Friday, February 16, 2007

Creative Destruction

On a daily basis newspapers or TV stations are bombarding us with heartbreaking stories such as this about how poor our economy is, despite economic data which shows the economy is in excellent shape. While it's easy to feel badly for these people (""there but by the grace of God, go I") fearing we could be next, the truth is that we are experiencing the greatest economy ever.

Few people are ever taught much about the benefits of capitalism in school or understand how it works. Even fewer understand the concept of "creative destruction" - a term used by Joseph Schumpeter to describe exactly how capitalism thrives and is the best of economic systems.

Our economic system continues to outperform the rest of the world because of the radical innovation that our entrepreneurial culture produces. The onslaught of new ideas constantly displace old ideas and make industries that don't innovate obsolete - these new ideas are called disruptive technology. So there is always going to be a turnover of businesses and jobs. If you recognize the dynamics of this system you can be prepared, if not, you will get caught with your pants down when your business takes a hit. While this process is uncomfortable for some, it has produced unprecedented prosperity for us and the rest of the world.

So what do you do about this? I have a few suggestions:
  • Make sure you have a rainy day savings fund
  • Keep your skills up to date - know industry trends and be the best at what you are
  • If your skill gets displaced by technology, don't be afraid to learn a new skill
  • Diversify yourself by starting a side business - don't depend on just your job for income
  • Be willing to change your lifestyle when you encounter a big change in circumstances. I did it and despite some inconvenience and embarrassment, it didn't kill me.

A lot of people want us to move to a more socialist model, like Europe's, which gives up prosperity for some "security". But, their security is an illusion. Unemployment is routinely above 10% and unemployed youths constantly create social upheaval - rioting, looting and killing - which is not very secure at all. Incomes stagnant and hope is lost.

Real capitalism has uncertainties, but it is a system for dreamers and doers. Embrace it and thrive.

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