The Disruptive Engine:Innovation and the Capitalistic Dream

By: Sam Vaknin, Ph.D.

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Also published by United Press International (UPI)


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War and money confer an evolutionary advantage on Mankind by spurring innovation: hence their ubiquity. Attempts to foster creativity and genius via state largesse, the education system, and bolstering entrepreneurship pale in comparison to the accomplishments wrought on by belligerence and cupidity.

On 18 June, 2002 business people across the UK took part in Living Innovation 2002. The extravaganza included a national broadcast linkup from the Eden Project in Cornwall and satellite-televised interviews with successful innovators.

Innovation occurs even in the most backward societies and in the hardest of times. It is thus, too often, taken for granted. But the intensity, extent, and practicality of innovation can be fine-tuned. Appropriate policies, the right environment, incentives, functional and risk seeking capital markets, or a skillful and committed Diaspora - can all enhance and channel innovation.

The wrong cultural context, discouraging social mores, xenophobia, a paranoid set of mind, isolation from international trade and FDI, lack of fiscal incentives, a small domestic or regional market, a conservative ethos, risk aversion, or a well-ingrained fear of disgracing failure - all tend to stifle innovation.

Product Development Units in banks, insurers, brokerage houses, and other financial intermediaries churn out groundbreaking financial instruments regularly. Governments - from the United Kingdom to New Zealand - set up "innovation teams or units" to foster innovation and support it. Canada's is more than two decades old.

In the first decade of the 21st century, the European Commission has floated a new program dubbed INNOVATION and aimed at the promotion of innovation and encouragement of SME participation. Its goals are:

But all these worthy efforts ignore what James O'Toole called in "Leading Change" - "the ideology of comfort and the tyranny of custom." The much quoted Austrian economist, Joseph Schumpeter coined the phrase "creative destruction". Together with its twin - "disruptive technologies" - it came to be the mantra of the now defunct "New Economy".

Schumpeter seemed to have captured the unsettling nature of innovation - unpredictable, unknown, unruly, troublesome, and ominous. Innovation often changes the inner dynamics of organizations and their internal power structure. It poses new demands on scarce resources. It provokes resistance and unrest. If mismanaged - it can spell doom rather than boom.

Satkar Gidda, Sales and Marketing Director for SiebertHead, a large UK packaging design house, was quoted in "The Financial Times" as saying:

"Every new product or pack concept is researched to death nowadays - and many great ideas are thrown out simply because a group of consumers is suspicious of anything that sounds new ... Conservatism among the buying public, twinned with a generation of marketing directors who won't take a chance on something that breaks new ground, is leading to super-markets and car showrooms full of me-too products, line extensions and minor product tweaks."

Yet, the truth is that no one knows why people innovate. The process of innovation has never been studied thoroughly - nor are the effects of innovation fully understood.

In a new tome titled "The Free-Market Innovation Machine", William Baumol of Princeton University claims that only capitalism guarantees growth through a steady flow of innovation:

"... Innovative activity-which in other types of economy is fortuitous and optional-becomes mandatory, a life-and-death matter for the firm."

Capitalism makes sure that innovators are rewarded for their time and skills. Property rights are enshrined in enforceable contracts. In non-capitalist societies, people are busy inventing ways to survive or circumvent the system, create monopolies, or engage in crime.

But Baumol fails to sufficiently account for the different levels of innovation in capitalistic countries. Why are inventors in America more productive than their French or British counterparts - at least judging by the number of patents they get issued? And why did innovation blossom in the USSR throughout its existence?

Perhaps because oligopolies are more common in the US than they are elsewhere. Baumol suggests that oligopolies use their excess rent - i.e., profits which exceed perfect competition takings - to innovate and thus to differentiate their products. Still, oligopolistic behavior does not sit well with another of Baumol's observations: that innovators tend to maximize their returns by sharing their technology and licensing it to more efficient and profitable manufacturers. Nor can one square this propensity to share with the ever more stringent and expansive intellectual property laws that afflict many rich countries nowadays.

