Destructive Creation

What Is Destructive Creation?

Destructive creation refers to circumstances in which innovation results in more damage to the economy than beneficial outcomes.

Understanding Destructive Creation

Destructive creation was coined as a play on Joseph Schumpeter's famous term "creative destruction", which suggests that innovation leads to productive changes in economic growth. For example, when computers were invented, they replaced typewriters and increased efficiency. As a result, the economy profited. In other words, there was little downside to this innovation. In contrast, destructive creation is when innovation leads to negative, net social and economic outcomes, though it might still benefit the originator or end-users of the new innovation.

Destructive creation is a term used to describe when the introduction of new technology, new products, or new processes happens in a way that produces more damage to existing industries or consumption patterns than the total benefit of the newly introduced innovation. This can occur through mechanisms like premature obsolescence of existing products, disruption of existing employment and investments, or unintended or unforeseen negative consequences of adoption and use of the new innovation. It can happen in any industry. 

The concept is derived from the idea of "creative destruction," which asserts that the process of industrial innovation revolutionizes economic structures from within. Creative destruction refers to the way newer innovations destroy older economic structures while simultaneously creating new ones. The rise of a new technology often results in older technologies being replaced, and the industries, jobs, and ways of life that depend on the older technologies are destroyed as a result. 

The disappearance of the buggy whip industry is classically cited as an example of creative destruction. With the advent and widespread adoption of the automobile and urban mass transit, people no longer use horse-drawn buggies to commute, so the demand for whips to drive the horses has mostly been destroyed and so has a previously profitable industry that produced them.

But the benefit to commuters of using cars, trains, and buses and the value of an investment in the related supporting industries that have been created outweighs the loss of jobs and investment opportunities in the buggy industry. One might also weigh the elimination of the cost of manure pollution in cities and potential concerns about animal cruelty as unintended benefits in this transformation.

In destructive creation, the cost of the industries, jobs, and investment opportunities destroyed (plus any other unintended consequences to the economy, society, or environment) appear to outweigh the benefits of a new product or technology. Major, long-term investment projects in the older technology might be driven into bankruptcy in favor of a small, incremental improvement in functionality. Large numbers of skilled workers in an existing industry can be forced into unemployment or underemployment in lower-value occupations. New technology might turn out to cause drastic health, environmental, or economic damage that comes to light too late, after it is adopted and the older technology is replaced.

Financial Innovation

Financial innovations can become more destructive than productive, and when financial innovation results in more harm than good, it is considered destructive creation. Some types of derivatives, structured investment products, and non-conventional mortgages have fallen under public scrutiny in recent years as innovations that prove to bring more harm than good.

The term destructive creation was popularized during the financial crisis and recession of 2007–2009 when, partially as a result of financial innovations like derivatives and non-conventional mortgages, the entire global economy declined, destroying millions of jobs and producing several trillions of dollars in economic damage.

Technology Sector

In the technology sector, numerous examples of destructive creation can be found. Network effects and path-dependencies play an especially powerful role in these industries, which can lead to large, unrecoverable costs to the industry and costly, durable electronic goods in the hands of consumers that lose value or become unusable as new technologies develop.

A prominent example of destructive creation is the near-constant introduction of new models of electronic devices that replace older versions, may offer only incrementally increased (or sometimes even decreased) functionality, and might not be backward compatible. Consumers can easily be left stranded, having spent money on devices and equipment that are incompatible with newly adopted technology or standards despite offering the same basic functionality as newer devices.

Consumer Goods

Other examples of destructive creation include the development of tools, utilities, and equipment that may solve problems for consumers, and make people’s lives easier, but also take a toll on public health or the environment, potentially leading to long-term damage that cannot be undone.

A possible, current example of this is the development of single-serving coffee pods and machines. This technology has risen to near-ubiquity in commercial and office coffee service, and it brought a not insignificant level of additional convenience. However, it also produces an enormous increase in waste generated every day as many millions of servings are produced and consumed daily, each one leaving a non-recyclable, individual serving pod to be disposed of. The inventor, John Sylvan, was famously quoted in a 2015 interview in The Atlantic magazine saying, "I feel bad sometimes that I ever did it."

Special Considerations

Destructive creation occurs essentially for the same reason as creative destruction. Entrepreneurs are motivated to introduce innovations by the prospect of profiting from their investment. However, because the future, and the full consequences of any innovation, are uncertain, there is little or no way to tell beforehand whether any given innovation will be a net gain or loss for society. The gains of introducing a new technology largely accrue to the private individuals and entities involved, while at least some of the cost may be borne by society at large.

An important consideration to potentially curb destructive creation is to think about the full social cost, including both the private gains to the originators and users of an innovative product and also the externalized costs (and benefits) borne by others who may have little or no say in the innovation process. 

To avoid destructive creation, economists emphasize the importance of measuring the impact of innovation. This assessment should not only evaluate the needs of consumers, but also how well the impact is sustained through the entire life cycle of a product. Otherwise, the impact created by the solution to address a problem for one target customer group, such as low-cost cars for middle-class families, could lead to the creation of new problems, such as a lack of parking space or increased traffic and pollution.

When developing new products or financial strategies, it could be helpful to examine resource allocation in a way that ensures all stakeholders in a society some kind of benefit, in order to curtail destructive creation.