The document discusses the concept of creative destruction in capitalism. It describes how new technologies, processes, and competitors can destroy existing companies and industries, using the example of how mini-mills disrupted the steel industry and led to the demise of Bethlehem Steel. While creative destruction causes disruption, it also drives progress and creates new opportunities. The document argues that embracing rather than resisting change is necessary for economic development and prosperity.

1. The Right Side of
Creative Destruction
Small Business Prosperity
Today and Tomorrow

2. • Went to Russia after the fall of the iron curtain
• Description of the change was:
– Before: a calm sea, little change, little opportunity
– After: A wild stormy sea, everyone tossed about.
People were scared because it was so different
It was such a change
The difference between a smelly stagnant pond and
a vibrant coral reef.

3. • The free market is stormy, exposed, a coral
reef
• Schumpeter: Capitalism…never can be
stationary
• The business environment changes, but that is
not what makes it difficult or invigorating
• Creative destruction-new
products, processes, services, consumers, tran
sportation, etc

4. • Creative destruction is the driver of progress
in the world.
• Developed countries developed because the
members embraced the change
• Creative destruction destroys, but it creates
even more.

5. • Bethlehem Steel in Lackawana, NY
• 4th largest steel plant in the world
Massive buildings, 20,000 thousand employees
• Bethlehem overall was Second largest steel
company, largest ship builder in the world,
• 8th on Fortune 500 list at one time
• It no longer exists.
• Lackawana alone has 1,300 acres of vacant
buildings and deserted equipment and land

6. • Bethlehem was strong and arrogant
• Extremely high salaries for management and
workers.
• 1954-2003 steel prices rose 220%
• Consumer Price index 540%
• Average Bethlehem wage 900%

7. • Creative destruction happened to Bethlehem
• New processes-Nucor and others started mini-
mills using updated technology
• They and other competitors started small and
were ignored by the big steel companies
• Eventually they got into the core business
• As a naïve teenager, I remember the layoffs
but I didn’t understand what was happening.

8. • Competitors were efficient, they served
customers well
• Nucor now largest US steelmaker
• Foreign imports of cheaper steel
• Other materials such as aluminum, advanced
plastics
• Mass customization
• Just-in-time inventories, etc

9. • Creative destruction happened in my little
town
• Hardware store had been around forever
• New hardware store in a convenient
area, more modern, more area for larger
equipment sales, bigger shopping floor, better
lighting, more modern looking, better line of
product
• Old hardware store went under.

10. • You can see creative destruction wherever you
look.
• New products, new processes, new
competitors, new regulatory environment
• Is creative destruction bad?
• Only if you are on the receiving end of the
destruction.

11. • Who Moved My Cheese?
• You need to find the cheese, you need to
make the cheese, you need to make cheese
substitutes.

12. • For society as a whole, Creative Destruction is
the way that society progresses.
• It is why developed countries are developed
and undeveloped ones are not.
• Capitalism is the way to eliminate poverty.
• Where does prosperity come from?
• From producing more than you consume
• Individual as well as national level

13. • You can’t talk about capitalism these days and
not talk about Occupy Wall Street.
• However justified protesters are in their anger
at Wall Street Wizards, they are barking up the
wrong tree. They are angry at crooks, which is
good. They are mixing the crooks in with
you, in with all other capitalists who put their
money, their time, their lives and their hearts
into their businesses

14. • You, as capitalists, need to be proud of your
contributions to society.
• You need to make other see the benefits of
capitalism
• In order to do that, you need to know why it is
good.
• That is what this is about. What you are doing
is good, proper, and humane.

15. • We’re here to find out why, and what to do to
stay on the good side of creative destruction.

16. • Economics is to markets and society as physics
is to the physical world.
• Physics is the description of how the world
works.
• Individuals and their organizations can use the
physical laws to produce specific outputs from
specific inputs.

17. • Economics is the description of the way
society works, the way human beings relate to
each other. In free market societies, that
involves voluntary interaction.
• Economics is not really about money
• Money is often used as a proxy when talking
about economics because it is easier to get
our minds around. We all use money.

18. • Economics is about people making choices.
• Human action in this respect is not a physical
movement, but rather the process of
choosing.
• Example of being thirsty on a hammock
• Whichever way you decide, you have
acted, even if you don’t move a muscle.

19. • That really is a key to economic understanding
because so much of what we do does not
involve money, and does not even involve
physical movement
• Deciding what’s for supper
• Strategic plans for your business
• When to leave home to go to work

20. • The problem with the normal understanding
or profit and loss is that accounting must be
done in dollars. It is the language of finance.
• Profit is not only dollars, however.
• “For what profit is it to a man if he gains the
whole world, and loses his own soul?” Gospel
of Matthew

21. • There is more to life than money, and there is
more to business than profits.
• That is especially true for small business
owners. Monetary profit is important, but a
loving family, a rewarding social and spiritual
life, and time for relaxation and refreshment
can be included in profitable activities.
• We will get more into that in the future to see
how that fits in.

