Joseph Schumpeter and Creative Destruction

positive effects of globalization

The original concept of creative destruction was introduced by the German economist and sociologist Werner Sombart (1863–1941) and developed and popularized by the brilliant Austrian-American economist Joseph Schumpeter (1883–1950) in his book Capitalism, Socialism and Democracy (1942).

From Schumpeter’s perspective, the process of creative destruction refers to disruptive new business platforms, methods, processes, products, and services. Once significant inefficiencies and gaps in the status quo have been identified in any economy, the new developments replace the old, obsolete schemes. The new platforms come to life, invigorating and re-energizing society. Fortunately, much more is created than destroyed, that is, there is a substantial net gain involved; otherwise, the creative destruction process would not constitute a self-sustaining mechanism. In short, despite the unquestionable negative side-effects, on the average, by and large, the net effect is positive globalization.

Sadly, there rarely are any halfway measures for these cases; the usual situation is total substitution which, understandably, creates a painful disruptive impact for employees, suppliers, and investors of the industry or sector under transformation. There are countless examples of this phenomenon. Let’s mention three:

  • The substitution of vacuum tubes for transistors.
  • The introduction of automatic telephone switchboards to replace manual plug-in systems.
  • A relatively recent example of creative destruction has to do with newspapers and print media in general.

Let’s draw out the most recent example of creative destruction. For a few years already, there has been a systematic, and at times quite dramatic, decline in printed materials, more so in developed countries. The whole world is pointing in that direction, as the Internet provides free information and eases the process of electronically subscribing to newspapers and other media services. Subscription rates for electronic devices is substantially cheaper, not to mention immediately delivered, than printed; readers have, therefore, increasingly leaned towards the e-devices, using their tablets, mobile phones, or computers, rather than physically turning the pages of a printed newspaper or magazine. In addition, free newspapers have entered the market – yet another example of how technology is changing habits for the better. Of course, that cannibalization of print media in favor of e-reading has its limits. Print media is not going to vanish; however, the new equilibrium in print media is going to be found substantially below to what it was before.

In fact, creative destruction is society’s primary growth pattern. Fortunately it tends to be much more creative than destructive. Undoubtedly, one of the most typical mechanisms of positive globalization.

Unfortunately though, the destruction is inevitable. Operations that become obsolete sooner or later are affected by a wave of renewal, and eventually disappear from the market or will be minimized. Mahatma Gandhi’s dictum “Do or die” illustrates the phenomenon quite well.

Free-market mechanisms have proven to be the best instruments to add value to society despite the often rude lessons they inflict, such as the never-ending creative destruction processes inherent to them.

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About Martin Marmolejo

Global Investment Manager | Founder & Managing Director at MMA Global Investment Management | Proud husband and father | Follow me @globalmarmolejo.

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  1. […] Joseph Schumpeter and Creative Destruction […]

  2. […] The process of substitution and displacement of old technologies and business models for new and significantly better ways of doing things has been very appropriately named by economists as creative destruction. […]

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