Very few inventions have forced "established companies from their dominant market positions" as the "The Economist" put it recently. Moreover, most novelties are spawned by established companies. The single, tortured, and misunderstood inventor working on a shoestring budget in his garage - is a mythical relic of 18th century Romanticism.

More often, innovation is systematically and methodically pursued by teams of scientists and researchers in the labs of mega-corporations and endowed academic institutions. Governments - and, more particularly the defense establishment - finance most of this brainstorming. the Internet was invented by DARPA - a Department of Defense agency - and not by libertarian intellectuals.

A report compiled by PricewaterhouseCoopers from interviews with 800 CEO's in the UK, France, Germany, Spain, Australia, Japan and the US and titled "Innovation and Growth: A Global Perspective" included the following findings:

"High-performing companies - those that generate annual total shareholder returns in excess of 37 percent and have seen consistent revenue growth over the last five years - average 61 percent of their turnover from new products and services. For low performers, only 26 percent of turnover comes from new products and services."

Most of the respondents attributed the need to innovate to increasing pressures to brand and differentiate exerted by the advent of e-business and globalization. Yet a full three quarters admitted to being entirely unprepared for the new challenges.

Two good places to study routine innovation are the design studio and the financial markets.

Tom Kelly, brother of founder David Kelly, studies, in "The Art of Innovation", the history of some of the greater inventions to have been incubated in IDEO, a prominent California-based design firm dubbed "Innovation U." by Fortune Magazine. These include the computer mouse, the instant camera, and the PDA. The secret of success seems to consist of keenly observing what people miss most when they work and play.

Robert Morris, an Amazon reviewer, sums up IDEO's creative process:

This methodology is a hybrid between the lone-inventor and the faceless corporate R&D team. An entirely different process of innovation characterizes the financial markets. Jacob Goldenberg and David Mazursky postulated the existence of Creativity Templates. Once systematically applied to existing products, these lead to innovation.

Financial innovation is methodical and product-centric. The resulting trade in pioneering products, such as all manner of derivatives, has expanded 20-fold between 1986 and 1999, when annual trading volume exceeded 13 trillion dollar.

Swiss Re Economic Research and Consulting had this to say in its study, Sigma 3/2001:

"Three types of factors drive financial innovation: demand, supply, and taxes and regulation. Demand driven innovation occurs in response to the desire of companies to protect themselves from market risks ... Supply side factors ... include improvements in technology and heightened competition among financial service firms. Other financial innovation occurs as a rational response to taxes and regulation, as firms seek to minimize the cost that these impose."

Financial innovation is closely related to breakthroughs in information technology. Both markets are founded on the manipulation of symbols and coded concepts. The dynamic of these markets is self-reinforcing. Faster computers with more massive storage, speedier data transfer ("pipeline"), and networking capabilities - give rise to all forms of advances - from math-rich derivatives contracts to distributed computing. These, in turn, drive software companies, creators of content, financial engineers, scientists, and inventors to a heightened complexity of thinking. It is a virtuous cycle in which innovation generates the very tools that facilitate further innovation.

The eminent American economist Robert Merton - quoted in Sigma 3/2001 - described in the Winter 1992 issue of the "Journal of Applied Corporate Finance" the various phases of the market-buttressed spiral of financial innovation thus:

  1. "In the first stage ... there is a proliferation of standardised securities such as futures. These securities make possible the creation of custom-designed financial products ...
  2. In the second stage, volume in the new market expands as financial intermediaries trade to hedge their market exposures.
  3. The increased trading volume in turn reduces financial transaction costs and thereby makes further implementation of new products and trading strategies possible, which leads to still more volume.
  4. The success of these trading markets then encourages investments in creating additional markets, and the financial system spirals towards the theoretical limit of zero transaction costs and dynamically complete markets."

