Capitalism Is So Broken It Can't Be Fixed?
Clayton Christensen, one of the world's brilliant minds on business innovation, believes capitalism is broken. Needs a fix.
But look closely at his three innovations for saving capitalism. He's really talking about saving America from a broken political system that was broken by capitalists. What if it's the other way around? If capitalism is America's biggest problem, why save it?
This story begins with Andy Grove. He once held up Christensen's 1997 book, "The Innovator's Dilemma," at a Las Vegas Comdex trade show and said it was "the most important book I've read in 10 years." Why? Solving the "innovator's dilemma" helped Grove build Intel into what's now a $100 billion semiconductor giant.
But when the new "A Capitalist's Dilemma" is published next year is there a new Andy Grove in Washington to endorse it?
The story really begins with Christensen's theory of innovation. In a Wired article Jeff Howe said back in 1997 "Clayton Christensen changed business thinking forever. 'The Innovator's Dilemma' looked at industries ranging from disk drives to steel to mechanical excavators and exposed a surprising phenomenon:
"When big companies fail, it's often not because they do something wrong but because they do everything right. Successful businesses ... are trained to focus on what he calls sustaining innovations — innovations at the profitable, high end of the market, making things incrementally bigger, more powerful, and more efficient." But "this leaves companies vulnerable to the disruptive innovations that emerge in the murky, low-margin bottom of the market."
New B-School innovation theory changed Andy Grove mind
Christensen's theory of innovation showed how "true revolutions occur, creating new markets and wreaking havoc within industries. Think: the PC, the MP3, the transistor radio. This insight — that managers might actually scuttle the ship by following the navigational chart laid down in business school — shifted the way people thought about innovation."
The story continues with New Yorker's Larissa MacFarquhar: "In industry after industry, Christensen discovered, the new technologies that had brought the big, established companies to their knees weren't better or more advanced — they were actually worse. The new products were low-end, dumb, shoddy, and in almost every way inferior. But the new products were usually cheaper and easier to use, and so people or companies who were not rich or sophisticated enough for the old ones started buying the new ones, and there were so many more of the regular people than there were of the rich, sophisticated people that the companies making the new products prospered. Christensen called these low-end products disruptive technologies."
Yes, Andy Grove got it! Before "The Innovator's Dilemma" was published, Grove met with Christensen. Discussed his theory. Intel then created a new subsidiary to make "the Celeron chip, a cheap product that was ideal for the new low-end PCs, and within a year it had captured 35% of the market."
But will the next book, 'A Capitalist's Dilemma,' save capitalism?
OK, so Christensen's got a great story. But will his next act save capitalism? And what about his real goal? Are his three new solutions truly innovative enough to save America from a broken political system? Don't bet on it. Yes, our political system is broken. But capitalism is the problem. Not the solution.
Washington's endless political drama has already been transformed by capitalism. So has Wall Street, Corporate America, Big Oil and the entire economy been transformed into a bizarre circus Adam Smith would never recognize. Capitalism is now an out-of-control Frankenstein monster that changed everything. Now it's "too powerful to change."
Still, Christensen's convinced his three main solutions to "A Capitalist's Dilemma" will transform capitalism, just as "The Innovator's Dilemma" transformed American business. That it's not too late to save the American economy, financial markets, politics, government and the world, if we just save capitalism. Don't count on it.
Transform Ayn Rand? Paul Ryan? The Tea Party?
So the story continues: Ask yourself, will it work in time to save America from the dark shadows Jack Bogle wrote about years ago in "The Battle for the Soul of Capitalism"? Unlikely. We'll never return to Adam Smith's ideal 1776 capitalism. Today, Ayn Rand, capitalism's new patron saint, locks in modern capitalism as a conservative ideal that speaks to conservatives:
"When I say capitalism, I mean a pure, uncontrolled, unregulated laissez-faire capitalism, with a separation of economics, in the same way and for the same reasons as a separation of state and church," totally free of all government restrictions. "Capitalism is the only system that can make freedom, individuality and the pursuit of values possible in practice because capitalism demands the best of every man, his rationality, and rewards him accordingly. It leaves every man free to choose the work he likes, to specialize in it, to trade his product for the products of others, and to go as far on the road of achievement as his ability and ambition will carry him."
Rand's ideas have a lot to do with polarizing American politics. In her classic, "Atlas Shrugged," a capitalist elite engages in perpetual class warfare for the soul of America, fighting society's "moochers, looters and parasites," anyone and everyone demanding government money to solve their problems. More recently this has become the rhetoric of the ideological war between "makers and takers."
Capitalism's blind self-destructive obsession with short-term profits
In a CNN report from the World Economic Conference in Davos last month Christensen wrote: We are "living the capitalist's dilemma. Year after year Americans ask: When will our economy get better? Injecting more capital into the economy should work, in theory, because capital fuels capitalism. Yet this capital sits unused on the balance sheets of corporations, and languishes inert in private equity funds."
This obsessive short-term thinking is capitalism's biggest problem, and a huge one for America. But nobody wants to ask the hardest question of all: If capitalism is America's core problem, why save capitalism? Instead, Christensen implies that the paradox of "The Innovator's Dilemma" simply morphs into "A Capitalist's Dilemma," with politicians simply "applying doctrines that were appropriate when capital was scarce." So Christensen's three solutions are laser focused on the political divide and short-term thinking:
1. Change America's metrics, incentivize long-term strategies
Christensen assures us Americans "can use capital with abandon now, because it's abundant and cheap." But most Americans would disagree, living in fear of too much debt. New metrics? It'll take a massive black swan to shock us, rewire our brains.
2. Change tax rates, on capital gains, plug loopholes
Christensen's theory of innovation worked in the closed-circuit cage-fighting world of capitalists vs capitalists. But it will be unworkable in a global economy populated by marauding state capitalists like China, banana republic dictators, and global energy giants armed with unlimited billions for lobbyists, campaign contributions, and advertising funds to sell their self-serving messages while ignoring the long-term costs to the public, and ignoring well-intentioned innovative solutions.
3. Change America's political system
Christensen attacks both parties with well-known criticisms: Republicans wrong in thinking the rich create jobs. Democrats wrong because "growth won't happen if they distribute the wealth of the wealthy to everyone else." Old ideological rhetoric.
Will Christensen's three innovative solution work as intended? No. In the final analysis, capitalism really is America's biggest problem. So the above three solutions are not really solutions, but rather the effect of not confronting the real problem, a broken system of capitalism.
We are distracted by focusing on our broken political system. Yes, distracted from the truth.
One final reminder: Again let's filter the likely next move through Jared Diamond's classic, "Collapse: How Societies Choose to Fail or Succeed": "One of the disturbing facts of history is that so many civilizations collapse. Few people, however, least of all our politicians, realize that" so "many of those civilizations share a sharp curve of decline," often "a decade or two after it reaches its peak population, wealth and power."
So why do leaders fail us? Why so few Andy Groves? History keeps repeating its lessons over and over through many millennia. But we never learn.
Throughout history leaders "focused only on issues likely to blow up in the next 90 days" lacking the will "to make bold, courageous, anticipatory decisions," setting the stage for a rapid "sharp curve of decline," and a 1929-style crash before another Great Depression.
Hopefully after a new black swan shocks us, we'll all wake up, wise up and do something truly innovative ... like reinstate Glass-Steagall.