Clayton Christensen on the “Capitalist’s Dilemma”

Clayton Christensen’s New York Times article yesterday is an inspiration of clarity and the kind of out-of-the-box thinking we’ve come to expect from him but have found so absent in this political season.

I’m taking a momentary departure from our familiar topics of digital marketing, brand and web design because his insight about why our economy is broken and most importantly how to think about it differently, struck me as fresh and particularly timely, so I wanted to share the highlights.

The premise of his article is that there are three categories of innovation — empowering innovations, sustaining innovations, and efficiency innovations — that when in balance produce a healthy economy. If investors invest disproportionately in one category, it has material impact on our economy. Recovery from the last three of nine recessions in the last century have been progressively slower as this investment imbalance has grown, professor Christensen notes.

Empowering innovations are those that transform expensive products and services available to the few into cheaper, more accessible products for the many. Examples include everything from the Model T to personal computers and now Cloud computing. Empowering innovations create jobs.

A sustaining innovation replaces products and services, and keeps things moving forward, but doesn’t translate into more jobs He cites the Toyota Prius as a current example. Sustaining innovations are, however, where the greatest amount of innovation dollars are spent.

Efficiency innovations are what you’d expect: innovations that cut the costs of making and distributing products. Geico online insurance is an example he cites. As a result of efficiency innovations, businesses save money by reducing jobs due to streamlined processes created by the efficiency.

Professor Christensen believes that these forms of innovation must maintain a balance for a healthy economy. If investments in efficiency innovations, which reduce jobs and save capital, are not proportionately reinvested in empowering innovations that create jobs, that is a way in which recessions happen.

Today, he continues, we have savings from efficiency innovations being reinvesting in more efficiency innovations, thus stockpiling more cash for other efficiency investment, and jobs continue to disappear. He believes we need to return the balance and start reinvesting some of that money in the kind of empowering innovations that grow jobs. 

Finally, he addresses one of the most charged issues of this election: the idea of redistributing the wealth of the top 1% to the other 99%, which he thinks will not have the desired effect on the economy. He thinks that the habit of the wealthy of investing purely for short-term ROI is based on antiquated thinking and that they must adjust their strategies for changing times, but that redistributing their wealth will be spent by people on sustaining innovations, which will not spur the growth in jobs or the economy we need.

Instead, the wealthy need incentives to invest in the long-term. His conclusion caveats this assertion by recognizing that the purpose of this article is not to be prescriptive, but to give our national discourse a new context to solve our huge problems and as he puts it, “seed discussion.”

It is the freshest, clearest, unencumbered discussion on the economy I’ve read in the last 4 years. Imagine if we could get that kind of thoughtfulness and clarity from our leaders and politicians!

(Clayton Christensen, for those who are unfamiliar, is a Harvard Business School professor, one of the world’s leading management thinkers, author of 8 books and countless articles, and is a RainCastle client).