2 November 2009
Much has happened since December 2008 when I made the final revisions to Winners and Losers. Capitalism has survived its worst crisis since the 1930s, though confidence in free markets has crumbled. Keynesian solutions have played a major part in averting another depression, while the reputation of Schumpeter may have suffered. If this was creative destruction at work, who would want more of it?
But was it really creative destruction?
This was a crisis of financial capitalism, caused by easy credit, frantic speculation, incompetent corporate governance and inadequate regulatory oversight. Such crises have occurred periodically for centuries and may be as intrinsic to capitalism as creative destruction, but they are not at all the same thing.
Creative destruction is the term Schumpeter used to describe the continuous evolutionary process ‘ that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process . . . is the essential fact about capitalism.’ Innovation in new technology and new methods is what increases wealth, but often undermines incumbent businesses. Sooner or later most are swept away or marginalised, but most consumers benefit from new products and lower prices.
Innovations in new products played a big part in the financial catastrophe, but much of the wealth they appeared to have created turned out to be illusory, so the net effect was highly destructive. The only winners so far have been those bankers who were able to cash their chips, and the main benefit for the rest of us some painful lessons.
That is probably my last word on financial matters. I may contribute occasionally to the broader debate about markets and institutions, but I intend to concentrate on issues where I have something distinctive to say. Winners and Losers started life as an examination of how creative destruction has worked in the last thirty years and I became, if not a devotee of Schumpeter, profoundly grateful to him for his great insight. Like all metaphors it is not a complete explanation of an ever-changing world, but it is indispensable to understanding it. It is certainly a fact of life that affects every business – and all our lives. In my next post I will consider some objections to creative destruction and try to explain why those who demonise it or minimise its importance are not living in the real world.
In later posts I will argue that reports of the death of email are greatly exaggerated and that too much focus and efficiency can be bad for corporate health. Mostly though I will elaborate on the main ideas of Winners and Losers: how markets are created, disrupted and transformed by innovations in technology and business models, why so few emerge as winners, and the qualities of those who do.