Creative Destruction

The creative destruction jointly indicates the process of disappearance of branches of industry to the creation of new economic activities. This expression is strongly associated with the economist Joseph Schumpeter. In the capitalist economies, any important technological innovation involves a process of creative destruction.

The expression was popularized by Schumpeter in its book Capitalisme, socialism and democracy published in 1942. The idea goes back to the philosopher Friedrich Nietzsche, but the formulation itself was proposed for the first time by the economist Werner Sombart. Although being preserving, Schumpeter drew most of its comprehension from the creative destruction of works of Karl Marx.

General information

In the vision of Schumpeter of capitalism, the innovation carried by the Entrepreneur S was the driving force of the Economic growth on the long run, even if that implied a destruction of value (or " hurricane perpétuel" according to Schumpeter) for the established companies which enjoyed a dominant position, even of a Monopole.

The companies which revolutionized and dominated their market formerly - such as Xerox for the photocopiers or Polaroïd for the instantaneous cameras - saw their Marge S being reduced and their domination to disappear with the arrival from rivals having a better design or much lower manufacturing costs. The creative destruction can sometimes constitute monopolies rather than to destroy them. It is the case of Wal-Mart, a company which, with the the United States, dominates the retail business gradually by using novel methods of inventory control, Marketing and human stock management while making disappear from many older or smaller companies, one speaks about “Walmartisation” to evoke this domination.

In fact, the Innovation when it is crowned success led to a power of temporary market, by decreasing the profits and the power of the established companies, and in the long term it can make them disappear vis-a-vis competition new products marketed by the new entrants. The creative destruction is a very powerful concept because it makes it possible to explain dynamic industrial change and the transition from a competitive system to a monopoly and conversely. It is at the origin of the endogenous economic evolution and theory of growth.

Unfortunately for some the creative destruction can be painful. The workmen having the competences made obsolete by new technologies lose their employment. Although it makes it possible more workers to have an activity more creative and more productive, it can have disastrous consequences on short-term employment.

Many types of innovation lead to the creative destruction :

new markets or new products
the new equipment
new sources of work and raw materials
new forms of organization and management
the new means of transport
new means of communication (for example Internet)
new methods of publicity and marketing
new financial means or of fraud
the changes legislature or of new ways of influencing the political decision makers.

Schumpeter distinguished in the beginning five types of innovations:

the manufacture of new goods
new methods of production
the opening of new outlets
the use of new raw materials
a new organization of work.

Quotation

The intrigues of this nature constitute, in the middle of the perpetual hurricane of simple incidents, often inevitable, which encourage, well far from slowing down it, the process of long-term expansion. Such an assertion is not more paradoxical that consisting in saying: the cars because they are provided with brakes roll more quickly than if they were dépourvues Joseph Schumpeter, 1943 Translation Frenchwoman 1951 Capitalisme, socialism and democracy , Paris, Payot, p.123

The fundamental impulse which puts and maintains moving the capitalist machine is printed by the new objects of consumption, the new methods of production and transport, the new markets, the new types of industrial engineering - all elements created by the capitalist initiative. '' history of the productive equipment of energy, since the waterwheel until the modern turbine, or the history of transport, since diligence to the plane. The opening of new national markets or outsides and the development of the productive organizations, since the artisanal workshop and manufacture until the companies amalgamated such as the U.S. Steel, constitutes other examples of the same process of industrial change - if one passes this biological expression to me - which revolutionizes without delay interior the economic structure, by destroying his out-of-date elements continuously and by creating new elements continuously. This process of Creative Destruction constitutes the fundamental data of capitalism: it is in it that consists, in last analysis, capitalism and very undertaken capitalist must, gladly badly liking, to adapt to it. Joseph Schumpeter, 1943 Translation Frenchwoman 1951 Capitalism, socialism and democracy , Paris, Payot, p.106 and 107

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