Creative destruction

Creative destruction is a term originally derived from Marxist economic theory which refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto (Marx and Engels, 1848)^[1] and were expanded in Marx's Grundrisse (1857)^[2] and "Volume IV" (1863) of Das Kapital.^[3] At its most basic, "creative destruction" (German: schöpferische Zerstörung) describes the way in which capitalist economic development arises out of the destruction of some prior economic order, and this is largely the sense implied by the German Marxist sociologist Werner Sombart who has been credited^[4] with the first use of these terms in his work Krieg und Kapitalismus ("War and Capitalism", 1913).^[5] In the earlier work of Marx, however, the idea of creative destruction or annihilation (German: Vernichtung) implies not only that capitalism destroys and reconfigures previous economic orders, but also that it must ceaselessly devalue existing wealth (whether through war, dereliction, or regular and periodic economic crises) in order to clear the ground for the creation of new wealth.^[1][2][3]

From the 1950s onwards, the term "creative destruction" has become more readily identified with the Austrian-American economist Joseph Schumpeter,^[4] who adapted and popularized it as a theory of economic innovation. In Capitalism, Socialism and Democracy (1942), he developed the concept out of a careful reading of Marx’s thought (to which the whole of Part I of the book is devoted), arguing (in Part II) that the creative-destructive forces unleashed by capitalism would eventually lead to its demise as a system.^[6] Despite this, the term subsequently gained popularity within neoliberal or free-market economics as a description of processes such as downsizing in order to increase the efficiency and dynamism of a company. The original Marxian usage has, however, been maintained in the work of influential social scientists such as David Harvey,^[7] Marshall Berman,^[8] and Manuel Castells.^[9]

History

In Marx's thought

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":

Modern bourgeois society, with its relations of production, of exchange and of property, a society that has conjured up such gigantic means of production and of exchange, is like the sorcerer who is no longer able to control the powers of the nether world whom he has called up by his spells. [...] It is enough to mention the commercial crises that by their periodical return put the existence of the whole of bourgeois society on trial, each time more threateningly. In these crises, a great part not only of existing production, but also of previously created productive forces, are periodically destroyed. In these crises, there breaks out an epidemic that, in all earlier epochs, would have seemed an absurdity — the epidemic of over-production. Society suddenly finds itself put back into a state of momentary barbarism; it appears as if a famine, a universal war of devastation, had cut off the supply of every means of subsistence; industry and commerce seem to be destroyed; and why? Because there is too much civilisation, too much means of subsistence, too much industry, too much commerce. The productive forces at the disposal of society no longer tend to further the development of the conditions of bourgeois property; on the contrary, they have become too powerful for these conditions. […] And how does the bourgeoisie get over these crises? On the one hand by enforced destruction of a mass of productive forces; on the other, by the conquest of new markets, and by the more thorough exploitation of the old ones. That is to say, by paving the way for more extensive and more destructive crises, and by diminishing the means whereby crises are prevented.^[1]

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".^[2] 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 [to go on] fully employing its productive powers without committing suicide.^[2][10]

In the Theories of Surplus Value ("Volume IV" of Das Kapital, 1863), Marx refines this theory to distinguish between scenarios where the destruction of (commodity) values affects either use values or exchange values or both together.^[7] 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.^[11]

Although the modern term "creative destruction" is not used explicitly by Marx, it is clear that subsequent usage of it derives from these analyses, particularly in the work of Werner Sombart (whom Engels described as the only German professor who understood Marx's Capital),^[12] and of Joseph Schumpeter (see below). 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".^[13]

Other early usage

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:^[14]

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.

It has been 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.^[4] Conceivably this influence passed from Johann Gottfried Herder, who brought Hindu thought to German philosophy in his Philosophy of Human History (Ideen zur Philosophie der Geschichte der Menschheit) (Herder 1790–92), specifically volume III, pp. 41–64.^[4] 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".^[15]

Other 19th century formulations of this idea include Russian anarchist Mikhail Bakunin, who wrote in 1842, "The passion for destruction is a creative passion, too!"^[16] Note, however, that this earlier formulation might more accurately be termed "destructive creation", and differs sharply from Schumpeter's formulation in the critical aspect of temporal precedence. For Schumpeter, the creation comes first; the destruction is an almost incidental effect of the creation.

