The Economic Importance Of Disruptive Innovation


Tim Worstall, Contributor

January 19, 2016

An interesting little piece over in The Guardian talking about how disruptive innovation isn’t quite all that it’s cracked up to be. And also not quite agreeing with Clayton Christensen’s original definition of disruptive innovation itself. And I’m fine with that: I’m not sure that theory was quite as useful as some, including myself, used to think, nor was it proven quite as emphatically as we might wish. However, I think this concept of disruptive innovation is still hugely important and one that we don’t want to reject. Even if I’m about to try to change the meaning of the phrase a little.

The nub of my point being this:

There’s no doubt that innovators can do good work with some of the core concepts behind the disruptive innovation theory, looking for ways to simplify market problems with attainable solutions. For example, Miki Agarwal, CEO of THINX, is tackling the taboo around menstruation and their associated sanitary products with discreet, absorbent underpants, an idea that could have particularly useful implications in the developing world, where, according to the UN, girls without access to tampons or pads sometimes just don’t go to school. THINX is also marketing a product line for transgender men, who open up on the official site about the importance of receiving support for gender dysphoria.

But it almost doesn’t suit this compassionate innovation to conceive of it as a great wrecking ball smashing into the headquarters of the $15bn tampon industry. Why isn’t it enough to add an important innovation to a space that sorely needs it? Why must the company be characterised as out to crush Big Tampon, especially when it’s inconceivable that any single solution should devour all other options? In the midst of Agarwal’s important work, there’s the word “disrupt”, like a weird leering bull ready to charge.

That a possibly over eager entrepreneur slightly misuses the current trendy buzzwords doesn’t make the original concept itself worthless. And the value of that phrase to me stems from the manner in which I think Mancur Olson was right about the economy. In any static economy, and in any economy there are always going to be parts of it that are static or nearly so, everything becomes a zero sum game. One can only have more if another has less. And in such an economy we end up with the most dreadful orgies of rent seeking. Politics becomes mostly about which special interest group gets to carve a slice off society as such a rent.

There’s always that marginal innovation as described above: but those with the economic power can generally maintain their position in the face of such marginal improvements. To me the joy of the disruptive part is that at times the possible technology has changed sufficiently that those disruptive innovators can charge in and over turn the static disposition of those economic rents. So, for example, taxi technology and business practices didn’t really change very much between say 1945 and 2010. And so the business settled down into a fairly predictable static arrangement with substantial rents sought and received. In New York City, the rents were going to those who owned the artificially limited supply of medallions. They were worth $1 million each and rented out for $80,000 a year. The cab drivers certainly weren’t benefiting, the consumers weren’t, the medallion holders were from the restrictions on the industry. Then along came Uber and simply blew that cosy arrangement apart.

We can look to other areas too. In the late 1990s you’d be hard pressed to find someone who didn’t think that Microsoft was a near monopolist on the consumer computing (and possibly also business) industry. They owned the OS and the main productivity package and that’s just what everyone had to use. No one has really changed that grip on PCs. And yet Apple’s smartphone revolution completely blindsided that industry and company: the iPhone was and is a great product but the disruptive innovation part is how it has completely changed who owns the computer OS. Google’s Android is of course attempting to do the same to Apple’s iOS.

So, to me, the value of disruptive innovation is not about the description of how it happens, as Christensen describes, nor even about the ability to change entire industries. To me the value is that the flip in the technological base allows the over turning of those rent sharing agreements. This is actually quite close to Robert Bork’s views on technological monopolies such as Microsoft had. Yes, they might exist for a time but they are going to get over thrown as technology changes.

Which brings us to that overthrow of Big Tampon, or any other industry we might want to see shredded and rebuilt anew. For technology does move in steps, in stages, and which industries are going to be disrupted will depend upon which stage technology is at. It’s difficult to see that feminine hygiene products are going to be radically changed by a computing revolution such as we are going through. But it’s easy enough to see that the self driving cars likely to be possible are going to change the auto business. But if the next great technological change were in how to spin cotton then it might well be Big Tampon being set up for the fall, not Detroit.

All of which leaves us with the question of what we should be doing. Given that we like rent seeking disrupted, what should public policy be about innovation? And the answer is that we’ve got it about right. We leave it to the market. Because the one thing that a market based economic system does really well is allow us to explore the various possibilities of the new technological space. People do go off and try all sorts of things. Hey, maybe this new thing can be used to do that? And given that there’s millions upon millions of us trying exactly that then we do explore, more quickly than any other alternative system, the possibilities for innovation of new inventions. This is rather the lesson William Baumol wants us to have: state and market can equally manage invention (say, Sputnik) but it’s markets that work out what to actually do with them, the innovation bit (say, use satellites to geolocate so Google can show us ads to the local hamburger stand).

So, what we need to do is just let people get on with it. We don’t need an innovation policy or even theory. Just leave well alone and let the natural human inquisitiveness and associated lust for profit get on with exploring the available technological space, as it changes, and thus occasionally producing that disruptive innovation that over turns the current rent seeking arrangements. The only other thing we need to do is make sure that the rent collectors aren’t able to use the law to protect their interests.

This article was written by Tim Worstall from Forbes and was legally licensed through the NewsCred publisher network.

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