Anyone who is into disruptive innovation at a business level will know the name Joseph Schumpeter (1883 – 1950). He’s one of the 20th century’s most brilliant economists and famous for his theory of dynamic economic growth, known as “creative destruction.”
A theory that innovation, not competition, causes continuous progress and improves economies, lowers costs and raises the standards of living for everyone.
I first came across Schumpeter, though briefly, when studying economics at A level. Whilst my tutor tried to preach Keynes and Friedman theories, it was Schumpeter’s ideas I found most interesting. My tutor’s dismissal just increased my interest.
Like many great people who challenged conventional wisdom and were ahead of their time, it wasn’t until long after his death that his theories and ideas were truly appreciated.
In 1983 Forbes pronounced him a better guide to the tumultuous world economy than John Maynard Keynes.
Today, in a current era of disruptive innovation, his thinking is more relevant than ever.
Here are some shocking facts: “Only 12% of companies in the Forbes 500 in 1955 and still on the list – 88% have gone. The average life of a company is now just 15 years!”
Innovation soon makes the old less relevant and even redundant, though in Schumpeter’s day innovation was more a reference to a new methodology of thinking than digital transformation or technology.
An American economist, political scientist and a professor at Harvard University, Schumpeter was the author of a number of groundbreaking books on economics including his most famous, ‘Capitalism, Socialism and Democracy’ (published in 1942). Schumpeterian economics is regarded as one of the main sources of evolutionary economics.
Born in Austria, he studied economics and law at the University of Vienna. In 1911 Schumpeter took a professorship in economics at the University of Graz and Bonn and was even Austria’s finance minister briefly before emigrating to the US in 1932, due to the rise of Hitler. In 1947 he became the first immigrant to be elected president of the American Economic Association.
Despite his radical views, going against the common beliefs of his fellow economists of the day like Keynes, ironically he rejected all new things, especially innovative technology, living in a Victorian American time bubble.
Schumpeter has been described as a ‘Prophet of Innovation.’ His hero and model was the entrepreneur, “the agent of innovation,” men like Henry Ford, “the pivot on which everything turns.”
Ford, like Steve Jobs, Bill Gates, Richard Branson, Anita Roddick, James Dyson, and many more, all have one thing in common, besides being success entrepreneurs – all are dyslexic. It is this ability to see things differently that allows them to challenge conventional thinking and redefine the future. If Schumpeter was alive today, I think he’d be adding ‘dyslexics’ to his list of those that change economies.
That’s not to say he didn’t praise corporations for innovating. He often cited the Aluminum Company of America as an example of a monopoly that continuously innovated in order to retain its monopoly, resulting in lower prices, which made it more competitive in world markets.
“Entrepreneurs are possessed by the dream and the will to found a private kingdom”.
Schumpeter believed that entrepreneurial innovation propels capitalist economies upward, though he preached that that capitalist economies evolve not smoothly but at irregularly regular intervals, a combination of small steps and big leaps.
That it was the innovators, not the bankers or governments, that defined and dictated change.
Whenever a new entrepreneurial idea comes along it disrupts an existing one. It is likely that existing workers, businesses or even entire sectors will be thrown into loss and become obsolete. But longer term, the new model replaces the old. Redundant workers find new jobs in new sectors, which can result in a better economy for all.
“The entrepreneur becomes the revolutionary, upsetting the established order to create dynamic change.”
According to Schumpeter, “it is the entrepreneur who creates innovation.”
And innovation is not only invention, it is also driven by competition to improve technology, finance and organisational structures. His model of the entrepreneur does more than textbook equilibrium theory allows. (Note: the US and UK adopted mathematically oriented general equilibrium models.)
He highlighted that entrepreneurs innovate not just by figuring out how to use inventions, but also by introducing new means of production, new products, new forms of organisation and new models. These innovations, he argued, took just as much skill and daring as does the process of invention.
“Innovation propels the capitalist economy” with “gales of creative destruction” (Schumpeter borrowed the phrase from the German economist and sociologist, Werner Sombart, but history made it his own).
Characterising innovation, he defined it as, “industrial mutation,” which “incessantly revolutionises 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.”
Schumpeterian ideas remain influential within higher education, his subjects – innovation, entrepreneurship, business strategy – form the very heart of business school curricula. But ironically, not so in departments of politics, sociology, history and economics.
But in today’s turbulent business economies, it is the entrepreneurs, the Davids, that are pulling down the goliaths and rebuilding the economies with new ideas and new models.
The Ubers that challenged decades of the taxi model. Netflix challenging the way we watch TV. Apple changing the way we consume music. Airbnb tearing apart the old model of hotels.
It’s a changing and challenging world and for those companies who prefer a Keynesian approach, their days are numbered.
FORD – AN ECONOMIC CASE IN POINT.
In 1908 Henry Ford revolutionised the way cars were made and sold. Before the Model T, the automotive industry was essentially a cottage industry but Ford changed all that by adopting a whole new process – the production assembly line. An idea he adopted from a meat processing plant. By 1914, the assembly line for the Model T had been so streamlined it took only 93 minutes to build a car.
The new model of manufacture made it possible to create a car that was easy to mass produce, cheaper to produce, was consistent (even down to the colour) and reliable (for its day). A car middle class Americans could own.
Ford created a new economy – the car and all that goes with it. Proving Schumpeter’s theories.
Henry Ford said of the Model T:
“I will build a car for the great multitude. It will be large enough for the family, but small enough for the individual to run and care for. It will be constructed of the best materials, by the best men to be hired, after the simplest designs that modern engineering can devise. But it will be so low in price that no man making a good salary will be unable to own one – and enjoy with his family the blessing of hours of pleasure in God’s great open spaces.”
Sales of petroleum rocketed. Car owners could now travel, meaning they could spend their money further afield, benefiting motels, restaurants, bars and entertainment venues.
With a sudden surge of vehicles on rough unmade roads, new road building programmes were created, employing tens of thousands of labourers.
The mass production of cars resulted in new employment both for those working for Ford as well as all the industries that grew up supplying Ford, plus all those selling, servicing and benefiting from a massive surge in car ownership. Plus the advertising industry, Ford invested big sums in marketing the vehicle.
Within a decade Ford was building cars all over the world, exactly the same way, benefitting other economies.
For trade, the Model T vans allowed them to deliver goods faster (essential if you deal in fresh foods) and further. For farmers, it became a cheap tractor.
By the time the 10millionth Model T rolled off the Detroit assembly line, 50% of all cars in the world were Fords.
Longer term, cars have consistently helped the American economy grow. Without cars, supermarkets would never have happened, or theme parks.
By the time production stopped in 1927, over 16.5 million had been made and Detroit had become ‘Motor City’.
Dr Chris Arnold is a long term Brand Republic blogger. A former board and Creative Director of Saatchi & Saatchi, he is founder of Creative Orchestra Advertising and their disruptive innovation lab, The Garage. www.co-garage.com (Chris is a Dr of business) Thoughts, comments and feedback to: firstname.lastname@example.org