Three Industries that Should Be Disrupted in the 21st Century
Joseph Schumpeter probably deserves the credit for introducing the concept of innovation (“creative destruction”) into economics. Clayton Christensen, the renowned HBS professor, popularized the term “disruptive innovation” and Silicon Valley entrepreneurs turned that term into an international mantra. Much of the wealth creation of the 3rd Industrial Revolution (~1960–2015) can be attributed to disruptive innovation. The constant emergence of new computer products, from mainframes to minicomputers, laptops and cell phones, is a notable Christensen example of disruptive innovation. Digital photography, SAAS software and cloud computing are well-documented examples from other commentators.
As the 4th Industrial Revolution emerges, I have become intrigued to predict what industries will be disrupted. For sure, anything that lends itself to Nobel economist Herbert Simon’s “synthesis”[1], the creative combination of components, will be disrupted by the application of machine learning. For example, anything based on biology or chemistry is likely to be disrupted. I see these sciences transitioning from empirical research to computational discovery. Jennifer Doudna’s Nobel Prize in Chemistry in 2019 and the Moderna COVID vaccine would be noteworthy data points. By extension, by disrupting biology and chemistry we also disrupt medical science, pharmaceutical development and cyber-physical boundaries. (For an in-depth examination of this topic, this article by nFx is an excellent start.)
Another opportunity for disruption is the regulated industries, which is the focus of this article. I have known for several years that regulated industries will be disrupted in the 21st Century, but now I have the argument to explain it. Nobel economist Michael Spence deserves some of the credit. Spence’s prize was awarded for his work in information theory and much of his research involved international trade flows.
Spence explains trade[2] in terms of “tradable” and “nontradable” goods. Tradable goods “can and are produced in one country and consumed in another”. Nontradable goods and [services] “have to be provided locally either because proximity is required or because remote production and delivery are too expensive”. Tradable goods tend to have economies of scale typically derived from leveraging investment in plant and equipment. Nontradable goods and services tend to have no economies of scale regardless of the amount of investment in plant and equipment because a large marginal cost in labor offsets production economies. Nontradable goods and services include healthcare, education and construction. These three industries have two characteristics in common. They have been slow to adopt state-of-the-art machine learning and predictive analytics, cloud computing and IOT sensors and they are heavily regulated by government at all levels — local, state and federal. International tradables grew dramatically as modern telecommunications and computer processing lowered the cost of international trade and enhanced the levels of counterparty trust. These benefits led to a self-organizing approach to international trade, an approach that evolution and culture have shown us is always beneficial. Such benefits were much more limited in the regulated industries of nontradables.
Highly regulated industries such as healthcare, education and construction have three inherent weaknesses that modern technologies only exacerbate, and therein lies the opportunity for disruption and innovation. These three regulated industries:
1. Focus on regulation and compliance rather than being customer-centric
2. Foster monopolies that perpetuate the status quo
3. Fail to use technology for transformative purposes
Focus on Regulation. By design, to serve the government’s purposes, regulators enforce compliance with existing law. There is limited evidence for the update of laws to reflect more recent conditions. The lack of change in regulation supports the point that regulators are not human-centric. Apple constantly updates their products to better serve the customer. How often do we see regulation rewritten to better serve the citizen. Voting laws might be an example where we need to update regulation to accept modern, online technology and better serve the citizens.
Foster Monopolies. Regulation creates monopolies in two ways, “by design” and “de facto”. An example of “by design” is the taxi monopoly in most major cities. The taxi monopoly was, of course, turned on its ear by Uber and Lyft. De facto monopolies built around government regulation might be seen in housing construction. Professor Alex Tabarrok provides an excellent example of the dysfunction created by regulation and the related monopolies of the informed. In the blog Marginal Revolution[3] he points out that construction costs of “factory manufactured homes have a cost per square foot that is one-third to one-half less than the cost per square foot to construct homes with traditional methods”. Regulations have created “monopolies” for traditional builders and prevent the widespread use of less expensive manufactured homes, which is particularly unfortunate for the poorest citizens.
Failure to use technology. The increasing popularity of online learning for homeschooling, university courses and continuing professional education all point out the slowness of public education to abandon buildings, learn from COVID and adopt the latest technology. Healthcare data management might be another example where a highly regulated industry has been unable to establish standards and gain widespread acceptance. Maybe the Blockchain will provide the security and anonymity to finally provide uniform, widely available health data without the need for government.
The opportunities to innovate in the regulated industries of healthcare, education and construction are perhaps best shown by talking about the banking industry. Money is one of the fundamental technologies like cooking and writing that are the basis of our culture and industry. People have been innovating around money since gold coins replaced barter. Money has shown increasing innovation with the emergence of computers, networks and the Internet originally to provide better customer service. As more and more financial regulation appeared I think the innovation accelerated, now with cryptocurrencies replacing fiat currencies as the ultimate unregulated innovation. Either the Chinese dynasties or John Maynard Keynes taught the politicians the power from controlling the money supply and hopefully the cryptocurrencies will be a step toward rolling back that government monopoly.
For me the history of finance shows the use of innovative new technologies to improve customer experience, roll back government regulation and monopolies and make more capital available globally. We should bring the same energy and innovation to disrupting other regulated industries and monopolies in the 21st century. Michael Spence’s nontradable industries of healthcare, education and construction might be the place to start.
These views are my own and do not reflect the views of any organization with whom I am affiliated.
[1] https://monoskop.org/images/9/9c/Simon_Herbert_A_The_Sciences_of_the_Artificial_3rd_ed.pdf
[2] Michael Spence, The Next Convergence
[3] https://marginalrevolution.com/marginalrevolution/2022/06/factory-built-housing.html
