In times of accelerated turmoil such as those we’ve been living through and which appear likely to continue, to the eye’s visible horizon, it can be useful to return to first principles.
So, herewith, a quick precis of Joseph Schumpeter’s famous analysis of capitalism in Capitalism, Socialism, and Democracy (1942), and in particular his exegesis of his powerful and original concept of “creative destruction.”
The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as US Steel illustrate the same process of industrial mutation–if I may use that biological term–that incessantly revolutionizes the economic structure from within [emphasis original], incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.
Following on this, Schumpeter observes that it’s “useless” to analyze a large firm’s behavior at a single point in time, since the behavior of a firm is “on the one hand, a result of a piece of past history, and on the other hand, an attempt to deal with a situation that is sure to change presently–an attempt by those firms to keep on their feet, on ground that is slipping away from under them.”
Every piece of business strategy acquires its true significance only against the background of that process and within the situation created by it. [Strategy] must be seen in its role in the perennial gale of crative destruction; it cannot be understood irrespective of it or, in fact, on the hypothesis that there is a perennial lull.
This also implies that the popular concept of perfect competition is, by and large, meaningless if one wants to grasp the world as it really is–although it has the academic virtue of being highly susceptible to mathematical modeling.
The primary flaw in perfect competition is that it “is always suspended whenever anything new is being introduced” because buyers and sellers cannot possibly have complete information about a potential market. Indeed, Schumpeter believed that most quasi-mature industries (law certainly qualifies) more closely resembled oligopolies, where “there is in fact no determinate equilibrium at all and the possibility presents itself that there may be an endless sequence of moves and countermoes, an indefinite state of warfare betweeen firms.”
The type of competition that overturns everything familiar is not that based on price or quality, which are, after all, continuums, but “the competition from the new commodity, the new technology, the new source of supply, the new type of organization [since this] strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.”
And this looming threat is ever-present: “It disciplines before it attacks.” Ignoring the potential impact of a spasm of creative destruction upon an industry is nothing less than ignoring a characteristic of capitalism which is intrinsic and endogenous.
So where does this leave us?
Were we to resurrect Schumpeter (1883, Czechoslovakia-1950, Connecticut) from the dead, and ask him to comment on this train of thought vis-a-vis law-land, here’s my supposition as to what he would say:
- The threat to the industry of BigLaw as we know it is not the next Skadden, the next Latham, the next Wachtell, the next Quinn Emanuel or Boies Schiller or Bartlit Beck.
- These are fundamentally familiar business models, indeed so profoundly familiar that to outside observers they surely appear indistinguishable from the largest and most prestigious firms with the longest pedigrees.
- Instead, the threat will come from unforeseen competitors currently outside the tent, and who have no interest in being inside the tent.
- Some of these competitors, perhaps most of them, don’t exist at the moment, or if they do exist, have only begun to find their sea legs.
- You can’t foresee what these new competitors will do; indeed, they themselves can’t even foresee it yet in any clearly articulated or planned way.
- And they won’t look at all like BigLaw as we know it; if they did, they wouldn’t be “creative destroyers.”
Now, this is nothing to be afraid of.
Will the new competitors come?
Given that in the US alone, the total annual revenue of private, for-profit law firms is about $225-billion, yes. We inhabit a very large industry.
So the question is what can they do that we can’t?
The tremendous advantage we have over these nascent competitors is that we know our clients and we know the law: In vastly nuanced fashion. But this won’t do us any good if we’re oblivious, indifferent, or too comfortable and complacent to recognize what’s on the horizon. Our knowledge of our clients, and our tightly bound relations with them, is the only barrier to entry that we really have; but it will give us enough breathing room to figure out how to meet the new competitors on their own ground.
But only if we are prepared for the fight. Because the fight is endogenous to capitalism.