Disruption’s Tragic Flaw
I. Digital Disruption
Are Germany and Europe behind the curve in digital disruption? Earlier this year Volkmar Denner, the CEO of Bosch, told the Financial Times: “Uber is not a revolutionary technology, it’s a business model innovation — and there we are not good enough yet…That’s where I see the biggest threat.” There’s also been quite a lot of material coming out of the European Commission and other sources on the need for more digital disruption in Europe. Is Mr. Denner correct? Should Germany and Europe imitate the Uber model? Is it a model that will drive economic history? Will it make our societies more prosperous? More democratic?
What does the U.S. experience suggest about the answers to these questions and the wider prospects of the so-called “sharing economy?” Just exactly who is sharing what with whom and who benefits? Let’s start by examining the key forces driving this disruption.
First among equals are fundamental changes in consumption that represent a shift from the mass to the individual. We live in a new society of individuals whose needs and demands have been frustrated for decades. This is no mere cohort effect. Today most of us share an expectation of psychological self determination—the sense that we create ourselves. Across generations we take for granted that we will design our own lives: family life, work life, religion, sexuality, community, what we eat, how we dress…the list is long. We no longer simply take these things for granted as handed down from traditions or dictated by conventions. When we are thwarted in these expectations, we smolder and suffer. We yearn for trustworthy channels to these resources, but we are typically disappointed.
A second driving force is the entire assembly of new digital capabilities. Only these technologies finally make it possible to create new market forms that can effectively respond to individuals’ needs at an affordable price.
Third, most people are looking for convenient access to the resources they need for effective life. In the U.S. many people are living deeply stressful hectic lives. Two income families are the norm. Most families struggle with childcare, healthcare, and employment security.
Fourth is the demand for affordability due to stagnating incomes and a retrenchment of consumer credit. The real wages of U.S. workers have been flat since 1979. Sharp decreases in union representation, the shift to disaggregated global production, the reduction of the labor share — these factors have each contributed to this stagnation.
Fifth, there is an on-demand labor pool. In US 37% of the working age population, 92 million people, are not permanently employed and appear to have given up seeking full time jobs. There are many others for whom one paycheck is not enough.
The credo of digital disruption has been conducted under the flag of “creative destruction,” Joseph Schumpeter’s famous fateful phrase! The destruction rhetoric has been used to legitimate what I think of as the “boys and their toys” theory of history—as if the winning hand in capitalism is about blowing things up with new technology. Schumpeter’s analysis was, in fact, far more nuanced and complex than the current rhetoric suggests. What did Schumpeter actually say about this process?
For one thing, he stressed that capitalism must be understood as an “evolutionary” process. It is not always the same thing. He also stressed that only certain changes in capitalism rise to evolutionary significance. These rare events are what he called “mutations.” Mutations are not random, temporary, or mere reactions to events. They are enduring, sustainable, qualitative shifts in the logic, understanding, and practice of the capitalist enterprise. What triggers a mutation? Schumpeter insists that this evolution is disciplined above all by new consumers’ needs combined with the new institutional forms that must be invented to reliably meet those needs. He wrote: “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.”As an example Schumpeter cites “the organizational development from the craft shop and factory to a firm like U.S. Steel…”
These ideas underscore another key point: mutations include new ways of institutionalizing social relationships as they align with the direction of the new consumer needs. To build on Schumpeter’s example, U.S. Steel was a revolutionary new form known as mass production aimed at meeting the new needs of mass consumers. Its technologies were only one aspect of its success. It depended upon new ways of organizing work and new social forms that institutionalized fair labor practices through unions and collective bargaining as well as internal labor markets, career ladders, employment security, training and development, and so on. This social inventiveness and institutionalization is critical. This is consistent with Schumpeter stress on two processes: He wrote that capitalism “creates and destroys.”
Finally, contrary to the rhetoric of speeding up business innovation, Schumpeter argued that a genuine mutation takes time. A lot of time. And patience. “We are dealing with a process ,” he wrote, “whose every element takes considerable time in revealing its true features and ultimate effects…We must judge its performance over time, as it unfolds through decades or centuries.”
My point here is plain enough. Every disruption and digital business model is not a mutation. The status of “mutation” implies a very high threshold, one that is crossed in time through the serious work of inventing new institutional forms embedded in new consumption requirements. Mutations fundamentally change the nature of capitalism by shifting it more radically in the direction of those it is supposed to serve. This sort of thinking is not nearly as sexy or explosive as the ‘boys and their toys’ approach would have us think, but this is what it takes to move the dial of economic history.
