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Schumpeter and the Second Machine Age

Geschreven door Ben van Lier - 23 juni 2014

Ben van Lier
The Austrian economist Joseph Schumpeter (1883-1950) is seen as the founding father of economic theory about innovation. Schumpeter defines innovation as a fundamental change in an existing economic cycle, made possible by combining new technology with for instance new or existing production methods. These new combinations are introduced into the economic cycle by entrepreneurs who are aiming to obtain a position within existing markets by using these new combinations in new organisations under new models for the business operations. If these newcomers are successful in these existing markets, the economic cycle will be affected radically by these new combinations of technology, production methods and business models. This form of what Schumpeter calls ‘creative destruction’ forces the existing organisations to adopt these new combinations as well, or else they will lose their existing market position in the shorter or longer term.

This process of ‘creative destruction’ or displacement of the existing by the new led to the following statement by Schumpeter: “In general, it is not the owner of the stagecoaches who builds railways.” [1]. Worldwide developments such as the Internet of Things, Advanced Manufacturing, Industry 4.0 and Smart Industries have the potential to make a new form of creative destruction possible.

Cyber-physical systems

Cyber-physical systems (CPS) are one example of what Schumpeter was describing, a new combination of technology with existing physical products. The National Institute of Standardization and Technology [2] in the USA therefore describes CPS as “smart networked systems with embedded sensors, processors and actuators that are designed to sense and interact with the physical world (including the human users) and support real-time, guaranteed performance in safety-critical applications where the proverbial ‘blue screen of death’ can have catastrophic consequences.” The new combination of a traditional physical object with IT allows a CPS to be connected into networks and then use those connections to exchange and share information with the other objects and people in that network. For designing, producing and maintaining these cyber-physical systems, however, a new revolution is required at the same time to switch to new production methods, i.e. Advanced Manufacturing [3]: “A family of activities that (a) depend on the use and coordination of information, automation, computation, software, sensing and networking and/or (b) make use of cutting-edge materials and emerging capabilities enabled by the physical and biological sciences, for example nanotechnology, chemistry and biology.”

Second Machine Age

The American economists Brynjolfsson and McAfee [4] see the design, production and maintenance of cyber-physical systems such as these as the beginning of the Second Machine Age. In their book of the same name, they state inter alia that this new form of digitisation of objects will generate vast quantities of data over the coming years about e.g. the location, usage, status, relationships (with other objects or people) etc. of these objects. This data can be reproduced, analysed and reused infinitely, by adding new meanings to it each time.

Intellectual property

According to Brynjolfsson and McAfee, changes will become increasingly less dependent in the Second Machine Age on the available physical equipment and/or structures and more dependent on four new categories of intangible assets. The first of these categories is intellectual property, for example in the form of the patents and copyrights that are going to play a key role in acquiring and retaining technological knowledge.

Organisational capital

The second category consists of organisational capital, such as the development and realisation of new business processes, production techniques, organisation structures and business models. To be able to apply new technologies effectively and utilise them to the full, numerous changes and modifications are required within existing organisations.

User-generated content

The third new category of intangible assets will comprise user-generated content. Or to put it another way, all information that consumers or users produce during the utilisation and application of a product. This is not referring merely to comments or reviews, but also to opinions about use and clips of it being used (both positive and negative) or questions on social media about how to use the product. The information about the organisation and the product thereby keeps providing digital added value to the product or its maintenance.

Human capital

The fourth new category consists principally of the business’s human capital. Over the coming decades, investments in this are going to be increasingly important due to the ageing professional population and the associated reduction in labour potential. Although technology is taking over an ever higher proportion of routine tasks, continuous development of knowledge is needed for carrying out new, more highly specialised tasks. A great deal of attention is needed to adjust this human capital to the technological applications that are becoming more and more important for organisations. In a high-tech production environment knowledge will be important, but in addition, people will need to be more creative and inventive than ever before. In an environment in which humans and machines are seen as connected on the basis of equality, attention to the development and utilisation of creativity and inventiveness will increasingly become the factor that sets the humans apart.

New influx

In addition to attention for the employees who are already there, an increasing influx of new employees with new knowledge and skills is needed to allow evolution into Smart Industries. Based on earlier research, however, the EU Commission has noted that there are worries about whether the preconditions are being met that would be able to guarantee this new influx. It states in a report that was drawn up as a result of that research: “Stakeholders reported concern about skills shortages in ICT and engineering, limited dialogue with education and training institutions both in academia and in vocational programmes .” [5]

Conclusion

For Brynjolfsson and McAfee, the Second Machine Age with all its uncertainties is a prime example of what Schumpeter meant by ‘creative destruction’. They therefore state in their book: “Schumpeter’s observations describe markets in software, media and the Internet much better than traditional markets in manufacturing and services. But as more and more industries become increasingly digitised and networked, we can expect the Schumpeterian dynamic to spread.” Finally, they state correctly that the new technological revolution raises major questions about what we as people and as a society want to be and what we think is valuable in this new, technology-dominated world.

Ben van Lier works at Centric as an account director and, in that function, is involved in research and analysis of developments in the areas of overlap between organisation and technology within the various market segments.

  • [1] Schumpeter J.A. (1934/2008) The theory of economic development. An inquiry into profits, capital, credit, interest and the business cycle. Transaction Publishers, London. ISBN 9780878556984
  • [2] NIST
  • [3] Report to the president on ensuring American leadership in advanced manufacturing. Executive office of the President. President’s Council of Advisors on Science and Technology. June 2011
  • [4] Brynjolfsson E. and McAfee A. (2014) The second machine age. Work, progress, and prosperity in a time of brilliant technologies. W.W. Norton Company, New York. ISBN 9780393239355
  • [5] European Commission. (2014) ‘Advancing Manufacturing – Advancing Europe’. Report of the taskforce on Advanced Manufacturing for clean production. SWD(2014) 120 final. Brussels, 19-Mar-2014

     
Reacties
  • n/a
    Bradley Good
    02 juli 2014
    I'm impressed with what you wrote. Honestly, I just printed it and need to study to fully comprehend the ramifications of what you outlined. Thank you for sharing.
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