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If you can name even one Harvard Business School professor, it's likely to be Clayton Christensen, one of the few superstars in this rather dry domain. Starting with his landmark book The Innovator's Dilemma, Christensen presented a new theory of innovation and why so many companies fail at it. It's become virtually a bible for startup businesses.

I last posted about Christensen when he wrote that, contrary to "free-market" dogma, competition and innovation in health care tend to drive prices up, not down.

Now he's saying that American business' relentless pursuit of profit is killing innovation…and our economy.

Keep reading…

In a Forbes column,  Christensen says U.S. business is going about things all wrong. And he blames "business school thinking" for it.

The way we measure profitability is misleading, he says. Because a company can make itself look more profitable simply by selling or scrapping assets and outsourcing everything, we're deliberately divesting ourselves of the know-how needed to make things (but just watch that stock price and the CEO's bonus shoot up!). And that's slowly strangling our economy and our tradition of innovation.

It's often said that Western science measures things that are easy to measure, not things that are important, and this is a prime case. Bean counters use "financial ratios" that are easy to calculate and can be applied to any industry, but may tell us little about the real impact on the greater economy. Christensen tells the story of a chipmaker in Taiwan, who remarked

You Americans measure profitability by a ratio. There’s a problem with that. No banks accept deposits denominated in ratios. The way we measure profitability is in ‘tons of money’. You use the return on assets ratio if cash is scarce. But if there is actually a lot of cash, then that is causing you to economize on something that is abundant.

Furthermore, the standard "Internal Rate of Return" measure used to evaluate a proposal to outsource manufacturing overseas fails to assign any value to things like the cost of the knowledge being lost, the cost of not being able to innovate in the future, or the cost of the company's current business being taken over by emerging competitors who can make a better product at lower cost.

I encourage you to read the whole column. It's yet another cautionary tale about the true cost of hollowing out our economy and shipping our jobs overseas.

There's also a video of an excellent talk by Christensen here.

Originally posted to RobLewis on Thu Dec 08, 2011 at 03:48 PM PST.

Also republished by ClassWarfare Newsletter: WallStreet VS Working Class Global Occupy movement and Community Spotlight.

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