Capitalists seem uninterested in capitalism—in supporting the development of market-creating innovations.
- Clayton M. Christensen and Derek van Bever, The Capitalist’s Dilemma, Harvard Business Review, June, 2014
Fourteen years ago, the 1% got the tax breaks and regulatory rollbacks which they had repeatedly assured us would usher in an era of boundless prosperity. What was ushered in instead was the worst economic disaster since the Great Depression - an ongoing disaster that is exacerbated by the austerity-mongering neoliberal vampires who still control our economy.
Now, even the Harvard Business Review is calling out the neoliberal nonsense about "entreprenuers", pointing out that the short-term view of the financial markets values "disruptive innovation" less than "efficiency innovation" (i.e., cutting jobs).
When the man who invented the term "disruptive innovation" (Clayton Christensen) says captialism does not value his brainchild, you know that Wall St. has jumped the shark.
Now, Christensen did not discover innovation. He merely named a certain variety of it, prevalent in the Silicon Valley companies he studied in his landmark book, The Innovator's Dilemma.
Christensen is a good teacher. Unlike most business school writers, he actually clarifies the topic he is writing about, as opposed to burying it in jargon, like Theory Z. In the article I'm referencing, he sub-divides innovation, and thereby uncloaks for us how the business jargon has mashed true innovation together with cost-cutting. (Sorta the same way today's Democratic Party has mashed progressivism together with corporate welfare.) Christensen defines three kinds of innovation:
Performance-improving innovations replace old products with new and better models. They generally create few jobs because they’re substitutive.
Efficiency innovations help companies make and sell mature, established products or services to the same customers at lower prices.
Market-creating innovations, our third category, transform complicated or costly products so radically that they create a new class of consumers, or a new market.
Then, he goes on to essentially say that one of the fundamental tenets of capitalism, a tenet that underlies the austerity mania, is no longer true:
A fundamental tenet of economics is that some of the inputs required to make a product or service are abundant and cheap—like sand. We don’t need to account for such inputs and can waste them, if need be. Others are scarce and costly and must be husbanded carefully. Historically, capital was scarce and costly. So investors and managers alike were taught to maximize the revenue and profit per dollar of capital deployed.
While it’s still true that scarce resources need to be managed closely, it’s no longer true that capital is scarce. A recent Bain & Company analysis captures this point nicely, concluding that we have entered a new environment of “capital superabundance.” Bain estimates that total financial assets are today almost 10 times the value of the global output of all goods and services, and that the development of financial sectors in emerging economies will cause global capital to grow another 50% by 2020. We are awash in capital...witness the $1.6 trillion in cash on corporate balance sheets.
People have been pointing to all the unspent capital, which politically-aware people understand is just parked until the crooks can buy a tax-amnesty. (I would add the estimated $20 Trillion
parked in tax havens by the super-rich over the last 30 years.) We should be shouting what Christensen says:
it’s no longer true that capital is scarce.
Therefore, austerity can be seen as a form of looting - privatization (and subsequent under- or dis-investment in public assets) and the ruthless extraction of the life savings of the middle class, as it struggles to keep its head above water.
In an almost Marxian analysis of contradictions, Christensen points out how the mis-measure of what is scarce by Wall St. is killing capitalism:
financial markets—and companies themselves—use assessment metrics that make innovations that eliminate jobs more attractive than those that create jobs...
All of this makes market-creating innovations appear less attractive as investments. Typically, they bear fruit only after five to 10 years; in contrast, efficiency innovations typically pay off within a year or two. What’s worse, growing market-creating innovations to scale uses capital, which must often be put onto the balance sheet. Efficiency innovations take capital off the balance sheet, however. To top it off, efficiency innovations almost always seem to entail less risk than market-creating ones, because a market for them already exists...
We would contend that the ability to attract talent, and the processes and resolve to deploy it against growth opportunities, are far harder to come by than cash. The tools businesses use to judge investments and their understanding of what is scarce and costly need to catch up with that new reality.
This insight did not originate with Mr. Christensen. Even a lowly mug like me diaried about this problem in the biotech industry three years ago, with a title that is a paraphrase of Christensen: Innovation isn't profitable enough for the plutocrats.
This same analysis was done by the late Jane Jacobs
in her 1969 book, The Economy of Cities
One of the most expensive things an economy can buy is economic trial, error, and development..."Expensive", of course, does not mean "wasteful". Develop work pays; indeed an economy does not continue to pay its way without development work, unless by a gradually declining standard of living among many of its people. Nevertheless, economic development is expensive and when development work is skimped or obstructed, large amounts of capital thus become available for other uses instead....
In sum, when the development of a formerly strong economy is neglected, so much capital becomes available for unproductive purposes that it is almost an embarrassment. People are hard put to devise ways to use it. The society seems extraordinarily affluent for a time, and in a way it is. For the society is economizing on one of the most expensive things it might otherwise buy. All sorts of philanthropies, extravagances and displays of vainglory become possible.
In America's case, the unproductive purposes began with the 50 year long real estate Ponzi scheme that was the build-out of suburbia and exurbia, as James Howard Kunstler
has chronicled over the years. The rest of our surplus has been channeled into the Wall St. gambling casino, the rise of a predatory class of financial capitalists, and a bloated military/intelligence/police budget. (In a later book, Cities and the Wealth of Nations
Jacobs lists unremitting military spending as the fastest way to wreck an economy.)
At this point in time, after more than 30 years of government bashing, money worshipping, and general anti-democracy propagandizing, we have reached the point where the only way to treat the corporate conversation about what is wrong with our economy is to call it either delusional self-interest or outright class warfare. Christensen calls the emphasis on austerity a mistake.
I call it class warfare.
So does Michael Lind. I diaried about this in Plantation ownership, it's not just for Southerners anymore. Lind lays out the inefficiencies, lack of investment in innovation, and the extraction of value by sweating labor that is the stock in trade of the new business model.
The mentality of the (today's) businessman is that of the pre-modern "seignurial" elite...It is not an industrial capitalist mind-set at all, but the mentality of the Spanish conquistador, who dreamed of quickly acquiring fabulous wealth by plundering precious metals...
(Today's economics) is based, like pre-industrial agrarian economics, on extensive development...Growth results from the employment of the same primitive, wasteful techniques...on additional resources...The free-market law of supply and demand, according to which reductions in the supply of land and labor should stimulate an increase in the demand for efficient technology , can be evaded by the addition of more land or the enlargement of the workforce by immigration or the expatriation of industries to new countries.
So, with all due respect to Mr. Christensen, these guys are thugs and looters. Your polite attempt to point out they are killing the goose that lays the golden eggs will get no traction with conquistadors. They will continue to suck America dry while looking for the next target overseas.
Still, its nice when I get to use the HBR to bash the financial fundamentalists.