Creative destruction

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The notion of creative destruction is found in the writings of Mikhail Bakunin,[1] 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". In Capitalism, Socialism and Democracy, the Austrian economist Joseph Schumpeter popularized and used the term to describe the process of transformation that accompanies radical innovation.[2] 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 power.


[edit] 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, Kmart, Sears) 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.

Other examples are the way in which online free newspaper sites such as The Huffington Post and the National Review Online are leading to creative destruction of the traditional paper newspaper. The Christian Science Monitor announced in January 2009[3] that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. The Seattle Post-Intelligencer became online-only in March 2009.[4] Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.[5]

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.[citation needed] It has been the inspiration of endogenous growth theory and also of evolutionary economics.[6]

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)

[edit] History

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.[citation needed]

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.[citation needed]

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.

[edit] Alternative name

Per the following text, this process is also known as Schumpeter's Gale:

"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)

[edit] Media reflections of creative destruction

The film Other People's Money provides contrasting views of creative destruction, presented in two speeches regarding the takeover of a publicly-traded wire and cable company in a small New England town. One speech is by a corporate raider, and the other is given by the company CEO, who is principally interested in protecting his employees and the town.[7]

[edit] See also

[edit] References

  1. ^ "the passion for destruction is a creative passion", The Reaction in Germany, Mikhail Bakunin, 1842
  2. ^ "$200 Laptops Break a Business Model". New York Times. January 25, 2009. Retrieved on 2009-01-27. "Indeed, Silicon Valley may be one of the few places where businesses are still aware of the ideas of Joseph Schumpeter, an Austrian economist who wrote about business cycles during the first half of the last century. He said the lifeblood of capitalism was “creative destruction.” Companies rising and falling would unleash innovation and in the end make the economy stronger." 
  3. ^
  4. ^ Richman, Dan; James, Andrea (2009-03-16). "Seattle P-I to publish last edition Tuesday". Seattle Post-Intelligencer. 
  5. ^
  6. ^ Richard R. Nelson, Katherine Nelson Technology, institutions, and innovation systems. Research Policy 31 (2002), p. 265-272.
  7. ^

[edit] Further reading

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