Creative Destruction

… a core concept in Economic Analysis and Atlas102

Joseph Schumpeter, 1883-1950

Joseph Schumpeter, 1883-1950

Concept description

Michael Cox and Richard Alm, in The Concise Encylopedia of Economics (reference below), describe how generations of economist have adopted Joseph Schumpeter’s seemingly paradoxical term, creative destruction, as a “shorthand description of the free market’s messy way of delivering progress.”

Cox and Alm cite the following quotation from Joseph Schumpeter’s Capitalism, Socialism, and Democracy (1942:

“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation – if I may use that biological term – that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. (p. 83)”

Cox and Alm go on to say:

“Although Schumpeter devoted a mere six-page chapter to “The Process of Creative Destruction,” … it has become the centerpiece for modern thinking on how economies evolve.

“Schumpeter and the economists who adopt his succinct summary of the free market’s ceaseless churning echo capitalism’s critics in acknowledging that lost jobs, ruined companies, and vanishing industries are inherent parts of the growth system. The saving grace comes from recognizing the good that comes from the turmoil. Over time, societies that allow creative destruction to operate grow more productive and richer; their citizens see the benefits of new and better products, shorter work weeks, better jobs, and higher living standards.

“Herein lies the paradox of progress. A society cannot reap the rewards of creative destruction without accepting that some individuals might be worse off, not just in the short term, but perhaps forever. At the same time, attempts to soften the harsher aspects of creative destruction by trying to preserve jobs or protect industries will lead to stagnation and decline, short-circuiting the march of progress. Schumpeter’s enduring term reminds us that capitalism’s pain and gain are inextricably linked. The process of creating new industries does not go forward without sweeping away the preexisting order.

“Transportation provides a dramatic, ongoing example of creative destruction at work. With the arrival of steam power in the nineteenth century, railroads swept across the United States, enlarging markets, reducing shipping costs, building new industries, and providing millions of new productive jobs. The internal combustion engine paved the way for the automobile early in the next century. The rush to put America on wheels spawned new enterprises; at one point in the 1920s, the industry had swelled to more than 260 car makers. The automobile’s ripples spilled into oil, tourism, entertainment, retailing, and other industries. On the heels of the automobile, the airplane flew into our world, setting off its own burst of new businesses and jobs.

Americans benefited as horses and mules gave way to cars and airplanes, but all this creation did not come without destruction. Each new mode of transportation took a toll on existing jobs and industries. In 1900, the peak year for the occupation, the country employed 109,000 carriage and harness makers. In 1910, 238,000 Americans worked as blacksmiths. Today, those jobs are largely obsolete. After eclipsing canals and other forms of transport, railroads lost out in competition with cars, long-haul trucks, and airplanes. In 1920, 2.1 million Americans earned their paychecks working for railroads, compared with fewer than 200,000 today.

What occurred in the transportation sector has been repeated in one industry after another – in many cases, several times in the same industry. Creative destruction recognizes change as the one constant in capitalism. Sawyers, masons, and miners were among the top thirty American occupations in 1900. A century later, they no longer rank among the top thirty; they have been replaced by medical technicians, engineers, computer scientists, and others.”

Atlas topic, subject, and course

Producer Theory and Competition (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

W. Michael Cox and Richard Alm, Creative Destruction, The Concise Encyclopedia of Economics, at http://www.econlib.org/library/Enc/CreativeDestruction.html, accessed 7 May 2016.

Page created by: Ian Clark, last modified 7 May 2016.

Image: Wikipedia, Joseph Schumpeter, at https://en.wikipedia.org/wiki/Joseph_Schumpeter, accessed 7 May 2016.