III. Disruption's Tragic Flaw
Is Uber a mutation? Does it meet Schumpeter’s standard? Should Uber’s “sharing economy” model be a role model for Germany, and Europe?
The first thing to note is that Uber is among a new group of firms that has taken disruption to the next level. The first round of disrupters, like Apple’s iPod and iTunes, bypassed old industry structures to distribute digital goods and services directly to individuals. The iPod/iTunes bypass was a model for the first wave of digital disruption.
Uber represents a critical second wave. It bypasses old institutional structures not only to distribute information but also to distribute valued human and physical assets directly to individuals. It does this by providing a platform that enables drivers to share their underutilized assets with individuals in need of transport. This model is important because the two most significant sectors in need of mutation are health and education, which together constitute 20% of global GDP. In both cases, distributing care and learning directly to individuals will require new ways of organizing people and physical assets, not just digitalized information. This means that there is much at stake in this second wave — and much to learn from this “sharing” model.
One thing that both waves have in common is the shift is away from the mass toward the individual. This suggests that the essential logic of mutation in our time involves providing individuals with the quality goods, services, experiences, and capabilities that they want, when they want them, how they want them, where they want them—and all at an affordable price. This reorientation around the individual necessarily implies trustworthy relationships. It implies a new kind of social contract based on a promise of advocacy and alignment with consumers’ genuine interests. As Schumpeter put it, “ the new consumer’s needs” are the disciplinary guideline.
Despite the potential of Uber’s sharing model, its actions are full of contradictions. Uber is under scrutiny for its failure to align with new consumers’ needs. For example, in India an Uber driver was accused of raping a passenger. This set off a firestorm during which Uber was banned in New Delhi for failing to adequately screen its drivers. The point of screening would be to ensure that drivers’ capabilities align with passengers’ needs—most fundamentally their needs for safety and security. Uber faces opposition in many countries and cities with respect to driver screening and licensing: including Germany, the Philippines, South Korea, Spain, Australia, Belgium, Britain, Canada, Thailand, the Netherlands, Portland, Oregon, San Francisco, London, and Los Angeles. To be sure, some of this resistance is the result of entrenched interests defending their territory. But genuine concerns about the quality and licensing of drivers cannot be written off solely as oligopolistic sour grapes. The failure to institutionalize around these bedrock customer needs violates Schumpeter’s evolutionary discipline to align with consumers’ needs.
The absence of creative customer -aligned institution-building leaves Uber vulnerable to a wide range of other violations of the implied social contract. This is the systemic source of the recent scandals that have erupted at Uber over the last few months. For those who have missed the highlights: News surfaced that Uber casually ignores its own privacy rules by tracking the rides of customers and even displaying them as a form of social entertainment. Other reports suggest the ease with which Uber employees can access private customer data and movements. An Uber executive used the real-time “God View” to track a journalist without her permission. Another executive suggested funding “opposition research” to silence journalists who wrote negative articles about the company. Uber reportedly ran a “dirty tricks” campaign to undermine its competitor Lyft. What these accounts share is a picture of a company without moorings in the institutional disciplines that shape the path to mutation. Uber appears to be at best indifferent toward, at worst contemptuous of, its own customers. One cybersecurity expert suggests that customers disguise their destination when they use Uber, by requesting a ride to a nearby address.
Similar criticisms are being directed toward Uber’s labor practices, questioning the fundamental fairness of its model. Uber’s drivers own the key physical assets —cars, maintenance, gas—but the company unilaterally sets the rates and terms of their labor, including its claim on each fare. Uber drivers— and other “on-demand” workers— have become increasingly vocal as the question the rights of these enterprises to operate outside of minimum wage laws, anti-discrimination statutes, workers’ compensation laws, and union-organizing rights. The firms have few obligations, while workers undertake nearly all the risks. In a Wall Street Journal article about on-demand employment, One worker tells the WSJ, ‘We are not robots; we are not a remote control; we are individuals…” An Uber competitor quoted in the same article praised Uber’s indifference to laws, “They don’t even make any effort to comply with what they think are bad laws.”
It seems to me that despite all the disruption rhetoric, these Uber practices suggest more continuity than change. They import the old logic of the neoliberal paradigm that explicitly disavows any unique allegiance to people and places. They also replay an even earlier Fordist logic that treats people as interchangeable parts in a universe of standardization and anonymity. The failures of institutionalization on the employment side also violate end consumer interests. These are two sides of the same coin. In consumer -facing service businesses we know all too well that employees who are exploited, insecure, and stressed do not easily operate in the best interests of their end consumers, as their motivations and incentives tend toward exerting the least possible effort.
