The Value of Creative Destruction

Plant closings. Downsizing. Reduction in force. Although manufacturing jobs are currently up in Vermont, in recent years those frightening words have been heard in a number of Vermont communities. The list of vanished Vermont companies includes such once well known names as St. Johnsbury Trucking, Tambrands, Howe Scale, Johnson Controls, Beck & Beck, Northeast Tool, and Vermont Marble.

Whenever a plant departs or closes, the newspapers are filled with stories of the personal distress of long time employees cast out of work through no fault of their own, and the economic pain for the community and its tax base. Most of us remember the events at that point, a time of sadness and despair. Then what happens?

Reporter Malcolm Gladwell of the Washington Post recently did an in-depth report of a major plant closing in Rochester, New York, in the 1970s. General Dynamics, a major defense contractor, laid off 1800 workers in this city of (at the time) 300,000. The local Congressman described the layoffs as "the most severe blow to Rochester since before World War II."

Gladwell went back to see what became of the laid-off workers. Some, of course, moved away. Some took early retirement. But an astonishing number of them - engineers, machinists and managers - started setting up little businesses of their own.

"Within 15 years, " Gladwell reported, "some 17 separate companies sprang from the ashes of General Dynamics, collectively employing three times as many workers as had been laid off."

"Other employees went to work for Xerox or IBM divisions in the area, or joined smaller start-up companies, helping to fuel a high-tech manufacturing boom that is one of the main reasons this city of 231,000 [in 1996] ranked last year as one of the top exporting areas in the country, sending some $13.2 billion in goods overseas."

"Today it is not difficult to find refugees from the old General Dynamics who think that 'the most severe blow to Rochester since World War II' was actually a blessing in disguise. 'The problem is that people don't see the big picture,' said Roger Bettin, an ex-GD engineer who is one of the co-founders of R.F. Communications. 'They hear about downsizing and they think that's it. They don't see the big picture. Jobs are being created all the time.'"

This phenomenon - of new, energetic firms rising from the death of large, tired noncompetitive firms - was dramatically explained in a memorable speech by actor Danny DeVito in the movie "Other Peoples Money". Danny plays a brash young corporate raider who has bought an ivy-clad New England factory and is uprooting its practices and traditions. He explains to the silver-haired fourth-generation factory owner (Gregory Peck) that (I paraphrase from memory here) "The way you're running this place, it's going nowhere but down. The market has changed. Nobody wants the stuff you've been making for the last hundred years. What I do is take what assets you have left and put them to work making something that people will pay for. That'll keep you all working at something useful. What if I just pack up and go away like you all want me to do? I'll tell you what happens. You die. This factory will become a moss-covered monument to your own lack of imagination, and all of your hopes will be buried inside along with your jobs."

Critical to this process of "creative destruction" is opportunity: opportunity for the losers from one economic failure to be reborn as winners in a new economic success. A lot depends on the entrepreneurial spirit, but a lot also depends on the environment in which new enterprises are born and flourish.

For a new enterprise to succeed, it has to overcome many obstacles and risks. Among them are lender skepticism, interest rate changes, established competitors, fickle consumer preferences, worker inexperience, and bad weather. Entrepreneurs are notable for being willing to take those chances.

But for the best chance of success, risk-taking entrepreneurs must not be dragged down by government-imposed barriers: costly mandates on businesses, high and unstable tax rates, and worst of all, arbitrary, unreasonable, costly, and prolonged regulation. Many an entrepreneur brave enough to risk his or her net worth to compete in the global marketplace can be reduced to sputtering helplessness - and insolvency - by the outlandish requirements of a government agency or prolonged litigation before an environmental commission.

The kind of creation after destruction that revived Rochester is a vital feature of a capitalistic system. But when a government as a matter of policy aggressively regulates, mandates, taxes and controls every economic activity in sight, little creation follows the unavoidable destruction. The creative men and women go elsewhere in search of a more congenial business climate. That didn't happen in the Rochester of the 1980s, and the city is prospering today. Vermont should profit from its example.

September 1997

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