WHAT THE FUTURE HOLDS:EVEN BY the standards of Harvard University of the mid-20th century, Joseph Schumpeter was a bit of a fuddy-duddy. He neglected to learn to drive, avoided aeroplanes and, apart from a single unhappy experiment, refused to take the subway that links Cambridge with Boston.
Obsessed by the idea of being a perfect gentleman, he spent an hour every morning dressing himself. Impatient with new-fangled devices such as photocopiers and carbon paper, he dispatched the only copy of his masterpiece, Capitalism, Socialism and Democracy, to his publishers by post.
Yet this strange man, this part cock-of-the-walk and part Austro-Hungarian stick-in-the-mud, was one of the most acute prophets of social change that the 20th century produced. For Schumpeter, capitalism was, above all, a “perennial gale of creative destruction” – a gale that was forever sweeping away old ways of doing things and replacing them with new ones. He believed that entrepreneurs were the agents of disruptive innovation – the people who saw the future first and translated it into viable businesses.
And he argued that history was speeding up. Old ways of doing things were being discarded faster. Change was becoming more discontinuous. Business people were constantly finding the ground disappearing from beneath their feet.
Schumpeter was often ignored during the era of managed capitalism that followed his death in 1950, an era when his great rival, John Maynard Keynes, ruled the roost, and when Keynes’s disciples, such as JK Galbraith, argued that the economy was planned by a handful of giant companies. Today, however, he is rightly regarded as a prophet: so much so that Lawrence Summers, who served as Bill Clinton’s treasury secretary and Barack Obama’s chief economic adviser, has argued that Schumpeter may well prove to be the most important economist of the 21st century.
It is a commonplace that we live in a period of unusual turbulence. But Schumpeter suggested this turbulence had a hidden logic. Entrepreneurs are constantly generating innovations that give them a temporary advantage over their competitors. And these innovations send waves of disruption through the economy as their competitors try to adjust to the new business landscape and institutions scrabble to adjust to new realities. The price of improved productivity is perpetual change.
Business people might be forgiven for thinking that the weather cannot get any stormier than it has been of late. They have witnessed a succession of disruptions unleashed by the powerful combination of technological innovation and global integration. The internet has spread more rapidly than any previous innovations and has rewritten the rules of business completely, putting billions of people into instant contact with each other, transforming information-intensive industries and creating companies, such as Google, that give away their products for free and yet somehow contrive to make billions of dollars.
The internet has turbo-charged a process that has been sweeping through the physical economy for decades: globalisation. Ponoko, a New Zealand-based company with clever software, will arrange to have your ideas turned into products and then delivered to your customers wherever they might be in the world.
As if this were not enough, the capital markets are adding to the turbulence. Financial institutions are more powerful than ever before – and more intrusive (investors put constant pressure on companies to perform). They are also injecting ever more uncertainty into the mix. In 2007-08 problems with arcane securities traded by often-obscure financial institutions shook “real” companies to their foundations and threw millions of people out of work.
The most obvious result of all this has been a radical reduction in the life expectancy of businesses. In 1956-81, an average of 24 companies dropped out of the Fortune 500 list every year. In 1982-2006, that number jumped to 40. But the upheaval is producing radical changes in business models, too. Businesses have been forced to transform themselves from fortresses to switches in networked systems.
At the most basic level, this means encouraging outsiders to produce ideas for products. Procter Gamble gets more than 50 per cent of its ideas from outsiders. Other companies have gone further and introduced “collaborative consumption”. Netflix and Zipcar have revolutionised markets in renting entertainment and cars, respectively. Flickr, Twitter and Linux specialise in taking the shared efforts of thousands or even millions of people and then using them to create online communities.
This turbulence will become far more dramatic in coming years. The internet revolution is going into warp speed. Google is experimenting with high-speed networks that operate more than 100 times faster than regular broadband. Cisco claims that its latest router can deliver the entire printed collection of three American Libraries of Congress in just over a second. Facebook took five years to attract 350 million users (in December 2009) but has more than doubled that number since (800 million in November 2011).
