Computer Prices and Creative Destruction

I ran across a 1989 product comparison of several top-of-the-line computers. Including one from Dell, which featured an 80286 (20 MHz) processor and a 40 MB hard drive, all for the bargain price of $4,099!

I remember consistently paying $3,000 for a new computer from Tandy (my first one, with an 8086 processor purchased in 1986) and then Gateway until about 1995-6, when the price started dropping. My first Tandy computer did not have a hard drive, and everything ran off of two floppies. Then about a year later, I was able to buy a 15 MB hard card and at that point was able to start loading some programs and saving files on the computer hard drive, instead of running/saving everything off of a floppy.

I skipped the 80286 processor, and bought my next computer with an 80386 processor in 1990, again for about $3,000, then repeated the process again around 1993 at the same price. But finally prices started coming down at the next purchase.

I thought it was great! And it was. The problem was …

The problem was I loved Gateway because they made the best computers for the best price in the business, and owned some stock. What I didn’t realize was that the price drop was the beginning of computers becoming commodities and the beginning of the restructuring of the computer industry. Of course, most other folks didn’t realize it either, but that was little consolation as I saw my Gateway stock plummet.

Change is hard, because while many people benefit from change, others suffer. Yet that is the price of innovation, or creative destruction as it is sometimes called in economics. New jobs in the refrigerator industry mean that old jobs in the ice making industry go away.

There are two ways that society can handle innovation.

One is to try to stop it. Government can step in and regulate the new jobs while subsidizing the old jobs. But this is only a forced transfer of wealth from one group to another that also stops the creation of new wealth that everyone can share in. Imagine a world today without modern refrigeration where we were all waiting for the ice man to show up before the pot roast went bad.

The other way is for individuals to adapt. To learn new skills, find new jobs, take new directions. And when that doesn’t work as smoothly as we’d all like it to, then other individuals must step in to help. It is called charity, a concept in great danger today. Because there is no charity in government welfare, even when we call it compassionate conservatism.

Welfare is the violent, anonymous transfer of wealth from one individual to another. There is no charity, no love, and no accountability. People are allowed, even encouraged, to live in the past and thus continue on in suffering. In fact, those in government have a stake in continuing the suffering, lest their jobs disappear as well. Little is accomplished, but many are harmed.

On the other hand, charity is the voluntary and personal giving of oneself to another in the form of time, money, and spirit. And because of this, it is the most effective means of helping others make the transitions required by innovation. Change may be painful, but as individual strength and charity take it on, the pain becomes tolerable and more often than not short-lived.

Innovation is why we have $500 computers today. Charity is why most of the old abacus workers made the transition to the computer age. Government regulation and welfare are why we don’t have $50 computers and why some of the abacus workers are still unemployed.