Akshay Dua
Department of Politics, University of California, Santa Cruz
Creative destruction, as formulated by Joseph Schumpeter, refers to the perennial process by which the modalities and outputs of production are transformed under capitalism, through the destruction of economic structures and the creation of new ones. In this view, capitalism is a violently evolutionary process, generating radical innovations that simultaneously advance society’s productive capacities and upend existing enterprises. While Schumpeter initially drew upon Marx in delineating the turbulent path of capitalist development generated by creative destruction, he departed from the latter author in emphasizing the positive material effects of this process over its self-destructive tendencies.
The ongoing processes of creative destruction that characterize capitalist development facilitate rapid technological advancement in a cyclical pattern of revolution, growth, and stagnation that fosters long-term material progress punctuated by recurrent short-term downturns. Creative destruction may entail the emergence of new commodities, markets, production methods, commercial opportunities, organizational strategies, or transportation infrastructure, so long as the economy is “revolutionized from within” (Schumpeter 2010, 27). As a result of creative destruction, capitalist competition “strikes not only at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.” (Schumpeter 2010, 74) Though capitalism produces huge amounts of wealth, cheapens commodities, and raises general standards of living in the long term, it repeatedly destroys businesses and creates economic shocks associated with short-term unemployment, impoverishment, and crises of production. Creative destruction, then, is closely associated with the motive forces underpinning capitalist change, as the prospect of innovation holds the possibility of delivering monopolistic market power to its authors (Diamond 2006, 121-122).
For Schumpeter, creative destruction was the beating heart of capitalism. As he explains in his widely influential Capitalism, Socialism and Democracy (2010 [1942]), “capitalist economy is not and cannot be stationary,” owing partly to its steady growth but more fundamentally to its immanent dynamism (Schumpeter 2010, 27). The constant threat of “actual or potential competition from new commodities or methods of production” animates a steady stream of innovations which render erstwhile economic structures unprofitable in a series of organic revolutions (28-29). As “the essential fact about capitalism,” creative destruction renders the study of business strategy or even the operations of existing economic institutions a secondary priority in the analysis of capitalist development (73). Coining ‘creative destruction,’, Schumpeter sought to establish both the paradoxical impracticality of perfect competition in short-term market activity and the enforcement of behaviour analogous to perfect competition in the long run (74-75). Borrowing from Marx, Schumpeter held that “capitalist evolution is driven by technological competition between firms,” dismissing the notion that price signals fuel economic change by way of consumer choice (Fagerberg 2003, 129). Moreover, he argued that creative destruction gradually drove capitalism towards monopolistic competition by linking long-term success to costly innovations, while rejecting the association of monopoly and oligopoly with uniformly low levels of production and innovation (90). In his words, “the introduction of new methods of production and new commodities is hardly conceivable with perfect–and perfectly prompt–competition,” as firms are “in a less favorable position to evolve and judge new possibilities” in the short term (90-91). Thus, creative destruction undermines perfect competition in the short term but secures it in the long run, as sudden transformations in productive structures afford little possibility for adaptation but enable large-scale firms to displace their competitors over time.
The concept of creative destruction deeply informed Schumpeter’s normative and political views on capitalism. Although he recognized the significant misery for both workers and ‘entrepreneurs’ arising from cycles of innovation, as businesses collapsed and jobs were eliminated, Schumpeter held that capitalism was beneficial for the masses in the long term. In his view, creative destruction generates “an avalanche of consumers’ goods that permanently deepens and widens the stream of real income although in the first instance they spell disturbance, losses and unemployment.” (Schumpeter 2010, 59) Over time, capitalism thereby augments purchasing power and generally raises the standard of living through technological and scientific advances. The rationalization of production and development achieved through creative destruction evinces that “all the features and achievements of modern civilization are, directly or indirectly, the products of the capitalist process.” (111) That said, Schumpeter also believed that capitalism was destined for destruction and supplantation by socialism, not due to the failures or contradictions identified by Marx, but rather the success of capitalism (53-54). In one sense, the wealth and civilizational advancement emerging from creative destruction would eventually render social hierarchy and the working class obsolete (53-54). In another, the tendency towards monopoly would not only undermine the innovation associated with small-scale industry, but contribute to a bureaucratization and depersonalization of social institutions (140-144). Schumpeter’s position evidently draws upon and yet contradicts Marx’s vision of capitalist development: while both authors suggested that creative destruction would propel a movement towards socialism, the cause of this movement was variably identified with the material improvements and deprivations arising from capitalism.