Schumpeter

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. In it, Schumpeter borrowed the term from Marxist thought (analysed extensively in Part I of the book) and used it to describe the disruptive process of transformation that accompanies radical innovation.^[17] In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term 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. Schumpeter also elaborated the concept, making it central to his economic theory. The most likely source can be found in his 1939 book Business Cycles. Here the Western world first learned about Nikolai Kondratieff and his long-wave cycle. These cycles, Schumpeter believed, were caused by innovations.

Schumpeter (1949) in one of his examples used the "the railroadization of the Middle West as it was initiated by the Illinois Central." He wrote, "The Illinois Central not only meant very good business whilst it was built and whilst new cities were built around it and land was cultivated, but it spelled the death sentence for the [old] agriculture of the West."^[18]

Examples

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers^[19] or Polaroid in instant photography have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs. Wal-Mart is a recent example of a company that has achieved a strong position in many markets, through its use of new inventory-management, marketing, and personnel-management techniques, resulting in lower prices to compete with older or smaller companies in the offering of retail consumer products. Just as older behemoths perceived to be juggernauts by their contemporaries (e.g., Montgomery Ward, FedMart, Woolworths) were eventually undone by nimbler and more innovative competitors, Wal-Mart faces the same threat. Just as the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, itself being undercut by MP3 players, the seemingly dominant Wal-Mart may well find itself an antiquated company of the past. This is the process of creative destruction in its technological manifestation.

Other examples are the way in which online free newspaper sites such as The Huffington Post and the Zero Hedge are leading to creative destruction of the traditional paper newspaper. The Christian Science Monitor announced in January 2009^[20] that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. The Seattle Post-Intelligencer became online-only in March 2009.^[21] Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.^[22]

In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics or kinetics of industrial change: the transition from a competitive to a monopolistic market, and back again. It has been the inspiration of endogenous growth theory and also of evolutionary economics.^[23]

David Ames Wells (1890), who was a leading authority on the effects of technology on the economy in the late 19th century, gave many examples of creative destruction (without using the term) brought about by improvements in steam engine efficiency, shipping, the international telegraph network and agricultural mechanization.^[24]

Criticism

Creative destruction can cause temporary economic distress . Layoffs of workers with obsolete working skills can be one price of new innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.

However, some believe that in the long-term society as a whole (including the descendants of those that experienced short-term hardship) enjoys a rise in overall quality of life due to the accumulation of innovation - for example, 90% of Americans were farmers in 1790, while 2.6% of Americans were farmers in 1990.^[25] Over those 200 years farm jobs were destroyed by exponential productivity gains in agricultural technology and replaced by jobs in new industries. Present day farmers and non-farmers alike enjoy much more prosperous lifestyles than their counterparts in 1790.

In terms of individuals recovering from obsolescence caused by creative destruction, when a small entity lacks sufficient resources to retrain, this can lead to an absorbing state which may persist due to information asymmetries that restrict borrowing. Small entities or individuals may prefer in such cases to obtain insurance (particularly if they are risk averse), although again this may be a problem due to adverse selection. Large entities may wish to drive smaller entities to an absorbing state (as an anticompetitive practice. (See also Kreps et al's solution to Selten's chainstore paradox)(This can also be conceptualized as raising the stakes in no-limit poker). As a result, it may be more efficient for the overall economy to provide insurance - (perhaps even mandatory insurance in order to obtain a pooling equilibrium) - since insurance can give small entities and individuals sufficient resources to have the activation energy needed to retrain and escape the absorbing state.

