The power of creative destruction, baby!

One of the first topics I covered on the blog at its inception almost two years ago was the power of capitalism’s “creative destruction.”  What the heck is that?  It is economist Joseph Schumpeter’s concept that capitalist economies are in a constant state of life-extending evolution.  New ideas lead to new businesses and new products and new consumer choices, or if you prefer: creation of new capital.  While old ideas and old businesses and old products lead to the destruction of old capital.  This cycle is largely echoed in nature and we recognize it as Charles Darwin’s natural selection.

At a metaphysical level I believe very deeply that the power of capitalism lies in its “creative destruction.”  This is one of the reasons that in the midst of the Great Recession I was able to see the so-called silver lining in the massive meltdown of the entire global economy.  There had been fat in the old capitalist body.  So the economy had to go on a diet and quickly or risk having a massive, life-ending, heart attack.  This process, just as in the life of a person, was painful.  Painful, but necessary, that is.  I have been saying that U.S. businesses would retool themselves for massive efficiency and for a very exciting future when innovative ideas met athletic businesses ready to execute these new plans.

That is starting to happen. This morning’s edition of the Wall Street Journal has an article which relies upon two eminent sources that support that the “destructive” phase of “creative destruction” is over.

First, is the Wall Street Journal’s analysis of the companies that make up the S&P 500 stock index and their second quarter profit performance.  What they found is that profits totalled $189 billion, up 38% from the year prior’s second quarter.  This amount is the sixth largest total ever.

Second, the U.S. Department of Commerce is reporting that all U.S. businesses reported second quarter profits of $1.208 trillion, up 26.5% from the previous year’s second quarter.  This is the highest amount of profit ever recorded by U.S. businesses.

Analysis: The most interesting piece of data is the obviously more powerful profit output of the 500 largest U.S. businesses.  Their growth was up 38% vs. the 27% for all businesses.  Big companies have in place massive information technologies that allow them to tweak and refine their business models rapidly.  Additionally, they typically have ready access to capital to support restructurings on a mass scale.  Smaller businesses just do not have this luxury.

Encouragingly, the profits in 2010 are much, much higher than in 2009, but in the face of slow revenue growth.  That means that the profits must be coming from reductions in business expenses.  In other words, the economic body is fit and lean again.  All of this is the necessary architecture for future economic growth.

What is missing, of course, are the new ideas that lead to new revenue growth and ultimately to a reduction in the unemployment rate.  But I feel that is coming.  People never stop innovating and never stop trying to improve their lives.  This, as I have said many times before, is the rock solid foundation underneath every economy.

Importance grade: 5; while it is personally satisfying to see data affirming my long-held intuitive assessment of the ultimate impact of the Great Recession on the U.S. economy, the data are not that important.  You can’t really do anything with this data other than breathe a sigh of relief.  SIGH!

Jason