Creative destruction, introduced in 1942 by the economist Joseph Schumpeter, describes the process of transformation that accompanies radical innovation. 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. Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ... Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ... Capitalism generally refers to an economic system in which the means of production are all or mostly privately[1][2] owned and operated for profit, and in which investments, distribution, income, production and pricing of goods and services are determined through the operation of a free market. ... Entrepreneurs created by Thomas Clarke in 2001. ... World GDP/capita changed very little for most of human history before the industrial revolution. ... A monopoly (from the Greek language monos, one + polein, to sell) is defined as a persistent market situation where there is only one provider of a product or service, in other words a firm that has no competitors in its industry. ...

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 (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 (better example needed) 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) 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. Xerox Corporation (NYSE: XRX) (name pronounced ) is a global document management company, which manufactures and sells a range of color and black-and-white printers, multifunction systems, photo copiers, digital production printing presses, and related consulting services and supplies. ... Polaroid Corporation was founded in 1937 by Edwin H. Land. ... Profit is what is gained, after costs are accounted for. ... Wal-Mart Stores, Inc. ... Montgomery Ward (later known as Wards) was an American department store chain, founded as the worlds first mail order business in 1872 by Aaron Montgomery Ward. ... This article does not cite any references or sources. ... Sears, Roebuck and Company is an American mid-range chain of international department stores, founded by Richard Sears and Alvah Roebuck in the late 19th century. ... For the meaning of cassette in genetics, see cassette (genetics). ... The 8-track cartridge is a now-obsolete audio storage magnetic tape cartridge technology, popular during the 1960s and 1970s. ... A compact disc or CD is an optical disc used to store digital data, originally developed for storing digital audio. ... For other uses, see MP3 (disambiguation). ...

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. In economics, market power is the ability of a firm to alter the market price of a good or service. ... Economics (deriving from the Greek words οίκω [okos], house, and νέμω [nemo], rules hence household management) is the social science that studies the allocation of scarce resources to satisfy unlimited wants. ... Competition characterises a biochemical, ecologic, economic, political, or sporting activity whereby two or more individuals or groups strive antagonistically against one another for some reward. ... In economics, endogenous growth theory or new growth theory was developed in the 1980s as a response to criticism of the neo-classical growth model. ... Evolutionary economics is a relatively new economic methodology that is modeled on biology. ...

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:

• 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)

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 idea as such derives from the philosophy of Friedrich Nietzsche, but scholars today agree that Schumpeter, although he did read Nietzsche himself, took the concept and phrase from the work of fellow economist Werner Sombart. Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ... Year 1942 (MCMXLII) was a common year starting on Thursday (the link will display the full 1942 calendar) of the Gregorian calendar. ... Friedrich Wilhelm Nietzsche (October 15, 1844 – August 25, 1900) (IPA: ) was a 19th-century German philosopher. ... Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ... Werner Sombart Werner Sombart (January 19, 1863-May 18, 1941) was a German economist and sociologist, the head of the Youngest Historical School and one of the leading Continental European social scientists during the first quarter of the 20th century. ...

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 Schumpeter claimed had little relevance to the real world. Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ... Perfect competition is an economic model that describes a hypothetical market form in which no producer or consumer has the market power to influence prices. ... The supply and demand model describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). ... Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ...

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. Peter Howitt (born May 5, 1957 in Manchester) is an English actor and film director. ... Econometrica is a prestigious academic journal of economics, publishing articles in not only econometrics but in many areas of economics. ...

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. Harvard Business School, officially named the Harvard Business School: George F. Baker Foundation, and also known as HBS, is one of the graduate schools of Harvard University. ... Richard L. Nolan is currently William Barclay Harding Professor of Business Administration at Harvard Business School Stages of growth model Harvard Business School Biography Categories: | ... Downsizing is a euphemism referring to layoffs initiated by a company in order to cut labor costs by reducing the size of the company. ... In marketing and strategic management, sustainable competitive advantage is an advantage that one firm has relative to competing firms. ...

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. For other uses, see Manhattan (disambiguation). ...

Alternative name

Per the following text, this process is also known as Schumpeter's Gale: Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ...

"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) The United States Steel Corporation (NYSE: X), later named USX Corporation in 1991, then renamed the United States Steel Corporation again in 2001 when the shareholders of USX spun off the steelmaking assets of the company after its acquisition of Marathon Oil, was once the largest steel producer and largest... Joseph Schumpeter Joseph Alois Schumpeter (February 8, 1883 – January 8, 1950) was an economist from Austria and an influential political scientist. ...

Antonyms

Destructive creativity is a mental process involving generation of ideas and behavior focused on harmful and destructive goals, such as committing crimes, extortion, organising criminal systems, harming business efficiency to feed socio-economic parasitism, implying that the sustainability of predation is threatened by improved efficiency. Psychology of system and software testing is also based on the knowledge of destructive creativity (try to break, try to falsify, be nasty) in order to understand and prevent possible destructive attacks by malicious software and other internet crime.

This looks like an apparent antonym which actually has nothing whatsoever to do with Creative Destruction. The concepts are skew.

See also

• Creativity techniques
• Disruptive technology

Creativity techniques are heuristic methods to facilitate creativity in a person or a group of people. ... A disruptive technology or disruptive innovation is a technological innovation, product, or service that eventually overturns the existing dominant technology or product in the market. ...

References

• Philippe Aghion and Peter Howitt. A Model of growth through Creative Destruction. Econometrica 60:2 (1992), pp. 323-51.
• Philippe Aghion and Peter Howitt. Endogenous Growth Theory. MIT Press. 1997.
• Clayton M. Christensen. "The Innovator's Dilemma". HarperBusiness. 2001.
• Richard Foster and Sarah Kaplan. "Creative Destruction: Why Companies that are Built to Last Underperform the Market - And how to Successfully Transform Them". Currency publisher. 2001.
• J. Stanley Metcalfe. Evolutionary Economics and Creative Destruction (Graz Schumpeter Lectures, 1). Routledge. 1998.
• Richard L. Nolan and David C. Croson, Creative Destruction: A Six-Stage Process for Transforming the Organization. Harvard Business School Press. 1995.
• Max Page. The Creative Destruction of Manhattan, 1900-1940. University of Chicago Press. 1999.
• Hugo Reinert and Erik S. Reinert. "Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter." In J.G. Backhaus and W. Drechsler, eds. Friedrich Nietzsche: Economy, and Society. Springer. 2006.
• Joseph A. Schumpeter. The Process of Creative Destruction. Unwin. 1942.
• James M. Utterback. Mastering the Dynamics of Innovation. Harvard Business School Press. 1996.
• Roger D. Smith. "The Disruptive Potential of Game Technologies: Lessons Learned from its Impact on the Military Simulation Industry". Research Technology Management 50:Sept-Oct (2006), pp. 57-64.
• Thomas Homer-Dixon. Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization. Island Press. 2006.