Additional Resources

  1. 1 Creative Destruction Creative Destruction Refers To ... [economics.mit.edu]
  2. Why Schumpeter Was Right: Innovation, Market Power, And Creative ... [people.hbs.edu]
  3. Prophet Of Innovation: Joseph Schumpeter And Creative Destruction ... [princeton.edu]
  4. Marx And Schumpeter On Capitalism's Creative Destruction: A ... [ic.ucsc.edu]

Definition

Creative destruction, sometimes known as Schumpeter's gale, is a concept in economics which since the 1950s has become most readily identified with the Austrian American economist Joseph Schumpeter who derived it from the work of Karl Marx and popularized it as a theory of economic innovation and the business cycle.

Creative destruction

Creative Destruction was a term coined back in 1942 when Joseph Schumpeter used it in one of his books. He used it to denote the new methods of transportation, production, or any other type of innovation that revolutionizes the market, cutting down the previous trends completely.

What is creative destruction?

The simplest way of explaining Creative Destruction is that it is something that kills an older trend just as something new comes in. There are a lot of examples that come under the umbrella of this topic. Some of the most common ones include personal computers and compact disks. Since smart phones have almost wiped out regular cell-phones entirely, it won’t be long before they are comprised under the examples of the same category. Joseph Schumpeter – a 20th century economist – even related Creative Destruction to capitalism.

The concept

Consider an existing firm in a market that is profitable and well-positioned. This market is basically stable. Now, when a new product comes along, it creates a new market which is smaller to the older market, at least initially. People don’t tend to switch from the old market to the newer one due to a couple of different reasons, neither do the big players. However, some investors tend to move as the newer market will offer a better ROI.

While the new market continues to grow, people start shifting with an even higher rate and before you know it, the new market with an innovative product is bigger than the existing market. This in turn, also affects the players of the affecting market as the customers are not inclined towards their product anymore. Consequently, the once market leaders find it hard to survive and either go bankrupt or dissolve completely.

The key here is to realize the importance of a new technology or invention because if it solves the point-of-pain of people better than the existing product, then people will switch to it sooner or later. This does not mean that the older market will dissolve. It might still continue, however, the number of players in the market will decrease drastically.

Examples

One of the greatest examples of Creative Destruction is the US postal service. It still exists but its market shrunk with the arrival of electronic mail. It is getting even smaller as shipment services like e-Bay were launched into the market.

Another very good example of Creative Destruction is printed newspapers. Formerly, we saw a lot of advertising revenue being generated solely by the newspapers. However, it got taken over as the television came along. Even today, we can see the shifts in ad revenue generation moving towards internet marketing as it is getting more popular every day.

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