Creative destruction

Creative destruction is a concept in economics that describes a process in which new innovations replace and make obsolete older innovations.
The concept is usually identified with the economist Joseph Schumpeter, who derived it from the work of Karl Marx and popularized it as a theory of economic innovation and the business cycle. It is also sometimes known as Schumpeter's gale. In Marxian economic theory, the concept refers more broadly to the linked processes of the accumulation and annihilation of wealth under capitalism.
The German sociologist Werner Sombart has been credited with the first use of these terms in his work Krieg und Kapitalismus. In the earlier work of Marx, however, the idea of creative destruction or annihilation implies not only that capitalism destroys and reconfigures previous economic orders, but also that it must continuously devalue existing wealth in order to clear the ground for the creation of new wealth.
In Capitalism, Socialism and Democracy, Joseph Schumpeter developed the concept out of a careful reading of Marx's thought. In contrast with Marx – who argued that the creative-destructive forces unleashed by capitalism would eventually lead to its demise as a system – Schumpeter reinforced the evolutionary nature of capitalist economies, downplaying the concerns of static competition analysis, and reinforcing the importance of dynamic competition analysis. In his words, "This process of Creative
Destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in The problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them. As long as this is not recognized, the investigator does a meaningless job. As soon as it is recognized, his outlook on capitalist practice and its social results changes considerably". Despite this, the term subsequently gained popularity within mainstream economics as a description of processes such as downsizing to increase the efficiency and dynamism of a company. The Marxian usage has, however, been retained and further developed in the work of social scientists such as David Harvey, Marshall Berman, Manuel Castells and Daniele Archibugi.
In modern economics, creative destruction is one of the central concepts in the endogenous growth theory.
In Why Nations Fail, a popular book on long-term economic development, Daron Acemoglu and James A. Robinson argue the major reason countries stagnate and go into decline is the willingness of the ruling elites to block creative destruction, a beneficial process that promotes innovation.

History

By Karl Marx

Although the modern term "creative destruction" is not used explicitly by Marx, it is largely derived from his analyses, particularly in the work of Werner Sombart, and of Joseph Schumpeter, who discussed at length the origin of the idea in Marx's work.
In The Communist Manifesto of 1848, Karl Marx and Friedrich Engels described the crisis tendencies of capitalism in terms of "the enforced destruction of a mass of productive forces":

In these crises, a great part not only of existing production, but also of previously created productive forces, are periodically destroyed.

A few years later, in the Grundrisse, Marx was writing of "the violent destruction of capital not by relations external to it, but rather as a condition of its self-preservation". In other words, he establishes a necessary link between the generative or creative forces of production in capitalism and the destruction of capital value as one of the key ways in which capitalism attempts to overcome its internal contradictions:

These contradictions lead to explosions, cataclysms, crises, in which... momentaneous suspension of labour and annihilation of a great portion of capital... violently lead it back to the point where it is enabled fully employing its productive powers without committing suicide.

In the Theories of Surplus Value, Marx refines this theory to distinguish between scenarios where the destruction of values affects either use values or exchange values or both together. The destruction of exchange value combined with the preservation of use value presents clear opportunities for new capital investment and hence for the repetition of the production-devaluation cycle:

the destruction of capital through crises means the depreciation of values which prevents them from later renewing their reproduction process as capital on the same scale. This is the ruinous effect of the fall in the prices of commodities. It does not cause the destruction of any use-values. What one loses, the other gains. Values used as capital are prevented from acting again as capital in the hands of the same person. The old capitalists go bankrupt.... A large part of the nominal capital of the society, i.e., of the exchange-value of the existing capital, is once for all destroyed, although this very destruction, since it does not affect the use-value, may very much expedite the new reproduction. This is also the period during which moneyed interest enriches itself at the cost of industrial interest.

Social geographer David Harvey sums up the differences between Marx's usage of these concepts and Schumpeter's: "Both Karl Marx and Joseph Schumpeter wrote at length on the 'creative-destructive' tendencies inherent in capitalism. While Marx clearly admired capitalism's creativity he... strongly emphasised its self-destructiveness. The Schumpeterians have all along gloried in capitalism's endless creativity while treating the destructiveness as mostly a matter of the normal costs of doing business".

