Free Enterprise: Appreciating the Churn - Expand Your Insight

QUICK FACTS

Shrinking and Expanding Industries

"The Churn Among Firms," Southwest Economy Jan./Feb. 1999 (Text or PDF)

"The Upside of Downsizing," Southwest Economy
Issue 6 1996 (Text or PDF)

"The Churn—The Paradox of Progress," Annual Report 1992 (Text or PDF)

Free Enterprise
Appreciating the Churn

Dallas Fed Chief Economist W. Michael Cox explains the creative destruction of capitalism's growth process, also known as the churn.

Constant, sometimes unsettling change is an indispensable part of what could be called the Great American Growth Machine. At its core are consumers and their endless list of needs, wants, conveniences, amusements and luxuries. Unlimited wants clash with the fundamental fact of limited resources—a.k.a. scarcity. We can't have everything we want, but we can satisfy more of our desires if we conserve and stretch our resources. For employers and workers, it means boosting productivity, the driving force for higher wages. For consumers, it means shopping for the best value. The system works because of competition: companies vie for customers, making more money if they're able to cut costs while offering consumers a better deal (Chart 1).

With many competitors, there's a constant drive to find new ways to meet consumers' needs—that is, to innovate. Companies offer lower prices, better performance, new features, catchier styling, faster service, more convenient locations, higher status, aggressive marketing or attractive packaging. Innovation comes in constant waves: inventions of new goods and services, improvements to existing products and increases in the efficiency of the factory, farm and office. The interplay of innovation and competition roils the status quo. New firms and industries emerge to take the market from existing ones. Surviving firms reorganize production using more, newer and better tools, making workers more productive. Consumers' tastes and expectations evolve. Companies that can no longer deliver what consumers want at ever-cheaper prices don't survive.

As with the churn of jobs, there's no mistaking where the change in America's corporate pecking order is taking us—to a postindustrial economy that provides what Americans want. We may lament the tragedies of the churn's downside, but we shouldn't lose sight of its very powerful and important upside: it makes us better off.

What's really going on is a healthy recycling of resources. In other words, it's conservation, not carnage.

What is the Churn?
In the 1930s, Joseph A. Schumpeter advanced the idea that an economy doesn't grow but evolves as people discover new ways to improve their standards of living. The capaitalist economy continuously recreates itself as resources are redirected to new and more profitable uses. Schumpeter called this process "creative destruction." Today "the churn" is sometimes used to describe the same principle. Implicit in either term is the paradox that Schumpeter uncovered: innovation—the manifestation of the individual's quest for gain—is central to economic progress but, at the same time, is the cause of most economic difficulties.

W. Michael Cox is a senior vice president and chief economist at the Federal Reserve Bank of Dallas.

SUGGESTED CITATION:
Cox, W. Michael (1999), "Appreciating the Churn," Federal Reserve Bank of Dallas Expand Your Insight, March 1, http://www.dallasfed.org/eyi/free/9903free.html