Creative Destruction: Solving Problems through Innovation

I've long been a fan of Joseph Schumpeter. His theory of "creative destruction" has always resonated with me as a powerful explanation for the tectonic shifts that have taken place across the business and industrial landscape over the past two millennia. And I've referenced his principles in several posts spanning a broad array of topics, including:

• 03/22/2007: Apple and the Enterprise in 20 Years: "Who Would Have Thought...?"

• 02/17/2007: Toyota Has Won According to the NYT: Not So Fast!

• 11/26/2006: Joe, that little coffee shop: Starbucks Beware

• 11/15/2006: Web 2.0 (Whatever that Means) - It's NOT a Bubble

• 10/23/2006: Google - A Ben Graham-type Value Play?

• 08/10/2006: Schumpeter and Search

• 08/01/2006: Convergence Redux

G. Pascal Zachary penned an interesting and insightful piece in Sunday's New York Times that showed the powerful effects - both productive and sinister - of destruction in action. I am most interested in the forces of creative destruction for solving problems, most specifically, where business problems and societal problems meet. This could be with respect to addressing today's concerns over global warming, or a previous generation's concerns over the impact of chloroflourocarbons on the ozone layer. Here is my bottom line - and you can quote me on it:

When the line is drawn in the sand, be it due to legal action, regulatory forces or a clear and present market need, and where there is a compelling economic motive, incredible intellectual and financial horsepower will be brought to bear to solve these problems. Progress and innovation, quite simply, cannot be stopped.

This is the power of Schumpeter's principles. Out with the old and out-moded, in with the new, better and more adaptive. While it is hard for the road-kill that are those businesses, models, companies and technologies that get creatively destroyed, there is a net benefit to society over all. And Mr. Zachary does a good job highlighting some of the key elements of this transformation:

A curious feature of capitalism is that threats, or more precisely, the human response to them, are economically and technologically stimulating. Or, to put it another way, “Necessity is the mother of invention.”

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But there are good reasons to believe that crying wolf is exactly what the brightest innovators ought to be doing, and not only in response to the challenge of climate change. As a general matter, high anxiety will lead to more intense pursuit of innovation.

In the history of economics, the ultimate wolf-crier was Joseph A. Schumpeter. An Austrian economist who taught at Harvard, Mr. Schumpeter in 1942 coined the term “creative destruction” to describe what he viewed as the engine of capitalism: how new products and processes constantly overtake existing ones. In his classic work, “Capitalism, Socialism and Democracy,” he described how unexpected innovations destroyed markets and gave rise to new fortunes.

The historian Thomas K. McCraw writes in his new biography of Schumpeter, “Prophet of Innovation” (Belknap Press): “Schumpeter’s signature legacy is his insight that innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general. Almost all businesses, no matter how strong they seem to be at a given moment, ultimately fail and almost always because they failed to innovate.”

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Mr. Schumpeter brilliantly realized that innovation — so often extolled as the purest expression of the human spirit — has a dark, violent, even nasty side.

Every innovator, in short, makes a declaration of war. And every successful innovation is a  destroyer.

To be sure, in these wars only technologies die, not the people who stand behind them. Yet people suffer nevertheless.

Richard W. Fisher, president of the Federal Reserve Bank of Dallas, said in a speech last month that he knew firsthand of “the painful adjustments that economic advancement inflicts upon displaced workers.”

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These new technologies, publicized by wolf-criers and driven by the impulse for self-preservation, will ultimately supplant existing products and processes — and remind us anew that the pursuit of innovation is the moral equivalent of war.

Yes, it is true. Progress can be violent, rapid and painful for some. And it is up to us as a society to figure out how to re-purpose and re-train people who are layed waste by the powerful forces of creative destruction. Building an educational and economic infrastructure to handle this issue, an issue which will invariably become more pressing over time, will be key to our global competitiveness. This is the hard part. But imagine a life without the progress and problem-solving of the best and brightest driving us forward. That is a life I choose not to contemplate.