Schumpeter Reloaded

Creative Creation

Economist Joseph Schumpeter’s signal contribution to economics was to put innovation at the core of economic development. He saw beyond the field’s obsession with marginal cost analysis and price-based competition, understanding that this fixation was merely a function of the ability to model such features of the landscape cleanly, with little regard for their ultimately secondary, and perhaps even trivial, role in shaping competition among firms:

• [I]n capitalist reality as distinguished from its textbook picture, it is not [price] competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization…– competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.ⁱ

Schumpeter memorably labeled the outcome of this type of competition “creative destruction,” a term that has become for many synonymous with innovation. The problem with Schumpeter’s model, however, is that the precise mechanisms by which one achieves the sort of innovation that is truly “creatively destructive” has remained largely a black box. We simply have not been able to gain any meaningful traction on how one achieves the “decisive cost or quality advantage” that strikes at the “very lives” of incumbents. Indeed, commentators on Schumpeter’s work note that for him, the entrepreneur is “a social miracle in the precise sense of the word: an event beyond the laws of nature and society.”ⁱⁱ And so although the centrality of innovation to economic advance is certainly correct, it is difficult to get much further when the mechanism of innovation is described simply as a “miracle.”

Nevertheless, Schumpeter provides at least one clue as to the sort of thing that might rise to the level of the requisite sort of miracle. For Schumpeter capitalist entrepreneurship and technological progress are “essentially one and the same thing,” the first being “the propelling force” of the second.”ⁱⁱⁱ As Disruption has been defined and explained and tested here, technological progress is similarly the “propelling force.” A new business model serves to create a new productivity frontier, but technological progress is what expands that frontier in ways that lead to Disruption. And Disruption leads to the creative destruction that Schumpeter identified.

Finally, Schumpeter demonstrated that the synthesis of entrepreneurship and technological progress led to the destruction of the old thanks to the creation of the new (hence, creative destruction). That is, he explained how the “destruction” half of his model works. Unfortunately, the mechanisms of creation were left largely unexplained.

If there is a broader significance to looking at innovation generally and Disruption in particular in the way I have described it here, I hope it is that I have shown that Disruption has, for now at least, the most valid claim on describing how the creation that leads to the kind of innovation that Schumpeter described actually happens. It is not by pushing out the existing productivity frontier in a manner that is, in all likelihood, wholly replicable by one’s equally endowed competitors. Rather, it is by creating an entirely new business model – a new form of organization, to use Schumpeter’s term – that makes possible what incumbents can, almost literally, not even dream of – not because it is beyond their imaginations but because it is beyond their desires. The overthrow of the old order is upon us when entrepreneurs ride the waves of technological progress that expand the new frontier they have created in ways that incumbents cannot respond to, even when they finally realize that they must.

In other words, Disruption provides an explanation of creative creation: the how, if, when, and how long of the kinds of innovations that have repeatedly remade the economic landscape in the service of the general weal.

Sources:

ⁱ Schumpeter, Joseph A. (1942). Capitalism, Socialism and Democracy. This quotation from pp.84-86 of the Harper Colophon edition of 1975.

ⁱⁱⁱ Schumpeter, Joseph A. (1942). Op. cit.

Excerpted from The Innovator’s Manifesto by Michael E. Raynor

Michael E. Raynor is a Director with Deloitte Consulting LLP. He focuses on questions of corporate and competitive strategy with clients of all sizes and across every major industry. “The Innovator’s Manifesto” is his third book, following “The Strategy Paradox” and “The Innovator’s Solution” (with Clayton Christensen). Reach him at mraynor@deloitte.com and www.deloitte.com/us/innovatorsmanifesto.