Creative destruction: process of industrial mutation that incessantly revolutionizes economic structure within

By J. Paul Grayson, CEO, Alibre

"Anytime there is significant unexpected change, you have insecurity. When there is fear, people naturally hunker down. What is unclear is how much of the slump is cyclical and how much reflects a permanent change in business and consumer behavior."- J. Paul Grayson

The term “Creative Destruction” was coined by Joseph Schumpeter in his book "Capitalism, Socialism and Democracy" to denote a "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

While Schumpeter was focused on innovation and its impact on mainstream companies, the current economic crisis can also be seen as a process of “Destructive Creation”, with destruction coming before creation.                           

-Flowers Blooming in a Burned Forest

According to many economists this is not an ordinary downturn, the contraction under way reflects a fundamental restructuring of the American economy. In crucial industries — particularly manufacturing, financial services and retail — many companies are exiting whole areas of business.

Many of the businesses that are failing or being left behind are actually very good businesses that have simply been ruined by greed, poor management, and obsolete business models.

In fact, companies like AIG, Citibank, GM and GE, who represent some of the world’s large conglomerates, arguably existed only because a booming stock market, easy credit and financial derivatives enabled them grow to dominance. These companies may cease to exist but the need for their products and business lines do not.

The collapse of large companies or their exit from “unprofitable” lines of business can lead to a flowering of innovation and company formation as new businesses spring up to take the place of the former monoliths.

Life, death, and rebirth are the endless cycle that defines and confines our world and us. Losing your job or seeing business fail can feel a lot like the end as you watch everything you have built, your hopes and your plans seemingly dissipate and disappear. When a company closes or shutters divisions, it is the end for that organization, and may also be for employees and business partners.

Life as we know it has changed, whether you are an engineer or a Wall Street tycoon. Anytime there is significant unexpected change, you have insecurity. When there is fear, people naturally hunker down. What is unclear is how much of the slump is cyclical and how much reflects a permanent change in business and consumer behavior.

While we may regret the passing of an AIG, Citibank, or GM, their demise will set the stage for the beginning of a new cycle. Just like the fruit of an apple tree that rots on the ground, fertilizing the seeds contained within, starts a new cycle of life, growth, and production.

Now is the time to shed fear and embrace these troubling times as a great opportunity to put the country and ourselves back on a rational path to prosperity.