The notion of creative destruction
is found in the writings of Mikhail Bakunin
, Friedrich Nietzsche
and in Werner Sombart
's Krieg und Kapitalismus
(War and Capitalism) (1913, p. 207), where he wrote: "again out of destruction a new spirit of creativity arises". The economist Joseph Schumpeter
popularized and used the term to describe the process of 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
Theory and examples
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. Wal-Mart
is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, using its resulting lower prices to compete with older or smaller companies in the offering of retail consumer products. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward
) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat. Just as the cassette tape
replaced the 8-track
, only to be replaced in turn by the compact disc
, itself being undercut by MP3
players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. 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.
Creative destruction can hurt. Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.
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 (though many economists would argue that this last is not a genuine example of creative destruction, so much as an example of using force of government to prevent more innovative or lower cost competitors from selling to one's customers)
The expression "creative destruction" was brought in to the economic discourse via Schumpeter
's book, Capitalism, Socialism and Democracy
, first published in 1942
. The most likely source can be found in his 1939 book Business Cycles. Here the Western world first learned about Nikolai Kondratieff
and his long-wave
cycle. These cycles, Schumpeter believed, were caused by innovations.
Schumpeter's contributions are not generally included in most undergraduate economic textbooks, which focus 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.
Per the following text, this process is also known as Schumpeter
"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 ... [The 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)
- Philippe Aghion and Peter Howitt. A Model of growth through Creative Destruction. Econometrica 60:2 (1992), pp. 323-51.
- Philippe Aghion and Peter Howitt. Endogenous Growth Theory. MIT Press. 1997.
- Edward Cheung, "Baby Boomers, Generation X and Social Cycles" Long Wave Press. 1995, revised 2007.
- Clayton M. Christensen. "The Innovator's Dilemma" HarperBusiness. 2001.
- Richard Foster and Sarah Kaplan. "Creative Destruction: Why Companies that are Built to Last Underperform the Market - And how to Successfully Transform Them" Currency publisher. 2001.
- J. Stanley Metcalfe. Evolutionary Economics and Creative Destruction (Graz Schumpeter Lectures, 1). Routledge. 1998.
- Richard L. Nolan and David C. Croson, Creative Destruction: A Six-Stage Process for Transforming the Organization. Harvard Business School Press. 1995.
- Max Page. The Creative Destruction of Manhattan, 1900-1940. University of Chicago Press. 1999.
- Hugo Reinert and Erik S. Reinert. "Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter." In J.G. Backhaus and W. Drechsler, eds. Friedrich Nietzsche: Economy, and Society. Springer. 2006.
- Joseph A. Schumpeter. ''Capitalism, Socialism and Democracy" (New York: Harper, 1975) [orig. pub. 1942]
- James M. Utterback. Mastering the Dynamics of Innovation. Harvard Business School Press. 1996.
- Roger D. Smith. "The Disruptive Potential of Game Technologies: Lessons Learned from its Impact on the Military Simulation Industry" Research Technology Management 50:Sept-Oct (2006), pp. 57-64.
- Thomas Homer-Dixon. Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization Island Press. 2006.