Financial innovation is not adjuvant. Innovation is useless without finance - whether in the form of equity or debt. Schumpeter himself gave equal weight to new forms of "credit creation" which invariably accompanied each technological "paradigm shift". In the absence of stock options and venture capital - there would have been no Microsoft or Intel.

It would seem that both management gurus and ivory tower academics agree that innovation - technological and financial - is an inseparable part of competition. Tom Peters put it succinctly in "The Circle of Innovation" when he wrote: "Innovate or die". James Morse, a management consultant, rendered, in the same tome, the same lesson more verbosely: "The only sustainable competitive advantage comes from out-innovating the competition."

The OECD published a study titled "Productivity and Innovation". It summarizes the orthodoxy, first formulated by Nobel prizewinner Robert Solow from MIT almost five decades ago:

"A substantial part of economic growth cannot be explained by increased utilisation of capital and labour. This part of growth, commonly labelled 'multi-factor productivity', represents improvements in the efficiency of production. It is usually seen as the result of innovation  by best-practice firms, technological catch-up by other firms, and reallocation of resources across firms and industries."

The study analyzed the entire OECD area. It concluded, unsurprisingly, that easing regulatory restrictions enhances productivity and that policies that favor competition spur innovation. They do so by making it easier to adjust the factors of production and by facilitating the entrance of new firms - mainly in rapidly evolving industries.

Pro-competition policies stimulate increases in efficiency and product diversification. They help shift output to innovative industries. More unconventionally, as the report diplomatically put it: "The effects on innovation of easing job protection are complex" and "Excessive intellectual property rights protection may hinder the development of new processes and products."

As expected, the study found that productivity performance varies across countries reflecting their ability to reach and then shift the technological frontier - a direct outcome of aggregate innovative effort.

Yet, innovation may be curbed by even more all-pervasive and pernicious problems. "The Economist" posed a question to its readers in the December 2001 issue of its Technology Quarterly:

Was "technology losing its knack of being able to invent a host of solutions for any given problem ... (and) as a corollary, (was) innovation ... running out of new ideas to exploit."

These worrying trends were attributed to "the soaring cost of developing high-tech products ... as only one of the reasons why technological choice is on the wane, as one or two firms emerge as the sole suppliers. The trend towards globalisation-of markets as much as manufacturing-was seen as another cause of this loss of engineering diversity ... (as was the) the widespread use of safety standards that emphasise detailed design specifications instead of setting minimum performance requirements for designers to achieve any way they wish.

Then there was the commoditisation of technology brought on largely by the cross-licensing and patent-trading between rival firms, which more or less guarantees that many of their products are essentially the same ... (Another innovation-inhibiting problem is that) increasing knowledge was leading to increasing specialisation - with little or no cross- communication between experts in different fields ...

... Maturing technology can quickly become de-skilled as automated tools get developed so designers can harness the technology's power without having to understand its inner workings. The more that happens, the more engineers closest to the technology become incapable of contributing improvements to it. And without such user input, a technology can quickly ossify."

The readers overwhelmingly rejected these contentions. The rate of innovation, they asserted, has actually accelerated with wider spread education and more efficient weeding-out of unfit solutions by the marketplace. "... Technology in the 21st century is going to be less about discovering new phenomena and more about putting known things together with greater imagination and efficiency."

Many cited the S-curve to illuminate the current respite. Innovation is followed by selection, improvement of the surviving models, shake-out among competing suppliers, and convergence on a single solution. Information technology has matured - but new S-curves are nascent: nanotechnology, quantum computing, proteomics, neuro-silicates, and machine intelligence.

Recent innovations have spawned two crucial ethical debates, though with accentuated pragmatic aspects. The first is "open source-free access" versus proprietary technology and the second revolves around the role of technological progress in re-defining relationships between stakeholders.

