Clayton M. Christensen: The New Church of Finance: Deeply held belief systems and complex codes must be changed

Published: Sunday, Dec. 9 2012 12:00 a.m. MST

Corporate balance sheets and profits are in the best shape they have been in over half a century.


Corporate balance sheets and profits are in the best shape they have been in over half a century. So why do jobs remain scarce?

The income of the top 1 percent of Americans has grown significantly, and they garner about 28 percent of total income. But total personal income has been flat for about 30 years. Why do the rich get richer while the rest tread water?

In seeking answers to these questions, we need to understand the relationship between innovations and how the decision of companies to invest in jobs is shaped by zealously maintained theories of finance.

Three types of innovation

There are three types of innovations that affect jobs and capital: empowering innovations, sustaining innovations and efficiency innovations.

Empowering innovations transform something that is complicated and expensive into something that is so much more simple and affordable that a much larger population can enjoy it. The Model T did that, making an automobile affordable and accessible. Apple and IBM computers made it so all of us could have a computer. Google made it possible for almost anyone to advertise at low costs.

It turns out that almost all net growth in jobs in America has been created by companies that were empowering — companies that made complicated things affordable and accessible so that more people could own them and use them. When more people are buying them, more people have to be hired to make them and distribute them and to service them. Empowering innovations make up the core engine of economic growth.

Sustaining innovations, on the other hand, account for most of the innovation activity in an economy. They have a net zero impact on employment. A sustaining innovation makes better products that you can sell for better profits to your best customers. When Toyota sells an innovative new car like the Prius, they don't sell a Camry. These innovations are important for the economy because they sustain the economic trajectory, but they do not create significant new growth.

Efficiency innovations arise in industries that already exist. They provide existing goods and services at much lower costs. They are not empowering. Efficiency innovators become the low cost providers within an existing framework. So Wal-Mart can come into town and announce that they have hired a lot of people, but actually they put those working at less efficient retail operations out of work. Efficiency innovations have a negative effect on employment. But the resulting efficiency gains allow financial capital to be invested elsewhere.

In a healthy economy empowering, sustaining and efficiency innovations operate in balance. A healthy economy creates and sustains more jobs before squeezing out inefficiencies.

Over the past 20 years, however, there has been far less money flowing into empowering innovations and much more capital flowing into efficiency innovations and sustaining innovations. As a result, we are not creating new jobs at a rate that will sustain our economy.

True believers

Why is financial capital flowing disproportionately to innovations that do not produce jobs? I think the roots lie in a powerful new belief system.

About 40 years ago some people established what I describe as a new church. I call it the New Church of Finance.

The members of this church are finance professors at business schools, a lot of economists and the partners in hedge funds and private equity funds. I call it a church because it has many of the characteristics of a well-catechized belief system. For those committed true believers within this "church" it is inconceivable that the catechism isn't true. People on the outside looking through the window, however, might be justifiably skeptical.

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