Innovation and Creative Destruction

One of the best books for 2007 was Prophet of Innovation: Joseph Schumpeter and Creative Destruction by Thomas McCraw.

Innovation and entrepreneurship is messy. By its very nature it is unexpected, so it is not easily modeled. While risk is countable, uncertainty is not measurable. Innovation is not measurable. There is no distribution of business creation. You cannot tell when it is going to happen, whether it will be adapted, or if it will be a success. You cannot plan for it. Innovation by its very nature creates new markets and products that did not exist. It is a “Black Swan” event. Yet it happens, and we are poor at forecasting these business prophets. It is this uncertain process of innovation is what drives economies. It takes a person who can see the existing system and envision an improvement or create a market that did not exist before. The very process is destructive because the status quo must change. Trying to explain this process requires not only an understanding of economics but the breath of history, cultural, and institutional structure. Only a remarkable man of intellectual power would be able to describe the environment required for innovation. Joseph Schumpeter was such a man.

His story is a complex one. He was a big ego who clawed his way up the academic world but was also exposed to government service and private banking. His failures coupled with a desire to be a great thinker makes for a fascinating story of a man and an idea. Schumpeter is not often taught in economic classes. The required need for true inter-disciplinary thinking makes him hard to read. The fact that there are no formal models for his thinking makes him out of step with mainstream economics, but he may be one of the most influential thinkers on business.

Even the current credit crisis should be looked at through the process of creative destruction. Innovation has changed the mortgage market forever. We will not go back to fixed 30-year mortgages regardless of how much regulation is imposed on the market. The development o many Asian economies is a result of creative destruction. Innovation allowed for countries to leap-frog the development process.

Thomas McCraw has been writing about innovation for years and he is able to bring the story of Schumpeter together as a lively tale of a man focused on bringing new economic ideas to the world. What McCraw will want you to pick up your dusty copies of Schumpeter’s works and read them for both the insight and enjoyment in a new light.