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'

With his theory of creative destruction, Schumpeter described a certain deus ex machina for free market economies. “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.

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