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.

RELATED TERMS
  1. Creative Accounting

    Creative accounting consists of accounting practices that follow ...
  2. New Growth Theory

    New growth theory is a concept that presumes the desire and wants ...
  3. Entrepreneur

    An entrepreneur is an individual who founds and runs a small ...
  4. Quantity Theory of Money

    The quantity theory of money is a theory about the demand for ...
  5. Economic Equilibrium

    Economic equilibrium is a condition or state in which economic ...
  6. Neoclassical Growth Theory

    The neoclassical growth theory is an economic concept where equilibrium ...
Related Articles
  1. Insights

    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 ...
  2. Tech

    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?
  3. Investing

    Deadly Habits Of Destructive Traders

    Many traders develop destructive habits that, left unchecked, trigger washout and failure.
  4. Small Business

    Why Entrepreneurs Are Important for the Economy

    Entrepreneurship is important to the economy in many ways, but it can potentially have a damaging effect as well if not properly regulated.
  5. Investing

    Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.
  6. Small Business

    Entrepreneurs Make Money: Why, How, Where & When

    There are many characteristics to an entrepreneur and how they make their money. Learn how it's done, where and when Entrepreneurs make money.
  7. Small Business

    How To Be An Entrepreneur In The Modern World

    Here are some online resources entrepreneurs can use to get the most success out of their businesses.
  8. Insights

    Why Can't Economists Agree?

    There are many reasons why economists can be given the same data and come up with entirely different conclusions.
RELATED FAQS
  1. What's the difference between agency theory and stakeholder theory?

    Learn how agency theory and stakeholder theory are used in business to understand common business communication problems ... Read Answer >>
  2. Who coined the term "entrepreneur"?

    Entrepreneur is a French word coined by an economist, Jean-Baptiste Say, and usually is translated as "adventurer." Read Answer >>
  3. What are some common features of a mixed economic system?

    Look at a brief overview of the defining features of mixed economies and its perceived advantages and disadvantages Read Answer >>
  4. Does perfect competition exist in the real world?

    There are significant obstacles preventing perfect competition in today's economy, and many economists think it is better ... Read Answer >>
  5. Is economics a science?

    Learn how economics fits into the category of social sciences, and discover the arguments critics make against this classification. Read Answer >>
  6. What is demand-side economics?

    Learn the basic theory of demand-side economics, which emphasizes the importance of aggregate demand and supports government ... Read Answer >>
Trading Center