Innovation drives creation, disruption, and destruction. It drives change. The impact can be unpredictable. It breeds excitement and new investment but also concern and fear over what it displaces.
We see it in discussions around AI today. We saw it with the rise of the internet, the personal computer, TV, radio, airplanes, and more.
The early days of the auto industry is one of many examples from the turn of the 20th century of the creative destruction that underlies innovation.
Business and Wealth
New innovation breeds excitement. Investment flows into new businesses. Success leads to further investment and competition. Excess competition leads to poor investment returns. Poor returns lead to business failure, consolidation, and less competition. Less competition drives returns higher. That’s the gist of the capital cycle in new industries. Under the right conditions, market booms and busts follow along.
Hundreds of auto companies emerged in the U.S. in the first decade of the 1900s. Thirty years in, only three sat on top. Ford, GM, and Chrysler controlled 90% of sales in 1934.
The byproduct of the capital cycle in the auto industry, in a winner take all arena, is that most auto companies failed or were bought out as size and scale created a massive advantage for the remaining few. Capitalism and competition lead to unequal outcomes.
That’s a ton of wealth created and destroyed in a short amount of time. Picking winners is hard. Picking winners out of hundreds of “opportunities” is more difficult. Maybe the solution is to wait for the winners to emerge before picking?
The initial invention of the automobile doesn’t end there. Innovation in new industries can expand existing industries and branch off from there.
The second order effect of car sales growth expanded the oil, steel, aluminum, tire and rubber, insurance, and agriculture industries. The need for improved infrastructure and road construction hit those businesses too.
As roads improved and people drove further, new businesses popped up: gas stations, motels, diners, fast food franchises, delivery services, and other roadside businesses. Growth in these new industries was limited only by infrastructure build out and capital.
New innovation is often the stepping stone to further innovation. Nobody knew about the second or third order effects the automobile would have in a dynamic economy. Each new industry that popped up created another round of investment opportunities, losers, winners, and a chance for further innovation.
Jobs and Automation
Excitement around new innovation is often offset by concern and fear of what that brings. Specifically, job loss.
For example, the automobile supplanted the horse drawn carriage. Horses lost work, along with stable hands, blacksmiths, carriage drivers, carriage makers, saddle makers, and street and crossing sweepers (manure picker uppers). While the automobile solved the manure crisis, the potential job losses hurt.
Eventually new jobs were created for those displaced workers and more. Auto manufacturers, designers and engineers, car salespeople, and mechanics. Rising demand for steel, aluminum, and rubber drove job growth in those industries.
Business structures arose as companies grew. Management, R&D, accounting, communications, marketing, and more, complete with new job opportunities. Some of that was contracted to outside companies like accounting and advertising. Others stayed in house.
However, Henry Ford’s obsession with efficient production transformed manufacturing. His ability to think up ways to make something better, faster, or more efficiently gave his company an advantage over the rest.
Save ten steps a day for each of twelve thousand employees and you will have saved fifty miles of wasted motion and misspent energy. Those are the principles on which the production of my plant was built up.
Innovation and automation increased worker productivity, lowered costs, lowered consumer prices, yet increased sales and profits, and allowed higher wages. And higher wages cycled back into higher sales across multiple industries. But it also meant companies could produce more stuff with fewer workers.
While early auto industry job growth outpaced the displacement from innovation and automation, it eventually fell short. One reason for the sustained high unemployment in the early 1930s, was that machines continued to replace workers across all industries, at a faster pace than new jobs were created (WWII shifted it).
A booming new industry offers enough initial job growth to outpace job losses from improved efficiency, business consolidation, and business failure but eventually new jobs from new businesses are needed to fill the gap. That takes time. As noted earlier, secondary industries eventually branch out from new innovations.
Beyond Autos
Similar stories played out in other industries. Electric utilities set the stage for new innovations that we’re still seeing today.
The rise of chain stores in the 1910s and 1920s, the earliest version of “Walmart killed local businesses,” had a similar effect. It crushed the mom-and-pop stores, but the scale and efficiency brought more competitive prices for consumers.
The telephone and Ma Bell (AT&T) was still in its early growth phase in 1901, two decades after its formation. Only 10% of U.S. homes had a phone at the start of the 1900s as it slowly displaced the telegraph as the build out spread across the country.
Movie, radio, airplane industries and more rose in the early 1900s and followed a similar path along the capital cycle.
Innovation can be destructive and scary. It crushes old businesses and displaces jobs. It’s also transformative. It creates opportunities for new businesses, investments, jobs, and new industries to branch off from there. The long-term benefits outweigh the short-term disruption.
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