Both issues are related to the inadvertent re-engineering of the corporation. Modern technology helped streamline firms by removing layers of paper-shuffling management. It placed great power in the hands of the end-user, be it an executive, a household, or an individual. It reversed the trends of centralization and hierarchical stratification wrought by the Industrial Revolution. From microprocessor to micropower - an enormous centrifugal shift is underway. Power percolates back to the people.

Thus, the relationships between user and supplier, customer and company, shareholder and manager, medium and consumer - are being radically reshaped. In an intriguing spin on this theme, Michael Cox and Richard Alm argue in their book "Myths of Rich and Poor - Why We are Better off than We Think" that income inequality actually engenders innovation. The rich and corporate clients pay exorbitant prices for prototypes and new products, thus cross-subsidising development costs for the poorer majority.

Yet the poor are malcontent. They want equal access to new products. One way of securing it is by having the poor develop the products and then disseminate them free of charge. The development effort is done collectively, by volunteers. Open source software, such as the Linux operating system is an example as is the Open Directory Project which competed with the commercial Yahoo! Directory.

The UNDP's Human Development Report 2001 titled "Making new technologies work for human development" is unequivocal. Innovation and access to technologies are the keys to poverty-reduction through sustained growth. Technology helps reduce mortality rates, disease, and hunger among the destitute.

"The Economist" carried last December the story of the agricultural technologist Richard Jefferson who helps "local plant breeders and growers develop the foods they think best ... CAMBIA (the institute he founded) has resisted the lure of exclusive licences and shareholder investment, because it wants its work to be freely available and widely used". This may well foretell the shape of things to come.

Note: The Death Knell of Success in Business

The film “The Artist” describes the waning career of a megastar of the era of silent movies when he refuses to make the transition into the epoch of “talkies” (films with sound.) He mocks the innovation and then challenges it by producing a lavish production of yet another silent epic. His inevitable downfall follows. He is reduced to pawning and auctioning off his few remaining belongings.

In the biological realms, genetic mutations ensure that the repertory of responses to constantly varying circumstances is always fresh and never depleted. Not so in the world of business where success often spells death and doom and it is failure that spurs innovation. Indeed, the successful firms of yesteryear are often forgotten: no one can name the three dominant horse whip manufacturers in the 19th century, for instance. Silent era film stars are also not household names.

Business success is due to an appealing or groundbreaking product (which generates its own market and demand), an efficient process, or a fortuitous and serendipitous set of events coupled with emerging needs. The overwhelming advantage of the first-mover guarantees that competitors (mostly imitators) are left far behind. Brand recognition, customer loyalty and intellectual property protections pose often insurmountable barriers to entry. This forces newcomers to innovate or perish.

Faced with challengers, monopolies and duopolies, or even oligopolies retrench. Why don’t these companies counter-innovate? Because they are emotionally-invested in their cash cows, their current best-selling offerings, and the managerial-organizational structures and processes they gave rise to. Fears of rocking the boat and of the unknown mingle with the haughtiness of the well-to-do and the inertia and anti-entrepreneurial culture that are the hallmarks of big business. Finally, the institutional knowledge of successful firms and their skills set are skewed in favour of existing products and processes. Lurking in the back of everyone’s mind, from the upper echelons of management to the lowliest menial labourer is the question: “As long as the money keeps pouring in – why bother to innovate? Why take chances?”

Indeed, innovation is an entirely modern concept. Up to the 19th century, innovators were penalized for daring to upset the proverbial applecart. Imitators, conservatives, and traditionalists were richly rewarded. The culture of successful companies tends to resemble this period of pre-Industrial Revolution.

Interview With Scott Douglas Jacobsen

Scott Douglas Jacobsen: Today’s topic: the next era of invention; what is the next era of invention? The previous eras relied upon unusually bright, innovative, and persistent, persons, solo: Legitimate geniuses. We have moved more into a world of invention emphasizing teamwork and dollars alongside some coordination with narrow artificial intelligence or specified algorithms, programs. 

