article

Creative destruction, introduced by the economist Joseph Schumpeter, describes the process of industrial transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs (lowering their own costs allows them to charge lower prices to customers, thereby drawing customers away from less efficient competitors who eventually close their doors or move into other products where they are able to find a cost advantage). Creative destruction may also go the other way, pushing an industry to a monopoly situation. Wal-Mart is a clear example of this, as it is a corporation that increasingly dominates retail markets by using new inventory-management, marketing, and personnel-management techniques, at the expense of older or smaller companies. However, this is not a problem for those who support the process of creative destruction because if Wal-Mart does not keep its prices low, then they risk losing their market share to new competitors. The fact that they must sustain low prices in order to prevent competition is seen as a good thing for consumers. Also, there is nothing to stop another firm from discovering how to become more efficient than the monopoly firm which would allow them to charge lower prices than the monopoly firm and erode their market share, and so on. This is the process of creative destruction.

In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics of industrial change: the transition from a competitive to a monopolistic market, and back again. It has been the inspiration of endogenous growth theory and also of evolutionary economics.

Unfortunately for some, creative destruction can hurt. Layoffs of workers with obsolete working skills sometimes signal these new innovations. Though they allow more workers to be available for more creative, and productive uses, they can cause severe hardship in the short term.

There are numerous types of innovation generating creative destruction in an industry:

  • New markets or products
  • New equipment
  • New sources of labor and raw materials
  • New methods of organization or management
  • New methods of inventory management
  • New methods of transportation
  • New methods of communication (e.g., the Internet)
  • New methods of advertising and marketing
  • New financial instruments
  • New ways to lobby politicians or new legal strategies

History

The expression "creative destruction" was brought into the economic discourse via Schumpeter's book, Capitalism, Socialism and Democracy, first published in 1942. The idea as such derives from the philosophy of Friedrich Nietzsche, but scholars today agree that Schumpeter, although he did read Nietzsche himself, took the concept and phrase from the work of fellow economist Werner Sombart. Schumpeter gained much of his understanding of competition and the essence of creative destruction from Karl Marx.

Schumpeter's contributions are not included in most elementary economic textbooks, focusing instead on the theories of perfect competition and static supply and demand, models which Schumpeter claimed had little relevance to the real world.

In 1992, the idea of "creative destruction" was put into formal mathematical terms by Philippe Aghion and Peter Howitt in their paper "A Model of Growth through Creative Destruction," published in Econometrica.

In 1995, Harvard Business School authors Richard L. Nolan and David C. Croson released Creative Destruction: A Six-Stage Process for Transforming the Organization. The book advocated downsizing to free up slack resources, which could then be reinvested to create competitive advantage.

More recently, the idea of "creative destruction" was utilized by Max Page in his 1999 book, The Creative Destruction of Manhattan, 1900-1940. The book traces Manhattan's constant reinvention, often at the expense of preserving a concrete past. Describing this process as "creative destruction," Page describes the complex historical circumstances, economics, social conditions and personalities that have produced crucial changes in Manhattan's cityscape.

Other authors using "Creative Destruction" as a book title include Tyler Cowen of George Mason University and Richard Foster & Sarah Kaplan of McKinsey & Co..

Per the following text, this process is also known as Schumpeter's Gale:

"The opening up of new markets and the organizational development from the craft shop and factory to such concerns as US Steel illustrate the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one ... process must be seen in its role in the perennial gale of creative destruction; it cannot be understood on the hypothesis that there is a perennial lull."

Quote from "The Process of Creative Destruction" by Joseph A. Schumpeter, 1942 http://www.awtrey.com/tony/foss/commodification.php

See also

Bibliography

Economics | Business ethics | Theories of history

Schöpferische Zerstörung | Destruction créatrice

 

This article is licensed under the GNU Free Documentation License. It uses material from the "Creative destruction".

Home Page • arts • business • computers • games • health • hospitals • home • kids & teens • news • physicians • recreation• reference • regional • science • shopping • society • sports • world