Disruption or Destruction?

Innovation Differs from Creative Destruction

Joseph Schumpeter, an early 20th century Austrian economist and political scientist, observed that unfettered capitalism mimics Darwin’s endless struggle of evolutionary biology: survival of the fittest. So if a better, faster or cheaper service arises, it will likely eventually overtake the incumbent.

By contrast, controlled economies centrally license businesses, just as capitalist systems sanction utility monopolies or government agencies. Unless overseen with extreme prejudice for customer service, these centralized functions often suffer all the inefficiencies and poor performance that you expect of your municipal taxi cartel. (Cue Uber.)

Free markets propel more vibrant innovation because participants must compete. The result: better product and service, at the cost of “creative destruction”. In today’s macroeconomic global trade, formerly local failures can now ripple across boundaries at a societal scale.

Liberty promotes growth and progress; the net benefit exceeds the loss to society – but not to all individuals. Some win. Some lose. Coal miners are one such post-industrial casualty that have been temporarily reanimated by current politics. (Not, however, by science, technology or economics.)

“Economic disruptions” (my term), occur when financial collapse, war, epidemic disease, or social upheaval change the rules. And “technical disruptions” cause a sweeping wave of destructive replacement, from the ancient innovation we call cement eliminating bricklayers, or steam replacing sail, electricity eliminating lamplighters – and eventually internal combustion engines, robotics replacing factory labor, and artificial intelligence and machine learning soon replacing many white-collar jobs, from the numerate like accounting to logistics and beyond to the literary like language tutoring, songwriting and poetry.

Where entrepreneurs create, others may whither. But just as newspapers were meant to be destroyed by radio, and cinema by television, it’s entirely possible for each to co-exist in their respective niche. Until, of course, the internet provides sufficient access and media breadth to change the game. And we are getting close.

Disruption can be a mean and unregulated blood sport. The privileged can disadvantage the masses, hoarding wealth, erecting walls and setting rules to protect this growing disparity.

Great societies address this great challenge. They try to moderate the negative aspects and social upheaval that come from creative destruction, while promoting the benefits of commercial innovation. Much of the US debate about health care and social security is a debate between the haves and have-nots. History rewards the societies that rise above the mean squabbles to find a balance that promotes growth without fomenting revolution by accruing all the benefits to the “winners” of any economic cycle.

The United States enjoyed a long tenure as the welcoming land of opportunity. But it also has long been the land of the most porous social safety net. Individuals, families, even whole communities can fall through the mesh, and suffer there for generations. Inequity breeds discontent.

Eventually we either resolve unearned inequality or face revolution. Early rumblings of recent years arose in the “Occupy Wallstreet” movement. The election of Donald Trump was fueled by false promises to serve the underclass. And when the old guard revealed its penchant to exploit the disenfranchised and protect the privileged, today’s “Resist” movement joined the other aggrieved constituents on the million woman march.

The next 6–18 months will rock the foundations of the US social contract, much as the Great Depression required a social transformation, or that the economic wreckage of World War II in continental Europe prompted the Marshall Plan.

The cost may be high. The alternative is far worse.

Clayton Christensen, a brilliant contemporary academic observer, first witnessed sector disruption in the late 20th century as a tech entrepreneur. Like Schumpeter 80 years before him, he is also an esteemed Harvard professor. He studied the transformation of hard drive technology by small startups offering a better, faster, or cheaper alternative.

In Christensen’s theory, incumbents frequently underestimate new entrants who present as cheaper, lower quality alternatives. In the past, legacy businesses safely ignored these “bottom feeders”. In today’s cycle of rapid technological innovation, new entrants attract a broader base of customers, iterate rapidly, adopt new improvements faster (because they have less invested infrastructure at risk). They eventually cross a threshold where they produce not only cheaper, but in some respect better or faster solutions than the incumbent. At that tipping point the legacy industry collapses, much as Kodak and the film industry dismissed digital innovations until it was too late.

Christensen’s “disruptive innovation” adapts Schumpeter’s principles, simply accelerated by our contemporary pace of technological innovation. I use “technology” broadly to refer to transformations across diverse domains of expertise, from digital to nanotech to genomics to fuels.

If we are to benefit “optimally” from creative destruction, we must monitor and anticipate disruptive innovations, allow them, even encourage them, but prepare for them so that we can minimize the short term social costs and soften the blow on the disenfranchised.

I recall without attribution an economic historian who observed that “all empires collapse, triggered from the singular tipping point—when they first choose to spend more on defense than on education”.

It should serve as a caution to all aspirational societies: invest more in building the future than in protecting the past.

Hello, Davos? Are you listening?

Make better.

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