Imagine the challenge of implementing the first Social Security system in 1937. 27 million employees and their employers had to be taxed. The basic idea was to collect the money and then redistribute it to current retirees. So everyone got an ID number. However, there were no computers. How to process so huge a quantity of data? The best that existed was the punched card tabulating machine.
This is where IBM enters the picture. The U.S. government used IBM’s data processing tabulator equipment and knowhow to implement the system.
Processing data, IBM evolved during 100 years. Described by The Economist, they, moved from punch card tabulators to magnetic tape systems, mainframe computers, PCs, and now, business services and consulting.
Their accomplishment is unusual. Many firms stick with the people, the organization, the equipment, the supply network that fuels their success. As a result, newcomers with better ideas replace them. The Economist says that because IBM adhered to a flexible concept–data processing for businesses and government–they could innovate, survive and thrive.
The Economic Lesson
Economist Joseph Schumpeter (1883-1950) tells us that innovation leads to a “paradox of progress” that he called “creative destruction. The word to associate with Schumpeter is entrepreneur. For Schumpeter, the entrepreneur is the innovator whom we find in small and large businesses. Increasingly, though, bureaucracy takes over and kills creativity. As a result, new firms replace outdated industries. (In this Teaching Company/History of Economic Thought course from Dr. Timothy Taylor, Lecture 8 on Schumpeter is excellent.)
It is surprising that IBM was not eliminated by creative destruction.
An Economic Question: Predicting that they will exist in 100 years, The Economist names Apple and Amazon as firms that will avoid creative destruction. Do you agree?