The Great Disruption

REVERSAL OF FORTUNE

The booming Japanese economy from the 1960s through the mid-1980s was one of the most thoroughly studied and admired phenomena of modern times. From steel to automobiles, consumer electronics to watches, Japanese companies easily overran the fortifications of their American and European competitors. Western scholars praised Tokyo's careful economic planning and the focus of Japan's keiretsu -- massive, interlocked networks of companies such as Mitsui, Mitsubishi, Matsushita, and Sumitomo -- on building long-term competitive advantages. Other analysts attributed Japan's economic momentum to its workers' selfless dedication to improving productivity and to the extraordinarily high savings rates of its consumers. Scholars cited the absence of similar factors in Europe and North America, meanwhile, to explain the stagnation afflicting those countries. In the United Kingdom, for example, the huge share of GNP taken up by government spending was seen as crippling economic growth because it crowded out private investment capital.

The fortunes of these economies, of course, have now reversed. America has experienced the longest unbroken economic expansion in its history, and the United Kingdom has achieved levels of prosperity that few could have imagined 30 years ago. Japan, in contrast, has been mired for a decade in stagnation that appears to have no end. What happened? The answer lies primarily at the managerial and microeconomic levels and in particular with a phenomenon best termed "disruptive technology."

Disruptive technologies create major new growth in the industries they penetrate -- even when they cause traditionally entrenched firms to fail -- by allowing less-skilled and less-aÛuent people to do things previously done only by expensive specialists in centralized, inconvenient locations. In effect, they offer consumers products and services that are cheaper, better, and more convenient than ever before. Disruption, a core microeconomic driver of macroeconomic growth, has played a fundamental role as the American economy has become more efficient and productive. Once the microeconomic roots of disruptive technology are understood, policymakers can learn how to transform relatively stagnant economies such as Japan's, Germany's, and India's. Understanding disruptive technology can also help forecast the dangers lurking for strong economies such as South Korea's.

TOO MUCH OF A GOOD THING