Since the start of the new millennium, we have witnessed a large number of industries being severely disrupted by the effects of the technology revolution that took place in the final two decades of the 20th century. During that period, an unprecedented number of new global brands emerged, to the extent that none of the world’s three most valuable ones — Apple, Microsoft and Google — even existed before the mid-1970s.
More to the point, established companies with global brands operating in cozy, old-style industries and stable markets saw their market shares decimated by new arrivals. The ease with which new companies have been able to enter previously well-protected markets in this new environment, and to fell old stalwarts that used to dominate those markets, suggests not only intensifying turmoil in world markets going forward but — perhaps surprisingly, given the spectacular corporate profits growth both in dollar terms and as a share of GDP seen in recent decades — relentless long-term pressure on profit margins.
Creative destruction, the great Austrian-American economist Joseph Schumpeter wrote in 1942, is the essential fact about the workings of capitalism. Earlier (in 1911, to be exact) he also wrote that innovation is not limited to inventing new technology or new ways of producing goods and services, but it requires bringing those inventions to the market.
Americans have always been good at generating new ideas, and U.S. universities, research hospitals and corporate departments involved in R&D were responsible for the lion’s share of patents issued in the post-World War II period. But innovation in Schumpeter’s sense of the word only really began to happen in the United States with the development of the financial infrastructure for capitalizing on those ideas. Since the 1990s, successful commercialization of ideas, which gave rise to a crop of tech millionaires and billionaires, in turn bolstered the ideas factory, creating a formidable innovation establishment.
Innovation has even made changes in the efficient markets theory, which is based on the often disputed assumption that whenever investors make stock purchasing decisions they are in possession of all available information that impacts the price of shares. Some economists have modified the efficient markets theory by suggested that broad long-term market movements occur in response to the invention of new technologies.
One undisputed result of innovation has been creative destruction accomplished on a massive scale. The list of markets and industries that have been disrupted over the past two decades is long and constantly growing. The music industry was hit early on by the spread of file-sharing software and is yet to recover fully: Even world-famous musicians can no longer make a living by selling their recordings, while venerable recording labels of the past have either disappeared or are moribund. The economic model that has sustained the free press, a key component of a functioning democracy, is in tatters. Thousands of members of the fourth estate find themselves permanently out of work or working for a fraction of their former salaries.
Major disruptions have occurred in the retail industry with the advent of Amazon, in antiques trade and collecting with the emergence of eBay, in television and cinema with the spread of Netflix and other streaming services, in taxi and limousine services as a result of the creation of Uber and its competitors, and in travel and hospitality thanks to Expedia and Airbnb.
The most recent and perhaps most dramatic example of market disruption was seen in mid-2014, when oil prices suddenly plummeted under the combined assault of new energy-saving technologies, alternative energy technologies and new oil exploration and production technologies that both boosted production in conventional wells and allowed the exploitation of shale and deepwater fields.
Watch Out, Detroit
One factor in bringing down oil prices has been the development of hybrid and fully electric cars, and, even more important, a steady increase in gas mileage. This is why U.S. oil consumption is now down to mid-1990s levels even though the number of vehicles on U.S. roads has increased by around 25%. Moreover, the average age of light vehicles is now a record 11.4 years, and as motorists replace them with newer vehicles, energy efficiency will rocket.
Along the way, advances by Tesla, Nissan and other carmakers in lithium-ion battery technology, in combination with the spread of solar panels used in private homes, may change the way electric utilities provide power to residential customers.
An even greater disruption may be in the making, impacting all aspects of the auto industry, the most important manufacturing industry in the U.S. and one of the core industries in the world economy. It promises to change not only how cars are fueled, but how they are made, sold, owned and driven.
A number of companies that are no strangers to the disruption of other markets and industries — most notably Google, Apple and Uber — have joined the race to develop autonomous vehicle technology. Google’s self-driving car project recently got its own CEO. Google plans a major reorganization, in which the auto effort may be separated into a stand-alone company. Google is considered to be one of the most advanced developers of self-driving technology. Its prototype has already logged over 1 million miles in California and Texas. Some estimates suggest that driverless cars will be used commercially by the end of 2020.