From Carriage to Car: The Transformative Power of Creative Destruction

In the bustling streets of 19th-century America, the horse-drawn carriage, wagon, and buggy reigned supreme. By 1900, a staggering number of over 3,500 carriage and wagon makers supplied the growing market. Technological progress in manufacturing drove down prices, making these vehicles accessible to a larger swath of consumers. In the 1860s, a top-quality buggy commanded a price of approximately $135, but by the 1880s, it had plummeted to less than $50. (Thomas A. Kinney, The Carriage Trade: Making Horse-Drawn Vehicles in America.)

It was inconceivable at that time that machines would render this industry nearly obsolete in a matter of decades. However, that is precisely what transpired when the internal combustion engine paved the way for Americans to transition from carts to automobiles. The allure of horsepower shifted from the equines that once adorned the streets to new mechanical marvels. Such is the transformative power of creative destruction.

The term “creative destruction” was coined by economist Joseph Schumpeter (1883–1950), capturing the seemingly paradoxical nature of progress. It encapsulates the chaotic and unpredictable essence of the free market, where established industries crumble, fresh ones emerge, and agile startups seize opportunities while established giants falter. 

Schumpeter expressed his views on this in his work, “Capitalism, Socialism, and Democracy,” published in 1942:

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p. 83)

Critics of capitalism often point to lost jobs, ruined companies, and obsolete industries as evidence of an inhumane economic system. However, this one-sided perspective neglects to consider the progress that emerges from the turmoil. Richard Alm and W. Michael Cox elucidated the long-term effects of creative destruction:

Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

Creative destruction often dismantles established players and outdated business models, making room for innovative startups and forward-thinking incumbents. By recognizing the signs of disruption, investors can position themselves to capitalize on new industries and technologies. This involves conducting thorough research, analyzing market trends, and keeping a finger on the pulse of technological advancements. 

An investor in the early 1900s would’ve done well to recognize that automobiles would essentially destroy the carriage industry. Failing to see beyond the short term and clinging to a fading industry would’ve been catastrophic to an investor in the era. Similar changes are occurring today, although it’s much harder to see in real-time.

Understanding creative destruction can guide investors in seeking companies equipped to thrive amid transformational changes. These companies exhibit resilience, agility, and a proactive approach to embracing new technologies and evolving market dynamics. By investing in such companies, investors align themselves with entities that have the potential to navigate the ever-shifting landscape and generate sustainable long-term returns.

The lens of creative destruction is useful beyond market analysis — it captures the essence of a society in constant flux. With this in mind, investors can recognize that the forces that shape the future lie beneath the surface of turbulence. 

By embracing the perpetual motion and understanding the power of creative destruction, we can avoid the trappings of fear-mongering narratives in media and politics. Instead, we can focus on our investment objectives without distractions that endanger our long-term goals.