Thursday, December 4, 2014

The Age of Big Entrepreneurship 2: Not All Innovations Are Created Equal

Some time ago I concluded that to understand entrepreneurs and innovation, I was finally going to have to read Joseph Schumpeter.  

Reading about Schumpeter in Thomas McCraw’s Prophet of Innovation[1]  and Richard Swedberg’s 1988 essay[2] was great fun: Here was a brilliant yet flawed thinker, foisting theories on his peers that economist Paul Samuelson said “began to smack of Pythagorean moonshine.”[3]  

Schumpeter championed mathematical economics despite himself not being very good at math; he blithely characterized the inner psyche of entrepreneurs before he’d actually met many; he was a frustrated competitor of John Maynard Keynes, whose basic theories Schumpeter may not have grasped; and he was a man nearly forgotten in the great stagflation of the 1970s.

Today, of course, Joseph Schumpeter is resurrected as the patron saint of entrepreneurs.  One German economist wondered by 1984 if we had entered the “Age of Schumpeter.”[4]

However, if reading about Schumpeter is fun, reading Schumpeter can take some concentrated effort.  It has its rewards, however.  Schumpeter’s 1947 “The Creative Response in Economic History” posited that the entrepreneur and his function were not difficult to understand: “the defining characteristic is simply the doing of new things or the doing of things that are already being done in a new way [innovation]. . .It should be observed at once that the ‘new thing’ need not be spectacular or of historical importance.  It need not be Bessemer steel or the explosion motor.  It can be the Deerfoot sausage.[5]

I don’t mind telling you I had to research that last item.  The Deerfoot sausage came to market in 1870 in Southborough, Massachusetts, and was something of a sensation.  An ad in a 1920 cookbook suggested it was made from the tenderest, leanest parts of the pig and had a “distinctive taste.”  This, then, was enough “new combination” for the patron saint of entrepreneurs: distinctive taste.

Make no mistake, when Schumpeter wrote in earnest about innovation he featured cotton textiles, railroads, steel, automobiles and electric power while emphasizing the rise of the factory, corporation and modern financial system.  He saw the growth of big business and the merger movement as among the major innovations of the 20th century.[6]  Professor McCraw concluded that “Schumpeter’s signature legacy is his insight that innovation in the form of creative destruction is the driving force not only of capitalism but of material progress in general.”[7]
Yet for Joseph Schumpeter, a sausage he might have enjoyed at the Harvard Business School commissary that morning was also enough to qualify as an innovation.  It is an odd idea for a generation of entrepreneurs seeking to make a dent in the universe.

Apple contributed to this conflation of big and small ideas.  You may recall the famous 1997 commercial, “Think Different,” which was a kind of celebration for Steve Jobs after his return to the company he founded.  “Here’s to the Crazy Ones,” Richard Dreyfus intoned, and before us flashed everyone from Albert Einstein to Bob Dylan, the Reverend Martin Luther King, Jr. to Richard Branson.  It was, you might say, a mix of creative destruction ranging from Bessemer steel to the Deerfoot sausage.  Benjamin Anastas wrote, “If the only measure of greatness is how big an iconoclast you are, then there really is no difference between coming up with the theory of relativity, plugging in an electric guitar, leading a civil rights movement, or spending great gobs of your own money to fly a balloon across the Atlantic.”[8]

The Language of Black Olives

And therein lies the problem.  If virtually everybody innovates, and therefore everyone turns out to be an entrepreneur—no matter how powerful or trivial their idea—then how do we decide what’s valuable and what’s not?  Shouldn’t we have a series of terms for innovation in the same way we grade, say, the lowly black olive?  

For olives we have whole, pitted, halved, segmented, sliced, chopped, and broken pitted.  We have small, medium, large, extra large, jumbo, extra jumbo, giant, colossal, super colossal, mammoth and super mammoth.  Isn’t a new clothing line or distinctive tasting pork sausage something akin to a chopped small black olive, and the electric grid or Internet more like its whole, super mammoth cousin?

Now you understand Starbucks.
I have never been to a Black Olive Convention, but I am imagining there is the Super Mammoth clique with big engraved name badges hung with ribbons who drink bourbon at one end of the bar, and the Small Chopped attendees whose badges are smudged sticky notes that say “Hello My Name Is” followed by blue magic marker who dine together at the local iHop.  A black olive is not just a black olive, after all, and that’s made clear to everyone walking the convention floor.

And yet, attend any conference of entrepreneurs and everyone is an entrepreneur.  Of course, there are super-colossal celebrity Entrepreneurs, and there’s no mistaking the upper one percent whole super mammoth Disruptors, but an entrepreneur is an entrepreneur, and an innovation is an innovation is an innovation.  You might well have bitten into one at breakfast.