In my view, what we see in Uber and similar cases is a tragic flaw: disruption without discipline. Disruption without the institutionalization required for systemic coherence, which is essential for trust. Half mutation, half repetition…half advocacy, half contempt…half future, half past. Uber’s is opportunistic disruption that does not rise to Schumpeter’s standard for moving capitalism’s evolutionary dial.
So far, the investment process has both enabled this tragic flaw and profited from it. Even as the accounts of Uber’s privacy violations were emerging in early December 2014, its profits and alleged 40% growth rates were sufficient to raise another $1.2 billion from venture firms, pushing its valuation to $41 billion and making it, according to the Wall Street Journal, the highest valuation “for any private startup backed by venture capitalists.” A month later, in January 2015, it received another $1.6 billion in financing from Goldman Sachs.
And while Mr. Denner praises Silicon Valley’s ability to raise capital…what does that mean for the economy? Just this week, a prominent Wall Street analyst’s comments underscored the relationship between exorbitant investor returns and the inequality that is defacing our society:‘‘Right now we have earnings coming off of record highs as a percentage of GDP and yet you have Wall Street saying ‘don’t worry, it’s going to soar to new highs.’ Pardon me, but when did the peasants with the pitchforks come out and start rioting? Society at large has to enjoy some of the largesse, or else the pitchforks come out. So earnings as a share of GDP can’t really advance materially from current levels, or at least it’s not healthy if they do.
Uber and similar disruptive businesses are supposed to be the correction— the solution. Instead they appear to be an extension of the decades-long trend toward emptying the enterprise of the human as executives and investors devour the labor share. In this “business model,” “sharing” is simply the new rhetoric of accumulation. The tragedy for a company like Uber is that it risks becoming the “Justin Bieber” of disruption—young, brash, and so overindulged that it has no incentive to mature into the kind of pioneering mutation that can aspire to greatness.
The tragedy is more than Uber’s. It affects all of us. People the world over are hungry for genuine mutations that produce new trustworthy forms of enterprise aligned with the genuine interests of individuals. According to the 2015 Edelman Global Trust Barometer, respondents in all nations by a two-to-one margin, feel the new developments in business are going too fast. Even worse, 54 percent say business growth or greed/money are the real impetuses behind innovation – two times more than those who say that business innovates because of a desire to make the world a better place or improve people’s lives.
Schumpeter reflected on the inherent vulnerability of modern enterprise because it induces ever more distance, anonymity, and indifference. In his time he worried that the shift from owning property to owning shares would destroy the moral center of the enterprise. “Dematerialized, defunctionalized, and absentee ownership,” he wrote, “ does not impress and call forth moral allegiance as the vital form of property did. Eventually there will be nobody left who really cares to stand for it—nobody within and nobody without….”
In our time the abstractions of the “God View” reduce human beings to just so many digital assets and leave firms like Uber subject to the same harms: nobody within and nobody without who cares to stand for it, except the new billionaires, of course.
IV. Europe Can Do Better
Europe can do better than mimic the Silicon Valley- inspired playbook of the North Atlantic where, despite so much disruption, the principles of neoliberal indifference and their consequences have not really been disrupted. Instead, Europe can enjoy the advantages of the second mover. Learn from the shortfalls and ambivalence of the so-called disruptors. Learn from their tragic flaws.
For example, in the U.S. new social institutions are emerging to fill the gap left by the disrupters’ failures of institutional creativity and discipline. The Drivers Network aims to organize drivers from a variety of ride-sharing services in order to effect more fair and democratic business practices. Another organization, peers.org, is an online community that supports workers in the sharing economy. Activist groups such as 15 Now, Jobs with Justice, and Fight for 15 advocate on behalf of on-demand workers for minimum wage protection.
These kinds of creative advocates will be necessary to stimulate 21st century regulatory innovations that help compel immature “disruptions” into the disciplines of a new social contract. In what may seem like a paradox to some, the healthy prosperous evolution of capitalism—along with the needs of the servers and the served—- depend upon these disciplines. Advocacy-oriented capitalism requires the reciprocal rights and obligations long associated with strong market democracies. If the prospects of capitalism and democracy are to find new common cause, this is the new terrain on which they must meet.
Genuine mutations unlock historic new levels of prosperity, not only for investors and executives— but for the wider societies in which they flourish.When it comes to digital disruption and the pseudo-sharing economy, Europe can do better.
Europe can be the new world.
Shoshana Zuboff is the Charles Edward Wilson Professor at the Harvard Business School (retired) and a faculty associate at the Berkman Center for Internet and Society at the Harvard Law School. In 1988, she published „In the Age of the Smart Machine: The Future of Work and Power“, her standard work on information technology.