July column for Builder & Developer magazine now online

My column for the July issue of Builder & Developer magazine is now online. For this month, the focus is on the need to discard the old rule books in order to thrive in an industry which, like many others, continues to undergo creative destruction in the way it works. An excerpt:

Over the past several weeks, my business partners and I have been taking a series of meetings with friends from the building industry to catch up, and through these meetings most seem to share one primary goal: a return to the good old days when every company shared the same mantra of ‘full steam ahead.’ Even despite a barrage of news of long-term changes in U.S. demographics, consumer spending and the economy in general, many people sit and wait, biding their time for a type of rebound that may never come.

And why is that? Because they refuse to throw away the dog-eared rule book which made them successful in the first place -- and perhaps to be surpassed by companies which never bothered to read one...

You can read the entire article here.

"Creative Destruction" gets sorely tested

Economist Joseph Shumpeter's theory that something called 'creative destruction' is in full force these days, impacting everything from real estate brokerages and newspapers to the American auto industry and even government. Against the grip of a painful recession, it's easy to dismiss the consequences of creative destruction as too much to bear, but in the long run, it's not only necessary for capitalism to thrive, but also for liberty as well. From an interesting opinion piece in the Wall Street Journal:

...it was Schumpeter who worried more than any other modern economist about what might be called the fragile condition of capitalism. He did so having lived through the economic horrors of Weimar, witnessed the terror of Soviet-style political economy, experienced the Depression -- and seen the chaos of World War II. Plenty of destruction, to be sure. His life's work concentrated on entrepreneurs renewing the economy through what he called "creative destruction."

If Schumpeter were alive today, he would surely ask, What caused this crisis? And, is this kind of scandal or drama endemic to the nature of capitalism itself? While a lot of attention has been given to the first question, I want to focus on the more ominous second one. Namely, how to save capitalism from a potentially fatal reaction to this crisis.

We need to remember that Schumpeter embraced capitalism not as a reaction or as the second-best solution to the unproductive reality of utopian economic planning. Rather, he saw capitalism as the foundation of two complementary forces. The first was economic expansion. The second was its role in protecting individual freedom...

As a general rule, only capitalism can create wealth and liberty at the same time. And, of course, capitalism can expand welfare faster than any other social or economic order has ever done.

However, given the pressures of the current crisis, a future where growth and freedom continue to jointly secure each other and anchor civil society is not assured. It seems that when economic contractions occur in their inevitable, yet unpredictable way, the critique of capitalism itself becomes more powerful and shrill...

Since the New Deal, Americans have come to see government as somehow the ultimate protector of their financial welfare. In reality, though, the evidence of the U.S. government behaving in this way during the New Deal is thin to say the least. Although it is largely forgotten now, much of the government's action during the Depression actually had a marginal impact on individual lives. Monetary expansion and technological innovation boosted the economy, while the "second" depression of 1937-1938 is widely understood as having been induced by Roosevelt's attempt to manipulate credit markets.

So what about the ultimate Schumpeterian challenge: Can capitalism be saved? France's President Nicolas Sarkozy in October 2008 proposed a brilliant formulation. He said: "The financial crisis is not the crisis of capitalism. It is the crisis of a system that has distanced itself from the most fundamental values of capitalism, which betrayed the spirit of capitalism."

No doubt, in the face of the continuing financial crisis, entrepreneurial capitalism is threatened. All over the world, people are giving greater emphasis to personal security. Their taste for assuming personal risk may be chastened, at least for the moment. This is an altogether rational and expected response.

Where that becomes troublesome, however, is the moment when government comes to be seen as the sole source of security. What we, the public, need to understand is that the best guarantor of security is not government. It's economic growth. While we want to believe otherwise, the cold fact is that government can't guarantee economic permanency. Nobody, and nothing, can.

Pragmatically speaking, we must figure out how to increase people's sense of security without making government itself bigger or more powerful...

Whatever road we choose, entrepreneurial capitalism cannot be revived or flourish if new government security programs end up attenuating the individual's ultimate responsibility to attend to his or her own welfare.

Do continuing job losses mean a greater economic shift?

You've probably heard terms before like "creative destruction," in which new technologies and ways of doing business can transform entire industries. But what happens if the entire economy is facing a generational shift? From a story in the New York Times:

Another 651,000 jobs disappeared from the American economy in February, the government reported Friday, as the unemployment rate soared to 8.1 percent — its highest level since 1983.

The latest grim scorecard of contraction in the American workplace largely destroyed what hopes remained for an economic recovery in the first half of this year, and added to a growing sense that 2009 is probably a lost cause...

The acceleration has convinced some economists that, far from an ordinary downturn after which jobs will return, the contraction under way reflects a fundamental restructuring of the American economy. In crucial industries — particularly manufacturing, financial services and retail — many companies have opted to abandon whole areas of business...

For American policy makers, such a reality poses fundamental challenges to the traditional response to hard times. For decades, the government has reacted to economic downturns by handing out temporary unemployment insurance checks, relying upon the resumption of economic growth to deliver needed jobs.

This time, argues Mr. Silvia, the government needs to put a much greater emphasis on retraining workers for careers in other industries.In the auto industry, for example annual American car sales have dropped from some 17 million a year a few years ago to 9 million now. Even if sales increase to 10 or 12 million, that still leaves a lot of unneeded factories...

Much the same can be said for financial services, which gave up another 44,000 jobs in February. During the housing boom, banks hired tens of thousands of well-compensated traders, analysts and marketers to sell mortgage-backed securities and other exotic flavors of investments. That industry is unlikely to return to anything close to its former shape...

Click here for full story.