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Creative destruction via technology

One of the theories of economics, originally popularized by Joseph Schumpeter, is termed creative destruction.  The idea behind this theory is that innovations will impact the market place at least in part by destroying the market share of older, less innovative products and companies. Thus, to use one oft quoted example, the Polaroid camera has all but disappeared, displaced by the digital camera.

Technology obviously plays a huge role in the creative destruction process. A common referent is to "buggy whip manufacturers" who were supposedly driven out of business by the rise of the automotive industry. It is not that their buggy whips were no longer good products - they remained useful to those who needed to use horse drawn buggies. It is just that the number of horse drawn buggies diminished precipitously and with them the need for buggy whips all but disappeared.

Creative destruction plays a role not only in new products but in new business models and new management systems. One reason for the US Automotive industry being in the mess it is in right now is that they were, by and large, very slow to adopt the quality measures preached by W. Edwards Deming (who was born, in 1900, in Sioux City, Iowa). In contrast, Japanese automotive manufacturers were quick to adopt these new and highly effective quality practices, with the result that the market share of US automotive companies has fallen over the last forty or so years, while that of the Japanese automotive companies has risen. In short, the less efficient manufacturer has been destroyed (to a degree) by the more efficient one, with the general public gaining the benefit (by way of higher quality cars).

Parenthetically, creative destruction plays a significant role in economic cycles and recessions. Companies that are not innovative in their products or their methods may survive in good times, but in recessions they will either downsize significantly (and thus get more efficient) or disappear altogether. While being involved in such situations is clearly very unpleasant for anyone, ultimately this destruction of inefficient companies is good for everybody, because those workers in the inefficient companies are freed up (a rather clinical description of the searing anxiety of unemployment, but true nonetheless)  to work in more productive companies and creating more innovative products. When the government messes with this process it does not avoid the pain and anxiety of unemployment, it merely delays it, and does so at the expense of the rest of the economy, thus prolonging the suffering for all.

Returning to innovative products, it is clearly of interest to spot which ones will be disruptive, and to get behind them. A recent example of a potentially disruptive technology was recently announced - spray-on liquid glass. The disruptive potential in this technology is the fact that having a very thin (between 15 and 30 molecules thick) flexible and breathable layer on things makes it much easier to keep those things clean. From the article it appears that a lot of testing has already been done on this material, and it seems to be working well.

Why is this so disruptive? Well, if this coating works out, it will severely impact the market for household cleaning products - most of them will not be needed anymore. It could spread over into several other sectors too - sterile environment management for example. But just the household cleaning product market would be enough - it is apparently a market of about $7 billion annually in the US alone. That part of the economy might disappear very rapidly. Now $7 billion is not very much in terms of the $14 trillion (approximately) US Gross Domestic Product (it's about 0.05% in fact) but this is not the only change of this sort that is happening. Imagine that you work in business of household cleaning products - if this new product pans out (and the evidence appears good that it will) then you had best be polishing your resume, because in 5 years or so the odds are your job will not exist.

And it is not just the household cleaning product business that is at risk. All of us, no matter what our jobs, had best be thinking about having to change jobs. Not to be thinking that way is simply to ensure that you are surprised when the change comes to your industry.

Of course, not all technology is going to create so much destruction. Another recent announcement of a technology development talked about a device to allow us to walk on walls. I have no doubt that this will prove useful to a small number of people (those who wash windows on high rise buildings for example, or cat burglars) but it is hard to see this impacting our economy to the tune of $7 billion a year (although that might reflect a lack of imagination on my part). So, cool technology - yes! Creatively destructive - no!

And then there are some areas where the impact of the new technology is far from clear. One such at present is the impact of e-books on the whole publishing industry. This is a matter of some current interest because of the recent unveiling of the iPad tablet from Apple. Additionally there was a bit of a spat between Amazon and MacMillan (the book publisher) over the weekend. Basically, Amazon wants to be able to sell e-books for significantly less than hardcover books. Publishers do not like this, because they see less opportunity for profit from e-books than from hardcovers. Virginia Postrel dissects the issues very neatly in her article, and there is a more scholarly discussion of "utility Strategy" here. But as Stephen Green points out, the whole business model of publishing books is going to change rapidly and irreversibly. A few years ago, the big book stores and Amazon put pressure on the small independent book store - some survived, many did not. Now, Amazon and Apply are applying similar pressure to book publishers - guess what's going to happen...

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