Furthermore, Schumpeter held that the severe disjunctions associated with creative destruction would fuel “hostile reactions that constitute a latent challenge to the institutions underlying capitalism.” (Schubert 2013, 228) Ultimately, the boons of capitalism would be swallowed up by its repeated harms: that is, by the hardships paradoxically arising from the successes of capitalist development. In parallel, the huge technological advances and increasingly bureaucratized social order generated by creative destruction would render the social functions and elite status of the bourgeoisie obsolete (143-144). In Schumpeter’s (2010) words, “entrepreneurs and capitalists–in fact the whole stratum that accepts the bourgeois scheme of life–will eventually cease to function.” (139) Schumpeter (2010) thus expected the “perennial gale of creative destruction” to extend to the very last moments of capitalism, its self-destruction being the moment of creation of a new socialist civilization (73; 144-145).
Though Schumpeter’s prognostications did not come to pass, scholars have applied the insights of creative destruction to many historical and contemporary examples. Creative destruction was initially formulated in a context of industrial capitalism, typically referring to new technologies, consumer commodities, organizational methods, and scientific discoveries that transformed the apparatus of production, distribution, and consumption. It continued to be employed as such for much of the twentieth century, but found new footing in the late 1980s and early 1990s, accompanying a general growth in the academic interest in and acceptance of Schumpeter’s evolutionary economic ideas (Fagerberg 2003; Diamond 2009, 538). Particularly in the 1990s, the confluence of rapid technological advance, economic instability, and a tendency towards monopoly seemed well-accounted for by Schumpeter’s model of capitalist development (Akdere and Dinar 2023, 88-89). The breakneck pace of progress in computing, internet, information, and communication technologies accorded with Schumpeter’s systemic conception of innovation and technological diffusion achieved through creative destruction (Fagerberg 2003, 141; Reinert and Reinert 2019, 386).
In subsequent years, creative destruction was applied to the analysis of particular industries and national economies as a whole. While authors such as Diamond (2006) suggest that the US has become so technologically advanced due to its institutional openness to creative destruction, others such as Liu (2013) have employed the concept to frame the study of the expanding copyright industry (139; 2). McClare and Thomas (2021), meanwhile, have sought to amend the systemic fatalism of Schumpeter’s creative destruction, arguing that the venture capital revolution – itself a process of creative destruction in the financial sector – has averted the capitalist collapse he envisioned by sustaining small-scale firms and thus preventing total monopoly. Still other scholars have further sought to leverage creative destruction to explain historical processes of capitalist development. Nicholas’ (2003) study of early twentieth century US capitalism uses creative destruction to explain the way that market power stimulates, rather than suppresses, radical innovation, demonstrating that large-scale American firms were motivated by the pursuit of monopoly control over consumer markets. As Schumpeterian creative destruction has become more central to the field of modern evolutionary economics, its applications have continued to grow (Akdere and Dinar 2023, 88).
