Creative Destruction

Deep down that is probably the message of capitalism: ‘Creative destruction’—the scrapping of old technologies and old ways of doing things for new—is the only way to increase productivity.

A matryoshka doll of libertarianism: Mitt Romney quoting Alan Greenspan quoting Joseph Schumpeter in his book “No apology: the case for American greatness.” I’ll spare you the full citation, here.

Creative destruction is the dismantling of long-standing practices in order to make way for innovation and is seen as a driving force of capitalism. The term was coined by Austrian economist Joseph Schumpeter in 1942 who derived the concept from Karl Marx’ economic theory. Schumpeter characterized creative destruction as innovations in the manufacturing process that increase productivity, describing it as the “process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” To Schumpeter, economic development is the natural result of forces internal to the market and is created by the opportunity to seek profit.

As is implied by the word destruction, the process inevitably results in losers and winners. Producers and workers committed to the older technology will be left stranded. Entrepreneurs and workers in new technologies, meanwhile, will inevitably create disequilibrium and highlight new profit opportunities.

Capitalism (...) is by nature a form or method of economic change and not only never is but never can be stationary. (...) The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.

(...) The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. 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. This process of Creative Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.

According to Schumpeter, innovative entry by entrepreneurs was the disruptive force that sustained economic growth, even as it ceaselessly destroyed the value of established companies and laborers that enjoyed some degree of monopoly power derived from previous technological, organizational, regulatory, and economic paradigms. Albeit introducing and popularizing the concept of creative destruction, Schumpeter himself did not necessarily endorse it. He was pessimistic about the sustainability of this process, seeing it as leading eventually to the undermining of capitalism’s own institutional frameworks.

In economy and business theory, the radical doing away with the old is connoted much more positively than Schumpeter’s original take was. Creative destruction has become a mantra for streamlining, optimizing and improving work processes. Especially in technology and start up culture, it hurled around in the same vein as the term “disruption.”

Creative destruction theory treats economy as an organic and dynamic process. There seems to be an underlying “natural” drive that makes markets an almost biological entity, reminiscient of an Darwin’s “survival of the fittest” evolutionary concept.

Oh look, there’s another libertarian: Ronald Reagan hosting the TV-variety show “GE Theater,” sponsored by General Electric, whose slogan at the time was sounded a lot like a mantra for creative destruction. In the meantime, GE itself has been hit by multiple waves of creative destruction and today leads a miserable existence as a third-tier company.


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