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Creative destruction is an expression used in economics, coined by Joseph Schumpeter. It refers to a dynamic process of competition and monopoly in markets under capitalism. For Schumpeter, the main principle of capitalism was innovation and the introduction of new technology and not perfect competition (the invisible hand and static markets).
Schumpeter distinguished between innovation and invention. While an invention may be purely theoretical in nature (or shows up only as a prototype), an innovation is put into practice. In a market-oriented economy, an innovation stands or falls in a "market test."
The main idea of this principle is that innovation ("creation") encourages economic growth and is thus central to capitalism's functioning. But innovation by one company also leads to destruction of complacent firms' monopoly market share. Companies that once dominated markets (such as Xerox, Polaroid, and Kodak) lose their dominance and shrink in profitability and importance. Creative destruction may also go the other way, toward monopoly, as a corporation such as Wal-Mart exerts its domination of retail markets at the expense of older or smaller companies using new inventory-management, marketing, and personnel-management techniques.
More generally, creative destruction refers to the fact that new ways of organizing production or distribution while being "creative" (having benefits) also are destructive (having costs). Many assume that the benefits automatically exceed the costs, but there is no reason why this should always be so. Independent farmers being driven out of business by agribusiness corporations may be forgiven if they think in terms of "destructive creation."
There are several kinds of innovations, i.e., new ways of organizing production and distribution:
- New ways to organize production, often using new equipment
- New methods of inventory management
- New products
- New methods of advertising and marketing
- New ways to transport products
- New methods of communication (e.g., the Internet)
- New management techniques
- New markets
- New sources of labor and raw materials
- New ways to lobby politicians or new legal strategies
- New financial instruments and/or scams
Many of these innovations can contribute to growth while often leading also to the (gradual) death of old ways of production and ways of life. But some of these innovations are not necessarily positive in their impact.
Most economists agree that long-term economic growth is largely the product of technological innovation. Thus, some see it as a scandal that Schumpeter is absent from many 600 page elementary economic texts' indexes.
Schumpeter's solution would be for a new generation of textbooks to emerge, which students would choose, in partial defiance of their lecturers. Wikipedia is now one of those texts!
History
The expression "creative destruction" was brought into the mainstream 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 Schumpeter scholars today agree that Schumpeter, although he did read Nietzsche himself, took concept and phrase from the work of fellow economist Werner Sombart, who is largely forgotten today but who was one of the most important German political economists of the generation just before Schumpeter. Though conservative in temperament, Schumpeter gained some of his understanding of competition and creative destruction from Karl Marx.
Miscellaneous
Several books concerning economics have creative destruction in their titles:
- Tyler Cowen. Creative Destruction: How Globalization Is Changing the World's Cultures. ISBN 0691117837
- Richard Foster and Sarah Kaplan. Creative Destruction: Why Companies That Are Built to Last Underperform the Market--And How to Successfully Transform Them. ISBN 0385501331
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