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Delicious Creative Destruction

Here’s a photo of a new restaurant in Fairfax, VA.  It’s near George Mason University’s Fairfax campus.  I ate there for the first time yesterday.  I had no idea that restaurants specializing in ramen noodles even existed, much less that the dishes they serve can be so tasty!

GetFileAttachment-1Anyway, most Americans will recognize that this ramen-noodle restaurant (which opened only about one month ago) is in a building that was once a Pizza Hut restaurant.  What’s going on here is what Joseph Schumpeter famously called “creative destruction.”  When one particular use of resources proves to be insufficiently productive – when one particular use of resources fails to satisfy consumers sufficiently – when one particular use of resources is revealed by market competition to cost more than the value that that use of resources generates for consumers – that particular use of resources is ended.  That particular use of resources is “destroyed” by market forces so that those resources can be used in ways that produce greater value for consumers.  (The ultimate test and only purpose of all economic activity are consumers; businesses and suppliers are valuable and useful only insofar as they satisfy consumers.)

Importantly, the “destruction” that occurs in the process of creative destruction is not physical destruction at all.  The great physical destroyer of resources (and lives) is war, which is the main and core speciality of the state.  Markets, in stark contrast to governments, are peaceful.  The “destruction” that they constantly unleash is creative: it’s a process of moving scarce, productive resources from uses that satisfy consumers less to use that satisfy consumers more.

The competition-guided movement of prices of inputs and outputs up and down over time – and, hence, the competition-guided creation of financial profits and of financial losses – directs resources from less-productive to more-productive uses and combinations.  This process requires entrepreneurial experimentation, as no one knows exactly what consumers want today – and even less what consumers will want tomorrow.  Different restauranteurs, for example, experiment with different menus, hours of operation, interior and exterior designs, levels and styles of service, locations, and marketing – all in the hopes of convincing enough consumers to dine at their establishments so that the revenues they earn will at least cover all of the costs of the scarce resources that are used to supply the restaurant service.

The Pizza Hut that once occupied the above-pictured building succeeded for a while.  Then it stopped succeeding.  Perhaps the tastes of consumers in this area of Fairfax changed.  Perhaps the managerial talent at that Pizza Hut declined.  Perhaps the value of the inputs used at that Pizza Hut – the value of these inputs’ alternative uses – rose so high that operating the Pizza Hut became a losing proposition.  Whatever happened, the use of resources as Pizza Hut in this location eventually proved to be unprofitable.  Yet no government bureaucrat had to come by to order the Pizza Hut to close down.  No PhD-laden economist was required to conduct a detailed empirical study to determine that that particular use of resources was no longer in the public interest.  Nope.  The financial loses at that Pizza Hut were sufficient both to inform the owners to shutter it and to give them incentives to do so.

And when Pizza Hut shut down this restaurant, it did not raze the building to the ground.  Nor did it trash most of the booths that are inside of this building.  No.  Those resources were transferred peacefully and voluntarily to another entrepreneur who, recombining them with other resources, now uses this building and its booths to offer to consumers a product different from the one that was offered there before.  It’s a product that consumers are – daily – free to accept or to reject.  If Pizza Hut were protected from competition – which is to say, protected from the consequences of consumer choice – that particular building might still be operating as a Pizza Hut.  But consumers would be worse off as a result.  The wealth of the nation would be lower.