Creative Destruction Makes (and Keeps) America Great

August 1, 2019

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The United States is one of the most prosperous economies on earth because our elected officials and other leaders have embraced, or at least accepted, “creative destruction.” Creative destruction is the idea, famously coined by economist Joseph Schumpeter, that firms with a “better mousetrap” take market share from firms with an inferior one.

This kind of competition can be upsetting for the faint of heart, but it is necessary for economies to advance—and the alternative of stasis and stability is far worse. This is why Treasury Secretary Steven Mnuchin’s recent comment that Amazon has “destroyed the retail industry across the United States” is so disturbing.

By objecting to Amazon for taking market share from other retailers, the administration would be turning its back on market-based competition. No one forced tens of millions of Americans to become Amazon Prime subscribers. Amazon gained the market share it did by providing a vast array of products at reasonable prices with convenient service. This is exactly what Wal-Mart did to become America’s largest retailer several decades before, and likely what another retailer will do two decades from now. This kind of vigorous competition, in retail or any other sector, that takes market share from less efficient firms is a key driver not only of consumer welfare but U.S economic growth.

Did other retailers lose market share and even overall sales because of Amazon? Of course they did. But that is what happens in a capitalist, market-based economy where companies get to profit from the upside but also risk losing on the downside. None of the “losing” retailers offered to repay the government when times were good and profits strong. So we shouldn’t shed any tears or try to protect them now that they are facing a robust competitor.

To be sure, it’s not like government officials in the past have not decried this kind of competition.  In the 1920s and 1930s, A&P, the nation’s largest retail chain, was demonized in the same way that Walmart and other “big box” stores were demonized in the late twentieth century and Amazon is demonized today. Former Louisiana governor Huey Long, then a U.S. senator but still the dominant political force in the state, declared, “I would rather have thieves and gangsters than chain stores in Louisiana.” Pundits and the media warned of wholesale destruction of small retailers, with the New York Times opining that “Big Business Now Sweeps Retail Trade,” in a 1928 editorial. But that opposition came at a cost of slower retail innovation and productivity growth, which is why groups like the AFL-CIO and the NAACP became vocal opponents of laws protecting less efficient retailers.

Prior to joining the Trump administration Secretary Mnuchin had been on the board of Sears, so maybe he is speaking from personal experience. But Sears got what it deserved, given its inept management and poor performance. Criticizing Amazon because Sears went bankrupt is like the Baltimore Orioles (the MLB team with the worst record) complaining that they have to compete against the New York Yankees.

It’s one thing to make sure that workers laid off from Sears and other struggling retailers are helped transition to new jobs. But the last thing Congress or the Administration should do is to protect incumbent businesses from fair domestic competition. If firms can’t cut it in the marketplace, good riddance. The rest of us are all better off.