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Destructing the Creative Destruction Myth

Debunking the argument that the Fortune 100 list is evidence of the productive vitality of capitalism

Joseph Schumpeter argued that capitalist economies are not stagnant and calcified but, instead,

by nature a form or method of economic change and not only never is but never can be stationary.

Joseph A. Schumpeter, Capitalism, Socialism, and Democracy, 1950

He believed that embedded in capitalism is an engine of change that

revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

Joseph A. Schumpeter, Capitalism, Socialism, and Democracy, 1950

Schumpeter was no doubt influenced by Charles Darwin’s theory of evolution. Darwin had written that the “extinction of old forms is the almost inevitable consequence of the production of new forms.” In the same way, Schumpeter reasoned that capitalism continuously births new companies that win survival-of-the-fittest battles with old companies.

Today, the productive vitality of capitalism is said to be demonstrated by the explosion of startups generously funded by venture capitalists and the striking turnover in lists of the largest U.S. companies. For instance, only 52 companies on the 1955 Fortune 500 were still on the list in 2020, leading the American Enterprise Institute to conclude that, “The fact that nearly nine of every 10 Fortune 500 companies in 1955 are gone, merged, reorganized, or contracted demonstrates that there’s been a lot of market disruption, churning, and Schumpeterian creative destruction over the last six decades.” They continued,

The constant turnover in the Fortune 500 is a positive sign of the dynamism and innovation that characterizes a vibrant consumer-oriented market economy, and that dynamic turnover is speeding up in today’s hyper-competitive global economy.

Mark J. Perry, “Comparing 1955’s Fortune 500 to 2019’s Fortune 500” at Foundation for Economic Education

It is an appealing story — and maybe it once was true — but it is now largely a myth. We are not experiencing an era of creative destruction led by vibrant young Davids wielding highly productive new technologies that slay old Goliaths and boost our incomes. In fact, there has been a clear and persistent slowing of productivity growth over the last 80 years, as documented by Robert Gordon’s The Rise and Fall of American Growth. This slowdown has continued, with the 2010s being the worst decade for productivity growth since the early 19th century.

In addition, a careful look at the Fortune 100 shows that the turnover among America’s largest companies has little or nothing to do with creative destruction fueled by technological innovation. True, only 17 companies on the 1955 list were still on the list in 2020 but it is not because young startups are displacing arthritic old-timers. In fact, the average age of the top 100 companies increased between 1955 and 2020, from 63 years to 100 years. For instance, the roots of today’s leading banking and insurance companies can be traced back to the mid-nineteenth century, some before America’s Civil War. GoldmanSachs was founded in 1869, MetLife in 1868, Wells Fargo in 1852, and NY Life in 1845. Citigroup can trace its roots to the forming of Citi Bank in 1812. Cigna began as the Insurance Company of North America in 1792.

Another problem with the creative destruction argument is that the changes in the top 100 are due more to the evolution of America’s economy from manufacturing, mining, and oil to services than to innovative startups — and this evolution has been accelerated by foreign competition and mergers and acquisitions. As shown in the table below, the number of large manufacturing, mining, and oil companies fell from 94 to 29, while the number of finance/insurance, ICT, health care, and retail companies increased from 6 to 62. 

The only change that is consistent with the creative destruction argument is the increase in the number of ICT companies from 6 to 17 as computer, semiconductor, and Internet companies became members of the Fortune 100 in the late twentieth and early twenty-first centuries. 

Number of Companies by Sector in Fortune 100 for 1955 and 2020

Other Metals40
Auto / Tire92
Pharmaceutical Drugs04
Finance / Insurance022
Information & Communication Technology (ICT)617
Health Care012

Many of the changes in oil and manufacturing were due to foreign competition and consolidation. Exxon and Mobil merged as did Chevron and Texaco, with acquisitions of Union Oil, Unocol, and Pure Oil along the way. Sinclair Oil and ARCO were acquired by British Petroleum. 

The number of auto and tire companies fell from 9 to 2 from both consolidation and foreign competition. Electric vehicles had less than 2% of the market in 2019 and Tesla is still far from being a Fortune 500, much less a Fortune 100 company. Component and tire suppliers were either acquired or driven out of business by Japanese and other foreign behemoths. Firestone was acquired by Bridgestone, Uniroyal and Goodrich by Michelin.

Steel and other metals were also decimated by competition from foreign giants, not by technological innovations made by small companies. Plastics have replaced metal in a wide variety of products; however, the number of chemical companies fell from eight to one. Dow and Dupont merged and acquired Union Carbide along the way. Monsanto was acquired by Bayer. 

Mergers have reduced the number of big food companies from 20 to 4, though Tyson Food and Archer Daniel Midland might be considered modest disruptors because of Tyson’s innovations in chicken processing and ADM’s emphasis on intermediate food products — though neither is a boisterous pup. 

In summary, nimble startups replacing ossified relics is a myth. The evolution of the Fortune 100 is not evidence of creative destruction but a reflection of the evolution of the American economy — from manufacturing to services — and a continuing torrent of mergers and acquisitions that are intended to protect large companies from meaningful competition.

Gary N. Smith

Senior Fellow, Walter Bradley Center for Natural and Artificial Intelligence
Gary N. Smith is the Fletcher Jones Professor of Economics at Pomona College. His research on financial markets statistical reasoning, and artificial intelligence, often involves stock market anomalies, statistical fallacies, and the misuse of data have been widely cited. He is the author of dozens of research articles and 16 books, most recently, The Power of Modern Value Investing: Beyond Indexing, Algos, and Alpha, co-authored with Margaret Smith (Palgrave Macmillan, 2023).

Jeffrey Funk

Fellow, Walter Bradley Center for Natural and Artificial Intelligence
Jeff Funk is a retired professor and a Fellow of Discovery Institute’s Walter Bradley Center for Natural and Artificial Intelligence. His book, Competing in the Age of Bubbles, is forthcoming from Harriman House.

Destructing the Creative Destruction Myth