Creative Destruction

Updated on April 5, 2024
Article byJyotsna Suthar
Reviewed byDheeraj Vaidya, CFA, FRM

Creative Destruction Meaning

Creative destruction definition refers to demolishing (destroying) outdated past business practices and replacing them with new innovative methods. Its main purpose is to bring radical change by breaking the old, rotten management methods and installing new ones to drive the capitalist forces.

Creative Destruction

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Creative destruction philosophy is an essential factor of capitalism. It brings technological advancement in terms of production methods. Also, it gives rise to many white-collar jobs in the industry. Therefore, it acts as a source of economic prosperity and development. However, on the downside, it eliminates the low-skilled workforce from the market.

Key Takeaways

  • Creative destruction paves the way for innovation by eliminating the previous methods with new ones. In addition, it boosts the power of productivity by replacing the workforce with innovative technology.
  • Australian economist Joseph Schumpeter first coined this in the book “Capitalism, Socialism, and Democracy” in 1942.
  • The benefits of this theory include driving innovation and creating new jobs and economic structures.
  • Railroads, the internet, electronic gadgets, and retail stores contributed significantly to the concept. For example, camera phones have replaced digital cameras.

Creative Destruction Theory In Economics Explained

Creative destruction destroys the age-old methods bringing in scope for development and innovation. Instead, it increases productivity by replacing the human workforce with skilled labor, machines, and innovative technology. Some examples include transportation and communication.

The origin of creation and destruction derives back to the 19th and 20th centuries. Austrian economist Joseph Schumpeter gave the theory of creative destruction. Schumpeter was the first to popularize this theory in the book “Capitalism, Socialism and Democracy” in 1942. It stated that a change in the industrial process could revolutionize the economic structure. And to achieve that, the old methods must get replaced with new ones.

Although generations refer to it as Schumpeter creative destruction, Karl Marx had already laid the base in 1848. In the book “The Communist Manifesto,” German economists Karl Marx and Friedrich Engels stated the destruction of the productive forces. Later, in 1887, a German philosopher, Friedrich Nietzsche, emphasized the universal principle of creation and destruction. Besides that, English biologist Charles Darwin and German economist Werner Sombart contributed to the creative destruction philosophy.

The process of creative destruction defines the economy as an organic and vibrant process. It means that some things need to be destroyed to bring development to the economy. Everything that exists has to either be left out or replaced by another. For example, low-skilled labor gets replaced with high-skilled labor or machines. As a result, unemployment increases, leading to a decline in capitalism. Also, Schumpeter said that the power of creative destruction would ultimately lead to capitalism’s failure.

However, the pattern of destruction and creation remains the same. For instance, an automobile sector may dismantle six professions during creative destruction. It may include blacksmiths, drovers, canal men, and others. Yet, another six professions may get added to the sector.

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Benefits

It frees energy and resources, paying the way for innovation by destroying long-standing arrangements and assumptions. According to Schumpeter, internal market forces and profit-seeking opportunities naturally led to economic development. So, let us look at the benefits of Schumpeter creative destruction theory in the economy:

#1 – Drives Innovation

As creative destruction occurs, there is scope for development and innovation. It eliminates unskilled labor and replaces it with machines. As new machines get replaced, the efficiency increases and time reduces. For example, during the industrial revolution, machines were introduced in factories. Capitalists tried to replace people and install machines in return. As a result, production gets boosted, and the economy blooms. Another example is the innovation of camera phones that shifted people’s mindsets.

#2 – Creation Of New Jobs

Although this theory eliminates a massive workforce, it also generates jobs in the long term. The theory states that every destruction will lead to creation. In the above example, where camera phones replaced Kodak cameras, there was a sure loss of workforce. Photographers, on a large scale, lost their jobs. However, technical and electrical engineers got a chance to earn bread.

#3 – Change In Economy Structure 

As Schumpeter defines the economy, creative destruction will lead to certain changes in it. People’s mindsets about a process change. For example, developing railroads and airways lead to shifts in the total demand from carts to cars, trains, and planes.

Examples

Let us look at the creative destruction examples to comprehend the concept better:

Example #1

In 1868, Swiss watchmaker Patek Philippe invented the wristwatch. For more than a century, people got addicted to it. First, however, certain changes and innovations were made to its appearance. Slowly, in 1972, digital or analog watches entered the market. It showed time, a compass, customized alarms, and blinking light. During this shift, people supplying leather and clock hands lost customers.

Likewise, in the late 20th century, smartwatches came into existence. There was again a drastic shift in the customer’s demand. People got attracted to the health plus phone features. Although people lost jobs during this process, it didn’t lose its total demand. In the current times, people still prefer old classic wristwatches.

Example #2

Although the Covid-19 pandemic had its effect for two years, it did not stop the power of creative destruction. This pandemic forced retailers to adopt this innovative technique. Retailers started a customer-centric approach through the use of online marketing. It led to a shift from traditional buying to online purchases.

According to the Statista report, digital buyers increased from 1.66 to 2.14 billion in 2021. Logistics companies like Amazon were the major ones to drive that change in the traditional system of deliveries.

Creative Destruction vs Disruptive Innovation

Although creative destruction and disruptive innovation try to change the economy, they differ from each other. While the former wants to bring change in the method, the latter tries to improve the reach of products and services. So, both theories aim at improving the economy. Professor Schumpeter proposed the former in 1942. Professor Clayton Christensen gave the latter in 1997.

ParticularsCreative Destruction Disruptive Innovation
Meaning It removes age-old methods and employs new ones. Disruptive innovation is when firms try to provide affordable products instead of expensive ones.  
Purpose To withdraw the traditional techniques with new ones. To challenge the limited resources that cause disruption and provide good end products. 
Focus It focuses on the principle of creation and destruction.It focuses on improving the competitive economy and serving customers. 

Frequently Asked Questions (FAQs)

Why is creative destruction important?

The Schumpeter gale theory is important because it increases the efficiency and productivity of the firm. First, it saves money and time. Unnecessary human resource gets replaced with quality personnel. And lastly, it drives innovation.

Is creative destruction good?

This theory has both pros and cons attached to it. While economists assume it is a cause of unemployment, it does eliminate labor. However, there is employment in return.

How does creative destruction affect the economy?

Yes, it does, but neutrally. As it boosts the economy, there can be a change in aggregate demand. According to a report (link 6), between 1976 to 1986, 27% growth was due to creative destruction.

What type of unemployment is associated with creative destruction or technological progress?

Structural unemployment is associated with Schumpeter’s theory. This situation occurs when available jobs do not match the demand and supply. In other words, there is a gap between what firms need and the workforce.

This has been a guide to Creative Destruction and its meaning. Here, we explain its benefits and examples and comparison with disruptive innovation. You may also find some useful articles here:

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