Monday, June 23, 2014

The Disrupted Recovery

To paraphrase Ronald Reagan:

'A recession is when your neighbour loses his job to disruptive technology; a depression is when you lose your job to disruptive technology'.

The thought came to mind reading Jill Lepore's eloquent (and maybe a little unfair) put down of Clay Christensen's ideas on disruptive innovation. She essentially compares the advocates of disruptive innovation to the disruption caused by ISIS in Iraq. Like I said, a little over the top.

Still, she has a way with words:

Beginning in the eighteenth century, as the intellectual historian Dorothy Ross once pointed out, theories of history became secular; then they started something new—historicism, the idea “that all events in historical time can be explained by prior events in historical time.” Things began looking up. First, there was that, then there was this, and this is better than that. The eighteenth century embraced the idea of progress; the nineteenth century had evolution; the twentieth century had growth and then innovation. Our era has disruption, which, despite its futurism, is atavistic. It’s a theory of history founded on a profound anxiety about financial collapse, an apocalyptic fear of global devastation, and shaky evidence. ...The idea of innovation is the idea of progress stripped of the aspirations of the Enlightenment, scrubbed clean of the horrors of the twentieth century, and relieved of its critics. Disruptive innovation goes further, holding out the hope of salvation against the very damnation it describes: disrupt, and you will be saved.
As far as Lepore is concerned, our uncritical embrace of disruptive innovation is somewhat lacking in evidence or proof that it is, on balance, a good thing. Michael Hennigan (who linked to Lepore) has just finished a five part critique of Ireland's innovation strategy. Or lack thereof. It's a familiar refrain from Michael - our stated ambitions for innovation policy far exceed any real world outcomes (either in terms of indigenous, innovative firms or job creation).

In fairness to Christensen, he's well aware of the risks associated with disruption, and he sees the potential for technological malinvestment as much as for technological investment - especially in a world awash with capital. Nor do I think he would recommend Irish policy makers to put all their eggs in the innovation basket.

The real danger it seems to me is that digital disruption - as opposed to the old-fashioned process of replacing coal with oil, steam with electricity - happens much, much faster so that the 'gains' from disruption are dissipated by the next disruption before they have been embedded by the wider society. The theoretical process of disruption is illustrated below (source):

But what if the area under the curve described as 'Height of New Productivity Gain' is much flatter, quickly turning back below the line as losses return sooner than in the past?

The latest EY report on Ireland's economic prospects sets out some interesting forecasts for job creation to the end of the decade across different sectors. What surprised me was the number of new jobs they are forecasting for retailing. I don't think so. If somewhere like Blackrock is turning into a retail Potemkin Village - thanks mainly to the recession but also to disruptive technology - then the time to 'bank the gains' from innovation just might not be long enough any more.

Maybe we can take consolation from Lepore's conclusion that often it is the incumbents who gain most from technological innovation and not the disrupters:
Disruptive innovation is a theory about why businesses fail. It’s not more than that. It doesn’t explain change. It’s not a law of nature. It’s an artifact of history, an idea, forged in time; it’s the manufacture of a moment of upsetting and edgy uncertainty. Transfixed by change, it’s blind to continuity. It makes a very poor prophet.
We are all incumbents now.

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