Creative Destruction – Coast Contact

The Trans Pacific Partnership (TPP) is a brainchild of Barack Obama. Consider this posting I made on February 22, 2014.

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Creative destruction occurs when something new kills something older. A great example of this is personal computers. Free Trade is another example.

NAFTA was President Bill Clinton’s naive plan to increase American trade while helping our neighbors. It has not worked out as promised.

Mexico becoming a driving force in auto production

Honda Fit rolls off the assembly line at a new $800 million factory near Celaya, Mexico

Mexico, with its low labor costs, has been the beneficiary of the free trade agreement. More products have entered the United States from Mexico than ever before. In 2013, according to our census bureau, $226 Million in products were exported and $280 Million were imported. That number is on a path to increase dramatically over the next few years. The reason is that Mexico has become the assembly floor for many products made in other countries. The Los Angeles Times article titled “Mexico becoming a driving force in auto production” tells of the average hourly labor cost in their assembly plants of $8 versus an average hourly rate in the United States of $37. These are the kinds of pay rates that drove American manufacturers to southern states in the USA.

What is the United States doing about this financial advantage? Nothing! Rather, the president of the United States, the Prime Minister of Canada, and the President of Mexico have just had meetings in Mexico at a town named Toluca (home of the Fiat 500 assembly plant), near Mexico City, discussing ways to further the NAFTA agreement.

Barack Obama claims to be concerned about the poorest in our nation and enhancing middle class opportunities. How are more free trade agreements bringing jobs to the non-tech workers that assemble cars, refrigerators, and televisions? They are not. It’s creative destruction at work.

The capitalist system is also the system of Creative Destruction. It is industrial evolution driven by the rise of new innovations and the downfall of old technologies. Kodak’s demise is a perfect example. Kodak developed the first digital camera and then buried the development to protect its very existence.

Excerpt from Why Nations Fail by Daron Acemoglu and James Robinson

in 1589 William Lee, an Englishman, had perfected a knitting machine and presented it to Queen Elizabeth for a patent. She refused to grant Lee a patent, instead observing, “Thou aimest high, Master Lee. Consider thou what the invention could do to my poor subjects. It would assuredly bring to them ruin by depriving them of employment, thus making them beggars.” Crushed, Lee moved to France to try his luck there; when he failed there, too, he returned to England, where he asked James I (1603-1625), Elizabeth’s successor, for a patent. James I also refused, on the same grounds as Elizabeth.

Both feared that the mechanization of stocking production would be politically destabilizing. It would throw people out of work, create unemployment and political instability, and threaten royal power. The stocking frame was an innovation that promised huge productivity increases, but it also promised Creative Destruction.

I don’t know the solution. I do know that there aren’t many blacksmiths or candle makers anymore.