Telling quote in the WSJ about the cycles of creative destruction as told by Ted Forstmann:
“Buffett once told me there are three ‘I’s in every cycle. The ‘innovator,’ that’s the first ‘I.’ After the innovator comes the ‘imitator.’ And after the imitator in the cycle comes the idiot. Which makes way for an innovator again.” So when Mr. Forstmann says we’re at the end of an era, it’s another way of saying that he’s afraid that the idiots have made their entrance.
“We’re in the third ‘I’ for sure,” he interjects an hour after first introducing the “rule.” “And that always leads to something. Innovators don’t just show up. Some disaster takes place because of the idiots, and then an innovator says, oh, look at this, I can do this, that or the other thing.” That disaster is now.
The interesting implication for me is that markets change due to pain, not generic opportunity. The idiots cause pain and the innovators solve for it. As a guide to policy, preventing the idiots from doing stupid things (or regulating their solution) prevents the pain that allows for wholesale transformation of outdated systems. Something we should think about when it comes to regulation of energy transmission or other such things– keeping pain below certain thresholds by keeping the system “good enough” for all participants almost inexorably prevents the innovator from rapid adoption (they still have opportunity with overshot and undershot customers).
In other words, “In order to fix what’s going on in the United States there’s going to have to be a certain amount of pain. The market’s going to have to clear somehow. . . and it’s hard for me to believe that it gets fixed without” upheaval in the financial system, the economy and the country as a whole. “Things are going to fail. Enterprises are going to fail. The economy is going to slow,” he warns.
Just like fire is a healthy cycle in forests and revolutions keep the politic focused on the people, social institutions at some point need to fail for the next generation to rise.
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