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The concept of creative destruction was made famous by the economist Joseph A. Schumpeter. For Schumpeter, creative destruction ”is the essential fact about capitalism” (Schumpeter 1975 [1942]: 82) and is meant to highlight the dynamic nature of capitalist systems. It refers to how capitalism continuously revolutionizes itself as new products and business processes are created that render obsolete and destroy those that are existing. The classic example of this is how the creation of the automobile led to the destruction of the horse and buggy industry: after the former was created the latter could not compete as an effective means of transport and it was destroyed as a result.
There are two aspects of creative destruction that should be kept in mind.
The first is that the source of creative destruction comes ”from within” the economic system itself and not from sources outside of it (p. 83, emphasis in original). In other words, change is endogenous to capitalism as entrepreneurs and innovators create the goods, technologies, and organizations that replace and destroy what already exists.
The second aspect is that the type of change involved in the process of creative destruction is qualitative in nature and highlights how firms seek a competitive advantage through the creation of qualitatively different products or processes. In fact, creative destruction rests upon the revolutionary nature of such qualitatively different goods, businesses, technologies, etc., being introduced into the economy This is what Schumpeter means when he says that the history of capitalism is a ”history of revolutions” where the creation of the new upsets, overturns, and destroys the old.
Bibliography:
- Schumpeter, J. 1975 [1942]. Capitalism, Socialism, and Democracy. Harper and Brothers, New York.
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