Insights On Creative Destruction and Technology

For the most part, working for or running a business is a way for someone to earn income and make a living. Beneath the surface though, business is an evolving process that can lead in a multitude of directions. A business’s unpredictable path can be steered by trends and opportunities contingent on the industry in which it operates. Creative destruction has a way of phasing out old technologies and inviting the new when applied to business models and economics. This theory has upsides and downsides in relation to technology, as well as economic repercussions. 

Key Takeaways

• Creative destruction is an economic concept described by Joseph Schumpeter in his 1942 book, “Capitalism, Socialism and Democracy.”
• Schumpeter derived the idea from the work of Karl Marx.
• Creative destruction describes the process in which new technologies and innovations replace old ones and, in the process, destroy existing wealth and economic structures.
• This process can be good or bad, depending on your view and whether you profit from new technologies or suffer due to the loss of your livelihood or wealth when existing structures are destroyed.

What is Creative Destruction?

Creative destruction is a concept coined by Austrian-American economist and political scientist Joseph Schumpeter in his book “Capitalism, Socialism and Democracy.” Schumpeter’s theories revolve around the concept of competition and innovation being the chief contributing factors to economic growth. Creative destruction, in essence, is when a new invention destroys what came before it. Schumpeter declared that “this process of Creative destruction is the essential fact about capitalism.” Of course, there are different perspectives on whether this idea yields positive or negative results. 

Pros and Cons

On the positive side, innovation from creative destruction can be a source of economic expansion resulting in a significant number of new jobs and technologies derived from new industries and even sub-industries. Progress of this nature has the ability to transform entire economies and improve standards of living. Think of what the invention of the automobile did for transportation, commerce, jobs and economic development: It created a plethora of new employment opportunities while allowing people to get where they needed to go faster than a horse-drawn carriage ever could. Not to mention the other industries like oil, steel, roadway development and automotive repair that were created or boosted because of this advancement.

Although with good, usually comes bad. Consider the industries that have been substantially reduced or eliminated by Creative destruction. For instance, the agriculture industry used to comprise 41% of the U.S. civil workforce in 1900, but improvements produced in manufacturing by the Industrial Revolution reduced that figure to 3% by 1980. This caused a considerable number of low-skilled workers to be left unemployed and unqualified to work in the newer factory jobs. This same scenario is playing out today with computers facilitating tasks once performed by people, which is phasing out opportunities in lower-skilled positions, sales, retail, manufacturing, and financial analysis positions, to name a few.

Important

Creative destruction may destroy value in the short term but is meant to generate net-positive value in the long term.

Industries in Danger

Presently, there are a number of industries that have been on the decline from the effects of creative destruction. For example, streaming services like Netflix (NFLX), Amazon (AMZN) and Hulu have negatively affected brick-and-mortar movie and gaming rental stores, as evidenced by massive store closings. Additionally, the low cost of these services is even causing consumers to reconsider the high costs of cable. Data recovery services will also continue to take a hit as cloud-computing services are seeing appreciable growth. Recordable media like CDs and DVDs will also fall victim to digital and streaming services as storage space and accessibility via mobile devices is superior.

Digital photography and film have also harmed photography lab services, including development and restoration, as demand for physical film is declining. Even more concerning is the emergence of 3D Printing and its potential influence on various manufacturing industries. With the ability to print objects or machines that would normally be produced on an assembly line, this may have a massive impact on employment in particular manufacturing industries.

What Can Make Creative Destruction Worse?

Several factors can prolong the “destructive” part of creative destruction and make it worse in the short term. For example, some regions may be especially hard hit by job loss and struggle to replace old jobs with new ones at a sufficient scale. Additionally, a lack of skilled employees or training programs can require governments to step in to fill the gap, which puts a burden on taxpayers and makes creative destruction less efficient.

What Are the Main Parts of Creative Destruction?

Creative destruction focuses on the interplay of innovation, competition, entrepreneurship, and capital. New innovations replace old ones, prompting entrepreneurs to develop new industries. This leads to increased competition as companies vie for market share. To ensure success, companies seek out existing capital to entrench and grow their business.

How Does Creative Destruction Relate to Business Cycles?

Schumpeter’s theory of creative destruction supports his theory of the business cycle. According to Schumpeter, capitalist development goes through four phases: prosperity, recession, depression, and recovery. These phases can be mapped as waves, with a long wave marking recovery and prosperity and a short wave signifying recession and depression. Based on this model, Schumpeter argues that new, economy-disrupting innovations occur approximately every 50 to 100 years.

The Bottom Line

Creative destruction is a serious and prevalent concept and is a necessary component of doing business. As long as we live in a capitalist society, competition and innovation will force businesses to progress to develop the ideal product or service. Subsequently, it will hurt those who remain stagnant and will reward those who are able to plan and adapt around these transformations. The landscape of business will undeniably change, but how it evolves will be an intriguing course to behold.