by Mitch Kokai
Senior Political Analyst, John Locke Foundation
As many of my John Locke Foundation colleagues spend the week at a conference based on the theme “Dare To Disrupt,” I am amused to find an article from Justin Fox in the latest issue of The Atlantic titled “The Disruption Myth.”
Fox, an executive editor of Harvard Business Review, examines the history of the business world’s love affair with consultant and entrepreneur Clayton Christensen’s academic theory of “disruptive innovation.” Looking at the current scene, Fox highlights some disturbing data.
What may be even more extraordinary, however, is the growing disjuncture between all this talk of disruption and its actual practice—at least so far as we can measure it. Thanks to data that the Census Bureau began releasing a decade ago, economists can now track what they call “business dynamism” in ways they couldn’t before. As researchers have dug into these numbers, they’ve found that most metrics of dynamism and upheaval in American business have actually been declining for decades, with the downturn steepening after 2000. Fewer new businesses are being launched in the United States, the average age of businesses is increasing, job creation and job destruction are on the wane, industries are being consolidated, and fast-growth businesses are rarer.
Before 2000, the decline was most pronounced in the retail and service sectors, and it didn’t necessarily contradictthe age-of-disruption theme. “We’ve moved away from mom-and-pop to Walmart,” says John Haltiwanger, an economist at the University of Maryland and a co-author of much of the recent business-dynamism research, “and the evidence suggests that this has largely been good for productivity.” New national chains armed with new technologies were the attackers, local retailers were the incumbents, and their collisions generally resulted in consumers getting a better deal. There was in fact plenty of upheaval in the top ranks of the business world in the 1980s and ’90s, as newcomers crashed the Fortune 500 list with increasing frequency. And the high tech sector was, as widely perceived, a hotbed of entrepreneurship and growth.
All of that activity seems to have peaked, however, a year or two after the stock market did in 2000. Measures of big-business volatility began to drop.High-tech start-up activity and what economists call the skewness of growth—how quickly the fastest-growing companies in a sector are outpacing the median company—declined below the levels of the mid-’90s and stayed there. Most worrying of all, the burst of productivity growth that started in 1995 and is widely attributed to the use of new information technologies also seems to have ended in the early 2000s.
Productivity growth is crucial to raising living standards, and economists have come to ascribe much of it to technological change. Research has shown that in the past, this change came in sudden bursts, with fast-growing new firms providing much of the impetus.The spectacular rise in living standards that began in Europe and North America just over 200 years ago is thus largely the work of disruptive innovations. Without a new burst of them, we may face “secular stagnation”—an extended period of slow growth.
Why the stagnation? Fox says some of the “business-dynamism” numbers might be wrong, but he also points to the government’s role.
But it’s also possible that a decades long accretion of regulation has come to weigh on new-business formation and growth; that for all the tales of Silicon Valley swashbuckling, most Americans have become more cautious and less entrepreneurial; or that—and this argument springs straight from Christensen’s keyboard—the pressures of the financial market and a preoccupation with corporate financial metrics have left most businesses “afraid to pursue what they see as risky innovations” and focused instead on cutting costs.
It’s also interesting to note that, quoting a Commentary magazine article, the disruption guru Christensen “recommends phasing out capital-gains taxes as a way of encouraging more transformation innovation that creates new goods, services, and jobs,” an idea that sounds familiar.