Creative destruction is a concept used for explaining change in market dynamics characterized by new products, services, and techniques displacing or replacing old ones.
In the wake of globalization and the digital revolution, the modern economy has been defined by an unprecedented pace of change and innovation. Indeed, whole markets and industries shift so rapidly that the economy might seem to be defined by laws and forces that are too chaotic to understand – if the dynamics obey any governing forces at all.
This is almost the opposite phenomenon from the rest of recorded history, in which change was so incremental that many workers weren’t aware there was such a thing as the economy, much less that it could be understood according to macroeconomic laws of change. In the middle ages, for instance, artisans, laborers, and craftsmen were raised to perform the exact same tasks (often using the exact same tools) as their parents and grandparents before them, with no sense that their descendants would ever do anything different. So, where did all the blacksmiths, the textile weavers, and the grass-reapers go? What happened to change the economy so profoundly that these jobs have changed or even disappeared entirely? Creative destruction happened.
What Is Creative Destruction?
What is the meaning of creative destruction, exactly? Any creative destruction definition must feature the concept of “change” prominently and point out how it results in winners and losers in an economic context.
The process of creative destruction was first formally named and identified by economist Joseph Schumpeter in 1942, whose definition of creative destruction was as follows: “[the] process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” In this definition, Schumpeter was drawing from the work of Karl Marx and Friedrich Engels who had similarly identified destructive techniques as being endemic to capitalist production. Though they did not explicitly name this concept in their pamphlet “The Communist Manifesto”, they did criticize the practices of the bourgeoisie for their “constant revolutionizing of production [and] uninterrupted disturbance of all social conditions.”
The concept of creative destruction is itself an innovation in the understanding of markets, treating the overall economy as an organic system characterized by dynamic as opposed to static processes. Many previous economic thinkers and mathematicians–whose work is now collectively understood as the Cambridge Tradition–took for granted that market equilibrium was the end goal of the economy, in other words, that economic dynamism was itself something to be rooted out or gone beyond.
Reconsidering The Ways Markets Function
After Schumpeter formalized the concept of creative destruction, many economists began to reconsider the ways markets function, accepting that dynamic processes and transformation are not only constant but desirable. Innovation and competition came to be seen as positive forces that help ensure the adaptability and vitality of markets to continue creating new wealth. This ran counter to the spirit in which Marx and Engels had envisioned the concept, as they focused less on the creation of new wealth than the destruction of old wealth. But you’re probably asking yourself, where can we see these forces in action?
Creative Destruction Examples
While nearly all economic and technological innovation can be understood in terms of creative destruction, some examples better illustrate the potential for the right innovation to completely upend an entire industry. The industrial revolution, for instance, is often traced back to James Watt’s coal-powered steam engine, which completely upended the traditional forms of manufacturing. Before the steam engine factories tended to rely on natural sources of power, such as the waterwheel, which dictated not only how rapidly production could proceed but also where factories themselves could be placed. Watt’s engine enabled factory owners to build factories almost wherever they wanted to and to replace large portions of their skilled labor force with machine power.
This completely changed the economic dynamics of the era, diminishing the earning power of the workforce and increasing the power of capital. It also helped to bolster the explosion of the coal industry, while ushering in an era of mass manufacturing in which many centuries-old artisanal skills and traditions were lost.
For a more contemporary example, we could consider the effect of Netflix on the entertainment industry. Netflix’s innovation was to offer an internet-based DVD rental service, which eventually transitioned from offering physical DVDs by mail to offering streaming content over the internet. This profound innovation soon captured an enormous share of the entertainment market, forcing many other companies to adapt (e.g. Disney, which now has its own subscription-based streaming service) or die (e.g. Blockbuster, a movie-rental chain which failed to adapt and eventually went out of business entirely). This disruption was significant enough that “The Netflix Effect” has become a way of referring to creative destruction examples in the internet era, though of course may other online companies have had an equally significant impact, such as Amazon, which has put many retailers out of business.
The Netflix Effect reveals two important things about creative destruction and, by extension, the modern economy in which creative destruction is allowed to take place. One is that, as innovation transforms industries and markets, creative destruction involves a constant sorting of winners and losers. In Netflix’s case, Netflix is the clear winner, as are its shareholders and arguably its customers and employees. One loser would be Blockbuster, as well as Blockbuster’s shareholders and employees.
The second thing The Netflix Effect reveals is that creative destruction can work both to disrupt and to create monopolies. While Netflix is a multibillion-dollar corporation in its own right, it has many more competitors in the field of video entertainment than Blockbuster did before its disappearance. Amazon, on the other hand, has integrated in such a way that it has destroyed competition in many different industries. While Amazon may seem “too big to fail” now (and some have called for Amazon to be broken up), the theory of creative destruction suggests that some new innovation may come along and dismantle even Amazon’s hold on the marketplace.