What does Schumpeter have to do with digital transformation?

I’ve always wanted to write an article combining thought on economics and information technology but the opportunity hasn’t arisen until now. I actually started out my career as an economist, working at the HM Treasury in the Economic Briefing and Analysis team, which was then headed up by one of the founding members of the UK Monetary Policy Committee, Sir Alan Budd. It was a great time to be there, we saw the change in power from Ken Clarke (Conservative) to Gordon Brown (Labour) and the appointment of 2 Eds – Ed Miliband and Ed Balls as Treasury officials. Many of my colleagues at the time have gone onto have amazing careers in the civil service and the city.

So who is Schumpeter? Joseph Schumpeter was an Austrian-born American economist and political scientist, who served as the Finance Minister of Austria in 1919 and in 1932 become a professor at Harvard. He is widely recognised as one of the most influential economists of the 20th century alongside John Maynard Keynes and Milton Friedman. He is best known for his theories on innovation and entrepreneurship which led to the phrases “creative destruction” and “Schumpeter’s gale”.

Creative Destruction

Schumpeter was a keen student of Karl Marx but he was not a socialist, an ideology which was rife at the time. He was inspired to pen what later became a basis for explaining the economic role of “Entrepreneurism”, the very engine of capitalism. Schumpeter’s works provided an explanation for the theories of economic innovation and the business cycle.

According to Schumpeter, the “gale of creative destruction” describes the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”.

This is in contrast to the point of view of Marx, who broadly linked his theories to the the accumulation and annihilation of wealth under capitalism.

Schumpeter’s Gale and the Digital Revolution

It cannot be denied we are in the midst of a digital revolution. Talk of digital transformation is all pervasive. Led by the likes of Amazon, Uber and Air BnB and promoted by management consultancies and technologists, the talk of disruption and destruction for traditional businesses is now rife. (I’m not going to explain these concepts again – for more information please read my posts and articles)

While Schumpeter agreed with Karl Marx that capitalism would eventually collapse and be replaced, he predicted that this would come about in a different way. While Marx predicted that capitalism would be overthrown by a violent working class revolution, Schumpeter believed that capitalism would gradually weaken by itself and eventually collapse. Specifically, the success of capitalism would evolve into corporatism, and to values hostile to capitalism, especially among the intellectual class. “Intellectuals” are a social class in a position to critique societal matters for which they are not directly responsible and to stand up for the interests of other classes. “Intellectuals” tend to have a negative outlook of corporatism, even while relying on it for prestige. The growing number of people with higher education is a great advantage to corporatism as it supplies a steady stream of cheap and well educated workers, according to Schumpeter. Yet he argued that unemployment and a lack of fulfilling work would cause intellectual critique, discontent and protests. 

His thinking has been scarily prophetic. Fast forward 67 years and he could be describing what has been taking place since the financial crisis in 2008.

Global Financial Crisis – a turning point

In the UK and US, the 80s banking boom, led to the eventual inflation of public sector wages and then to relaxation of credit controls, creating an unprecedented housing boom. This resulted in the Global Financial Crisis of 2008. Since then the zero interest rate (ZIRP) monetary policies of the developed nations have led to the biggest disparities in wealth for centuries. These policies have done little to dampen down corporate greed, bonuses and the runaway house prices which caused this problem in the first place, having huge implications for GDP in the developed economies. Paradoxically this has led to recessions, as the disposable income of the average person has been squeezed by redundancies, wage freezes and globalization. This has led to a disenfranchisement of the political system, especially among the “Millennial” generation, many of them who have just graduated, wondering how they are going to earn enough to live on and put a roof over their heads.

The Tech Entrepreneur

Since 2008, the tech industry has gone from strength to strength, the corporate focus on KPIs and costs has led to a wave of innovation, especially in the area of cloud based technologies, business process automation and software development. This has led to conditions which strongly favour the tech entrepreneur. Due to modern advancements, it is now very easy to start up a technology business and this can be done without much startup cost.

I’m seeing more and more millennials, shunning the traditional graduate corporate route, in favour of becoming an entrepreneur. Given the possible upsides of starting your own business, compared to working as an employee and the failure of wages to keep up with house prices, the trend is not surprising. Whether this leads us to a more socially acceptable form of capitalism or the even nirvana of “Social Capitalism”, remains to be seen.

2017 and beyond

The digital transformation age has now got a head of steam and is powered by a hungry, ambitious, dynamic and disenfranchised engine. Some may have seen me referring to 2017 as the “Year of the Tech Entrepreneur”. With Brexit on the horizon, the weather certainly isn’t calm at the moment. It is necessary to stay agile and on the balls of our feet. We must never stand still or we too risk being blown away by Schumpeter’s Gale.