Schumpeter on Speed
Rich Karlgaard
Abstract: The article focuses on the ideas of Austrian economist Joseph Schumpeter (1883-1950). Schumpeter is best known for developing the term "creative destruction." According to Schumpeter, an economy without entrepreneurs is trapped in "circular flow." The author discusses Google Earth and innovation in medical technology as examples of entrepreneurship and threats to the established order. The author suggests that both real estate agents and doctors could see their jobs transformed by these respective technologies.
Recently I got a peek at a future version of Google Earth, which will showcase a much-improved 3-D depiction of terrain and buildings. This cool software could make tons of money--from ads.
Imagine using Google Earth to zoom low on a city street. Gone is the old pancake-flat look of buildings. They will be depicted in stark relief. And here's the moneymaker: Addresses that have bought ads, such as restaurants, shops or commercial buildings for lease, will stand out as a cut above the rest--in perfect, rich detail and color. Click on one of these buildings and you'll be whisked away to the establishment's Web site.
Maybe you prefer Zillow. What, you haven't heard of Zillow.com? Get ready to be amazed--or frightened for your privacy. Go to Zillow's site, type in your home address and watch a satellite photo of your house emerge … along with the price of your house and those of your neighbors'. Now click for a 45-degree angle "bird's-eye view" of your house (Zillow uses Microsoft's Virtual Earth mapping platform) and pull out more detail--such as your original purchase price, your annual property taxes and whether you swim nude in your backyard pool. Okay, I'm just kidding about the pool.
Neat stuff. Well, unless you own a newspaper chain. Then Google Earth and Zillow look like T. rexes. Recall how Ebay siphoned off newspaper garage sale ads, as did Monster.com with employment ads and Craigslist with personals. That's old news. Soon Google Earth and Zillow will scarf up real estate ad revenue. Perhaps someday the broker's commission, too. That giant sucking sound you hear is Joseph Schumpeter drawing on his pipe.
Innovation from Wild Spirits
Steve Forbes is fond of saying that FORBES stands for entrepreneurial capitalism. Joseph Schumpeter is our lodestar economist. History remembers Schumpeter (1883--1950) for his snappy line about the entrepreneurial process: "creative destruction." An economy without creative destruction--which is to say, one without entrepreneurs--is trapped in a state of "circular flow." It is doomed to stagnation and death, like a pond lacking a fresh water source.
What I like about Schumpeter is that he was no mere academic. At age 36 he became Austria's minister of finance. Later he ran a large private bank that collapsed, leaving him bankrupt. Licking his wounds at the University of Bonn (but not for long), Schumpeter next had to flee Germany in 1932, when the Nazis rolled in.
We know Schumpeter mixed it up with the real world. He bore the scars and learned a good many things not taught in the academy. During his banking debacle Schumpeter saw the distorting ravages of hyperinflation, which hit 134% between 1921 and 1922. From the Nazis Schumpeter learned that classical liberal freedoms--of association, speech, trade, etc.--must stand together, or not at all. An older, wizened Schumpeter wound up teaching and writing at Harvard, where his ideas were trumped by Keynesian fashion. Oh, well. For Schumpeter, history's vindication would have to be enough.
Boy, has he been vindicated. Schumpeter made himself a giant of 20th-century economics with one big idea: the role of the entrepreneur in an economy. Wikipedia, the free online encyclopedia and a creative destroyer in its own right, writes this about Schumpeter: "[He] argued that the innovation and technological change of a nation comes from the entrepreneurs, or wild spirits."
I suspect even Schumpeter would be shocked at the rate of wildly spirited change today. Take medicine, which until now has resisted computer-like gains in price and capability. That could soon change, according to Andy Kessler, who has written a book called The End of Medicine (Collins, $24.95). Kessler spent the 1980s as a chip analyst on Wall Street and the 1990s as a Silicon Valley fund manager. Investing in private and public tech companies, Kessler and a partner grew an $11 million fund in 1996 to $1 billion in 1999. He made his clients rich, and got them out at the top.
If Schumpeter's big economic idea was the role of the entrepreneur, Kessler's big investing idea is the role of silicon in reshaping industries. Health care is ripe for creative destruction by silicon, he says. "It is a $2 trillion industry that'll soon be going to $3 trillion. Doctors drive medicine and are a large part of why costs rise by double digits each year." But silicon, Kessler says, gets cheaper by 30% every year and halves in price every two years.
Are you sitting down, doctors? Ready for your grim prognosis? Kessler's prediction: "If silicon can make its way into detection and diagnosis, health care can get better even as it gets cheaper. What happened to telephone operators, auto mechanics and stock traders--death at the hands of silicon automation--will happen to frontline doctors."
CT scanners, he says, have started down the cost-efficiency curve familiar to PCs and cell phones. "We will see low-cost 256-slice scanners that can pinpoint atherosclerosis in high-resolution 3-D images," says Kessler. "We will see biomarkers and molecular imaging, all silicon-based, that can detect unique proteins from cancer cells five years [before the cancer presents]."