According to a quip once made by Peter Ustinov, “Just before the world blows itself to bits, the last audible voice will be that of an expert saying it can’t be done.” Yes, it’s standard for experts to fail to see the end coming. Of course, you won’t find many experts who express doubts that the physical world will eventually end, but I have something else in mind. There are always worlds entering death spirals, pushed into non-existence as new worlds emerge to take their place. If we could predict this process – “creative destruction” – we’d have the key to economic forecasting, effective economic policy making, and wildly successful stock market investment.
Pretty good, eh? Unfortunately, any systematic prediction of creative destruction is beyond us.
In the summer of 1886, every village in England had at least one smithy. Indeed, according to the census, there were more than 200,000 blacksmiths. It was an ancient industry stretching back into prehistory. And although the Industrial Revolution brought significant changes for the blacksmith, as the end of the nineteenth century approached the industry remained strong with farriery, the manufacture of horseshoes, providing a stable core business. However, within ten years the number of blacksmiths had halved. It isn’t difficult to work out what happened. In 1886, Carl Benz patented his Benz Patent-Motorwagen, the modern car was born, and by 1908 the Ford Model T brought automotive transport to the masses and death to the village smithy.
I’ve searched in vain for any analysis of this in the works of late nineteenth-century economists. It would be very interesting to see if any of them saw it coming. Now, watch out for hindsight bias. From our early 21st-century perspective, the advent of the motor car was obviously going to lead to the downgrading of the blacksmith. However, at the time, making that connection would have been a very major, in fact, an almost impossible, intellectual feat, and as for predicting the growth of ancillary industries, forget it. More on that in a moment.
As the motor car’s popularity grew, village smithies were turned into petrol stations, and former blacksmiths became car mechanics. A huge economic ecosystem had been obliterated; an ancient and venerable world had ended, but a vast new one had been born. The motor car brought economic growth and enormous new ancillary industries developed. Many more jobs were created than had been destroyed, but a long-established, traditional way of life had gone forever. Over the next few decades, coaching inns would close as motorway service stations opened and saddlers would attempt to pivot into car seat manufacture. In towns and cities, the ubiquitous stables would be converted into homes; and the heirs to John Loudon McAdam’s road-building innovations were about to become very rich.
If you apply the tools of risk to a situation of uncertainty, you’re going to lose
Could you, on hearing of Benz’s invention, have predicted any of this? If so, you could have made an absolute killing. Here comes the important technical bit. One of the most important distinctions in economic theory is also one of the most elusive. It is the distinction between “risk” and “uncertainty”. We face risk only when there is a defined range of possible outcomes, roulette for example. However, when the range of possible outcomes is undefined, such as when there’s a new invention, we don’t face risk, we face uncertainty. What impact will a new invention have? If you conducted an analysis based on the impact of previous inventions you would, at best, be wasting your time.
More strongly, if you apply the tools of risk to a situation of uncertainty, you’re going to lose. Given Benz’s invention, what was the probability of the death of the smithy or the emergence of the motor vehicle industry or any of the ancillary industries? Forget it. Probability doesn’t apply here. Can you imagine yourself in 1886, having heard about Benz’s invention, getting a message to your broker with the instruction to short farriers, saddlers, and country inns, and to go long on Tarmac?
One might be tempted to think the invention of the motor car was an event of unique importance. Not at all, as the constant revolutions in the music business illustrate very clearly. Back in 2005, I was doing something with EMI. EMI was still an industry giant; home of the Beatles no less. However, as negotiations continued, it became clear that the company had completely failed to see the significance of downloads. I thought, bloody hell, they’ve had it. And so they had, the old world, the world of records and CDs was dying, to be replaced by iTunes. But it goes on: the traditional record industry was blown to bits by downloads but, amazingly, Apple didn’t see the significance of streaming until it was too late and iTunes was, in turn, decimated by Spotify. Here’s another: those arch baddies, The Post Office, should have been at the forefront of the proliferation in delivery drivers that came with the growing dominance of online shopping, but they completely missed it.
In every established industry, considerations of uncertainty, if they exist at all, are completely dominated by considerations of risk. This is why experts always fail to see the end of their world coming.
Peter Lawlor was the Chief Economist at the German Stock Exchange and continues to advise senior politicians and Wall St institutions. These are strictly his own views
1 Comment. Leave new
A brilliant article. I look at new technologies and see what the could collapse as they change the world. If they don’t they are not as important as punted.
EV’s were touted to replace petrol vehicles, and even with hard political support they haven’t.
EV’s kicked off a very long time ago, +/- the time of the petrol car. New technology has arrived but the problems run too deep.
Political interference has forced leapfrogging and from perfect town tools they have been rushed into all sectors, too soon, too flawed and the resulting pushback.