Businesses begin devising all sorts of non-existent problems convincing consumers that something really hurts. From those looking for pain spots, marketers turn into those brainwashing consumers convincing them that they are suffering.
There was an economist, Joseph Schumpeter, of the Austrian school. He was a Harvard professor deeply revered in the US. His theory boiled down to a statement that, with time, any industry faces a market consolidation followed by oligopolisaiton (which, actually, means an undisguised agreement or a collusion) or dwindling net profits. This could have led capitalism to a collapse, if it were not for innovators.
Now, here is what these ‘saviours’ do. They see a common problem people have and invent a new cheap/the best way to address it. They remove this ‘pain spot’ all startuppers have much heard about. A proposed solution is new and there are no competitors around. So, the margin rate is very high initially. Thanks to this, the innovator shortly gains a capital, which is similar to older market players, and becomes one of them.
At the same time, if the innovation offers a better/cheaper solution to a problem, for which older capitals offered a less efficient solution, this leads to ‘a creative destruction’ of existing companies. Yet, not all of them get destroyed. More passionate older capitalists promptly build new businesses competing with the innovator or refurbish their companies to offer equivalent goods/services. Further, due to competition, the industry ‘gets old’, with emerging M&As and buildup of new oligopolies. Everything starts over again, with the leading part played by another innovator. An eternal two-stroke engine of sorts.
Here one can easily observe ‘transformed’ Marx in the backbone. Schumpeter gave capitalists so much reassurance that their death phenomenon had to be postponed. Neo-Marxists often say that the main way to address zero margins in old industries faced by shark capitalists is to tap into new regional markets and to strangle all small players through damping. Well, fair enough. However, the noble Schumpeterianism is still a valid option.
The Americans like Schumpeterianism so much they wiped out their railroads on an impulse. Because of cars and planes, which appeared. Why need trains right after two technological disruptions, right?
However, this may not be such an eternal engine, if we look at it closely. The funniest thing is that Schumpeter himself did not believe it was eternal, of which he wrote much and in plain terms. By the way, he also warned of imbalances caused by financing and highly valued the role of gold as a scarce resource in this game. He believed all this will lead to the death of capitalism at some point and its replacement with corporatism/socialism. But his followers decided to forget all this emphasizing innovations as the source of capitalism’s rebirth and its ‘life elixir’.
Let’s see what is wrong.
First and foremost, maintaining such ‘an eternal engine’ requires continuous inventions. Of course, some pain spots can be addressed by thinking out of the box or through ‘betterising’, improvement of existing technologies, rationalisation. However, all really major breakthroughs are all based on science, at the end of the day.
Somewhere in late XVII century, the modern scientific knowledge box opened and scientists started pulling out rabbits from there, they did it faster and faster as time went on. Initially, to research electricity or electromagnetics it was enough to have a small and quite basic lab, like Faraday’s or Amper’s, and discoveries were cheap. Only flasks and vials were enough for chemical experiments, with quite a narrow set of agents. But the times, when Becquerel walked with a flask of radium in his pocket getting a fair radiation burn, are long gone. Already in the XX century, to gain new knowledge such capital intensive things like particle accelerators had to be built. And these costs grew for the whole chain: fundamental science – applied science – technologies. And the pace itself also slowed down.
It turned out that, like in all other cases, the research progress is non-linear. Critical knowledge mass is accumulated followed by a plethora of discoveries and then by inventions. Next, the progress does not exactly come to a halt, but becomes steady. This does not mean such a bifurcation point will never repeat in human history. But today is not this moment.
Second, the list of major pain spots does come to an end. As a result, businesses begin devising all sorts of non-existent problems convincing consumers that something really hurts. From those looking for pain spots, marketers turn into those brainwashing consumers convincing them that they are suffering.
‘Fashion’ spreads everywhere. Buying a car two years ago I learned that the current colours ‘in vogue’ are depressive colours (possibly, a post-COVID repercussion), a car of a non-trendy colour can only be ordered separately by paying the manufacturer an awful extra lot. This ‘trendiness’ is ubiquitous today. Also, one cannot develop continuously mocking up pain spots. Not to mention, where it leads when it comes to ecology or resource depletion. The cycle has become artificial in this area.
Third, the West came up with a startup/venture industry, a Schumpeter’s cycle ‘on steroids’. They decided to squeeze capitals into promising areas artificially consolidating ‘a hammer fist’. This was expected to speed up innovations but caused a bulk of quasi-innovations. These are all those Forbes covers with Lisa Holmes and the like. A couple of times each month we hear of new and other disruptions in different areas. Shale revolution (in reality, massive hydrofracturing, which is an old technology, also leading to an environmental disaster). Rockets disrupted by first-stage recovery (well, yes, a useful thing, indeed, but second-generation Energia launch vehicle was already designed to have first-stage recovery. This is not a new on-orbit delivery type, this is ‘betterising’). The augmented and virtual reality revolution (did not work at all)… Fake disruptions are everywhere. ‘Fake It Till You Make It’ is in the limelight.
Looking back, you understand real disruptions simply do not happen. Steep increase of labour efficiency in a very short timeframe is a vivid sign of a real disruption. In the US it grew just by 8.6 per cent from 2012 to 2022. And just by 3.7 per cent in France. There was a huge stake on biotech somewhere in 2000–2010s. Why it did not work is a story of its own. But it didn’t.
Labour efficiency also grows in emerging nations. This is exactly why, ironically, today they will be the main protectors of capitalism and globalism.
Fourth and last but not least, there is no one left in the West to be displaced through ‘creative destruction’. Capitals are evenly distributed across industries via foundations and the death of just one player does not mean anything. We just have hired executives wandering across companies, in general, without caring too much.
At the same time, it is no longer possible to get on a par with older capital through innovations. Thanks to the same venture/startup set-up, innovators are closely watched. And, when at least anything of value turns up, an M&A follows in an instant. Innovators receive hard-to-refuse offers while they have not yet taken off. This is where Schumpeter’s cycle breaks at a half-step.
When it comes to older capitals, today governments buy them out with no strings attached. By printing money. No one dies anymore. Such is the sad story…