argument is the increase in the number of ICT companies from 6 to 17 as computer, semiconductor and internet companies have become members of the Fortune 100 at the time. late twentieth and early twenty-first century.

Number of companies by sector in Fortune 100 for 1955 and 2020

SECTOR 1955 2020
Manufacturing 73 20
Food 20 4
Chemical products 8 1
Steel 6 0
Other metals 4 0
Auto / Tire 9 2
Pharmaceutical drugs 0 4
Others 26 9
Mining 4 0
Oil 17 9
Finance / Insurance 0 22
Information and Communication Technologies (ICT) 6 17
Health care 0 12
Retail 0 11
Other 0 9

Many of the changes in the oil and manufacturing sector were due to foreign competition and consolidation. Exxon and Mobil merged, as did Chevron and Texaco, with acquisitions of Union Oil, Unocol and Pure Oil along the way. Sinclair Oil and ARCO were acquired by British Petroleum.

The number of automotive and tire companies fell from 9 to 2 at a time due to consolidation and foreign competition. Electric vehicles accounted for less than 2% of the market in 2019 and Tesla is still far from being a Fortune 500 company, let alone a Fortune 100 company. Component and tire suppliers have either been bought out or driven out of business by companies. Japanese and foreign giants. Firestone was acquired by Bridgestone, Uniroyal and Goodrich by Michelin.

Steel and other metals have also been decimated by competition from foreign giants, not by technological innovations brought by small companies. Plastics have replaced metal in a wide variety of products; however, the number of chemical companies fell from eight to one. Dow and Dupont merged and acquired Union Carbide along the way. Monsanto was acquired by Bayer.

The mergers have reduced the number of large food companies from 20 to 4, although Tyson Food and Archer Daniel Midland can be seen as modest disruptors due to Tyson’s innovations in chicken processing and ADM’s focus on intermediate food products – although neither is a rowdy puppy.

In summary, agile startups replacing ossified relics are a myth. The evolution of the Fortune 100 is not evidence of creative destruction but a reflection of the evolution of the U.S. economy – from manufacturing to services – and a continuing torrent of mergers and acquisitions that target to protect large companies from significant competition.


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