Two weeks ago, we looked at the driving forces of change in societies by looking at four traditional roles that underpin most societies: a smart scholar or academic; a progressive merchant or entrepreneur; a collegial farmer or worker; and the rule-enforcing warrior or cop. We learned how these four traditional roles are associated with the four bases — Theories, Ideas, People, and Systems — of TIPS, Thinkergy’s innovation people-profiling method. Today, allow me give you more insights into how to ride the cycles of change in society and business by looking at the four TIPS bases through another lens: the concepts of evolutionary economics and long cycles of Joseph Schumpeter and Nikolai Kondratiev.
A brief introduction to Schumpeter
Roughly a hundred years ago, the Austrian economist Joseph A. Schumpeter proposed a radically new theory of macroeconomics. Inspired by Darwin’s theory of evolution, evolutionary economics focuses on the non-equilibrium processes —especially technological and institutional innovations— that transform an economy from within and drive the cycles of change:
- Most established industries are in a state of balance and relative stasis — the macroeconomic equilibrium that Schumpeter acknowledged as “the normal mode of economic affairs”, in which a few market leaders dominate the industry. According to Pareto theory (80/20 thinking), around 20% of companies in any industry make around 80% of revenues generated in that industry. Typically, two or three command the highest market shares, two or three follow at a distance, and a myriad of smaller players vie for the balance.
- Over time, new research and new technologies surface. Progressive entrepreneurs and agile ventures operating at the fringes of an established market space recognize these as a business opportunity and pick them up. While the incumbents are preoccupied with “milking the cow”, making incremental improvements and fighting tactical battles for market share, entrepreneurs enter the market space with a truly innovative technology. As Schumpeter emphasized: “Innovations are changes which cannot be decomposed into infinitesimal steps.”
- If the entrepreneurs succeed, their “disruptive technology” upsets the established order of economic life. They become the dominant players of a new market, and the incumbents fall behind.
- Eventually, a once mighty outdated corporation or its flagship business gets acquired or is closed. Schumpeter called this process “creative destruction”, describing it as follows: “The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation — if I may use that biological term — that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”
- Radical shifts in lead technologies disrupt the traditional order of markets and societies, and instigate major social changes. As Schumpeter observed: “Capitalism inevitably and by virtue of the very logic of its civilization creates, educates and subsidizes a vested interest in social unrest.”
- How does the story continue? Over time, a new equilibrium establishes itself in the new industry. The leaders of the now dominating new market eventually become part of the economic establishment and comfortably enjoy the returns of their disruptive innovation — until a new disruptive technology comes along. A new macroeconomic cycle has begun, giving birth to a new industry and a new round of creative destruction of the old.
The long waves of economic change
Schumpeter and the Russian economist Nikolai Kondratiev both observed that major shifts in lead technologies happen in long cycles that flow in waves (known as Schumpeter-waves or Kondratiev-waves). What long cycles and related lead technologies can we distinguish?
Water power, textiles and iron led the first wave (ca. 1785-1845), followed by steam, railway and steel (1845-1900). Electricity, chemicals and automobiles powered the third wave (1900- 1950), followed by petrochemicals, aviation, and electronics in the fourth wave (1950-1990). The current fifth wave is driven by digital networks, software, and new media (1990-2020).
What industries will dominate the next wave (2020-2045)? In his book The Sixth Wave, John Moody predicts that resources efficiency and clean technologies will be major drivers. By the way, have you noticed that the duration of the long waves seems to shorten? And so does the life span of corporations. The cycles of change are accelerating — or to put it in the words of Schumpeter: the incessant process of creative destruction is speeding up.
Evolutionary economics, long cycles and TIPS
Our innovation people profiling method TIPS distinguishes four bases that drive the behavior of individuals and organizations, industries or economies alike: Theories, Ideas, People and Systems. How do the evolutionary economic processes that drive the cycles of change relate to the four bases of TIPS?
- An established industry resting in a macroeconomic equilibrium is Systems-driven. A few mighty corporations dominate the industry and focus on keeping control and defending their commanding market shares. Typically, they are too busy with themselves and their established peers to notice emerging trends on the horizon, thus facing the threat of creative destruction by a new disruptive technology.
- Over time, the Theories base produces new base and applied research that crystallizes in new technologies, the catalyst of transformative change.
- Entrepreneurs and agile ventures at the Ideas base are the first to recognize the market potential of an emerging technology. Thanks to their appetite for both progress and profit, they are willing to undertake both the risks related to investing in the new technology and the efforts to turn it into marketable products.
- Finally, the People base is needed to make a new technology and a related products a market success. People become the consumers of the new technology, paying for it with money earned in an old industry or by switching to work in the new industry.
Over time, the successful entrepreneurial venture grows through the People base and solidifies into a large corporation at the Systems base. A new macroeconomic equilibrium sets in that years later will be unsettled by the start of a new long cycle. And so flow the cycles of change, the incessant economic cycles of creation and creative destruction.
Wanna learn more about our new innovation people profiling method TIPS ? Take a look at this video — and consider taking the TIPS online test yourself for just USD 88.88. Finally, contact us if we can help you in any other way.
© Dr. Detlef Reis 2016. This article was published in parallel in the Bangkok Post under the same title on 13 October 2016.