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Destruction Driving Creation

The opinions expressed by columnists are their own and do not necessarily represent the views of

Recently the social networking site MySpace announced it was firing some 500 people -- half of its staff.

How can this be? Just six years ago, savvy billionaire Rupert Murdoch was willing to pay $580 million for it. Furthermore, social networking is becoming more popular every day. They’re making movies about Mark Zuckerberg. Goldman Sachs thinks the Facebook site is worth $50 billion, although they’re only making the investment available to foreigners.

Ah, but that’s just the way things are on the Web. In 2006, MySpace was the hot, happening property. Today it’s outdated and boring, destined to be remembered only because it was once mentioned in a Katy Perry song. And that’s assuming anyone remembers her a decade hence.

Luckily, the passing of MySpace is happening quietly. Murdoch is looking for cost savings, but not a bailout. And the federal government wouldn’t give him one anyway. This is important, because it shows that, for now, the Web remains a haven of creative destruction.

As economist Joseph Schumpter explained, the latest and greatest ideas can often thrive only by upsetting the existing order. Thus “creativity,” (in with the new) often requires “destruction” (out with the old).

Often, though, the government stands in the way. That’s a problem in any industry, but especially in the fast-moving high-tech world.

“Most of the federal government’s intrusions in the twentieth century were efforts at preventing disruption by new technologies in order to usher in a future more orderly, less chaotic,” writes Tim Wu in his new book The Master Switch. “That might sound like a sensible objective, but the effort can be easily perverted into serving special interests.”

Wu examines the history of broadcasting as an example.

“Radio is hardly our most vital medium, yet it is hard if not impossible to get a radio license, and to broadcast without one is a federal felony,” Wu notes. He explains how a couple of big companies worked over the years with the government to limit competition. First, they managed to delay the onset of FM broadcasting, and later they were able to transfer their control of networks directly from radio to television.

“The best antidote to the disruptive power of innovation is overregulation,” Wu writes. “In fact, a close review of the 1930s makes clear that the early FCC was among the most useful tools of domination that industry has ever invented.” And these days, the FCC seems eager to do for the Web what it’s done for radio.

The FCC is pushing for net neutrality again, warns columnist Holman Jenkins in the Wall Street Journal. He writes that a key goal is, “an unstated agenda to deliver bandwidth to cable’s competitors at a price that suits those competitors.”

That’s ironic, Jenkins notes, since creative destruction is busy giving us new and better ways to get programming. Meanwhile, Washington may step up and save the failing cable business. “Cable distributors, once as popular in Washington as health insurers, become a new protected class just as technology and competition are dictating that their heyday is over.”

And that brings us back to the reason Goldman is only offering its Facebook investment to foreigners. After the investment bank announced plans to sell Facebook shares to its richest clients the federal Securities and Exchange Commission started making noises about possibly investigating the sale. “Experts on securities law said Goldman’s switch reflected the strict regulatory climate in this country,” the L.A. Times explained.

The odd thing here is that Goldman’s sale would have been limited to its millionaire clients, people who could presumably afford to lose money but are presumably good enough investors that they’re unlikely to do so. It’s overregulation in the service of protecting folks who don’t need the protection.

Facebook may succeed, as and Google have. Or it may crash and burn, as and MySpace did. What’s important is that it be allowed to succeed or fail on its own, without support or opposition from the government.

Creative destruction, “revolutionizes industries and ultimately multiplies productivity and value,” Wu writes. It is especially important to maintain on the Web. After all, “where information is the ultimate commodity, the multiplier effect is incalculably great.”

That’s a lesson that rent seeking companies and federal regulators should take to heart.

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