Reviewed by Aug 27, 2020| Updated on
Creative destruction can be defined as eliminating long-standing practices. In 1942, Austrian theorist, Joseph Schumpeter, coined the term creative destruction for the first time. Schumpeter defines creative destruction as productivity-enhancing advances in the manufacturing process, but the term has been used in many other ways.
How Does Creative Destruction Work?
Schumpeter defines creative destruction as the "phase of a technological transition that continually revolutionises the economic structure from within, continually replacing the old one, creating a new one incessantly".
The theory of creative destruction treats the economy as an organic and vibrant process. This stands in sharp contrast to Cambridge-tradition economics' static mathematical models. Equilibrium is no longer the market processes' ultimate goal. Alternatively, creativity and rivalry continually reshape or substitute other fluctuating dynamics.
As the word destruction means, the cycle will inevitably lead to losers and winners. With new technologies, businessmen and employees must inevitably create an imbalance and highlight new opportunities for profit. Older technology manufacturers and staff will be left stranded.
Economic development is the natural result of internal market forces, and the opportunity to seek profit is created.
Example of Creative Destruction
The assembly line of Henry Ford and how it revolutionised the automotive manufacturing industry are examples of creative destruction in history. It also disrupted older industries, however, and put many employees out of jobs.
The internet is by far the most comprehensive example of creative destruction, where not only retail clerks and their employers, but bank tellers, secretaries, and travel agents were the losers. There were many more losers on the mobile internet, from taxi cab drivers to mapmakers.
The winners could be just as numerous beyond the obvious example of programmers. The internet turned the entertainment industry upside down, but its need for creative talent and product remains the same or larger. The internet has destroyed many small businesses, but online has created many new ones.
As Schumpeter noted, the argument is that an evolutionary process rewards changes and inventions, and punishes less efficient methods of resource organisation. The trend line is towards overall progress, prosperity, and higher living standards.