And globalisation is closer to the beginning than the end. Pankaj Ghemawat, a professor at IESE Business School in Spain, says that foreign direct investment (FDI) so far accounts for only 9 per cent of all fixed investment and cross-border internet traffic accounts for only about 20 per cent of all internet traffic.
The coming decades will see the biggest revolution in manufacturing since the arrival of mass production. Mass production created a world of huge organisations and gigantic conglomerations of people. Three-dimensional printing or “additive manufacturing” will turn manufacturing inside out and upside down. Inside out because three-dimensional printing creates products by addition rather than subtraction – building up objects by adding material, one layer at a time, rather than taking a lump of stuff and hacking away at it. Upside down because three-dimensional printing makes it as cheap to produce a single copy as 1,000.
This will help to create a world much more like the one that fierce critics of mass manufacturing, such as William Morris and his fellow members of the Arts and Crafts movement, dreamed of: a world of independent craftsmen flourishing in Elysian peace. Small manufacturers will be able to service the global market from any outpost on the planet. And ordinary people will be able to design and print their own products, rather than buying them off the shelf.
Three other innovations will add to the sense of radical change, sending ripples through the world economy. First, the “internet of things” will allow people and objects to communicate via millions of sensors embedded in physical objects. Fridges will reorder food; wine glasses will warn us that we have had too much to drink; medicine bottles will advise us to take our medicines.
Second, the world envisaged by so many science-fiction writers will soon be upon us, as robots take on a growing number of tasks that humans are reluctant to do: difficult, dirty and dangerous ones such as cleaning nuclear plants; and routine ones such as housework. In a decade or so, personal robots will be available for elderly or disabled people for less than €10,000.
And third, robots will acquire cousins, in the form of electronic secretaries, which will organise the torrent of information that comes our way, manage our timetables, set up meetings and arrange business trips.
This tidal wave of innovations will spread to the public sector as well as the private sector, as governments try to get more value for their taxpayers’ money and citizens demand the same quality of services from the state as they get from private providers. The remarkable reduction in the cost of collaboration, brought about by the internet, will arguably transform the public sector even more radically than the private.
State institutions will transform themselves from bureaucratic empires to “platforms”, working hand-in-hand with voluntary organisations, private businesses and active citizens.Schools will routinely use computers to deliver basic instruction, thereby giving teachers more time to spend with individual pupils.
Doctors will monitor patients over the internet and call them into their surgeries when they spot something wrong. Universities will be able to plug themselves into a bank of star lecturers and state-of the-art courses. This will provoke a bitter war with professional guilds, as academics and doctors fight to preserve their comfortable niches, but the pressure on governments to improve the productivity of the public sector will be irresistible.
The emerging world economies will become a cauldron of innovation as high-growth economies challenge the rich world for brain work as well as manual work.
Emerging-world giants will produce ever more sophisticated goods. Rich-world companies will move more activities to the emerging world in order to exploit local intellectual talent and bring their factories close to growing markets. The result will be that an activity that has been a monopoly of the West since the 16th century – business innovation – will become global. Emerging economies will produce a growing number of “breakthrough” innovations.
China is already becoming a world leader in the “internet of things”, embedding sensors in manufactured products; Kenya is leading the world in “mobile money” (using mobile phones to make payments); Asian countries in general are leading the world in video gaming.
The emerging world will also be setting the pace in a new kind of innovation – so-called “frugal innovation”, driven by the desire to cut the cost of products not just incrementally, by 10 per cent, but dramatically, by 90 per cent. We have already seen a few examples of this, albeit with limited initial success: Tata’s $2,200 car; General Electric’s $400 electrocardiogram; Godrej Boyce’s $70 fridge, “the little cool”.
But much bigger things are on the way, from a $300 house that will revolutionise life in the slums to cheap, genetically modified foods. These innovations will change life in the rich world as well as the poor one: emerging-world countries will produce a wave of products that will force rich-world companies to reduce their costs, produce more value, or go out of business, and they will do this on more and more fronts.
