Creative Destruction in Economics Definition & Examples
Published: 20 March, 2022
Creative Destruction Definition
Creative Destruction is the ongoing process of innovating new products and services to replace old ones. New products meet customer needs better, making previous versions inadequate or obsolete. Good examples of Creative Destruction include smartwatches replacing wristwatches, cars with improved gas mileage, and streaming replacing CDs and DVDs.
Creative Destruction, a term that comes from macroeconomics, is the core statement. It states: Every economic development relies on creative or creative destruction, Old structures can be dismantled and destroyed by a new mix of production factors. For reorganization to occur, creative destruction is necessary.
Creative destruction is the basis for innovation, entrepreneurial growth, and prosperity, according to the economic philosophy of Joseph A. Schumpeter, an Austrian economist in the first half of the 20th century. What sounds contradictory at first glance becomes clear at second glance. But let’s start at the beginning.
Joseph Alois Schumpeter is an Austrian economist and social scientist, He was a professor since 1909, among others in Graz (1911 to 1919), Bonn (1925 to 1932) and since 1932 at Harvard University.
Schumpeter developed a theory of the economic development of the capitalist economic system, which he explained by intra-economic changes. These changes are based primarily on “dynamic entrepreneurs” who push through innovations, achieve pioneering profits and bring about the economic upswing. This process of “creative destruction” enables growth and technical progress.
Schumpeter thus made an important contribution to business cycle theory. However, he also feared the end of capitalism, as the innovation process would weaken, primarily due to bureaucratization in companies and an increased role for the state. Schumpeter is considered one of the most influential economists of the 20th century.
The 4 Waves Of Industrial Revolution offer a clear visual representation of the entire history of human civilization with an emphasis on cultural, technological, and organizational development. In combination with disruptive innovation examples, you will get a clearer picture of what creative destruction entails and how it can serve your business.
What Is Creative Destruction in Economics?
Creative destruction sounds pretty harsh at first. But what is it all about? The term goes back to the Austrian economist Joseph Schumpeter. He coined it in the first half of the 20th century. The economist believed that creative destruction is the basis of entrepreneurial growth, prosperity, and innovation.
Hardly anyone doubts that innovations are important for economic growth. But how can innovation come about in the first place? And what happens when the innovation is there? The old must perish and make way for the new markets. Although Joseph Schumpeter was referring to national economies, we can nonetheless apply the model of creative destruction applied to many other areas. And so we can explain the development of services, products, technologies, and methods by this model.
Read also our article about the connection between creativity and innovation.
The economist Joseph Schumpeter was the first to coin the term “creative destruction”. Creative destruction is the destruction of old markets and those active in them through innovation, & inventing of new markets, this can be new technologies, methods, business models, services, or products.
In the first half of the 20th century, Joseph Schumpeter came to the conclusion that markets and economies do not develop statically, but that dynamic development takes place. Individual products or services are therefore not improved and refined in small steps, but innovative ideas are the fuel of the market economic growth.
Innovation and risk-taking can be important keys to success for companies. According to Schumpeter, creative destruction is the driving force of capitalism. Creative destruction ensures that there can continue to be growth and progress and that we can generate sustainable wealth. From this, we can conclude the following:
- If companies are willing to constantly question their business model and adapt it if necessary, they have a better chance of remaining active in the market.
- Newly founded companies and start-ups should be given special support, as innovative ideas often come from new market participants. These do not have to take into account already established products and existing markets.
Standstill Means Regression
“The new”, according to Schumpeter in his book “Capitalism, Socialism, and Democracy”, allows for erratic, radical, and dynamic development. Many companies, however, try to manifest stability and plannability as basic principles. It may be in the nature of man to strive for stability and to avoid change.
From a business perspective, however, this is tantamount to standing still and insisting on the status quo. In an economic system characterized by competition, companies strive for development by moving past and strengthening their competitive positions.
Creative Destruction In Context
If you want to develop, you need more. This “more” is the “creative destruction”. “Creative destruction” in this context means:
- to question the status quo and to improve permanently
- to create something “new”: the “old” faces competition and disappears. “New” refers not only to products and inventions but also to processes, methods, procedures, …
- the “new”, the innovation, changes everything that was before (for the better) and brings about further and far-reaching changes
- these changes have an impact on many companies, create new jobs, new business models, technologies, and industries, or more generally formulated:
Creative destruction = the better is the enemy of the good
Creative Destruction – Innovations Mean Opportunity And Risk
Not many people welcome innovations and changes joyfully and with a warm welcome. We like to stick with the tried and true. We like habits and are happy to persist if it feels good so far. However, without economic development, there is no further growth, and capitalism is built on this.
If a company has a product that is actually doing well in the market and then rests on it, it can quickly be overtaken by competitors. The competitor’s product offers something completely new. Of course, the competitor doesn’t know whether this will be well received. For this reason, innovations are always a risk. They are part of the entrepreneurial risks that you have to take if you want to survive as a company in the long term.
If a company manufactures carriages, even if they are the best, most beautiful, and even cheapest carriages available, this does not benefit the company at all if the competitor brings cars onto the market. The carriage manufacturer can invest as much as he likes in advertising and marketing, he will simply be overrun by the car manufacturer. It is therefore important for managers to allow innovations and take risks time and again. Entrepreneurial thinking and action do not involve simply accepting every risk, but analyzing them and proceeding.
In today’s fast-paced world, where change is the order of the day, companies must also adapt. Either they simply react to these changes, or they try to actively shape the market. The concept of creative destruction is, therefore, more relevant to modern companies than ever before.
Creative Destruction Economics Examples
The following are some creative destruction examples of immense value creation:
- The printing of books ensured that knowledge could be disseminated and enabled the education of the population
- The record player has been replaced by cassettes, cassettes by CDs, and CDs by digital offerings
- Automobiles have displaced carriages. The automobile provides mobility (and created gas stations)
- Digital innovations for photography have almost completely replaced analog photography
- The railroad ensured the settlement of larger areas and faster communication
- In the future, electric cars and autonomous driving cars will entirely replace cars with gasoline or diesel
- Assembly line work was a process innovation that lowered the cost of cars
These creative destruction examples show that often not only the old products disappear from the market, but also their manufacturers. However, there are always companies that recognize the current trends and adapt accordingly. Those that manage to adapt in this way often also succeed in continuing to secure market share.
- The Internet, of course, is changing pretty much everything we know – from television to social interaction (and also made publication formats like this blog possible in the first place)
- Mobile telephony and smartphones changing the telecommunications industry and creating something like “apps”
- Peer-to-peer data exchange was ultimately the basis for the digitization of the music industry
- and many, many more that you can find in our article on disruptive innovation examples
Conclusion On Creative Destruction
Creative destruction teaches us that we should generally place more emphasis on competition and market mechanisms in our economy. We must avoid any type of overregulation by politicians, which should allow companies to develop and innovate. Innovations are always a risk, but they also offer a great opportunity to help shape future markets. Those who do not develop further, do not take risks, and do not dare to innovate will probably not be able to survive in the long term. In this context, there are of course also many examples of innovation flops.
Frequently Asked Questions:
- What causes creative destruction?
Creative destruction is the process by which capitalist enterprise creates a continuously changing economy. The closing of old industries and businesses that are no longer profitable allows the resources to be used for more productive activities.
- What is Schumpeter's theory?
Schumpeter believed that capitalism's success would eventually destroy it. Schumpeter believed that the economic system would eventually produce a large intellectual group that could survive by attacking the system that allowed private property and the freedoms that were necessary to sustain its existence.