Explaining Creative Destruction

Leander McCormick-Goodhart provides an overview of the concept of creative destruction

The term “creative destruction" was first coined by Joseph Schumpeter in his book Capitalism, Socialism and Democracy in 1942.

Schumpeter was an economist of the Austrian School which advocated a laissez-faire approach to economic policy and argued that the ephemeral human nature made it unreliable to mathematically model a changing market. Schumpeter argued that long-wave cycles were caused by a step change in technology or a significant innovation. Innovation is a strong source of market power and entrepreneurs can therefore compete with existing firms in an industry, eroding their profits and market share and eventually becoming more powerful than them.

Consequently, “creative destruction" describes the process of industrial transformation, from a competitive to a monopolistic market and then back to a competitive one. We can see the idea of “creative destruction" in action today as CDs are gradually being replaced by MP3 players and digital music downloads.