“Capitalism is by nature a form or method of economic change and only never is but never can be stationary. The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates. The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in”.( Schumpeter Joseph, 1942. ‘Capitalism, Socialism and Democracy’, London: Routledge. pp. 82–83).
These words of the great economist, Joseph Alois Schumpeter, have a searing resonance in the contemporary world. The past couple of decades or so have witnessed creative destruction in almost every sphere of commerce, industry and society. Think of a prosaic product or service like the postal services and letter writing. Both have become redundant and have been supplanted by the internet and emails. Industrial and business organization of the past –for example, the top down and top heavy, hierarchical firms- belong to a past which is receding into distant memory. The new mantra has been lean, flat, decentralized organizations, vertically decentralized structures where the boundaries of the firm, in the classic formulation of another great economist, Ronald Coase, have become blurred. The contemporary industrial and commercial landscape is littered with instances of creative destruction.
The question is: Does creative destruction, to use the phrase coined by the business guru, Andy Grove, make only the paranoid survive? That is, does the phenomenon totally destroy the old and create the new, repeating the cycle, ad infinitum? No, appears to be the answer, if the trajectory of the behemoth, General Electric, is held to be the yardstick. The diversified conglomerate focus on financial engineering during the pre-2008 crisis and the ‘roaring nineties’ is gradually giving way to a refocus on the ‘nuts and bolts’ or widget making businesses, in plain vanilla terms, complemented by software making and integration of technology into its businesses. The behemoth’s acquisition of the French engineering group, Alstom and the attendant rejig and focus on what the group calls the ‘industrial internet’ suggests this. The ‘industrial internet connects physical machinery to a digital network.( see The Economist: http://www.economist.com/news/
The dot com ‘mania’ of the nineties led many to believe that a ‘knowledge economy’ or a ‘new’ economy would supplant the ‘old’ one. This ‘new economy’ was alleged to give short shrift to economic fundamentals, economic logic and would , some held, even make the business cycle-the contractions and expansions in the level of economic activity and an intrinsic feature of capitalism- redundant. ‘Widget making’ was passé; the new fashion was anything and everything pertaining to the internet, computers and communication technologies, many believed. Bits and Bytes supplanted bricks and mortar, so to speak. The lessons of economic history were ignored and businesses, consumers and even governments, to an extent, went on a manic binge. This ethereal atmosphere was punctured with the onset of the bust. Economic and financial reality hit severely bringing back a semblance of sobriety and repose back into the markets, market participants and the world of commerce.
Many business, consumers and economies, as is the wont, suffered. This was the price that was paid for what has been termed as ‘irrational exuberance’ and whose parallel could be the ‘tulip mania’ of yore. As sobriety and common sense sunk in, people realized the importance of the ‘old economy’. Not that the knowledge economy was discarded entirely but a new synthesis appeared to be arrived at that integrated the old and the new. General Electric’s refocus and reorientation may constitute a classic example of this. The old and the new then co-exist till a new mean and normal is found.
Does this carry lessons for economic and industrial policies and development paths of developing countries? Yes. Poignant ones. Essentially, economic and industrial development in the contemporary world means a synthesis of classic bricks and mortar industries and the new information ones. This holds true for both the developed and developing countries like India which have latched onto the IT sector and ICT development as the new frontier. Competitive advantage may be the new, fashionable buzzword in policy and academic circles but comparative advantage has not lost its salience. Countries should specialize in areas where they have a comparative advantage and at the same time proactively develop their information and technology infrastructure. In other words, synthesis of the old and the new should be the focus of companies, industries and economies. This may be the most important lesson of General Electric’s acquisition of Alstom and the attendant refocus. Prudence dictates that this development be paid heed to and factored into policy making.
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