Emerging markets will lead the world in thinking creatively about the delivery of human welfare. Indian entrepreneurs have applied mass-production techniques to healthcare. Philanthropist Devi Shetty has created a focused hospital in Bangalore that has dramatically reduced the cost of heart operations without any loss of quality, through a combination of specialisation and economies of scale (the hospital performs 600 operations a week).
Aravind, the world’s biggest eye-hospital chain, performs some 200,000 eye operations a year and takes the assembly-line principle literally: four operating tables are laid side by side and two doctors operate on adjacent tables. When the first operation is done, the second patient is already in place.
This turbulence will add to long-term trends that are reshaping the world of work, such as the feminisation of the workforce, the spread of flexible working and growing life expectancies.
The traditional career will not disappear entirely: companies will continue to employ core workers who join when they are young and try to climb to the top of the ladder. But in general, careers will become much more complicated. Feminists have created the phrase “off-ramping” and “on-ramping” to describe the way that women leave the full-time workforce to have children and then rejoin as their children grow up. Off-ramping and on-ramping will spread to men as life expectancies grow and voluntary breaks (through sabbaticals and the like) and involuntary ones (through job churn) become more common.
Lynda Gratton, a professor at London Business School, suggests that we should abandon the image of ladders in favour of “a series of ascending bell-shaped curves – or what’s termed carillon curves, in which energy and the accumulation of resources grow and then plateau, only to grow again”.
How will we cope with all this creative destruction? Will we be able to harness it to improve the quality of our everyday lives, or will it tear apart our societies and degrade the quality of life? For most companies the great problem of the coming decades will be how to innovate as quickly as their competitors. But for a growing number of ordinary people the challenge will be in coping with the social and psychological impact of all these innovations.
Several things are already creating tension. The cognitive elite is pulling further ahead of the rest of the population; not just bankers, but also consultants and surgeons are soaking up a greater proportion of national income. And within the cognitive elites intellectual stars are pulling further ahead of their less stellar (or more modest) peers.
Many of those who might be termed “brainworkers” have supersized jobs to match their supersized salaries: they spend their youths commanding ever more demanding bodies of knowledge and their careers working long hours. These pressures will only become greater as knowledge advances.
But the burden of work is also increasing for more modest people: the combination of globalisation and the internet means that work has become omnipresent and all-consuming. Evenings and weekends can be eaten up by emails and conference calls from far-flung parts of the world. The problem of information overload will only get worse as the cost of communications continues to fall and as work is dispersed along global supply chains.
Striking a sustainable balance between the imperatives of creative destruction and the demands for a manageable life will be one of the great themes of the next decades. This will lead to some interesting growth industries.
IT companies will produce lots of clever ideas for coping with the information overload that they are themselves creating. Bright people will devote more effort to managing themselves. Educational entrepreneurs will recognise that there is a huge market among middle-aged people wanting to upgrade their knowledge and older people, wanting to pursue second careers as philosophers and writers.
“Free agents” will form all sorts of networks and associations in order to provide themselves with security, as well as to escape from loneliness. Entrepreneurs are also creating office complexes – variously dubbed hubs, sandbox suites and citizen spaces – to provide freelancers with places to go.
These developments may add up, as they gather momentum, into something bigger and more surprising – the recreation of something like medieval guilds.
The struggle to strike a balance will also produce some significant continuities. Companies will survive in a recognisable form, not just because they are powerful economic institutions but also because they salve the human desire to form associations with others (the term company is derived from two Latin words, cum and pane, meaning breaking bread together).
That may help to explain why, even in a technology sector notable for its nerds and characterised by extraordinary degrees of volatility, a remarkable number of companies are founded by partners rather than lone wolves.
It is also important to remember that people will win more than they lose from all these changes. Schumpeter’s phrase, “creative destruction”, is attractive because it captures the dynamism of the modern economy. But in many ways it is deceptive. Creative destruction creates far more than it destroys: e-books supplement physical books, rather than replacing them, for example.
The storms of creative destruction are blowing us to a better place.
Adrian Wooldridge is management editor at the Economist. This is an extract from Megachange, published by Profile Books
