What Is Creative Destruction?

Creative destruction can be described as the dismantling of long-standing practices in order to make way for innovation.

The term creative destruction was coined by Austrian economist Joseph Schumpeter in 1942. It is used most frequently to describe innovations in manufacturing processes that increase productivity, but the term has been adopted for use in many other contexts.

Economists often use it to express the essential nature of capitalism as a relentless drive towards progress.

[Important: Henry Ford's assembly line revolutionized manufacturing industries, but forced many laborers out of work. That is creative destruction at work.]

How Creative Destruction Works

Schumpeter describes creative destruction as the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

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.

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. Entrepreneurs and workers in new technologies will inevitably create disequilibrium and highlight new profit opportunities. Producers and workers committed to the older technology will be left stranded.

To Schumpeter, economic development is the natural result of forces internal to the market and is created by the opportunity to seek profit.

Examples of Creative Destruction

Many historical examples lend credence to Schumpeter’s insight.

Henry Ford's assembly line revolutionized automobile manufacturing and many other manufacturing industries, but it also displaced older markets and forced many laborers out of work.

The internet is perhaps the most all-encompassing example of creative destruction of our times. The losers were not only retail clerks and their employers but 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 trendline is toward progress, growth, and higher standards of living overall.

Disadvantages of Creative Destruction

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."

Key Takeaways

  • Creative destruction describes the deliberate dismantling of established processes in order to make way for improved methods of production.
  • The term is most often used to describe disruptive technologies such as the railroads or, in our own time, the internet.