Schumpeter’s Creative Destruction: Die to Live

Have You Ever?

Have you ever played with building brick toys? One day, you might make a fantasy castle. The next, you could tear it down and create a modern skyscraper. Their whole appeal is that you can make fantastic, unique creations with the same core materials of these little blocks. You reuse the blocks whenever you want to build something new, so you first cannibalize that which is old, destroying it.

The Explanation

This process could very well be called a form of creative destruction. Like a phoenix rising from the ashes, the death of something old makes way for something new.

Definition of Schumpeter’s Creative Destruction

Joseph Schumpeter first popularized the term “creative destruction” in 1942. In his book, Capitalism, Socialism and Democracy, he analyzed Karl Marx’s theories and writings on capitalism. Creative destruction is the process of industrial change in which the economic structure is so radicalized from the inside that the system falls apart while a new system is made.

How It Works

Marx himself never used the term, but he did point out the basic ideas behind creative destruction in his observations of capitalism. He claimed that in times of great crises, “a great part not only of existing production, but also of previously created productive forces, are periodically destroyed.” Capitalism doesn’t prevent these crises but rather encourages them - they become routine.

Joseph Schumpeter further developed the concept in his book, Capitalism, Socialism and Democracy. Schumpeter wrote, “capitalist economy is not and cannot be stationary.“ It needs disruption and destruction to allow for innovation. Creative destruction assures that the market and thus the economy will remain dynamic and changing. Therefore, Schumpeter argued, creative destruction is a key part of capitalism. 

Creative destruction in general is a cycle of death and rebirth. An innovation by an entrepreneur is introduced and shakes up the system. This innovation makes the contemporary ideas, technologies, and inventions old and obsolete. The old dies off and makes room for the new, but it’s only a matter of time before this new becomes old itself. 

This vital process of the capitalist system, Schumpeter cautioned, would eventually lead to its overall demise. Like a snake eating its own tail, capitalism would become unsustainable, and the destruction would fail to produce any new creations.

Later Developments

The idea of creative destruction has become somewhat different in more recent years. Marxian economic theorists use the term to describe the general process of gathering and then destroying wealth under capitalism. Social scientists use both Marx’s and Schumpeter’s definitions and have added their own ideas to the mix. Specifically, Schumpeter’s idea of creative destruction is sometimes called Schumpeter’s Gale, which is a reference to his description of the process as “the gale of creative destruction.” Mainstream economics has even warped the initial term to include processes that increase the efficiency of a company through smaller targeted destructions - methods like downsizing, which don’t fit with Schumpeter’s idea of creative destruction.

So What?

Creative destruction is more relevant now than ever. In the past decade alone, several gigantic titans of industry have died off in record time. Just think of some headlines of articles. “Millennials are Killing” seems to be the first three words in a majority of them, but new innovations kill off industries that can’t adapt as fast. CDs and MP3s got replaced with music streaming services, newspapers got replaced with online journal sites and apps, and department stores got replaced by online shopping.

New creations inspire, but destruction can be very harmful. The constant death and rebirth of markets mean an uncertain market. That translates to a fair amount of unemployment and general job uncertainty. If the market is always changing, then the workers need a skill set that includes very specific knowledge over an incredibly wide range. 

Creative destruction has its ups and downs. It’s important to recognize the facts of the economy. Nothing is fixed. The only constant is change - and that fact itself, if Schumpeter is to be believed, might even change.

Think Further

  1. What are some other industries that are failing and getting replaced by new ones?
  2. Which do you think outweighs the other: the benefits or the detriments of Schumpeter’s creative destruction?
  3. Do you think creative destruction is a sustainable process? Why or why not?


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Learn More

  1. Diamond, Arthur M. Jr., “Schumpeter’s Creative Destruction: A Review of the Evidence.” Journal of Private Enterprise, vol 22, issue 1, pp 120-146, Fall 2006. 
  2. Elliot, “Marx and Schumpeter on Capitalism’s Creative Destruction: A Comparative Restatement.” The Quarterly Journal of Economics, Volume 95, Issue 1, pp 45–68, August 1980. DOI: 10.2307/1885348.
  3. Reinert, Hugo and Erik S. Reinert. “Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter.” Friedrich Nietzsche (1844–1900), Springer, pp 55-85, 2006. DOI: 10.1007/978-0-387-32980-2_4.
  4. Schubert, Christian. “How to evaluate creative destruction: reconstructing Schumpeter’s approach.” Cambridge Journal of Economics, vol 37, issue 2, pp 227-250, Mar 2013. DOI: 10.1093/cje/bes055.
  5. Schumpeter, Joseph A. Capitalism, Socialism and Democracy. Reprint by Taylor & Francis, 2003. ISBN: 0-203-20205-8.