Wednesday, October 6, 2010

"The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes 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. It is what capitalism consists in and what every capitalist concern has got to live in."
-- Economist Joseph Schumpeter

Remember Pan Am? Digital Equipment? Remember buggy whips?

In the death of companies and entire industries lies our future. Our work and prosperity depends on what replaces them. This is the nature of capitalism.
A company founded today has an 80 percent chance of disappearing over the next quarter-century, report Dane Stangler and Paul Kedrosky of the Kauffman Foundation. 
Robert J. Samuelson examines this in an important piece in The Washington Post.
In any given year, employment may reflect the ups and downs of the business cycle. But over longer periods, almost all job growth comes from new businesses. The reason: high failure rates among existing firms. Even successful firms succumb to threats: new competition, products or technologies; mature markets; family feuds and the deaths of founders; shifting consumer tastes; poor management and unprofitability.
He makes a point I had not appreciated: The debate over whether small or big firms create more jobs is misleading. The real distinction is between new and old. 
American workers are roughly split between firms with fewer or more than 500 employees. In healthy times, older companies of all sizes do create lots of jobs. But they also lose jobs, as some businesses shrink or vanish. On balance, job creation and destruction cancel each other. All the net job increases occur among start-ups, finds a study of the 1992-2005 period by economists John Haltiwanger of the University of Maryland and Ron Jarmin and Javier Miranda of the Census Bureau. Because most start-ups are necessarily small, this gives a statistical edge to tinier firms in job creation. But, the study says, the effect entirely reflects the impact of new businesses. 
Samuelson concludes by discussing several myths about startups, including: It's necessary to keep tax rates low, so entrepreneurs can reap huge rewards for their time, sweat and money.
Well, this may be true, but it misses a parallel truth: government disincentives to entrepreneurship. Panner, a registered Democrat, criticizes complex accounting, employment, and health-care regulations imposed by federal and state agencies that consume scarce investment funds and time. The fragmented system of business oversight imposes a bureaucratic bias, perhaps unintended, on start-ups. Any one rule or tax may seem justifiable, but the collective effect can be crushing. 
Little wonder we aren't creating new jobs.

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