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Schumpeter’s ‘gale of creative destruction’ vs business models

When in 1942 the economist Joseph Schumpeter famously described capitalism as being in a ‘perennial gale of creative destruction’, he wasn’t just reflecting on technological advance during the war. Competition with and the destruction of commercial rivals was also his focus. These things now occurred, Schumpeter argued, not just by changes in price, product quality or sales volume, but also by a new, ‘powerful lever’ behind long-term improvements in output and cheapness: new consumer goods, technologies and methods of production or transport, as well as new markets, sources of supply and forms of organisation. Thus technology formed only a part of Schumpeter’s approach to economic development.

While Schumpeter's comprehensive approach had merits, today's experts in innovation go too far. They give a nod to R&D; but they add and implicitly prefer just about any other stratagem to it. Business models have the last word, and innovation can mean whatever you want.

What these models have in common is a limited amount of genuine technological innovation; a stress on expensive, high-margin consumables and software; an attempt to drive up switching costs on the part of users (‘lock-in’ to proprietary systems); a reliance on advertising, branding, retailing, franchising, and more or less regular ‘hits’ on users’ finances.

Mobile phone companies, digital TV broadcasters and Internet Service Providers have scores of formulae for their subscriptions and call rates. In energy, utilities do something similar. The net result, however, has been consumer annoyance that, for all the babble about payment regimes, basic service can often go wildly wrong.

Dumbing us down with User-centeredness and Open Innovation

Today we see an emphasis on user-centeredness and open innovation, while R&D is stagnant in the West. Management consultants Booz Allen propose that ‘just throwing money’ at R&D ‘isn’t the answer’. In fact, throwing money at energy R&D would make a change.

What the world confronts today is not a knowledge economy, but rather a relative scarcity of knowledge. People no more live in a knowledge or network economy than they live in a consumer society. Knowledge is the basis for innovation, but the fact is that the world doesn’t have enough of that either. People never lived in the atomic age or the space age. They are not engaged in life after the oil crash; nor are they about to move into a hydrogen economy.

In the same superficial vein, open, networked ecosystems of innovation represent a disingenuous reading of the field through the spectacles of IT and of biology. There’s no reason why technological and other kinds of innovation should resemble the flow of electrons around a physical grid, and no reason why the conscious, human activity of innovation should emulate the unconscious, Darwinian world of random mutation and natural selection. Analogies and metaphors are all very well. But only in today’s dumbed-down society can they successfully pass as theories.

To present innovation in ecological terms is to make a new twist on an old myth. Indeed, the illusion that the Earth’s ecosystem, rather than human activity, is the key source of wealth is now deeply embedded in mainstream economics. Yet genuinely innovative physical grids - in electricity, broadband, hydrocarbons and water - are more important to a humanised planet than rhetoric about networked innovation.

We have no doubts about the potential, in new technologies, for innovation on a grand scale. But as we have shown there are significant barriers to that kind of innovation. So long as precaution and environmentalism dominate the thinking of society, today’s boom in wind turbines is unlikely to assume the dimensions of Schumpeter’s gale.®

© Adapted with kind permission of the authors. You can buy Energise! at Amazon here .

About the authors

James Woudhuysen is visiting professor of Forecasting and Innovation at De Montfort University, Leicester. In the past he headed market intelligence for Philips Consumer Electronics and read physics at Sussex University.

Joe Kaplinsky is pursuing postgraduate research in chemical biology at Imperial College London. He read theoretical physics at the University of Manchester, staying there to do experimental research in low temperature physics, and has a masters degree in structural molecular biology from Birkbeck, University of London.

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