Amazon, Karl Marx... And Creative Destruction

| About: Consumer Discretionary (XLY)

By Alexander Green

Karl Marx predicted that our capitalist system would eventually tear itself apart and be replaced by socialism.

Some insist it is already happening today...

Technology and automation are replacing workers. Manufacturers have moved factories overseas. Retailers everywhere are shutting their doors and laying off employees.

Hard as it is for some to believe, this is how progress is supposed to look.

Austrian economist Joseph Schumpeter pointed out that market economies are continually hit by “gales of creative destruction” that incessantly destroy the old economy and continually create a new one.

There is no better example than Amazon (Nasdaq: AMZN).

When it first arrived on the scene in 1995, it was a threat merely to bookstores and music sellers. Goodbye, Borders and Tower Records.

Then it decimated sellers of consumer electronics. Goodbye, Circuit City and RadioShack.

Before long, it became competitive with just about everyone. Two years ago, it surpassed Wal-Mart (NYSE: WMT) to become the most valuable retailer in the U.S. and - by the third quarter of last year - the fourth most valuable public company.

Investors have benefited enormously. From less than $60 in the depths of the recent financial crisis, Amazon’s share price has risen to more than $800.

Look at the company’s competitors, however, and you’ll see a very different story. Macy’s (NYSE: M) plans to close 68 stores and cut 10,000 jobs.

The Limited announced last week that it would close all 250 of its stores, eliminating 4,000 jobs.

Sears (NASDAQ:SHLD) has used just about every trick in its arsenal to stay afloat and may well be headed for bankruptcy.

According to Challenger, Gray & Christmas, a Chicago-based outplacement firm, U.S. retailers have cut a net 200,000 jobs in the last four years alone.

Can this really be a good thing?

Yes, it can. Greater productivity is essential for economic growth. (The typical online retailer generates $1,267,000 in sales per employee compared to $279,000 at brick-and-mortar stores.) There are huge benefits to consumers from Amazon. And the company is in the midst of a hiring binge.

Last week, Amazon announced that it will add 100,000 new jobs. Not just hourly dock loaders and warehouse pickers, but highly paid engineers and software developers.

This still doesn’t measure the firm’s full effect on the job markets. Its sales create more jobs in industries like manufacturing, packaging and transportation. And Amazon estimates that independent merchants who sell on its website are creating 300,000 additional jobs.

If you’re one of the workers getting laid off instead of hired, of course, this all seems like a terrible thing. Economic dynamism can create havoc in people’s personal and financial lives.

But that doesn’t mean consumers or the government should prop up failing businesses. Would it have made sense to subsidize the horse-and-buggy industry when Ford (NYSE:F) showed up... or Smith Corona when the PC appeared... or Blockbuster after the advent of Netflix (Nasdaq: NFLX)?

Displaced workers will hurt (at least temporarily) and could benefit from retraining programs and perhaps even an increase in the earned income tax credit.

But Karl Marx isn’t just dead. He was dead wrong.

The American economy is the envy of the world, producing a quarter of its wealth with just 4.4% of the population.

American life spans have never been longer. Our living standards have never been higher. We lead the world in science, technology, entertainment and the arts. We have the best businesses, hospitals and universities on the planet. No country attracts more students, more immigrants or more investment capital.

And last month, the Federal Reserve reported that U.S. household net worth just hit an all-time high: $90.2 trillion.

It all begins with free markets and “creative destruction,” the scourge of some... but the benefactor of us all.

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