Are Disruption & Destruction Driving the Economy?

Creative destruction in a world of exponential growth

In 1942, Austrian-American economist Joseph Schumpeter explained that the overhaul of existing ideas and products was an essential fact of capitalism. He called this ‘creative destruction’, and innovators have been discussing it ever since. The concept describes the relationship between innovation and conservatism. If a business wants to progress in a capitalist economy, then destructive, disruptive sacrifices need to be made. Instead of being presented as negative, the term suggests that disruption is necessary for growth. But does disruption drive the economy? Which effect does innovation have on economic growth, and what does this mean for businesses?

Quantifying innovation
When it comes to innovation there are both negatives and positives that need to be weighed up and considered. This decision process has been neatly summarised as the Innovator’s Dilemma. There are always winners and losers in this difficult game, but it’s often a case of withstanding short term pain for long term gain. For instance, a business may lose a proportion of loyal customers when introducing a new product but they may then gain a new, larger following. Sometimes, though, the impact isn’t temporary. Automation has cast a shadow over the employment market in its present state, challenging traditional roles that once seemed indispensable. Despite this, Claus Risager, CEO of Blue Ocean Robotics, suggests the existence of more global jobs and working hours per day than ever before as a clear indication of positive economic change. “When you implement new technology, over time you actually create more jobs. In a logical way you would probably think the opposite, but when you become more productive you create value,” he says. The problem is that these new jobs require new skillsets. The replacement of old expertise with new skills is one clear example of creative destruction at play, but creation can’t happen without support. Big companies like Google, for example, are taking steps to encourage and foster this transformation. This month, CEO Sundar Pichai announced a $1b investment in non-profits to help prepare the US workforce for high tech jobs. The mission, said Pichai, is to ensure that information serves everyone, and in turn, no doubt, the wider economy.

How is innovation linked to growth?
Earlier this year, a team of academics came together from different US universities to conduct a study that mapped the correlation between innovation and economic growth. By measuring how far the news of a patent impacted the issuing company’s stock price, the researchers came up with a concise conclusion – the more patents, the more competitive growth. Periods of rapid technological growth in the 1920s, 1960s, and 1990s were all shown to lead to a clear rise in overall economic growth. In fact, it was found that jumps in innovative output led to an increase in annual economic output of up to 6.5 per cent. To put this into perspective, the US economy usually expands by 4 per cent annually. We’re currently in another phase of expansion, which will hopefully deliver similar positive disruption to the economy. The effect on businesses and workers within this economy depends on how they react. For instance, if businesses take calculated risks and confront the Innovator’s Dilemma, they could reap the rewards. From an employee’s perspective, those who acquire new skillsets will step up to claim the positions that employers will need to fill, thus transforming the nature of work. But if job seekers are unable or unwilling to adapt, the situation could become incredibly uncertain.

The study carried out by the academic researchers shows that if businesses can pursue a policy of innovation, then they are likely to be successful and some may lead to disruption. It’s clear that in some areas this is already happening at a considerable rate, as automation and new job requirements shake up the employment market. It’s also evident from the new strategies followed by companies like setting up innovation hubs, for example. But while we may be experiencing a phase of expansion, this will only continue with the support of influential organisations and the willingness of businesses to take risks. The next challenge, it seems, is to build an economy that can support this exponential growth.

Does Schumpeter’s creative destruction ring true? Is it possible to measure innovation? Will other major tech companies follow Google’s lead by investing in job and business transformation? Share your thoughts and opinions.