Creative Destruction

What Is Creative Destruction?

Creative destruction is the dismantling of long-standing practices in order to make way for innovation and is seen as a driving force of capitalism.

Understanding Creative Destruction

The term creative destruction was first coined by Austrian economist Joseph Schumpeter in 1942. Schumpeter characterized creative destruction as innovations in the manufacturing process that increase productivity, describing it as the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

Basically, the theory of creative destruction assumes that long-standing arrangements and assumptions must be destroyed to free up resources and energy to be deployed for innovation. To Schumpeter, economic development is the natural result of forces internal to the market and is created by the opportunity to seek profit.

Creative destruction theory treats economics as an organic and dynamic process. This stands in stark contrast with the static mathematical models of traditional Cambridge-tradition economics. Equilibrium is no longer the end goal of market processes. Instead, many fluctuating dynamics are constantly reshaped or replaced by innovation and competition.

As is implied by the word destruction, the process inevitably results in losers and winners. Producers and workers committed to the older technology will be left stranded. Entrepreneurs and workers in new technologies, meanwhile, will inevitably create disequilibrium and highlight new profit opportunities.

Netflix is a modern example of creative destruction, having overthrown disc rental and traditional media industries.

In describing creative destruction, Schumpeter was not necessarily endorsing it. In fact, his work is considered to be heavily influenced by The Communist Manifesto, the pamphlet by Karl Marx and Friedrich Engels which decried the bourgeoisie for its "constant revolutionizing of production [and] uninterrupted disturbance of all social conditions."

Creative Destruction Examples

Examples of creative destruction in history include Henry Ford's assembly line and how it revolutionized the automobile manufacturing industry. However, it also displaced older markets and forced many laborers out of work.

The internet is perhaps the most all-encompassing example of creative destruction, where the losers were not only retail clerks and their employers but also bank tellers, secretaries, and travel agents. The mobile internet added many more losers, from taxi cab drivers to mapmakers.

The winners, beyond the obvious example of programmers, might be just as numerous. The entertainment industry was turned upside down by the internet, but its need for creative talent and product remains the same or greater. The internet destroyed many small businesses but created many new ones online.

The point, as Schumpeter noted, is that an evolutionary process rewards improvements and innovations and punishes less efficient ways of organizing resources. The trend line is toward progress, growth, and higher standards of living overall.