As a bombardement in comparison with forcing a door Can we measure whether a particular innovation, net of all the costs it imposes on society, makes things better?

But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance) – competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition is as much more effective than the other as a bombardment is in comparison with forcing a door, and so much more important that it becomes a matter of comparative indifference whether competition in the ordinary sense functions more or less promptly; the powerful lever that in the long run expands output and brings down prices is in any case made of other stuff – Joseph Schumpeter

Innovation is both creative and destructive. It creates genuine real options to make the world a better place; at the same time it inflicts damage on incumbent companies – and their employees. The ensuing loss (or “redistribution”) of income and the increased uncertainty tend to fuel hostile reactions to capitalism itself. Is innovation in se legitimate? Is what is created always more valuable than what is being destroyed?

Joseph Schumpeter, the Moravia-born economist that coined the term creative destruction, was quite sensitive to this dark side of innovation. Although he opposed any policy measure that would interfere with the Darwinian process itself, he held that “the real tragedy is not unemployment per se, but unemployment plus the impossibility of providing adequately for the unemployed without impairing the conditions of further economic development.”

However, the acceleration that comes with the Information Age makes such collateral damage blow up in our face increasingly faster. So fast that government-annex-central-banks cannot in time provide for insurance or other forms of downside protection. The incumbents, faced with the stark choice between imitating the new kid on the block or going extinct, seldom have the mindset and the wherewithal to innovate themselves and only add to the misallocation of capital.

If disruption is not unambiguously good, can we measure whether a particular innovation, net of all the costs it imposes on society, makes things better? Schumpeter pointed out that the established ways of quantifying economic value added or welfare gains would certainly not do. Society’s measuring rods, its wants and preferences, are themselves changed by such fundamental shifts as the advent of railroads or electricity – or the Internet.

Because our measuring rods are shaped within the process of progress, rather than being given to us as absolute and static measures of what is going on as it unfolds, the question of appraising the private and social gains from entrepreneurship became “so complex and perhaps even hopeless that I beg to excuse myself from entering into it,” Schumpeter remarked. Anyone taking a stab at the answer may have to consider whether there is a limit to the extent and the speed of change we can, individually and socially, cope with and adjust to. And whether we can let business interests ultimately determine our well-being.

gepost door
Karel Volckaert