Creative Destruction

The urge to destroy is also a creative urge.

Pablo Picasso
Creative destruction refers to the incessant product and process innovation mechanism by
which new production units replace outdated ones. This restructuring process permeates
major aspects of macroeconomic performance, not only long-run growth but also economic
fluctuations, structural adjustment and the functioning of factor markets. It was originally
coined by Joseph Schumpeter , who considered it the essential fact about capitalism in his
book Capitalism, Socialism and Democracy(Schumpeter 1942).
Creative Destruction and Entrepreneurship
Entrepreneurship and competition fuel creative destruction. Schumpeter summed it up as follows:
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. (Schumpeter 1942 :83).
Entrepreneurs introduce new products and technologies with an eye toward making themselves
better offthe profit motive. New goods and services, new firms, and new industries compete with
existing ones in the marketplace, taking customers by offering lower prices, better performance,
new features, catchier styling, faster service, more convenient locations, higher status, more
aggressive marketing, or more attractive packaging. In another seemingly contradictory aspect of
creative destruction, the pursuit of self-interest ignites the progress that makes others better off.
Producers survive by streamlining production with newer and better tools that make workers more
productive. Companies that no longer deliver what consumers want at competitive prices lose
customers, and eventually wither and die. The markets invisible handa phrase owing to Adam
Smithshifts resources from declining sectors to more valuable uses as workers, inputs, and
financial capital seek their highest returns.
By this process the market clean itself out by taking resources away from the less efficient
producers, so it creatively destroys the inefficient companies and reallocates resources to the more
efficient one.
Over the long run, the process of creative destruction accounts for over 50 per cent of productivity
growth. A modern example Creative destruction is the way in which the iPod has creatively
destroyed the CD. The iPod made listening to music more convenient in that there was a greatly
reduced need to carry around replacement batteries, a heavy, bulky CD player or the user's entire
CD collection. iPods emergence spurred the decline of CDs and in creating new economic value for
the iPod destroyed the economic value of the CD.
Reference

Schumpeter,1962. Chapter VII: The Process of Creative Destruction, in Capitalism, Socialism and
Democracy 3rd Edition, New York, Harper Torchbooks.
Davis, Stevens J, Haltwanger, and Scott Schuh,1996. Gross Job Creation, Gross Job Destruction.
Cambridge, MIT Press.
W. Michael Cox and Richard Alm, 2008. Creative Destruction. [Online]. Available:
http://www.econlib.org/library/Enc/CreativeDestruction.html,(9th October 2013).
Dawson, J., Deubert, K., Grey-Smith, S. & Smith, L. 2002. Creative Destruction. [Online]. Available:
http://en.wikipedia.org/wiki/Creative_destruction. [9th October 2013] .