In a recent gathering of the US Fed, Lawrence Summers and Bradford DeLong, both erstwhile honchos of US Treasury observed that “the economy of the future is likely to be 'Schumpeterian,” with ‘creative destruction’ the norm and innovation the main driver of wealth.
All
products are essentially based on ideas. Some become enduring products. Some
change our very way of life for a while or for a long time. Some are great
products arising from simple ideas. Some are outcomes of complex technology.
Today development of products is complex costing enormous sums in some fields. Developing
a breakthrough product in entertainment, software, pharmaceuticals needs
massive investment, often with promise of little returns unless they achieve
critical mass in output and marketing. The strategic ability to capture the
market for the product with the winning combination of high cost of development
and the low cost of manufacturing gives the organization a near monopoly advantage.
Such ideas cause destruction of existing technology and products and entrench
the new technology and products – that is, until another idea does its magic.
Schumpeter understood
that at the heart of capitalist economies was the entrepreneur and the innovator.
It is the entrepreneur who takes risk, sets in motion new and more-efficient
ways of making old products or innovating new products. His actions produce an
economy in constant change. Much before Schumpeter, Marx had foreseen the
gradual extinction of the feudal system with the rise of capitalism. But, Schumpeter
saw farther. He saw how each successive generation of market capitalism would
destroy its own predecessors. There was a constant “process of industrial
mutation…that incessantly 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.”
Growth. is
the result of the “heroic intervention of individual men (who) appear as
leaders toward new economic shores.” It is the leader who creates opportunities
for innovation, finding new ways of manipulating nature, and new ways of organizing
and managing people. The emphasis is on innovation. Schumpeter’s entrepreneur
is not an inventor, but an innovator. From an organizational viewpoint it
should be recognized that entrepreneurial innovation breeds innovation all
around. Just as great universities produce great scholars not so much because
they teach better, but because they have great pupils who learn from each other
much more, the supportive environment in the
Like his
contemporary, Karl Polyani, Schumpeter feared tremendous challenges of
resistance from bureaucrats and ideologues threatened by creative destruction.
In business organizations the challenge is greater. Those likely to be affected
by creative destruction would resist innovation vehemently. It is not just the
fear of change, but also loss of employment in the short term, the obsolescence
of skills.
Perhaps, the
time for Schumpeter’s idea of innovation has come. Today’s organizations need
to give his work its proper place as the power of innovation to transform
organizations, create new technologies, products and markets, create wealth,
and inevitably destroy redundancies becomes a global phenomenon. The world can continue
to marvel on the very freshness of his idea of innovation and argue about the
impracticalities of his economic thoughts. But business organizations need
hardnosed action to go on with innovation and to mitigate the effects of
creative destruction by:
* creating the
social environment congenial to creative destruction, alleviating the fears of
the losers by providing opportunities for retraining and safety nets..
* ensuring that
man’s innovative spirit does not make man irrelevant in the productive process.
* making sure
that enrichment resulting from innovation reaches the winners and losers alike
uplifting the lives of all
By V.K.Talithaya (vktalithaya@managementmasala.com)
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