“Creative destruction” is a term coined by the economist Joseph Schumpeter to describe a process by which entrepreneurs and innovators work together to replace old products and services with new ones.
It’s the driving force behind labor-saving devices such as the automobile and the computer. (In fact, Schumpeter first used the term to describe the impact of the steam engine.)
But creative destruction is not just limited to labor-saving devices. Companies that “invent a better mousetrap” are also working to displace old products and services with new ones.
Long before economists came up with the term creative destruction, it was a term that artists and philosophers used to describe the need for innovation.
In the world of art, it was a term used by Russian painter Wassily Kandinsky in his 1911 treatise on art theory, Concerning the Spiritual in Art.
In the world of business, it was a term used by Austrian economist Joseph Schumpeter who described it as a process of “industrial mutation that incessantly revolutionizes the economic structure from within, introducing new products and new methods of production, and incessantly destroying the old ones”.
“Economic crisis and innovation: Is destruction prevailing over accumulation?”
A new report says that global renewable energy investment jumped 10 percent last year, driven by surging demand in China.
Last year, global investment in the sector hit $244 billion, a level that was not surpassed until 2011, according to a London-based environmental advocacy group called the Clean Energy Ministerial.
In a global economy where companies are always seeking to cut costs and increase profits, it is easy to see how the idea of dismantling and disposing of broken or obsolete technologies and machines might seem like an attractive option.
As we enter into a period where governments and businesses are scrambling to ensure that economic crisis does not lead to a domino effect of job loss and a decline in the standard of living for many, the wisdom of stubbornly resisting innovation in favour of sticking with what we know could be viewed as misguided.
But for many, this is the wrong approach to take, and it ignores the potential for innovation and growth in those technologies and machines that have reached the end of their life cycle.
Creative destruction and Marxism
Marxists have a slightly different take on this concept. They see productive or creative destruction as a destructive process created and enacted by capitalism in the pursuit of profits.
Karl Marx, an economist, sociologist and philosopher, published his most famous work, Das Capital (in English, Capital), in 1867. This book is an analysis of capitalism and its impact on the society.
According to Marx, the system of capitalism is driven by a desire for profit at the expense of the working class. Marx argued that this system leads to rises and falls of the society, a process known as creative destruction, which in turn leads to a clash between the two opposing classes of capitalists and workers. Eventually Marx predicted that this system would be replaced by a classless society.
Creative destruction and laissez-faire economics
Laissez-faire economics and creative destruction are two of the most important concepts in free market economics. Laissez-faire is a French term meaning “let it be”, and is a belief that the economy should be left to operate without government intervention.
This contrasts with interventionist economics, in which the government controls the economy by means of taxation, regulation, tariffs, subsidies and other means. Creation destruction is any economic process in which resources are rearranged to make new products, services or technologies.
Free market justification for creative destruction
Regulation is a necessary part of our economy. It is the only way to ensure that people behave in socially desired ways, whether it be not polluting the air or not selling dangerous drugs. The market can’t do this on its own, since Adam Smith’s “invisible hand” is never capable of solving all the problems that the real world throws at it. So, why do so many free-market advocates argue against regulation?
Because they assume that regulation interferes with the natural workings of the market. This assumption is wrong.
When the market is free—when property rights are secure and government doesn’t pick winners and losers—the creative destruction of the market is an engine of progress and prosperity. When companies must compete, they are forced to innovate.
New technologies and new ways of doing things are constantly being introduced. Old technologies and old ways of doing things are constantly being replaced by the better, more efficient, less expensive innovations of competitors.
The problems of creative destruction
Although creative destruction has been, and clearly will continue to be, a driving force in the economy, it has one problem: it is destroying the world, and not just by reducing the number of species.
It’s destroying it through environmental pollution, climate change, the degradation of our freshwater, our soils, our oceans, and the list goes on and on. So, how do you solve this problem? Some say that we simply need to hold onto the old economy.
Others claim that we can have creative destruction and a healthy planet at the same time. But what if creative destruction cannot be tamed? What if, to solve the problems of creative destruction, we have to stop creating?
Think of creative destruction as the process of new technology replacing older technology. The very industries that were once the fastest growing, most popular and most profitable can become obsolete.
The industries that replace them are now the fastest-growing, most popular and most profitable. Now, it’s important to remember that creative destruction has its own set of problems.
The rise of new industries almost always results in a decline in the number of workers employed in an industry. While new industries and technologies create new jobs, they also eliminate some old ones.
The term creative destruction refers to the cycle of innovation that drives economies forward. The idea is that innovation always involves the destruction of the old, which leads to the creation of new industries. This process has been going on for hundreds of years and it is the basis for many of the world’s most successful economies.
However, some argue that it hurts consumers. They believe that companies are doing things that are destroying the environment and that we should do everything we can to stop innovation and keep the old.