 

Prof. Sam Vaknin: Mankind have always alternated between teamwork and the individual genius. I think that we should focus on the raw materials (inputs) and the outputs of innovation rather than on who and how we bring it about.

 

We are transitioning from the age of monetized attention to the age of reality engineering.

 

Cities amounted to the first make-belief, virtual reality. Urbanization and population growth led to the rise of the creative genius (auteur), and the emergence of the concept of the original (due to the need to be seen and noticed in the multitude).

 

Intellectual property followed 300 years ago when mechanical reproduction blurred the line between original and copy and dramatically reduced the marginal cost of copies.

 

The Work of Art in the Age of Mechanical Reproduction" (1935), by Walter Benjamin, is an essay of cultural criticism which proposes and explains that mechanical reproduction devalues the aura (uniqueness) of an objet d'art.

 

Since then, identity has become a big business: patents, copyrights, brands, and blockchain NFTs. Distributed ledgers as well as centralised records vouch for one’s identity and guarantee it.

 

The nonrivalrous zero marginal cost of digital goods has shifted the focus from manufacturing of tangibles to the manipulation of abstract symbols, the commodification of attention, and the emerging conundrum of discoverability.

 

Both individual creators and commercial enterprises reacted by interpellating potential consumers via propaganda and targeted advertising and by turning a profit via the aggregation of big data (targeting the demographics of attention).

 

These trends engendered self-sufficient disintermediated atomization - attention has been diverted to asocial online pursuits - and yielded an impaired reality testing (fantasy paracosms, virtual and augmented reality, and, soon, the metaverse).

 

The next frontiers are reality-like (pseudoreal) “real estate” and commodified but idiosyncratic menu-driven reality (the aforementioned metaverse).

 

Collaborative virtual realities will supplant physical ones and reality substitutes (sex dolls, intimacy apps) will proliferate. Tech behemoths, such as Facebook, Google, Apple, and Amazon will try to control the way we perceive reality and the immersive universes that we inhabit.

 

IRL AI will displace people as friends, advisors, interlocutors, lovers, and service providers. Users will construct online simulations and inhabit them. But this turn of events will also force the introduction of mandatory digital identities, hopefully based on blockchain rather than government regulation.

 

Jacobsen: What marks something as genuinely inventive rather than simply an update to some technology?

 

Vaknin: Truly innovative inventions profoundly change the way we live, communicate, work, make love, and interact. By this standard, neither the automobile nor the smartphone are veritable innovations: the former is a mere mechanized horse and the latter a derivative of the phone. But Bell’s telephone and the telegraph are examples of paradigm-shifting, reality-altering inventions.

 

Jacobsen: More fundamentally, what is the basic principle of invention, its nature? 

Vaknin: Most groundbreaking inventions generate their own markets, fostering needs in consumers that they were unaware of. They also recombine the familiar (e.g., previous technologies) in ways that produce alien, unprecedented, and strange products or services. Finally, true inventions become indispensable in short order: it is hard to imagine a life without them and we pity our predecessors for having been deprived of their existence.

Schumpeter seemed to have captured the unsettling nature of innovation: unpredictable, unknown, unruly, troublesome, and ominous. Innovation often changes the inner dynamics of organizations and their internal power structure. It poses new demands on scarce resources. It provokes resistance and unrest. If mismanaged - it can spell doom rather than boom.

Yet, the truth is that no one knows why people innovate. The process of innovation has never been studied thoroughly - nor are the effects of innovation fully understood.

Jacobsen: What do you see as the most significant biotechnology invention in the history of the biological world?

 

Vaknin: Possibly CRISPR, the revolutionary gene editing technology. Sometimes, advances in speed and quantity do constitute a quantum leap.

 

Jacobsen: What has been the most worldview-shattering invention in human history?

 

Vaknin: The harnessing of fire, the ability to reignite it at will.

 

Jacobsen: How does the psychology of an inventive person work?

