Schumpeterian Rubble

‘Creative destruction’ is second only to ‘disruption’ as the catchcry of the startup-as-rockstar culture.

The phrase comes from Joseph Schumpeter, describing creative destruction as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”.

It’s easy to see why it’s an attractive idea. Through technology we can now create revolution from within. Challenge outdated norms, usurp corrupted institutions, kill the old, champion the new. Huzzah, progress!

But somewhere along the way, this idea of creative destruction was grabbed on to so tightly that we lost one of its fundamental, and important, elements - Schumpeterian rents. The idea here is that rents can be earned by the disruptive innovator in the period between market entry and the disruptive technology or idea becoming mainstream - at which point it is copied in the market and battered by the winds of perfect(ish) competition.

These Schumpeterian rents are not simply the reward for creative destruction, they’re the incentive. But they’re also a factor in determining what ideas win. Because the ability for an idea to be both destructive and commercially viable is critical to it being better than the status quo.

In today’s environment of easy money and ‘global at all costs’ scaling efforts, we’ve lost sight of this commercial necessity.

Today, a lot of innovation is succeeding more often because it is better funded than the alternative, rather than being better than the alternative.

The better idea should win. Not the better funded one.

The result of this shift is important. If a new idea isn’t commercially viable in the long run, it’s probably not actually better than the incumbent that it just ‘creatively’ destroyed.

In the incessant drive to ‘make the world a better place’, the better world may well become Schumpeterian rubble.

Or in the words of Stu Card, a man who knows more about innovation than most, “We should be careful to create the world that we actually want to live in”.

- September 2015