I have to admit, when I heard about General Motors’ decision to close several factories and lay off 30,000 workers, I was sad. I grew up in the 1950s when GM and other U.S. manufacturers dominated the auto market. I remember eagerly awaiting the debut of GM’s new cars each fall. I memorized the styles and models and recalled the information for years to come.
For decades, GM symbolized the U.S. economy. In the 1950s, GM President Charles Wilson was reported to have said, “What’s good for GM is good for America.” Although his actual statement was different (“…what was good for the country was good for GM, and vice-versa”), the point is that the auto industry was one of the largest and most successful economic entities in the country. Almost 10 percent of the national economy was directly or indirectly tied to the auto industry, and American-made cars were the standard around the world.
It’s different today. The stock market barely shrugged on the day of GM’s announcement. The simple reason was that the domestic auto industry isn’t nearly as important as it once was. Its contribution to the total economy is only half as large as in the 1950s. And, in only a few years, a foreign-owned producer, Toyota, will likely overtake GM as the largest seller of vehicles in the United States.
How did this happen? How is it that the once-mighty-giant GM has come to the edge of bankruptcy?
Many answers have been offered. Unsustainable labor contracts, more generous than for many other auto manufacturers, are cited as one reason. Also, inadequate vehicle models that didn’t successfully adapt to the quick-changing marketplace of consumer preferences have been another problem for GM.
But behind GM’s travails is a bigger idea, an idea that economists say really dictates the ebb and flow of the business world. It’s the idea that says nothing really stays the same; there’s always change on-going. Economists have a fancy name for the idea, creative destruction.
In short, the economic world moves in a series of several steps forward and some steps back. The new replaces the old. Cars took the place of wagons, personal computers ousted typewriters, CDs replaced tapes, on-line shopping takes sales from “bricks and mortar” shopping, and the list goes on and on. Investors and workers associated with the new companies and technologies gain at the expense of those tied to the old way of doing things.
Who dictates the change that comes with creative destruction? It’s you and me, the consumer. We decide who wins and who loses because we make the purchasing decisions. We compare alternative products and decide which ones best fit our needs and wallet. In the auto market, foreign manufacturers’ reputations for quality and performance have led many American consumers to favor their products over domestic competitors.
Our economy is bigger than any one company or industry. Companies come and go, and rise and fall, all the time. It’s all part of the constant transformation of business. Still, it doesn’t prevent me from shedding a tear when a childhood idol, like GM, hits rough times.
Michael L. Walden is a William Neal Reynolds distinguished professor at North Carolina State University and an adjunct scholar of the John Locke Foundation.