Our house is 101 years old, and leaks in the original galvanized iron water piping have ruined ceiling plaster twice recently, so I am replacing all of the original water pipes with new copper. This extended effort gives me plenty of opportunity to reflect on the insights of that great Austro-American economist, Joseph Schumpeter.
Schumpeter was a brilliant scholar who worked on a broad range of topics, none directly related to plumbing. But in his work on the process of innovation in capitalist economies he coined a phrase that can be understood by any consumer who has to buy things at “big box” retail stores.
Schumpeter said that capitalism is a process of “creative destruction.” He meant that, in market economies, technological innovations and new ideas about how to conduct business continually give rise to new business enterprises. These new businesses compete with established ones, eventually driving many out of business. The public benefits from lower costs and better products, but the business world is a sometimes savage one as old firms struggle to stave off new challengers.
So what does that have to do with sweating copper fittings in confined spaces? As any handyman knows, no matter how broad an assortment of pipe fittings you own, the exact one you need for two pipes to join in the right place is the one you don’t happen to have on hand. Two or three daily trips to the building supply store are par for the course.
Here is where creative destruction becomes painfully evident. Competition has become intense in the consumer building supply sector. National firms selling a huge range of products in gargantuan stores have built many stores in my metro area over the past five years. Existing firms responded by increasing their own square footage and by cutting prices.
This process has gone on nationwide, and building-supply retailers are on the verge of bankruptcy as they duel to see who will survive the eventual shakeout. That is good for me as a consumer–prices are low and sales are frequent. It is also bad for me as a consumer in that quality of service has slumped. Store displays are sloppy, with elbows mixed in the bin of tees, and #6 brass screws where the #8 plated steel ones should be. Sales helpers are hard to find and frazzled, with three or four customers pursuing them at any moment. Only one or two of the dozen cash registers are open.
There are obvious signs that the once-dominant older chain, call it Red Arrow, is in deep financial trouble. The stock price of the big box challenger, call it Orange Rectangle, is down about 35 percent from a year ago. Some participants in harshly competitive retail environments clearly are locked in death struggles. To be balanced, while service is lousy, prices are good. Adjusted for inflation, many hardware and building items are much cheaper than 30 years ago. I spend more time rummaging through poorly organized displays to find what I want, but when I get to the cash register, I am compensated.
In the 1990s, when I was a regional economist for the Federal Reserve, there were clear indications that retailers were overbuilding. At a time when national output and household incomes were growing at 2 percent to 3 percent per year, there were repeated double-digit annual increases in retailers’ square footage. Now the long-awaited shakeout is well under way.
The fact that over-investment in various sectors tends to occur repeatedly in competitive free markets made many observers in the 19th and 20th centuries conclude that market economies were inherently wasteful. Central planning under socialism or communism would be more efficient.
But history showed that conclusion was naïve. In markets with imperfect information, even profit-maximizing entrepreneurs make investment decisions that eventually look silly in retrospect. But such markets still allocate resources much more efficiently than in societies where decisions on new lumberyards have to be made by a Ministry of Building Materials in some distant capital.
Employees also are affected by creative destruction. 3M and other national firms have projected large layoffs. Decisions made in the past about how many people to employ are now judged in error for prevailing conditions. Some employees may experience jarring readjustments.
No economist ever said that life in a market economy was uneventful or filled with bliss. Compared to many western Europeans or Japanese, U.S. households have higher levels of consumption and more choices. But we also have to adjust to less job security. Based on how we vote, most Americans seem to find this tradeoff acceptable. But not everyone who gets a pink slip or waits for 15 minutes in a checkout line while an overworked and undertrained cashier makes error after error will agree.
© 2001 Edward Lotterman
Chanarambie Consulting, Inc.