« The Pie | Main | Burning Down the House »
Sunday
Nov062011

Creative Destruction and Technology

"If a doctor predicts that his patient will die presently, this does not mean that he desires it."

Joseph Schumpeter

We are in a crisis of innovation.

Pretty much the only industry which is still exhibiting massive growth as a whole is the computer and internet industry. I believe that there is a reason for that. And there is a lesson to learn for politicians and economists as to what the strategy for future prosperity might look like.

Capitalism and monopolization

Competition in a free marketplace is a peculiar thing. As long as the power to create products and market them to customers is distributed roughly evenly, competition is at its core healthy and drives progress. As soon as a small group of players captures a large enough share of the market, though, competition effectively prevents new players from coming in.

That is the trend towards monopolization inherent in capitalism as described by Joseph Schumpeter. The trend towards monopolization is natural in the sense that the bigger players in the market benefit from their unique advantages: the first-mover advantage, higher barriers to entry, higher switching costs for their customers, as well as plain market experience and more extensive resources.

It is precisely what you would expect from the application of the Pareto principle and the understanding of the process which leads to it: that the rich get richer and the poor get poorer.

It is why we see monopolization (or oligopolization) across many industries today: the mobile service provider industry, the fast food industry, the agricultural industry, the banking and financial industry, the housing industry, you name it. All these industries have in common that there are few large players dominating the market and dictating its rules.

Disruption

Disruption or the shifting of paradigms is what crushes monopolies and dislocates the status quo. Disruptions are at the heart of Schumpeter's creative destruction. They destroy large and established companies and open up a new world for creating even more value and prosperity.

They allow technology to work its magic.

As long as large companies dominate the marketplace in relative security, unchallenged by smaller upstarts, there is little progress—just as science does not progress much in between paradigm shifts. The health of capitalism depends on a constant challenging of the status quo.

That is why large companies are actually the enemy of progress. Instead of subsidizing them, we should encourage their downfall. Instead of bailing them out, we should let them struggle—and ultimately perish.

"Too big to fail" becomes an oxymoron. "The bigger, the better if they fail" would be a far healthier mantra. If we do not allow capitalism to work its magic—and intermediate destruction of value is a necessary and inherent part of that—, we hamper innovation and cause stagnation.

Computers and the internet

There is one industry which seems to remain unchallenged by the crisis of innovation. It is the computer and internet industry. While I would not go as far as argue that it is in good shape, I do believe that it is still in a much better shape than many other industries.

Here's why: The internet industry is driven by exponential trends and an unprecedented overall speed of development. Internet companies such as Google, Facebook, or Twitter appear out of nowhere and become huge and life-changing companies within a mere couple of years. They displace other companies which have been hailed as the Next Big Thing much less than a decade before.

It is this overall speed allowing disruptions to occur at a much faster rate which I believe to be at the heart of the progress we see in the computer and internet industry. It is not a coincidence that we think of the internet industry when we hear the word "startup".

Rebooting innovation

If we want to reboot prosperity, we need more innovation. We can use the computer and internet industry as a model for how to encourage creative destruction and increase the speed of progress.

If we want to innovate, we must allow the dinosaurs to rest in piece.

PrintView Printer Friendly Version

EmailEmail Article to Friend

References (5)

References allow you to track sources for this article, as well as articles that were written in response to this article.
  • Response
    Creative Destruction and Technology - Thoughts on Technology and Innovation - Deviant Bits
  • Response
    If you enjoy football, you in all probability have a favorite team from the National Football League or two and have a list of players who like to have observed.
  • Response
    Football is seriously a single of the biggest sports in America. It has a major following.
  • Response
    Excellent page, Maintain the useful job. Thank you!
  • Response
    Creative Destruction and Technology - Thoughts on Technology and Innovation - Deviant Bits

Reader Comments

There are no comments for this journal entry. To create a new comment, use the form below.

PostPost a New Comment

Enter your information below to add a new comment.

My response is on my own website »
Author Email (optional):
Author URL (optional):
Post:
 
Some HTML allowed: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <code> <em> <i> <strike> <strong>