Want to join the 1%? Nothing is stopping you

By Steven Horwitz. Excerpt:

"Studies show that between 2001 and 2007, about half of the households in the lower 20% of income moved up, while one-third of the households in the top 20% in 2001 were no longer there in 2007. We see similar movement among the Fortune 500 companies. This kind of mobility has been measured for decades, and the longer the period we look at, the more likely it is that poor households will get out of poverty.

These results should not surprise us, as we have seen the dynamics of the economy in action over the last few decades. Companies like Facebook FB, -2.24%  or eBay EBAY, -0.80%  or Amazon AMZN, -0.26%  , not to mention brick and mortar stores like Whole Foods WFM, -0.35%  , Chipotle CMG, +8.11%  , or Walmart WMT, +0.82%  , are all companies that we had never heard of or were much smaller 20 years ago.

On the other hand, there are at least as many firms that were household names that are now gone or are mere shadows of their former selves: Radio Shack RSHCQ, +9.81%  , Netscape, Borders books, Eastman Kodak KODK, +0.27%  , and Blockbuster Video BLIAQ, -30.67%  are a few examples.

This turnover is the dynamism of the market economy and it changes the fortunes of individual workers and owners every single day. It is what economist Joseph Schumpeter called the “creative destruction” of the market. That creativity does come with destruction, and many people who thought they had comfortable, assured incomes have seen those disappear over time as new people have entered the 1%.

All of this churning does make life less certain, but it also delivers better and cheaper goods, so that even if our incomes don’t rise a lot, falling prices due to competition make us richer.

Income mobility is a byproduct of a healthy economy in which firms and workers are constantly facing pressure to better serve consumers. People who come up with new and better ways to do so see their income rise and those who cannot keep up see their incomes fall.

One thing that prevents new people joining the 1% are interventions that attempt to prevent the losses from that churn. Political privileges like bailouts lock in inefficient firms disconnecting incomes from having pleased consumers, and undermining upward mobility and the American dream. Imagine if we had bailed out Radio Shack when their early computers didn’t sell, or Netscape when people stopped using that browser.

We would never have had Apple AAPL, -4.39%   or Google GOOG, +0.91%   and all the benefits they have brought.

The only problem with capitalism in America is that some people insist on getting in the way of the free market, thus limiting its power. If we leave capitalism alone and don’t tinker with it as California just did in the Uber case, it will do just fine.

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University in Canton, N.Y., and an affiliated senior scholar of the Mercatus Center in Arlington, Va."