Wednesday, April 29, 2009

Why bad times lead to great ideas?

Foreign Policy Magazine
May/June 2009

AS NIKOLAI KONDRATIEV SHIVERED before his executioners on a wintry Siberian morning in 1938, he could scarcely have imagined that, 71 years later, his name would be resurrected by a new generation of business theorists and management gurus seeking to understand the first Great Recession of the 21st century.

A prime mover behind Lenin’s 1921 New Economic Policy, which briefly rehabilitated capitalism in order to save a young Soviet Union from imminent collapse, Kondratiev was an intellectual insurgent in a time and place where heresy could get one killed. Kondratiev theorized that economic activity took place in long waves: 50- or 60-year periods of creativity and growth followed by briefer contractions, after which the cycle would begin anew.

So taken was Joseph Schumpeter, the Harvard University economist best known for coining the term “creative destruction,” with the idea of long waves that he named the concept for Kondratiev. Schumpeter’s view was that innovation tends to arrive in clumps: “discrete rushes which are separated from each other by spans of comparative quiet.” These bursts of creativity, he wrote, “periodically reshape the existing structure of industry by introducing new methods” of production, organization, and supply. As for the negative effects of depressions—unemployment, the loss of wealth, economic dislocation—they were just creative destruction at work.

Today, with the pillars of capitalism falling all around us, it might seem odd to wonder what world-changing shifts this Great Recession will help bring to life—what Next Big Thing is just around the corner. But moments of rupture such as these are precisely what true innovators seek to exploit, creating new paradigms and leaving a trail of winners and losers in their wake. Companies, technologies, and ideas that survive this latest tide of creative destruction will emerge sharper, stronger, and more resilient for it.

History virtually guarantees it. The Long Recession that began in 1873 paved the way for new titans of industry and finance. The Great Depression before World War II gave us synthetic rubber, television, and the New Deal. The popping of the 1990s tech bubble cleared the field for Google.

So what might the next wave bring? Massive structural shifts are no doubt in store for capitalism itself, with the once mighty financial industry on its knees and market fundamentalism in retreat. In world politics, power may be fragmenting, but a humbled America stands poised to be an unlikely beneficiary of the crash its financial wizards created. Awareness of the Earth’s vulnerability is growing, but perhaps not fast enough to combat environmental decline. And in the new field of bioengineering, scientists are steadily perfecting technologies that may forever alter what it means to be human.

Innovation can be a double-edged sword. The Carnegies and Rockefellers of the late 19th century became Teddy Roosevelt’s crony capitalists in the early 20th. The engineering advances of the 1930s helped turn World War II into a bloodbath. And the credit-default swaps and collateralized debt obligations of the 2000s became financial weapons of mass destruction in 2008. We can expect what comes next to have its dark side, too.

We can’t predict the future with any certainty. But we know it will be much different from today. Get ready for a world of change. Get ready for the Next Big Thing.


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