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An Innovation Lesson From Germany: Less Disruption, More Quality

Paul Krugman: Maybe we need to do less disruption and instead put more effort into doing whatever we do well.

Jill Lepore has written a great article in The New Yorker debunking the hyping of “disruptive innovation” as the key to success in business and everything else. It’s not a bah-humbug piece; it is instead a careful takedown, in which she goes back to the case studies supposedly showing the overwhelming importance of upstart innovators, and shows that what actually happened didn’t fit the script.

Specifically, many of the “upstarts” were actually long-established firms, and more often than not the big payoffs went not to disruptive innovators but to firms that focused on incremental change and ordinary forms of efficiency and quality.

Andrew Leonard at Salon reports that Silicon Valley types are not pleased. You can understand why. But their annoyance also tells you why the disruptive innovation thing took off: it glamorizes business and lets nerdy guys come across as heroes.

The same impulse, I think, explains why the economist Joseph Schumpeter gets cited so much. If you read his stuff, it’s interesting, I guess, although his attempts to describe the business cycle were a waste of good paper. But it’s that glamorizing phrase “creative destruction” that made his work popular, because it’s so flattering to the big money (and excuses a lot of suffering, too).

Ms. Lepore tells us that innovation became a popular buzzword in the 1990s. I guess I thought it came much earlier – I wrote about product-cycle models of trade back in the 1970s, and even then I was formalizing a much older literature. And in trade, as in business competition, it’s far from clear that the big rewards go to those who trash the past and invent new stuff. What’s the most remarkable export success story out there? Surely it’s the German one – the country manages to be an export powerhouse despite its very high labor costs. How do the Germans do it? Not by constantly coming out with revolutionary new products, but by producing very high-quality goods for which people are willing to pay premium prices.

So here’s a revolutionary thought: maybe we need to do less disruption and instead put more effort into doing whatever we do well.

German Labor Costs

Here’s the key point on the remarkable German export story: German labor is very expensive, even compared with the United States’ (see this chart from the Bureau of Labor Statistics).

And this has been true for decades, yet Germany is a very successful exporter all the same. Not by producing the latest tech product, but by maintaining a reputation for producing high-quality goods, year after year.

If Germany seems remarkably competitive given its high costs, the United States is the reverse; our productivity is high, but we seem to be consistently bad at exporting – and have remained so throughout my professional life. I used to think it was our cultural insularity, our difficulty in thinking about what other people might want. But is that still plausible?