The Big Shift -- Opportunities for Innovation and Risks of Growth

Originally posted 22/05/10

John Hagel III and John Seely Brown have identified a “Big Shift” in the way our economy functions, including the startling finding in a report with Deloitte that return on assets (ROA) of US publicly-traded companies has declined 75% since 1965. Hagel and Brown observe that this change is associated with an increase in competitive intensity related to the spread of digital technology and economic liberalisation.  They also identify an opportunity to reverse the deterioration in ROA for firms that learn how to participate in the knowledge economy.  These conclusions point to huge opportunities for innovation — both to topple existing business models and to create new ones (which are of course flip sides of the same coin).

There is also a more sinister conclusion that could be drawn from the decline in ROA, on which Hagel and Brown do not seem to focus. A decline in ROA can be caused both by a decrease in the numerator (i.e. returns) or an increase in the denominator (i.e. assets).  Given the huge economic expansion in the last 50 years, returns have increased significantly. But total invested assets have increased much faster, driven in large part by innovation in the now enormous financial sector. There are serious questions whether continued economic growth of this nature is sustainable, with probably the two leading concerns being the environmental effects of growth (primarily global warming) and the increasing financial instability caused by the risk structures necessary to sustain growth. For most of human history (until about the last 100-150 years) growth was considered far from the unalloyed good that it is today. We may need to move back towards the philosophy of those slower times to save our planet and our societies for our children.

These cautionary conclusions do not, however, disturb my initial conclusion in this post that this is a wonderful time for innovation, and indeed innovation is not inconsistent with slower growth. Indeed, new technologies and ideas present real opportunities for us to live better with less.