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Summary

  • Creative destruction describes the way in which economic development arises out of the destruction of some prior economic order.
  • Creative destruction and evolution cannot be stopped, controlled or tampered with.
  • And for the first time in history, creative destruction might destroy more wealth than it produces.

Joseph Schumpeter was an Austrian-American economist and is considered to be one of the most influential economists of the 20th century. Schumpeter is credited with popularizing the term "creative destruction" in economics.

Strangely enough, the term "creative destruction" is adopted from Marxist economic theory, where it refers to the linked processes of the accumulation and annihilation of wealth under capitalism, as first described in The Communist Manifesto (Marx and Engels, 1848).

In short, "creative destruction" describes the way in which economic development arises out of the destruction of some prior economic order. Creative destruction implies not only that capitalism destroys and reconfigures previous economic orders, but also that it must ceaselessly devalue existing wealth in order to clear the ground for the creation of new wealth.

As an example, over 100 years ago communications were usually done via the telegraph. When telephones became widely available to consumers, the money and resources invested in telegraph technology became obsolete and were written down. That caused a lot of people to lose a lot of money.

In the 1930s telex networks were developed, that to a great extent evolved from telegraph systems. Telex networks offered point-to-point teleprinting systems. However when the fax machine was introduced, all the technology and money invested in these networks became obsolete. Today with the evolution of the Internet, and with email widely available, rarely does anyone use a fax anymore.

About 10 states so far have indicated that Tesla (NASDAQ:TSLA) will not be allowed to sell cars directly to consumers as the company intends to do. Many commentators say this has a lot to do with the fact that automotive dealers have clout with local state legislators. Some say this is a battle for survival among the old automotive guard and the new wave (meaning electric cars) that is evolving.

Local lobbying will not stop Tesla from going ahead with its plan to sell cars the way it intends. Tesla has many options to overcome these hurdles. In the long run, there will be creative destruction in the automotive dealership space. Just as people didn't stop the telegraph when the telephone was invented, and just as telephone operators were replaced by automatic PBX systems, in the same manner lobbying will not stop evolution.

Obviously, if Tesla manages to become a household name, there are many companies and sectors that will lose out. Creative destruction will be of such magnitude, that very few of us can imagine what the repercussions will be, and local car dealers are the tip of the iceberg. Wealth destruction will appear in many forms and sizes, and in most cases, we cannot even begin to imagine what it will look like.

For example, has anyone envisioned what will happen to all the gasoline stations all over the U.S.? What exactly are Exxon's (NYSE:XOM) plans, if electric cars become the mainstream in a decade from now? Do they actually have a plan? And what will be done with all the real estate around the country associated with gasoline stations? Can anyone begin to imagine the real estate recycling that will occur, if the majority of Americans purchase electric cars in a decade from now?

Obviously some of those stations will be converted to electric power stations, but only very few. People will probably prefer to fill up their batteries at home when they get home at night, or for free at a Tesla station. In fact with the photovoltaic revolution underway, it might not cost anything at all, since most people will have some sort of photovoltaic installation on their roof.

While car manufacturers like General Motors (NYSE:GM) and Ford (NYSE:F) will join the electric car bandwagon and bring to market electric cars also, the market will not be so kind to part manufacturers like TRW Automotive (NYSE:TRW) and Autoliv (NYSE:ALV).

And how about all the people who fix and service cars? Yes many of them will also fix Tesla cars, but not as many as those that fix gas powered cars today. About 75% of the automotive lubricants industry consists of companies who provide products and services for cars. The US automotive oil change and lubrication industry includes about 5,000 companies with combined annual revenue of about $5 billion. How much lubricants will electric cars use?

I can probably continue writing for several days of all those who will be affected by the continued success of Tesla. In fact the more I think about it, I think that Tesla singlehandedly might become the single biggest creative wealth destruction company the world has ever seen. Granted not by itself, and many more players will make electric cars, but as the company who will put electric cars on the map.

And at the end of the day, if one adds all the destruction that will accrue, the question is, will Tesla be an asset or a liability to the U.S. economy? In theory it should be an asset; however, never before will the evolutionary process disrupt so many sectors and companies as the electric car and Tesla will in the future.

In fact, I think this time around, and for the first time ever, the new order of new things might yield less wealth compared to the destruction that will happen to the old guard.

Don't get me wrong, I am not for or against evolution. Evolution will happen whether someone is for or against it. I am simply trying to decipher what the future might look like, especially from an investment perspective. And the conclusion is, a lot of money will be made and lost, but mostly lost.

As to whether Tesla can make money for investors from these levels (and these valuations) remains to be seen. I for one cannot invest at such valuations, no matter how disruptive a technology or company might be. But then again, this is me, and everyone is not the same. And at the end of the day, that's what the market is all about. Different opinions and different perspectives, money made and money lost ...

Source: Tesla's Deflationary Creative Destruction Has Not Even Begun