By Werner Sombart

In philosophical terms, the concept of "creative destruction" is close to Hegel's concept of sublation. In German economic discourse it was taken up from Marx's writings by Werner Sombart, particularly in his 1913 text Krieg und Kapitalismus:

Again, however, from destruction a new spirit of creation arises; the scarcity of wood and the needs of everyday life... forced the discovery or invention of substitutes for wood, forced the use of coal for heating, forced the invention of coke for the production of iron.

Other early usage

In the Origin of Species, which was published in 1859, Charles Darwin wrote that the "extinction of old forms is the almost inevitable consequence of the production of new forms". One notable exception to this rule is how the extinction of the dinosaurs facilitated the adaptive radiation of mammals. In this case creation was the consequence, rather than the cause, of destruction.
File:Shiva as the Lord of Dance LACMA edit.jpg|thumb|In Hinduism, the god Shiva is simultaneously destroyer and creator, portrayed as Shiva Nataraja, which is proposed as the source of the Western notion of "creative destruction".
Hugo Reinert has argued that Sombart's formulation of the concept was influenced by Eastern mysticism, specifically the image of the Hindu god Shiva, who is presented in the paradoxical aspect of simultaneous destroyer and creator. Conceivably this influence passed from Johann Gottfried Herder, who brought Hindu thought to German philosophy in his Philosophy of Human History , specifically volume III, pp. 41–64. via Arthur Schopenhauer and the Orientalist Friedrich Maier through Friedrich Nietzsche's writings.
Nietzsche represented the creative destruction of modernity through the mythical figure of Dionysus, a figure whom he saw as at one and the same time "destructively creative" and "creatively destructive". In the following passage from On the Genealogy of Morality, Nietzsche argues for a universal principle of a cycle of creation and destruction, such that every creative act has its destructive consequence:

But have you ever asked yourselves sufficiently how much the erection of every ideal on earth has cost? How much reality has had to be misunderstood and slandered, how many lies have had to be sanctified, how many consciences disturbed, how much "God" sacrificed every time? If a temple is to be erected a temple must be destroyed: that is the law – let anyone who can show me a case in which it is not fulfilled! – Friedrich Nietzsche, On the Genealogy of Morality

Other nineteenth-century formulations of this idea include Russian anarchist Mikhail Bakunin, who wrote in 1842, "The passion for destruction is a creative passion, too!" Note, however, that this earlier formulation might more accurately be termed "destructive creation", and differs sharply from Marx's and Schumpeter's formulations in its focus on the active destruction of the existing social and political order by human agents.

Association with Joseph Schumpeter

The expression "creative destruction" was popularized by and is most associated with Joseph Schumpeter, particularly in his book Capitalism, Socialism and Democracy, first published in 1942. Already in his 1939 book Business Cycles, he attempted to refine the innovative ideas of Nikolai Kondratieff and his long-wave cycle which Schumpeter believed was driven by technological innovation. Three years later, in Capitalism, Socialism and Democracy, Schumpeter introduced the term "creative destruction", which he explicitly derived from Marxist thought and used it to describe the disruptive process of transformation that accompanies such innovation:

Capitalism... is by nature a form or method of economic change and not only never is but never can be stationary.... The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.
... The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the process of industrial mutation 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. It is what capitalism consists in and what every capitalist concern has got to live in.
the perennial gale of Creative Destruction.

In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the disruptive force that sustained economic growth, even as it destroyed the value of established companies and laborers that enjoyed some degree of monopoly power derived from previous technological, organizational, regulatory, and economic paradigms. However, Schumpeter was pessimistic about the sustainability of this process, seeing it as leading eventually to the undermining of capitalism's own institutional frameworks:

In breaking down the pre-capitalist framework of society, capitalism thus broke not only barriers that impeded its progress but also flying buttresses that prevented its collapse. That process, impressive in its relentless necessity, was not merely a matter of removing institutional deadwood, but of removing partners of the capitalist stratum, symbiosis with whom was an essential element of the capitalist schema. he capitalist process in much the same way in which it destroyed the institutional framework of feudal society also undermines its own.