Abstract
Something almost magical has happened in the American economy over the past couple centuries. Material standards of living have soared. A land of hardworking but poor people transformed itself into a genuinely prosperous nation. Arthur Diamond identifies “innovative dynamism” as the key to this success. But he warns that now, perhaps, “. . . the magic is departing” (p. 181) because we don’t appreciate how to encourage inventiveness, innovation, and entrepreneurship. We are no longer as open to creative destruction as we once were. Recent economic growth statistics reflect this worry: annual growth in per capita GDP in the United States averaged about 2% during the 1980s (2.2%) and 1990s (2.0%), but fell dramatically in the first decade of the 21st century (1.0%) and remained below average in the 2010s (1.5% as of 2019).
Diamond’s goal in Openness to Creative Destruction is to explain the “magic.” He aims to show how life has improved through innovation, how innovation has occurred through the efforts of inventors and innovative entrepreneurs, how workers on balance benefit from a system of innovative dynamism, and how policies can be crafted to encourage the inventor and innovative entrepreneur to bring us more innovations. (p. xvii)
The first task—showing how life has improved through innovation—is the easiest and Diamond demonstrates his case with force and clarity. The third task—showing how workers generally benefit from innovation—is a bit trickier in places and critics will complain that Diamond overdoes it at times, but it is hard to refute his overall argument. The last task—showing how policies can be crafted to encourage innovation—is probably the hardest and Diamond makes a plausible case that entrepreneurs need better patent protections, taxes low enough to allow them to self-fund their ventures, and serious pruning of regulatory hedges. His evidence is suggestive and he tries not to overstate his case. But, it’s the second task—showing how innovation has occurred—that is the heart and soul of the book. Diamond argues his case with a blizzard of examples, relying on extensive reading of case studies of entrepreneurs and innovators. Through this multitude of incisive examples and interesting historical illustrations, Diamond’s work radiates an ebullient energy that almost matches that of the entrepreneurs he studies.
Critics may fault Diamond for not using a more systematic, statistical approach to demonstrate the root causes of innovation, but there is no real alternative to his historical approach. I believe this because I taught an economics of entrepreneurship course for about a decade and ended up following a similar strategy—having students read biographies of historical entrepreneurs (from Ben Franklin to Steve Jobs) to see what drove their decisions, how they overcame obstacles, what made them tick, and how they transformed the economy. Diamond’s reading is far wider than mine and allows him to identify important patterns.
His chapter on funding entrepreneurship does an especially good job of making the case that “the earliest stages of breakthrough innovations have almost always been self-funded” (p. 154) and explaining why venture capital cannot fill the void very easily. Diamond uses the historical examples of, among others, Walt Disney, Frederic “the Ice King” Tudor, Guglielmo Marconi, George Eastman, Soichiro Honda, and Jeff Bezos as a lens through which he examines the difficulty of financing truly entrepreneurial activities. He suggests that “the crucial early stage” of cutting-edge entrepreneurship (p. 155) is inevitably self-funded because “the more innovative the innovation, the harder it will be to convincingly explain in advance” (p. 156). The problem is that ground-breaking innovations require funding before a track record is established and profits arrive. Diamond explains that the failure of incumbent firms, banks, venture capitalists, and governments to fund entrepreneurs’ innovative breakthroughs is not due to irresponsibility or even of lack of appreciation of the innovations. “The primary problem is that these institutions have a fiduciary responsibility to do due diligence” (p. 156). In addition, these breakthrough innovations involve tacit knowledge that the entrepreneur simply cannot convey to others, so this kind of innovation doesn’t flourish in large firms: If large incumbent organizations try to fund based on informal knowledge, they will run up against two problems. One of these is the problem of distinguishing project proposers who possess genuine informal knowledge from those who merely claim to possess informal knowledge. The other is the problem of incumbent interests who lobby and bribe funders to induce them not to fund potential disruptive innovations. (p. 157, emphasis in the original)
My principal criticism of Openness to Creative Destruction is that Diamond is simply too optimistic in places. It’s hard not to be optimistic given the immense improvements in material life brought about by the efforts of the innovators he studies, but Diamond does go overboard in places. Here are a few examples: In a fine section praising the benefits of mass automobile ownership (apparently aimed at fossil-fuel-hating urban-sprawl-phobes), he extolls the autonomy that automobiles give: Imagine yourself waiting, afraid, by yourself for a bus at a street corner in a dangerous neighborhood. Imagine yourself waiting, bored, for a train . . . that is inexplicably late. With cars you can go where you want, when you want. (p. 57)
Yes, but Diamond neglects the bane of traffic jams and of long commutes. In discussing how innovation benefits workers, he seriously downplays the transitions that occur when technologies replace workers. He even optimistically suggests that “being able to check in while on vacation allows [workers] to stay informed and might actually make their vacations more relaxing” (p. 99). This may be true in some cases, but for many people, the point of a vacation is to get away from the office. He argues that the benefits of innovation have included greater tolerance, going so far as to argue that those who are immersed in their own projects do not have the time or energy to nurse grudges or plot revenge. So most fundamentally, tolerance is practiced in a system of innovative dynamism because we do not have time for intolerance. (p. 110)
I suspect he is correct that innovative dynamism is positively related to many types of tolerance, but I can think of quite a few entrepreneurs, who held deep grudges and treated friends, workers, competitors, and even consumers pretty shabbily at times. For example, for all the beneficial advances he spearheaded, Henry Ford’s mean streak and antisemitism remain a stain on his reputation.
Perhaps, the greatest strength of the book is that Diamond is a master at giving penetrating examples. One of my favorites is the tidbit that “Howard Hughes bought a Las Vegas TV station in 1967 so that late at night he could tell them to use their video tape recorder to broadcast the movies that he wanted to watch” (p. 67). By the early 1980s, this technology was available to everyone as VCRs reached the market and video stores became ubiquitous. Innovation allowed the average individual opportunities that only the wealthiest people enjoyed just a few years earlier. More broadly, Diamond points out the importance of wealthy customers in purchasing newly developed goods, allowing producers to reduce unit costs, improve their products, and then sell them to everyone. This “venturesome consumption” (p. 70) is the benign counterpart of “conspicuous consumption” by the rich.
All in all, Openness to Creative Destruction delivers what it promises. I strongly recommend it.