Despite Schumpeter’s strong association with creative destruction, though, the genealogy of the concept extends far beyond his figure. As multiple scholars (Reinert and Reinert 2019; Elliot 1980; Fagerberg 2003) have highlighted, Schumpeter’s ideas owe much to German economic thought of the nineteenth and early twentieth centuries. The most immediate connection to be drawn is to Marx, with whom Schumpeter himself engaged heavily in Capitalism, Socialism and Democracy. As Elliot (1980) notes, Schumpeter and Marx aligned closely in their understanding of capitalist’s developmental process as endogenous, uneven, cyclical, and revolutionary in character, regularly transforming the conditions of production and thereby generating both immense wealth and suffering (46). While Marx never used the term ‘creative destruction,’ his references to a violent evolutionary force underpinning capitalism that lay the ground for socialism was directly echoed by Schumpeter many years later, even if the latter viewed this force as ultimately beneficial for humanity in the long term (Akdere and Dinar 2023, 90). Even the monopolizing tendencies that Schumpeter identified with creative destruction were expressed by Marx: as Schumpeter put it, “more clearly than any other writer of his day Marx discerned the trend toward big business” (Elliot 1980, 56; Schumpeter 2010, 41). Besides Marx, Reinert and Reinert (2019) have traced Schumpeter’s thought to a series of other German thinkers, most notably Werner Sombart and Friedrich Nietzsche, who articulated the concept of creative destruction in economic and cultural terms, respectively (386). In this regard, Reinert and Reinert (2019) maintain that Schumpeter’s thought was not entirely novel within the German tradition, but mostly translated existing debates on cycles of social and economic change to an English audience (404).
Even as Schumpeterian creative destruction has obtained new life in the annals of evolutionary economics, it has remained the subject of debate. Arguably the most central of these debates concerns the long-run benefits of creative destruction, whether measured in material or normative terms. Though some scholars (Diamond 2006; McClure and Thomas 2021) have revived Schumpeter’s position that the long-term benefits of creative destruction outweigh the short-term costs for social welfare, Schubert (2013) argues that such conclusions are shaky. From a normative standpoint, it is unclear whether the things created are necessarily better than what is destroyed or whether it is even possible to evaluate the balance between gains and losses (Schubert 2013, 228-229). From a material standpoint, Schumpeter’s metric of social welfare as productive output or technological development possesses no clear connection to the actual distribution of access to said goods (237-238); a greater total accumulation of wealth does not necessarily equate to uniformly higher living standards.
The second major debate is more entrenched in evolutionary economics, concerning the relative capacities of monopolistic versus small-scale firms to effectively advance creative destruction. Scholars are divided over Schumpeter’s position on this matter. Diamond (2006) claims that Schumpeter’s original vision of creative destruction held that “large, monopoly firms are the most able and the most likely to produce new, leapfrogging innovations,” due to the difficulties of smaller firms in radically transforming modes of production (122). McClure and Thomas (2021, 77) and Elliot (1980, 56), however, indicate that Schumpeter saw the growth of large firms as inimical to competition, which served as the driving force of creative destruction. These disagreements frame the wider debate around the optimal conditions for creative destruction, sundered between the stances that large firms possess the requisite capital to produce innovation and that large firms face no incentives to innovate due to market domination. Schumpeter lends credence to both positions at various points, insisting that innovation is incompatible with perfect competition due to capital wastage, even as he argues that the growth of large firms stifles creative destruction by striking at the social institutions underpinning capitalism (2010, 90-91; 53-54; Akdere and Dinar 2023, 95). Further complicating matters, Schumpeter is clear that creative destruction always poses a threat to the survival of individual firms, even in conditions of monopoly or oligopoly (2010, 28-29). These seemingly conflicting positions have arguably structured much of the debate over the advantages of monopolistic versus highly competitive market economies for processes of creative destruction.
Nonetheless, the very existence of these debates indicates the enduring relevance of Schumpeterian creative destruction for analyses of contemporary capitalism, particularly those sectors of the economy that experience rapid innovation and turnover. As capitalism continues to be an unparalleled force of both wealth generation and immiseration, the cyclical patterns and turbulent contradictions explicated by creative destruction offer much to political economy and its practitioners.
(See also: Capital, Crisis, War)
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