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The phrase creative destruction was introduced by the economist Joseph Schumpeter (1883–1950) in 1942 to describe the process by which innovation occurs in capitalist societies. A “process of industrial mutation” occurs as markets are opened up, revolutionizing “the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Schumpeter called this process “creative destruction,” and he held that it was the “essential fact about capitalism” (1962, p. 83).
For Schumpeter, the competitive process that characterized capitalism was not the timid elements of cost reduction but instead the creation of new products, new technology, or new markets, all of which threatened the lives of currently existing products or firms (1962, p. 84). It was such innovation that, for Schumpeter, generated overall economic growth and development, even while it often destroyed the value of sustained companies and monopoly rents. Successful innovation created new monopoly rents, but the process continued with waves of successive innovation. Schumpeter’s theory of creative destruction provides an explanation for dynamic industrial change.
The “Schumpeterian hypothesis” that temporary monopoly power is associated with economic growth has engaged generations of empirical workers who struggle with the requirement to make precise what is understood by “temporary” and “innovation” and what must be treated as exogenous to make such tests. There seems to be evidence for a positive association between research and development productivity and firm size, but it is not clear that this is sufficient for the hypothesis itself. Recent work on endogenous growth theory has attempted to operationalize Schumpeter’s notion of creative destruction by which one innovation destroys another.
The creative energy for innovation was supplied, Schumpeter argued, by the entrepreneur. It was the entrepreneur who found the means to put new inventions into place. Like Karl Marx (1818–1883), Schumpeter was persuaded that capitalism was destined to pass away: “Can capitalism survive?” Schumpeter asks in Capitalism, Socialism, and Democracy (1942), “No. I do not think it can” (1962, p. 61). But unlike Marx, Schumpeter saw the threat to capitalism coming from its very success, from an overreliance on rationality that he associated with capitalism. And unlike Marx, Schumpeter offered a prediction, not a prescription.
Schumpeter’s is a “tory” worldview (Stolper 1994, p. 30), not a sedate caricature of the feudal past but instead something akin to that expressed in Scottish essayist and historian Thomas Carlyle’s (1795–1881) description of the captains of industry as the heroes for a new age. Markus C. Becker and Thorbjørn Knudsen’s 2002 translation of omitted material from Schumpeter’s Theory of Economic Development (1911) makes clear the parallel between Schumpeter’s entrepreneur and Carlyle’s hero. Creative destruction is capitalism in the age of the hero, where the entrepreneur provides the creative energy for innovation and the destruction that it entails. What will destroy capitalism is the rationality that kills the heroic (Schumpeter 1962, p. 160).
Without the heroic ethic, which regards risk-taking as an obligation, the capitalist could not defend himself against those who wished to arrest the gales of creative destruction. In notes to Schumpeter’s “Can Capitalism Survive?” the editor reports this fascinating floor discussion:
Schumpeter was now asked why the feudal class in its days of glory was so much more capable of defending itself than the bourgeoisie is today. According to Schumpeter the answer was very simple. The knights of the feudal times were trained to fight and in battle they were superior to everyone else. The only way of defending itself that the bourgeoisie, however, has, is to take up the telephone and telephone Senator X and say, “Good God! Good God! Can’t you help us?” (Schumpeter 1991, p. 315)
This would not have been the response from an older capitalism manned by those bound to spouse and children, for whom “navigare necesse est, vivere non necesse est” (Seafaring is necessary, living is not), as noted in an inscription on an old house in Bremen, Germany (Schumpeter 1962, p. 160).
On the face of it, Schumpeter’s analysis suggests a role for policy in the promotion of growth through patent laws or subsidized research and development. But if Schumpeter’s capitalist can call up government assistance with a telephone call, then government policy with regard to technology should be considered endogenous. Once policy related to technological change is endogenous, it may benefit the existing few instead of the uncreated many of the future.
- Schumpeter, Joseph A.  1962. Capitalism, Socialism, and Democracy. 3rd ed. New York: Harper and Row.
- Schumpeter, Joseph A. 1991. The Economics and Sociology of Capitalism. Ed. Richard Swedberg. Princeton, NJ: Princeton University Press.
- Schumpeter, Joseph A. 2002. New Translations from Theorie der wirtschaftlichen Entwicklung. Trans. Markus C. Becker and Thorbjørn Knudsen. American Journal of Economics and Sociology 61 (2): 405–437.
- Stolper, Wolfgang F. 1994. Joseph Alois Schumpeter: The Public Life of a Private Man. Princeton, NJ: Princeton University Press.
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