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Creative destruction, introduced in 1942 by the economist Joseph Schumpeter, describes the process of transformation that accompanies radical innovation. In Joseph 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.

Theory and examples Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid Corporation in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs (lowering their own costs allows them to charge lower prices to customers, thereby drawing customers away from less efficient competitors who eventually close their doors or move into other products where they are able to find a cost advantage). 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 eliminate the profitability of older or smaller companies. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, Kmart, Sears, Roebuck and Company) 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 (which is now 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.

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. It has been the inspiration of endogenous growth theory and also of evolutionary economics.

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.

There are numerous types of innovation-generating creative destruction in an industry:

History The expression "creative destruction" was brought in to the economic discourse via Joseph Schumpeter's book, Capitalism, Socialism and Democracy, first published in 1942. The idea as such derives from the philosophy of Friedrich Nietzsche, but scholars today agree that Joseph Schumpeter, although he did read Nietzsche himself, took the concept and phrase from the work of fellow economist Werner Sombart. But the most likely source can be found in his 1939 book Business Cycles. Here the Western world first learned about Nikolai Kondratieff and his Kondratiev wave cycle. These cycles, Schumpeter believed, were caused by innovations.

Joseph Schumpeter's contributions are not generally included in most elementary economic textbooks, which focus instead on the theories of perfect competition and static supply and demand, models which Joseph Schumpeter claimed had little relevance to the real world.

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.

Alternative name Per the following text, this process is also known as Joseph 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 ... 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 Schumpeter, 1942)

See also

References

Creative destruction, introduced in 1942 by the economist Joseph Schumpeter, describes the process of transformation that accompanies radical innovation. In Joseph 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.

Theory and examples Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid Corporation in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs (lowering their own costs allows them to charge lower prices to customers, thereby drawing customers away from less efficient competitors who eventually close their doors or move into other products where they are able to find a cost advantage). 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 eliminate the profitability of older or smaller companies. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, Kmart, Sears, Roebuck and Company) 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 (which is now 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.

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. It has been the inspiration of endogenous growth theory and also of evolutionary economics.

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.

There are numerous types of innovation-generating creative destruction in an industry:

History The expression "creative destruction" was brought in to the economic discourse via Joseph Schumpeter's book, Capitalism, Socialism and Democracy, first published in 1942. The idea as such derives from the philosophy of Friedrich Nietzsche, but scholars today agree that Joseph Schumpeter, although he did read Nietzsche himself, took the concept and phrase from the work of fellow economist Werner Sombart. But the most likely source can be found in his 1939 book Business Cycles. Here the Western world first learned about Nikolai Kondratieff and his Kondratiev wave cycle. These cycles, Schumpeter believed, were caused by innovations.

Joseph Schumpeter's contributions are not generally included in most elementary economic textbooks, which focus instead on the theories of perfect competition and static supply and demand, models which Joseph Schumpeter claimed had little relevance to the real world.

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.

Alternative name Per the following text, this process is also known as Joseph 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 ... 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 Schumpeter, 1942)

See also

References



 

Creative Destruction



 
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