 

Vaknin: The typical inventor is solutions-oriented. S/he perceives a lack, deficiency, or lacuna and sets out to remedy it. Inventors are also possessed of a synoptic-panoramic view, able to discern the connective tissue that binds apparently disparate phenomena. Finally, a true inventor is able to transition seamlessly from the theoretical to practical, from the drawing board to testing, and thence to prototype.

 

Creative people are feared and hated, ostracized and punished, unless they are willing to clown themselves or dumb down and conform to the biases, prejudices, and errors of the masses.

 

High IQ does not translate into success in the absence of perseverance, agreeableness, industriousness, stability (self-regulation), humility, a capacity for teamwork (minimal empathy and respect for others), robust mental health, a social support network, and luck. Many geniuses are homeless or incarcerated and all but forgotten.

 

The reality testing of inventors is impaired: they perceive the world differently (possibly a sign of autism). Coupled with recklessness, a sense of fearless godlike immunity, it leads to exploratory behavior.

 

Originality, novelty, difference: synoptic connectivity appears schizotypal or even psychotic (Schizotypy). Eysenck linked psychoticism to creativity. Indeed, the creative burst is often disorganized initially (inspiration, intuition, dreams). Attention multitasking generates unexpected insights and synergies.

 

Impatience, grandiosity or contempt and condescension charcaterize inventors: convinced of their superiority, they tend to block out “noise” and ignore criticism. Lability and dysregulation are sources of inspiration. Proclivity for change, thrill-seeking, and risky conduct result in innovation.

 

These are the reasons that most innovators endure inordinate hardships in life, their resilience and perseverance tested to the breaking point.

 

Jacobsen: With the advent of some software capable of mimicking human capacities more, and performing in superhuman capacities - at least on paper in computational power, how is this changing the interaction of human beings with software to invent in more precise and creative ways?

 

Vaknin: We tend to mythologize the process of invention, to render it mystical and uniquely human. The truth is that it is an emergent artefact (epiphenomenon), the ineluctable outcome of complexity. At this stage, we are feeding computer models with humungous reams of raw data in the hope that irreducible interactions between the umpteen pieces of information will yield innovative insights and discoveries. The next phase will involve fine-tuning the inputs so as to allow artificial intelligence to work on its own and to seek data as well as outputs autonomously. At that stage, we would still be able to define the research agenda, but not for long.

 

Jacobsen: In line with Alan Turing’s views, who I agree with more than the ‘moderns’ in Western technology communities, when engineered computational systems match our “feeble powers,” how will this change the world of invention?

 

Vaknin: We will be rendered obsolete. We would still maintain a parasitic, atomized, technologically self-sufficient kind of existence for a while, but then, like everything superfluous in Nature, we will wane and fade away. Hence my prediction of a Luddite counter-revolution which would seek to physically demolish or ban certain technologies, maybe justly so.

 

Jacobsen: How might the style of invention, or even the definition of invention itself, change with the precision and breadth future computation, and simulation, will bring to everything in our lives? Where, there might be the capacity of a constant roll of mini-invention increasingly in every facet of human life, similar to the infusion of - what we consider - ordinary technologies now.

 

Vaknin: The overwhelming vast majority of people are incapable of making use of the full set of features made available even by current technologies, let alone of innovating. I foresee “innovation engineers” whose job would be to cajole artificial intelligence codes and models into new discoveries. But innovation would become the domain of machines, not humans.

 

Jacobsen: How long until the technological world or the biological world make human beings, as an environmentally engineered (evolved) structure, neither entirely relevant to the business of the Earth nor the dominant conscious information processors on the planet?

 

Vaknin: I would be surprised if this would take longer than 50 years. With the exception of physical jobs like plumbing, AI would be perfectly capable of replacing and displacing us and doing a better job of it.

 

Jacobsen: Thank you for the opportunity and your time, and the happy final note, Sam.

 

Vaknin: You are welcome. Always delighted to spread doom!

 

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