22. • The human world really does work according
to the laws of economics.
• Economics in one page-the late Milton
Friedman
• Knowing a very simple relationship can give a
very powerful understanding
• Can help you from shooting yourself in the
foot

23. • I think if Friedman put his ideas of economics
on one page, I believe that it would include
something like this:

24. • The straight forward relationship between
supply, demand, and prices can explain 85% of
the phenomena in society when we realize
that it involves monetary and non-monetary
interactions and prices.
• Jim Crow Laws-racism involves a real cost.
• Many economic problems for business and for
society result from a lack of understanding of
the relationship.

25. • Cost plus delusion
• Official Pricing System:
– Cost + Profit% = Price
• Actual Pricing System:
– (Cost + Profit%)Fudge Factor = Price
• The fudge factor is the adjustment of the price
the system generated to the price they knew
made them competitive.

26. • In all cases, the market sets the price, without
exceptions.
• You can choose to leave some profits on the
table by offering a price lower than the market
• You can choose to lose customers by requiring
a price higher than the market, but supply and
demand always determine the market price.

27. • Lack of understanding of the power of supply and
demand leads politicians to enact policies that
have the opposite effect of what they
propose, no matter how compassionate the
motives might be.
• Examples: Minimum wage, hurricane price
controls, protectionism,…
• Nearly every action that the federal government
takes is an abuse of economic law.

28. • The problem with politicians is that they try to
use the laws of economics for their own
purposes, whether with good intentions or
not.
• That always leads to unintended
consequences that we, the people, pay for.
• Every abuse of economic law yields
unintended consequences

29. • If you know the laws of economics and can
see how politicians are abusing them, you can
react in more rational ways.
• If you don’t know the laws of economics, the
operation of the economy is a big mystery
• There will always be uncertainty, but the idea
is to minimize the uncertainty so the risks are
not so dangerous.

30. • Bubble economy of the 1990s:
• Low interest rates, rapid increase in the monsy
supply, sky high returns on financial assets.
• 30% returns in the stock market distorted all
reason- everyone was saying “things are
different this time.”
• Simple math will show you how distorted the
view was.

31. • That distorted view had devastating effects on
people and companies who joined the frenzy.
• Anderson example.

32. • When you have a bubble economy, the
investing sector steals value from the
productive sector. Price inflation of assets also
devalues the currency.
• The biggest redistribution occurs when
government bails out the investment sector
after the crash.
• Those who didn’t get the gains are made to
bear the losses.

33. • 1990s was a very confusing time. I knew finance, and I
knew what was happening couldn’t be sustainable, yet
mainstream economists were saying how wonderful
the world was, that there was no end in sight.
• My employer got caught up in it and went on a major
capital spending spree. Then all of a sudden sales
dropped 40% in one month and didn’t come back for a
long time.
• There really was a reason that that bubble inflated and
burst, just like the real estate bubble of the 2000s and
every other bubble economy

34. • Government policy can create distortions in
the economy with unpredictable results.
• Those policies are not necessarily even-
handed.
• It is necessary to be prudent even in good
times because you don’t know when they will
be bad.

35. • Creative destruction can be good for you if
you actively seek it, if you are the creator.
• How can you be the creator in your industry?

36. • A lot of real economics doesn’t sound like
economics at all.
• That’s because economics is common sense, it
is based on human logic.
• If you want to rigorously test the laws of
economics, you need a PhD.
• If you want to use the laws of economics, you
only have to know them.

37. • They say that discretion is the better part of
valor.
• Humility is the better part of longevity.
• Customer relationships
• Product development
• Employee relationships
• Training and succession

38. • Knowing your business is key, but it is not
enough
• Awareness of your environment is
important, but you have to know where to
look for the important information

39. • Real economic understanding can help you:
• Interpret events and politics,
• Interpret history,
• See through economic obfuscation, hiding the
truth through complexity,
• Influence people with the truth.

40. • There really is such a thing as truth
• There is an economic reality that is possible to grasp
• Cause-and-Effect. Nothing happens without a cause.
• Practical economics can help you fight the right battles.
• Practical economics can help you understand your
business
• Practical economics can help you be on the right side
of Creative Destruction

41. • The next sessions will show you how improve
your business by respecting the laws of
economics.
• Living on the edge-thinking at the margin.
• Are You an Entrepreneur?
• Limited resources can give you the advantage.
• Competitive Obsolescence.