What Is Creative Destruction?

Creative destruction can be described as the dismantling of long-standing practices in order to make way for innovation. Creative destruction was first coined by Austrian economist Joseph Schumpeter in 1942. Schumpeter describes creative destruction as innovations in the manufacturing process that increase productivity, but the term has been adopted for use in many other contexts. 

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.
  • It was coined in the early 1940s by economist Joseph Schumpeter, who observed real-life examples of creative destruction, such as Henry Ford’s assembly line. 

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.

Netflix is one of the modern examples of creative destruction, having overthrown disc rental and traditional media industries—now being known as the “Netflix effect” and being “Netflixed.” 

Limitations 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."

Examples of Creative Destruction

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.