Competition to profit from ideas for offering better substitutions is the underlying strength of producing more from less. On the backdrop of monopolization and uprising of super-rich out of offering substitutions, the start-up mortality rate has been rising. On the other hand, we need to scale up the uprising of creative destructions for creating increasing Wealth from depleting resources to meet the sustainable development agenda. However, the rise of the super-rich out of monopolization, and the astronomical mortality rate of start-ups appear to be magic. Hence, it demands to get Schumpeter’s Creative Destruction demystified.
Recreating the monopolization success of Bill Gates or Apple demands us to get Schumpeter’s creative destruction demystified. Schumpeter’s creative destruction examples are all around us. They are at the core of our capability for offering an increasingly better quality of life. For instance, automobiles emerged to improve our quality of living standards while causing destruction to the horse wagon industry. Similarly, by causing destruction to oil lamps or hurricanes, the electric light bulb appeared. The list goes on.
In fact, in the absence of Schumpeter’s creative destructions, our quality of living standard could have been stalled. Moreover, waves of Schumpeter’s creative destruction made some people rich and also compel some others to suffer from wealth annihilation. It creates as well as destroys jobs, making it a messy transformation. However, what is the underlying dynamic is not clear. In the absence of such clarity, often, such occurrences of creative destruction appear to us magic. Hence, there is an urgent need to get Schumpeter’s creative destruction demystified.
The genesis of Schumpeter Creative Destruction
Carl Marks observed the reoccurring of philosophical observations that human beings have an inherent trait of producing ideas for Getting jobs done better. This has been the driver of Innovation in offering better products or new products to increase prosperity and advance our quality of living standards. Subsequently, Schumpeter observed that profit-making competition to pursue ideas for offering better products at lower cost had been the core strength of the Market Economy. The freedom of ownership of capital and deploying it to profit from ideas is at the core of enjoying an increasingly higher quality of living standards.
Our living standards depend on how we get our numerous jobs done. Starting from cleaning cloth to enjoying movies, the list of jobs appears to be endless. Profit-making competition in pursuing ideas for offering better means at less cost to execute those jobs is the driving force. In certain cases, those products emerge, causing destruction to the demand of existing products. Along with their uprising, they destroy jobs, firms, and industries in making incumbent products. This messy process is also known as the Schumpeter gale of creative destruction. However, as those alternative products are better and also cheaper, they also become affordable to more customers. Hence, an increasing number of people start enjoying a better quality of life due to the unfolding of Schumpeter’s creative destructions.
Technology core and underlying dynamics in a bid to get Schumpeter creative destruction demystified
Every product has one or several core technologies. For example, the internal combustion engine is the technology core of current automobiles. In the future, electric batteries or fuel cells will be the likely core technology of the automobile. The horse was the core technology for offering energy to automobiles in the 19th century. Similarly, Edison used carbon filament as the technology core of the light bulb. Subsequently, the technology core of the light bulb has been changed, at least twice.
Furthermore, some products are experiencing the changing of hardware technology core with software. For example, word processing migrated from hardware to software. Similarly, mobile phone handsets have been experiencing rapid growth in innovation due to the increasing focus on software.
In the beginning, often, substitutions around new technology core emerged as primitive forms. However, the underlying technology core’s continued progression leads to offering better alternatives, often consuming fewer resources. As ideas in the form of intellectual assets offer better quality at less cost, such better substitutions, invariably, have a greater scale advantage. Moreover, once those ideas are implemented in software, the zero cost of copying software offers a further extremely high economy of scale advantage.
Apart from it, ideas for taking advantage of the Externality Effect increase the scale advantage further. Ideas, particularly in the form of software, are also amenable to take the economy of scope advantage. Hence, changing the technology core of products opens the opportunity to attain market power by leveraging Economies of Scale, scope, and externality. Therefore, to get Schumpeter’s creative destruction demystified, we should look into the monopolization issue too. However, it also causes wealth annihilation due to the suffering of destruction effect by existing firms.
Schumpeter’s creative destruction demystified sheds light on the rising of global monopolies.
One of the most well-discussed beneficiaries of Schumpeter’s creative destruction is Microsoft and Bill Gates. Microsoft’s founder Bill Gates became the richest person in the world due to the uprising of Schumpeter’s creative destruction to computer and word processing industries.
Let’s talk about the word processing industry first. During the early part of the 20th century, paper tape came for recording texts of typewriters. It opened the opportunity to delete or add characters or words on the tape without typing the whole document again. This was the beginning of word processing. However, the scope of monopolization was limited as ideas were implemented in hardware. The watershed moment came in the 1970s. Instead of building a dedicated word processing machine, the emergence of the floppy diskette and personal computer offered the option of developing word processing as software and distributing it on a floppy diskette. Hence, the zero cost of copying the software and its very low distribution cost using floppy diskette offered huge scale advantages. Microsoft intelligently pursued the supply-driven strategy to take advantage of it and emerged as the global monopoly in the word processing market.
On the other hand, Microsoft’s operating system (OS) kept increasing with the rapid growth of PC quality. Microsoft also took the OS’s scale advantage due to zero cost of copying and negligible cost for floppy or CD ROM for distribution. Moreover, Microsoft also took the scope advantage offered by the applications running on its OS Windows. Hence, the unfolding of Schumpeter’s creative destruction in the PC industry also offered the monopolization opportunity due to the change of technology core. Consequentially, Bill Gates emerged as the richest person out of monopoly.
Software and network-centric innovation fuels the Natural tendency of monopoly
Changing hardware technology core with software offers unfolding global monopolization opportunities. The monopolization success stories of Microsoft, Apple, Facebook, and Google are remarkable. But where is the underlying economics? How can we predict and pursue similar monopolization trends? Or, are they just magic? Fortunately, these magical outcomes have the underlying economics of offering better quality at a lower cost. This is all about changing the technology core for fueling innovation from hardware to software and connectivity. The software offers very high economies of scale and scope advantage due to the zero cost of copying.
Furthermore, connectivity offers the network externality effect, which exponentially increases the perceived value with customer base growth. Besides, the software also offers an externality effect in the form of 3rd party plugin apps and digital content. Once we combine these attributes together, we not only create the opportunity of offering unfolding examples of Schumpeter’s creative destruction, most importantly, we get the opening of monopolizing and being super-rich.
Market power, monopolization, and wealth annihilation
As Prof. Schumpeter explained, entrepreneurship in pursuing ideas for offering a better alternative is at the core of unfolding creative destructions. However, the opportunity of pursuing such creative destructions out of software and connectivity-centric innovations is an opening window of opportunity of gaining market power. The window is so open that it supports the emergence of global monopolies. Due to the decreasing cost and increasing capability of sensors and computing devices, ubiquitous wireless connectivity, and the growing penetration of smartphones, it appears that Schumpeter’s creative destruction will keep unfolding in many industries. Consequentially, this trend will keep making a few super-rich while giving no opportunity to the rest. How will these super-rich individuals suffer from wealth annihilation yet to be clarified? What are the next technology cores to cause creative destructions to newly emerged Global monopolies?
