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Best of the Month – The Innovation Illusion

Best of the Month –  The Innovation Illusion

| On 12, Sep 2018

Darrell Mann

Here’s one of those best-of choices that comes with a health-warning: This book might cause prospective innovators to believe that all of their innovation efforts are futile. This is a depressing book. Mainly because, rather than our SI research focusing on millions of individual innovation attempts, the authors of The Innovation Illusion focus on the meta picture. And what a depressing picture that is. Capitalism is supposed to encourage innovation, but now, because of the emergence of hundreds of intermediary rent-seekers, effectively becomes a locked-in system increasingly incapable of allowing disruptive or breakthrough innovation to occur. Depressing as it might be, our view is that every prospective innovator needs to know what Erixon and Weigel (respectively, a Swedish economist and an entrepreneur) have to say. The book provides no semblance of answers, but yet, we still believe inside every piece of bad news is some important information regarding how we might – might! – beat the system.

Conventional wisdom holds that Western economies are on the threshold of fast-and-furious technological development. Fredrik Erixon and Bjorn Weigel refute this idea, bringing together a vast array of data and case studies to tell a very different story.

With expertise spanning academia and the business world, Erixon and Weigel illustrate how innovation is being hampered by existing government regulations and corporate practices. Capitalism, they argue, has lost its mojo. Assessing the experiences of global companies, including Nokia, Uber, IBM, and Apple, the authors explore four key themes: declining economic dynamism in Western economies; growing corporate reluctance to contest markets and innovate; increasing specialisation, and excessive regulation limiting the diffusion of innovation. At a time of low growth, high unemployment, and increasing income inequality, innovation-led growth is more necessary than ever. This book unequivocally details the obstacles hindering our future prosperity.

In theory, meanwhile, the developed world stands on the brink of technological revolution. Evangelists of the New Machine Age predict that within just a few years robots will be doing the most dirty, dangerous and dull jobs, freeing workers for more rewarding tasks. Clever machines will fuel a new burst of global productivity that will restore fragile economies still bruised by the Great Recession. Except that the revolution predicted by these technology prophets is not happening on the scale or at the speed they would have us believe. According to The Innovation Illusion, the world is not about to grow fat on a feast of innovation. Instead it should be steeling itself for a famine. The blame, they argue, lies in a system of capitalism which, far from fostering Joseph Schumpeter’s creative destruction, has become a counter-revolutionary force: middle-aged, fearful of risk and cut off from the entrepreneurial spirit that once drove truly disruptive change. Our ability to adopt and spread the use of innovative products and services has been paralysed by this hidebound system. Erixon and Weigel know how to make their case seductive and entertaining. They describe the four horsemen of capitalist decline riding down innovation before it has any chance of reaching the wider world. The first horseman is Gray Capital, anonymous corporate owners — such as institutions and sovereign wealth funds — who have replaced the original risk-taking entrepreneurs. The second follows naturally in Gray Capital’s wake: institutional owners need predictability and security so they encourage Corporate Managerialism. Managers focus on meeting targets and reducing uncertainty, while the potentially great rewards of high-risk innovation are shunned. Globalisation is the less predictable beast, initially spurring competition but eventually leading to such high degrees of specialisation that it is difficult for disruptive innovators to establish a presence; and finally Regulation, which has become so complex that the rules favour incumbents and deter challengers. The tale is liberally sprinkled with colourful examples — such as the Belgian politician who used regulations to force a charity to cancel a distribution of free food to the needy at Christmas because it planned to use drivers from Uber, the taxi hailing app. The narrative is also nourished with statistics. The book cites Robert Gordon, author of The Rise and Fall of American Growth, who found that apart from a brief period between 1996 and 2004, when productivity soared, levels have for roughly the past 40 years trended significantly below those achieved after the industrial revolution and the second world war — despite the spread of computerisation and the internet. Innovation is no longer driving productivity as it once did, Gordon suggests. Our impression has been of great technological progress, but Erixon and Weigel argue many innovations have been more “fun than fundamental”. Mobile gaming has grown at a far faster rate than industrial robotics, for example. The book is eloquent at laying out the thesis. Capitalism has fallen victim to rentiers. Big business is increasingly innovation-allergic (71% of new Fortune 500 companies, the book tells us, were started by individuals that had failed to convince their big-business employers that they should disrupt themselves, and so left to do it themselves). The authors are on weaker ground when they tackle possible solutions. Mainly – of course – because they don’t seem to understand the concept of contradictions or contradiction-solving. Their ‘solution’ thoughts, as a result are scant and some are fraught with difficulty. Dual classes of ownership, for example, have in the past been used to discriminate in the interests of a few rather than innovate for the gain of many. They are also open to challenge when playing down the technological revolution. There is barely a mention of big data, which could give new innovators, big and small, far greater power to meet consumers’ needs and at far less cost. Understanding where the value lies in this brave new world will take time. There will also be significant social questions (contradictions – naturally!) to be resolved as old jobs go and new ones are created. The transition may not be fast or fun. But it will be fundamental.


Still depressing, but essential reading nevertheless.