An ode to creative destruction

It took 400 years for the Gutenberg revolution to reach my house. Not that we didn’t have books; there were plenty, some even had words.

But the idea of actually printing something, of leaving a permanent mark in a recognisable typeface on a crisp sheet of white paper? That was beyond my comprehension.

Then, sometime in the mid-1970s, I got a John Bull printing kit for Christmas. The system was elegantly simple and had been around for 40 years. Select the individual rubber letters to form words, slide them into a wooden block, run it over an ink pad and press onto paper. What a revelation.

Around the same time, Letraset was doing for adults what the John Bull printing kit was doing for kids. Founder Dai Davis wanted to ‘liberate the letter’ from the printing industry and put it in the hands of ordinary people.

It worked in the same way that a kid transfers an ink tattoo to their forearm: select the letter or word from a sheet of film and rub it onto the page. The beauty was in the range of fonts available and the individuality one could apply to the spacing and location of letters.

Coming revolution

Traditional typographers hated Letraset’s lack of precision, blinding them to the coming revolution. Desktop publishing had begun, popularised by punk fanzines like Sniffin’ Glue.

Meanwhile, IBM’s golfball typewriter, featuring an interchangeable metal sphere that allowed the typist to choose from 20 different fonts, became a tool for creative expression. The desktop PC and printer breached the final defences of the traditional printing profession. Print as it had been for hundreds of years had been transformed in less than 20.

In his book Just My Type – A book about fonts, Simon Garfield describes it thus;

‘Once you could use a computer keyboard and press the print button, why expect a future for a Platignum or Golfball? Once you had a calculator, what on earth was all that fuss about multiplication tables? Once you had email, why would you need a Post Office clerk to stick strips of type on a telegram? And once you had digital music, too bad for the burnished sleevenotes.’

Over the past few months, and particularly our recent two part story on the risk of an Australian recession, we’ve focused on preserving the extra capital you’ve accumulated since the global financial crisis. It would be easy to deduce that we’re pessimistic about the future. It would also be incorrect.

Austrian economist Joseph Schumpeter was an avid reader of Karl Marx, from whom he developed the theory of creative destruction. You can see it at work in the printing industry, where one technology is superseded by another.

Knowledge transfer

The Chinese invented movable type in 1040 but it took another 400 years before Johannes Gutenberg came up with the printing press. Along with paper, gunpowder and the compass, Francis Bacon, a principal in the scientific revolution, called it one of the four great inventions. For the first time, the acquisition and transfer of knowledge became as easy as lifting a book from a shelf.

This fed the Industrial Revolution and the waves of technological improvement that followed: steam, railways, steel, electricity, mass production and, from the 1970s, information technology, operating at the speed of Moore’s Law. Each led to an increase in productivity that created great wealth. Within them fortunes were made, and lost.

When Japanese car exports first reached Europe and the US, around the time of General Motors' dominance, they had a reputation much as Chinese vehicles do now. How do you double the value of a Toyota, the joke went – fill it with petrol. GM ignored the threat and lost its dominance.

Microsoft’s once powerful position has been eroded by companies that didn’t exist 20 years ago. Google, Facebook and Twitter, beneficiaries of huge network effects, are now household names. For software engineers, working for Microsoft now must be like an agriculture college graduate being asked to use a seed drill.

This is the story of capitalism told a thousand times over, of Schumpeter’s forces of creative destruction destroying the old and ringing in the new, at an ever increasing rate. What does it mean for investors?

About 25 years passed between the Christmas arrival of my John Bull printing set and the widespread use of PCs. During that time, the Western world dealt with four recessions, an oil price shock, a rather hot cold war, the Asian crisis, a Russian and Argentinian debt default, the Y2K scare, the 1987 stockmarket crash, the collapse of the Berlin wall and a US banking crisis (the savings and loans sector). Had I checked Google that list would be even longer.

Problem solvers

Humans are hardwired to solve problems, to improve things (and, for a time, make them worse), to give vent to our creative instincts. We want to discover, tinker, adapt and fail until we succeed. And we do this no matter what.

The difference now is that it has never been easier to have an idea, find financing for it, employ people, make something, and sell it into a potential global market. In the last 30 years, a time when multinationals have been shipping jobs (and profits) offshore, all the net new jobs created in the US have come from businesses less than five years old. Just think of that for a moment.

Humans have always had ideas, but the tinker’s great inventions of the past often rusted and rotted, a testament to failed ambition in the shed at the bottom of the garden. Even those that took their ideas to the next stage and built a prototype often couldn’t get funding to actually market their invention. There has never been a shortage of human creativity; finding access to capital and markets have been the hurdles.

If you’ve got a good idea and want to spin the wheel, sites like Kickstarter will help you raise the money you need, and build an audience for it. Then you can go to Big Commerce, set up a website in a few minutes and start selling your widget right around the world.

We should not underestimate the magnitude of this shift. For the very best ideas, access to capital and markets are no longer a barrier to the expression of human creativity and ingenuity. Of course, we have our problems. But for Australian investors right now, perched on the rim of Asia, this is an incredibly exciting time to be alive.

So increase your cash holdings by all means, but don't cash out just yet. It pays to remain invested through bouts of pessimism, as long as you have some cash to take advantage of the opportunities it presents. Meanwhile, let creative destruction do its work. So, let's say 'bye bye' to the car industry and welcome of the next Cochlear, CSL and ARB Corp.