Tuesday, June 17, 2014

Krugman on Disruptive Innovation

Paul Krugman, in his latest blog post, writes something that doesn't cause an immediate reaction from me of "You have got to be kidding?" I think it is the first time, ever.

His post provides a disruptive take on creative destruction. His take is quite interesting. I would have to do quite of bit of thinking on the subject to reach a conclusion as to how much I agree with him, but that's not going to happen now, my thinking time is pretty much tied up on books that I am writing on other topics. But, nevertheless, the limited time I spent thinking about his point (which really originated with Jill Lepore) it struck me as something along the lines that I have been thinking about in a general way for a long term project on the nature of entrepreneurship. What is really new from Krugman, which goes beyond Lepore, is his take on Schumpeter and why he is so popular:
Jill Lepore has a great article in the New Yorker debunking the hyping of “disruptive innovation” as the key to success in business and everything else. It’s not a bah-humbug piece; it is instead a careful takedown, in which she goes back to the case studies supposedly showing the overwhelming importance of upstart innovators, and shows that what actually happened didn’t fit the script. Specifically, many of the “upstarts” were actually long-established firms, and more often than not the big payoffs went not to disruptive innovators but to firms that focused on incremental change and ordinary forms of efficiency and quality.

Andrew Leonard reports that Silicon Valley types are not pleased. You can understand why. But their annoyance also tells you why the whole disruptive innovation thing took off: it glamorizes business, it lets nerdy guys come across as bold heroes.

The same impulse, I think, is why Schumpeter gets cited so much. If you read his stuff directly, it’s interesting, I guess...it’s that glamorizing phrase “creative destruction” that did it, because it’s so flattering to the big money...

Note well: This is Krugman, so there is also a good bit of nonsense in his post, but I wanted to highlight here what appears on first blush  to be accurate and interesting.



  1. Robert,

    I think that the Jill Lepore piece is well written but as with anything else, is poorly argued. The devil is in the details. There is no question that disruptive innovation happens, especially in silicon valley. See Uber disrupting the taxicab space, airbnb, the hotel rental space, zip car/lyft with car rental space etc and there are countless examples of this. But, in established and mature industries like escalator and excavators which Jill lepore references, disruptions are hard because of the lock the incumbents have on the distribution channels and the lack of fundamental technological innovations along with regulatory and legal barriers. There is nothing wrong with disruptive innovation as a concept as it is, just that some industries are amenable to it at certain points of time (due to underlying trends) and some are not. As usual, the ignoramuses at salon and of course the preeminent ignoramus of our time, the krug jump on this to prove some BS agenda.

  2. The reason Krugman and other leftists at the New Yorker are keen on attacking 'disruptive innovation' is because the term really has two meanings, and by attacking one they also attack the other. The first meaning is the one popularized by Clayton Christensen which is a fairly milquetoast view of how challengers unseat incumbents who represent the status quo in established industries.

    The second and more interesting meaning of 'disruptive innovation' has to do with situations in which the status quo is enshrined not by economic forces but rather by force of law, and so any challenger must act more rapidly than the government can respond to and without regard for uncompetitive regulations. Uber is a prime example of this - it does not lobby the local transportation authorities to change taxicab regulations before it opens business in the area, rather it simply moves in and quickly gains a large market share, making it more politically difficult for regulators to mount a challenge.

    Anyone who reads Krugman will understand that it's the second meaning he dislikes, and by criticizing the business school version popularized by Christensen he hopes to give the whole idea of disruptive innovation a bad name, or at least give the left a new reason to oppose it.

  3. Interesting. My first impression is that this is Krugman being Krugman. Defending the crony businesses against the entrepreneurial. Ms. Lepore's observation in no way detracts from Schumpeter's "creative destruction" concept. Neither Krugman nor Lepore can see the forest for the trees. Her statement: "the big payoffs went not to disruptive innovators but to firms that focused on incremental change and ordinary forms of efficiency and quality" reveals a fundamental lack of understanding. The number or type of businesses (or forms) in an industry have little to do with the innovation in that industry. More important is the freedom to enter and exit without coercive interference. This allows for the constant threat of competition, motivating firms whether long-established or new to be ever vigilant for the next new thing. Markets care not whether you are old or new only whether you deliver.

  4. So is it flaterring to big money or nerds working in upstart companies? You can't have both, our dear laureate.