Symphony of Creative Destruction

You wouldn’t think a Hawaiian vacation would offer a Texan lessons about economic change, comparative advantage, and creative destruction—but my trip to Maui did.

Of course, my wife and I may have been in relaxation mode, but we still tuned in to the Republican primary debates. (We both take this election very seriously.) The one in Detroit, you may recall—the 11th one, believe it or not—featured familiar questions from the Fox News panelists and canned non-responses from the candidates.

Chris Wallace focused on the jobs question. He asked: “What specifically would you do to bring manufacturing jobs back to America and train residents of cities like Detroit to do those jobs?”

The junior senator from my state, Ted Cruz, did an admirable job of lamenting the impact of “60 years of failed left-wing policy,” eliciting audience applause, but he failed to address the key issue of comparative advantage. This is the economic principle that nations are better off importing goods at a lower cost than it would take to produce them domestically.

In Ricardian terms, a country increases its economic efficiency (and, ultimately, the quality of life enjoyed by its consumers) by specializing in the production of goods for which it has a “comparative advantage.” A related concept, Schumpeter’s theory of creative destruction, holds that a dynamic economy characterized by innovation will inevitably lead to technological obsolescence and the displacement of particular firms (and even industries). F.A. Hayek’s great insight was that no central planner has the knowledge or insight to predict consumer preferences, making the free market indispensable. The government will inevitably fail successfully to pick winners and losers. Shortages, rationing, and bread lines are the result.

We heard nothing about these theories in the Detroit debate, which is unfortunate, since the American public needs an economics lesson and it would have been a great opportunity to provide one. Take the case, as I said, of Hawaii. After Captain James Cook’s discovery of what he called the Sandwich Islands in 1778, the archipelago we know as Hawaii became an important port-of-call for the sailing ships that plied the ocean (until the advent of the steam engine, which would make wind-powered sailing obsolete) due to its strategic location in the middle of the Pacific Ocean.

Before petroleum replaced whale oil as the primary source of lamp fuel, essential for illumination prior to the discovery of electricity and incandescent bulbs—note the creative destruction contained in the first clause of this sentence—whaling was a major industry. Fleets of ships left New England to scour the Pacific Ocean for the large Cetaceans whose blubber was rendered into valuable oil. The whales would diminish in number eventually, but at the peak of the whaling industry, around 1846, 736 whaling ships arrived in Hawaii (chiefly Lahaina on Maui and Honolulu on Oahu).

When crude oil was successfully extracted from the ground in Titusville, Pennsylvania in 1859, providing a cheaper source of lubrication, heat, and lamp fuel, whaling quickly faded into oblivion. The hundreds of whaling ships that used to dock in Lahaina have been replaced with tourists wishing only to watch the magnificent creatures breach during their annual migration.

Did the federal government dictate this transformation, or assist displaced workers in the whaling industry? Hardly. Hawaii has experienced other episodes of major economic change. The Hawaiian Islands, with rich soil, abundant fresh water, and consistently warm temperatures, were perfectly suited for the cultivation of tropical fruit such as pineapples. At one time, large tracts (including the entire island of Lanai) were pineapple plantations.

Alas, after decades of production and canning in Hawaii, the labor-intensive crop ultimately proved to be cheaper to raise elsewhere (and environmental laws banned the use of invaluable pesticides). Most of the pineapple production and canning has moved to countries such as Thailand and the Philippines. Lanai now has luxurious destination resorts, and Maui replaced pineapple plantations with designer golf courses—all of which are extensively landscaped and tended by an army of gardeners. On the site of the old pineapple cannery in Lahaina is a modern shopping center. The economy has changed, without government interference or direction.

The last example of economic change in Hawaii is the cultivation of sugar cane. At one time, Hawaii was the nation’s biggest producer of sugar, and Maui was covered with sugar cane. At the industry’s peak, in 1931, Hawaii’s sugar plantations employed more than 50,000 workers and produced more than a million tons of sugar annually. Even now, 37,000 acres on Maui are planted in sugar cane. Despite the importation of foreign workers, labor costs are high compared to other countries, and environmental restrictions make the practice of controlled burns (to reduce excess plant material prior to harvest) increasingly problematic.

Accordingly, after 130 years, Maui’s last remaining sugar producer, Alexander & Baldwin, recently announced that it will halt sugar production at the end of this year, idling its processing plant and laying off hundreds of employees. Sugar is cheaper to import from countries such as Indonesia, Mexico, and the Philippines, and Americans increasingly consume artificial sweeteners and sweeteners derived from corn syrup.

The lesson: change is inevitable. Unlike the futile delusions of King Canute, politicians cannot wave a wand and halt the inexorable tide of progress. The discovery of petroleum doomed the whaling industry. High labor costs and environmental regulations—along with competing uses for valuable land–doomed the domestic pineapple and sugar cane industries. Attracting millions of visitors a year, Hawaii is better off with a tourist economy.

In the case of Detroit, U.S. automobile makers used to have a near-monopoly on domestic auto sales. The United Auto Workers cartelized the workforce, and—facing little resistance from an industry unconcerned with competition—drove up labor costs (wages and what used to be called “fringe” benefits) to an astronomical (and unsustainable) level. Simultaneously, quality and design declined. When the oil embargo imposed by the Organization of the Petroleum Exporting Countries hit America in the early 1970s, and U.S. auto buyers became interested in foreign cars offering better gas mileage, the U.S. auto makers were unable to compete, with restrictive work rules, no-layoff provisions, and absurdly expensive labor. The domestic auto industry has been in a freefall ever since—and the once-lucrative jobs in Detroit and Flint have shrunken accordingly.

Should the government fix this? Or more appropriately, is it even possible for it to do so? The laws of economics are as unyielding as the law of gravity. Jobs will gravitate to labor markets offering competitive wages and productivity. Businesses will invest capital only if they can reasonably anticipate an adequate return. Employers will eschew jurisdictions that impose excessive costs, regulations, and potential liabilities. Given a choice, consumers will buy products that are cheaper and better than the alternatives.

Free markets sort these things out. Detroit has fallen from grace—virtually imploded—due to irresistible economic forces. Despite bankruptcies and bailouts, the domestic auto industry continues to struggle.  The tragic plight of Detroit—once a vibrant, wealthy major population center—is a parable of free market economics at work.

We don’t bemoan the obsolescence of buggy whips, whale oil, kerosene lamps, or sailing ships. Neither should we bemoan the collapse of an artificially inflated wage structure in a now-competitive auto industry.

As has always been the case with economic dislocation, people will eventually adjust—relocating, re-tooling, or adapting as necessary to meet the reality of the market conditions. “Rescuing” affected workers from their plight will only perpetuate the dysfunction that caused their predicament.

That is the answer I would have liked to hear at the debate instead of vague denunciations of “failed left-wing policy.” It is a sad commentary that basic economic principles went unmentioned at a panel of GOP presidential aspirants.