Creative Destruction

What is 'Creative Destruction'

Creative destruction, a term coined by Joseph Schumpeter in "Capitalism, Socialism and Democracy" in 1942, describes the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." This occurs when innovation deconstructs long-standing arrangements and frees resources to be deployed elsewhere. Since Schumpeter, the term has been adopted into many other contexts outside of economic theory.

BREAKING DOWN 'Creative Destruction'

Schumpeter described a certain deus ex machina for free market economies with his theory of creative destruction. “The essential point to grasp is that in dealing with capitalism we are dealing with an evolutionary process,” he wrote in Chapter VII of “Capitalism, Socialism and Democracy.”

To Schumpeter, economic development was the result of forces internal to the market and created by the opportunity to seek profit and property. This fits neatly alongside similar theories about how economic markets naturally evolve, including the “spontaneous order” of F.A. Hayek and the theory of the entrepreneur by Israel Kirzner.

Economics as Organic and Dynamic

By its very nature, the creative destruction philosophy treats economics as an organic and dynamic process. This stands in stark contrast with the static and highly mathematical models of Cambridge-tradition economics. For example, the treatment by Schumpeter does not consider equilibrium to be the end goal of market processes; instead, many fluctuating equilibria are constantly reshaped or even replaced by dynamic innovation and competition.

By using the word “destruction,” Schumpeter directly implies the process results in losses alongside profits and there are losers in the creative destruction. Unlike other economic theories, many of which ignore the entrepreneur and technology entirely, the process of creative destruction does not assume markets generally tend toward equilibrium. Instead, entrepreneurs and technologies actively create disequilibrium and highlight new profit opportunities that did not previously exist.

Many historical examples lend credence to Schumpeter’s insight. Henry Ford's assembly line not only revolutionized the automobile and manufacturing industries, but it also displaced many older markets and forced many laborers out of work.

The internet and internet-based “dot-com” companies of the 1990s led a similar revolution in both social and economic organization. The losers were the old economy companies that could not adapt in time to take advantage of the new technology.

The point, as Schumpeter noted, is this evolutionary process rewards profitable adaptations and innovations and punishes less efficient ways of organizing resources. The process can be bumpy and unpleasant for some, but the trendline is toward progress, growth and higher standards of living.

Application to Other Fields

The term creative destruction is commonly used in business governance, particularly in industries associated with technology or other rapid changes. There are also philosophical, biological and political adaptations of the concept. Indeed, Schumpeter may have been greatly influenced by the philosopher Friedrich Nietzsche and economist Werner Sombart.

RELATED TERMS
  1. Joseph Schumpeter

    One of the 20th century's great economic and political thinkers. ...
  2. Destructive Creation

    When innovation leads to destruction. Destructive creation was ...
  3. Creative Accounting

    Accounting practices that follow required laws and regulations, ...
  4. General Equilibrium Theory

    General equilibrium theory studies supply and demand fundamentals ...
  5. Evolutionary Economics

    A term coined by Thorstein Veblen (1857-1929), an American economist ...
  6. Endogenous Growth Theory

    An economic theory which argues that economic growth is generated ...
Related Articles
  1. Markets

    Insights On Creative Destruction and Technology

    Creative Destruction has a way of phasing out old technologies and inviting the new when applied to business models and economics.
  2. Markets

    How Creative Destruction Happens in Real Life

    In his seminal work, Capitalism, Socialism and Democracy (1942), Joseph Schumpeter proclaimed “the essential fact about capitalism” as being a process “that incessantly revolutionizes the economic ...
  3. Investing

    Understanding Disruption

    Disruption’s concept comes from the term creative destruction, coined by Austrian economist Joseph Schumpeter in 1942, who called it one of the essential elements of capitalism. The term was ...
  4. Investing

    App-pocalypse! 20 Industries Disrupted By New Tech

    Mainstream economic thought says that while those displaced by technology will see their industries destroyed, the industries replacing them will create new jobs that they can fill.
  5. Professionals

    Is Automation Destroying Intellectual Jobs?

    As more jobs are automated, intellectual jobs that require the human brain remain, but does artificial intelligence pose a threat to these jobs, too?
  6. Markets

    Japan's Nonperforming Loans Cap Future Growth

    Discover why Japan is lying about its banking sector, and how protecting underperforming Japanese businesses is stunting economic growth.
  7. Managing Wealth

    Deadly Habits Of Destructive Traders

    Many traders develop destructive habits that, left unchecked, trigger washout and failure.
  8. Professionals

    Are We Living In An App-Driven Economy?

    As people change the way they complete these daily tasks, businesses also have to adapt. These changes signal a trend towards a more app-driven economy.
  9. Entrepreneurship & Small Business

    How Entrepreneurs Benefit the Economy

    Why are entrepreneurs important for the economy?
  10. Trading

    Why Entrepreneurs Are Important for the Economy

    This article discusses the importance of entrepreneurs and their important value-add to the economy of a state.
RELATED FAQS
  1. Why do some economists consider entrepreneurship to be a factor of production?

    Find out if entrepreneurship should be considered a factor of production in economic models, and whether or not entrepreneurs ... Read Answer >>
  2. How does an entrepreneur help the economy?

    Find out about how entrepreneurs play a fundamental role in capitalist economies by helping to coordinate resources and bearing ... Read Answer >>
  3. What safeguards exist to prevent the abuse of power in a market economy?

    Find out why free market theorists believe that natural safeguards prevent power from centralizing in a capitalist system, ... Read Answer >>
  4. Can a country be both a market economy and a socialist economy?

    Find out what mixed economies are, how they develop, and the inherent challenges of balancing capitalism and socialism in ... Read Answer >>
  5. What is general equilibrium theory in macroeconomics?

    Achieving equilibrium of prices in a single or multi-market setting involves a bidding process that is informed precisely ... Read Answer >>
  6. How does a monopoly contribute to market failure?

    Read a simple overview of the theory of market monopoly, where it originated and some contemporary challenges to the classical ... Read Answer >>
Hot Definitions
  1. Duration

    A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates. ...
  2. Dove

    An economic policy advisor who promotes monetary policies that involve the maintenance of low interest rates, believing that ...
  3. Cyclical Stock

    An equity security whose price is affected by ups and downs in the overall economy. Cyclical stocks typically relate to companies ...
  4. Front Running

    The unethical practice of a broker trading an equity based on information from the analyst department before his or her clients ...
  5. After-Hours Trading - AHT

    Trading after regular trading hours on the major exchanges. The increasing popularity of electronic communication networks ...
  6. Omnibus Account

    An account between two futures merchants (brokers). It involves the transaction of individual accounts which are combined ...
Trading Center