Overview

Capitalism is a storm. It constantly destroys the old to create the new. The car destroyed the horse carriage. Netflix destroyed Blockbuster. This process is painful for the losers (carriage drivers), but it is the engine of progress.

Core Idea

The core idea is Innovation is Destructive. You can’t have the new without killing the old. Trying to save the old (Bailouts) just stops progress.

Formal Definition

The process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. Coined by Joseph Schumpeter.

Intuition

  • The Forest Fire: A forest fire burns down old, dead trees. This clears space and returns nutrients to the soil so new, stronger trees can grow. If you stop every fire, the forest becomes choked and unhealthy.

Examples

  • Kodak: They invented the digital camera, but refused to sell it because it would destroy their film business. So Apple destroyed them instead.
  • Uber: Destroyed the taxi monopoly.
  • AI: Currently destroying the graphic design and copywriting industries.

Common Misconceptions

  • Monopolies last forever: Schumpeter argued that monopolies are temporary. They get lazy, and then a startup invents something better and kills them. (Microsoft was a monopoly, then Google happened).
  • The Innovator’s Dilemma: Why big companies fail. They are too good at listening to their current customers (who want better film) and miss the future (digital).
  • Luddites: People who smash machines to save jobs.

Applications

  • Policy: Should the government save dying industries (Coal)? Creative Destruction says no. Help the workers (retraining), but let the industry die.

Criticism / Limitations

  • Social Cost: It destroys communities. When the steel mill closes, the whole town dies. The “destruction” is real and painful.

Further Reading

  • Schumpeter, Joseph. Capitalism, Socialism and Democracy.
  • Christensen, Clayton. The Innovator’s Dilemma.