A Modest Proposal: Not All Innovations Are Created Equal

In prior posts, I’ve mentioned the single best thing that I read in 2013 was Benjamin Wallace-Well’s “The Blip” in New York Magazine.  It’s about the work of Northwestern economist Robert Gordon, and there’s no way to read it and not conclude that our ability to consistently raise the standard of living is the essential lever on which all civilization rests; when we stagnate, bad things happen economically, and when bad things happen economically we become less civilized.  We are always just a few GNP growth points away from barbarism, or at least the latest version of the Know-Nothings or Tea Partiers.

Given this relationship, I would suggest a simple characterization of innovation: Any new combination that raises the standard of living is classified as a capital-I Innovation.  In this regard, the electrical grid is its own industrial revolution (as Schumpeter pointed out in his writings), and the railroad, Bessemer steel, and the automobile all rate. 

One level down, and sometimes in parallel with innovation that raises the world’s standard of living, is that which improves the general quality of life.  That’s where we might place television, and perhaps some social media, making us happier but not always more productive.  This class of new combinations I would classify as small-I innovation.

So, if an innovation broadly raises the standard of living or generally improve the quality of life, it’s the product of a true entrepreneur.  These are the meaningful innovations, the innovations that keep us healthy and civilized.

And then—well then, there’s everything else.  New fashion lines and sausages.  Almost everything that comes out of a “Disrupt” conference or Y Combinator style machinery.  The last 900,000 apps written.  The last twelve “smart” bike locks, file-sharing, restaurant-booking and ride-sharing services. 

These all rise to the level of innovation in Schumpeter’s work but fail to leave much of a footprint in real life.  They are novelties. They are the shavings of a lathe that occasionally yields an Airbnb, Stripe or Dropbox.  They are the byproduct of Big Entrepreneurship, which—like the San Francisco Gold Rush—enriches those selling the picks and shovels far more than it enriches the miners.  (See TheBig Winner from Y Combinator’s Success.)

So, I beg to differ with Joseph Schumpeter on this point: These fleeting and often trivial products, while technically “new combinations,” do not denote a particularly useful kind of entrepreneurship.  I make this distinction because I believe legions of today's "wantapreneurs" make important choices along the way.  Easy, fast, convenient choices, those leveraging small ideas and underdeveloped skill sets, tend to create novelty and empty entrepreneurship—at best, the distinctive taste of a Deerfoot sausage.  Harder, more informed, more patient choices can lead to real innovation, and sometimes true Innovation.  Not everyone will or can be a Super Mammoth Entrepreneur—we are often shaped more by our opportunities than we are able to shape them--but everyone should understand that the opportunity to try might appear along the way. 

If it turns out the single greatest innovation of of the “Age of Big Entrepreneurship” is Big Entrepreneurship itself, there are going to be a lot of disappointed people who were told they could make sausage but found, looking back, that they were actually the sausage being made instead. 

[1] Thomas K. McCraw, Prophet of Innovation: Joseph Schumpeter and Creative Destruction, Cambridge, MA: The Belknap Press of Harvard University Press, 2007.
[2] Richard Swedberg, “Introduction to the Transaction Edition,” Essays on Entrepreneurs, Innovations, Business Cycles, and the Revolution of Capitalism, Richard V. Clemence, ed., New Brunswick, NJ: Transaction Publishers, 2000 [rpt: 1951], vii-xxxix.
[3] Thomas K. McCraw, “Schumpeter’s Business Cycles as Business History,” Business History Review 80 (Summer 2006), Boston: The President and Fellows of Harvard College, 2006, 231-261.
[4] Herbert Giersch, “The Age of Schumpeter,” The American Economic Review,” Vol. 74, No. 2, Papers and Proceedings of the Ninety-Sixth Annual Meeting of the American Economic Association, American Economic Association, May 1984,, pp. 103-109.
[5] Joseph A. Schumpeter, “The Creative Response in Economic History,” Essays on Entrepreneurs, Innovations, Business Cycles, and the Revolution of Capitalism, Richard V. Clemence, ed., New Brunswick, NJ: Transaction Publishers, 2000 [rpt: 1951], 223.
[6] Thomas K. McCraw, “Schumpeter’s Business Cycles as Business History,” Business History Review 80 (Summer 2006), Boston: The President and Fellows of Harvard College, 2006, 231-261.
[7] Thomas K. McCraw, Prophet of Innovation: Joseph Schumpeter and Creative Destruction, Cambridge, MA: The Belknap Press of Harvard University Press, 2007, 495.
[8] Benjamin Anastas, “The Foul Reign of Self-Reliance,” The New York Times Magazine, December 4, 2011.