The theory of creative destruction – an idea elucidated by the Czech-born Joseph Schumpeter (1883–1950) – holds that the entrepreneur is the key figure in nurturing economic progress. Schumpeter promoted the counter-intuitive idea that economic recessions are forces for good, since they clear the market of inefficient agencies and leave space for growth. It is an argument that has held great sway among those who believe in minimal intervention in the markets.
Schumpeter introduced his theory in Capitalism, Socialism and Democracy (1942), where he described the process of creative destruction as ‘the essential fact about capitalism’. He grew the idea out of the work of Karl Marx (see here), but where Marx considered that capitalism created economic crises through its need to overturn the existing economic order so as to produce new wealth, Schumpeter argued that the cycle of creative destruction is key to human progress.
For all his commendation of creative destruction, Schumpeter feared it contained the kernel of its own self-destruction by ultimately tearing down the institutional framework that upholds it. This was, he suggested, the likely punchline to the ‘process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.’
The power of ideas
There are plentiful examples of creative destruction throughout history. Take, for example, the Industrial Revolution, when innovations including the steam engine and factory production reshaped the way people worked and lived. A similar upheaval is being brought about by the Internet, which has changed the way many older businesses operate – from record companies to newspapers and high-street retailers – and created entirely new types of business in the process. Schumpeter emphasized that creative destruction relies not only on technological innovation, but also on the introduction of new types of commercial models, methods of production and ways of doing business. For Schumpeter, the entrepreneur is every bit as important as the inventor, since it is their ideas that make new markets and propel capitalism.