Joseph Schumpeter, an Austrian-born economist, coined the term “creative destruction” in 1942 to describe the turbulent forces of innovation and competition in market economies. The “incessant gales” of markets cull out failing or underperforming companies, clearing the way for new companies, new products and new processes.
Because the economic winners have substantially outnumbered the losers, the churn of competition remains a defining characteristic of the U.S. economy. One of the United States’ most important competitive advantages is the willingness to encourage and embrace — and at times endure — change.
Jobs, companies — and even entire industries — come and go. Cities and entire regions expand and, if they cannot adjust to change, contract. For decades some industrialized cities in the “Rust Belt” of the Northeast and Midwest and some agricultural states in the Great Plains lost residents to the “Sunbelt” in the South and West, and to other parts of the country. Now California, Nevada, Florida and other “Sunbelt” states suffering economically because of excess housing construction are losing some residents.
Economic change takes place most readily in small businesses, those with fewer than 500 employees.
Outsiders often equate the U.S. economy with its largest corporations. They may be surprised, then, by the vital part that small businesses play. Shop owners and other small businesses account for more than half of the U.S. private-sector nonfarm economic output and work force.
Many small retailers compete with national chains that boast billions of dollars in annual revenue and thousands of employees. Many other small businesses provide goods and services to such large companies.
Small businesses account for the majority of new U.S. jobs, especially as large manufacturers continue to shed jobs in the face of stiff global competition. In 2005, for example, the number of jobs in small businesses increased by 979,000 over the previous year while larger companies added only 262,000 jobs.
American entrepreneurs remain eager to risk their own savings to start small businesses, despite the potential for failure. In 2008, 43,546 U.S. companies filed for bankruptcy.
One obvious reason why so many Americans choose this path is the relative ease of starting a small business. The World Bank ranks the United States as No. 4 among 183 economies in ease of starting a business.
Launching a business in the United States is relatively easy — and so is trying again after a failed attempt. The philosopher Erich Fromm said that the “freedom to fail” was essential to overall freedom, and the adage is often cited as a basic tenet of American economic life. Business failure does not carry the social stigma in the United States that it does in some other countries. In fact, failure is often viewed as a valuable learning experience for the entrepreneur, who may succeed the next time.
U.S. bankruptcy laws govern business failures. The U.S. Congress has tried to strike a balance that recovers as much of a failed company’s assets as possible for creditors while providing financial protections that can allow entrepreneurs to make a fresh start.
A small business that cannot pay its bills will usually go through what is called a liquidation, selling all its assets to pay what it can to its creditors. Some of the debts are paid ahead of others, and a bankruptcy court appoints a trustee to make sure the process follows the rules. Banks and other secured lenders are high on the repayment list, as are employees’ wages. If the business was a small corporation, the shareholders — who assumed risk in exchange for potential reward — are at the bottom of the list and often receive nothing as the business closes its doors.
Large companies that cannot pay their debts may choose what is called a Chapter 11 bankruptcy process, which allows a company to stay in business while it tries to recover. If the company still has valuable assets or some cash coming in — and if its crisis seems temporary — creditors may initially choose to take less than full repayment of their claims in order to allow the company to survive and continue repaying. In this case, too, shareholders might lose their investment, but the business can survive.
Bankruptcy laws also allow individuals and families to escape unmanageable debts and start over, although in many states they may lose their homes. This escape route can be crucial for some.
Schumpeter’s creative destruction is evident at the top of the economy in the rise and fall of the largest, most powerful U.S. corporations. Fortune magazine’s Fortune 500 list of the top U.S. companies ranked by revenue tells the tale: In 2009 Wal-Mart, with $408 billion in revenue, swept past previous year’s top-ranked Exxon Mobil, with $285 billion, as commodity prices fell. That same year the plunge in auto sales dropped General Motors from sixth to 15th place.
Of the 12 companies that Dow Jones listed in 1896 when it created its famous stock index to represent the U.S. industrial sector, only one, General Electric, remains on the index of 30 companies now. Others disappeared from the index as they were acquired by other companies, split into smaller companies, became relatively smaller players in the economy, or simply dissolved. Some of the companies that replaced them started out as small businesses.
Competitiveness is integral to American culture. “Nowhere else has change occurred in so short a span,” historian Walter A. McDougall said. “America was not just born of revolution, it is one.”