When capitalism and corporate self-interest collide

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Adam Smith understood the difference between policies that favoured free trade and policies that favoured established business. “The interest of the dealers in any particular branch of trade or manufacturers,” he wrote, “is always in some respects different from, and even opposite to, that of the public.” He went on to observe that any proposals coming from business “ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention”.Information and communications technology today is dominated by Microsoft and Intel, Apple, Amazon and Google. The oldest of these, Intel, was founded in 1968; at about that time the British government sponsored a merger of the computer divisions of electrical companies to create a national champion able to compete in world markets. Every big European country put an entrant into the same race. They all fell before the post – and so did IBM.

Content was king, they said: but digital publishing was to be dominated not by Time Warner, EMI or Columbia Pictures, but by Apple and Amazon. Rapid innovation is everywhere associated with market entry. Google occupies the position that only a decade ago people expected would be occupied by Yahoo and AOL, just as Facebook displaced MySpace. What became of Sirius (the Exxon subsidiary that made the first personal computer I ever used) or CompuServe (which provided its communications)?

Joseph Schumpeter applied the term “creative destruction” to the dynamic of the market economy. Not only does the new technology displace the old: the new company displaces the old. Innovation mostly comes from entrepreneurs outside established businesses, engaged in an endless succession of experiments. Most fail, but not all. Bill Gates, Andy Grove, Jeff Bezos and Steve Jobs were talented people, but most of all they were lucky people.

Elephants can dance, but rarely well. Exxon did, bizarrely, diversify into small computers. Personal computers, and the graphical user interface that enabled them to become ubiquitous, were pioneered at Xerox Parc. But these ventures did not succeed commercially.

The established firm more often responds by using its market and political power to resist change. The tactic failed for music publishers, but does not always fail: see how state-supported dinosaurs have tightened their control of the banking system, or observe that the cars we drive have changed only incrementally in a century. The internet came about because the technology emerged in a brief interval in which US telecom deregulation had broken up AT&T and before changes in policy allowed three regionally dominant operators to regain dominance.

But the most illuminating story is that of IBM. Through the 1970s, the personal computer was mired in its corporate bureaucracy, which – correctly – perceived a threat to its existing business. The computer that introduced the term PC into everyday language was designed by an off-site team, which bought software from Microsoft and chips from Intel to avoid dealing with their own colleagues. These engineers changed the world. In the process, they almost destroyed the company that gave them the freedom to do so.

Schumpeter applauded capitalism as much as Marxists despised it. But he shared the Marxist beliefs that creative destruction was at the heart of capitalism and that its inevitable consequence would be capitalism’s demise. Schumpeter feared that the very success of capitalism would give entrenched interests the power to resist the process of innovation that was at the heart of capitalism’s success. Mitt Romney is right to emphasise the role of creative destruction in the market economy, but that is not the market economy his financial backers have in mind.

And perhaps Schumpeter was right. The prescient, cynical Adam Smith had still not imagined a world in which the Wealth of Nations would cross the world digitally at the click of a mouse. Nor had he envisaged one in which legislation would be drafted by paid lobbyists.

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