Later developments

David Harvey

Radical geographer David Harvey in a series of works from the 1970s onwards (Social Justice and the City, 1973;^[26] The Limits to Capital, 1982;^[27] The Urbanization of Capital, 1985;^[28] Spaces of Hope, 2000;^[29] Spaces of Capital, 2001;^[30] Spaces of Neoliberalization, 2005;^[31] The Enigma of Capital and the Crises of Capitalism, 2010^[32]), elaborated Marx's thought on the systemic contradictions of capitalism, particularly in relation to the production of the urban environment (and to the production of space more broadly). He developed the notion that capitalism finds a "spatial fix"^[33] for its periodic crises of overaccumulation through investment in fixed assets of infrastructure, buildings, etc.: "The built environment that constitutes a vast field of collective means of production and consumption absorbs huge amounts of capital in both its construction and its maintenance. Urbanisation is one way to absorb the capital surplus".^[34] While the creation of the built environment can act as a form of crisis displacement, it can also constitute a limit in its own right, as it tends to freeze productive forces into a fixed spatial form. As capital cannot abide a limit to profitability, ever more frantic forms of "time-space compression"^[35] (increased speed of turnover, innovation of ever faster transport and communications' infrastructure, "flexible accumulation"^[36]) ensue, often impelling technological innovation. Such innovation, however, is a double-edged sword:

The effect of continuous innovation [...] is to devalue, if not destroy, past investments and labour skills. Creative destruction is embedded within the circulation of capital itself. Innovation exacerbates instability, insecurity, and in the end, becomes the prime force pushing capitalism into periodic paroxysms of crisis. [...] The struggle to maintain profitability sends capitalists racing off to explore all kinds of other possibilities. New product lines are opened up, and that means the creation of new wants and needs. Capitalists are forced to redouble their efforts to create new needs in others [...]. The result is to exacerbate insecurity and instability, as masses of capital and workers shift from one line of production to another, leaving whole sectors devastated [...]. The drive to relocate to more advantageous places (the geographical movement of both capital and labour) periodically revolutionizes the international and territorial division of labour, adding a vital geographical dimension to the insecurity. The resultant transformation in the experience of space and place is matched by revolutions in the time dimension, as capitalists strive to reduce the turnover time of their capital to "the twinkling of an eye".^[37]

Globalization can be viewed as some ultimate form of time-space compression, allowing capital investment to move almost instantaneously from one corner of the globe to another, devaluing fixed assets and laying off labour in one urban conglommeration while opening up new centres of manufacture in more profitable sites for production operations. Hence, in this continual process of creative destruction, capitalism does not resolve its contradictions and crises, but merely "moves them around geographically".^[38]

Marshall Berman

In his 1987 book All That is Solid Melts into Air: The Experience of Modernity,^[8] particularly in the chapter entitled "Innovative Self-Destruction" (pp. 98–104), Marshall Berman provides a reading of Marxist "creative destruction" to explain key processes at work within modernity. The title of the book is taken from a well-known passage from The Communist Manifesto. Berman elaborates this into something of a Zeitgeist which has profound social and cultural consequences:

The truth of the matter, as Marx sees, is that everything that bourgeois society builds is built to be torn down. "All that is solid" — from the clothes on our backs to the looms and mills that weave them, to the men and women who work the machines, to the houses and neighborhoods the workers live in, to the firms and corporations that exploit the workers, to the towns and cities and whole regions and even nations that embrace them all — all these are made to be broken tomorrow, smashed or shredded or pulverized or dissolved, so they can be recycled or replaced next week, and the whole process can go on again and again, hopefully forever, in ever more profitable forms. The pathos of all bourgeois monuments is that their material strength and solidity actually count for nothing and carry no weight at all, that they are blown away like frail reeds by the very forces of capitalist development that they celebrate. Even the most beautiful and impressive bourgeois buildings and public works are disposable, capitalized for fast depreciation and planned to be obsolete, closer in their social functions to tents and encampments than to "Egyptian pyramids, Roman aqueducts, Gothic cathedrals".^[39]

Here Berman emphasizes Marx's perception of the fragility and evanescence of capitalism's immense creative forces, and makes this apparent contradiction into one of the key explanatory figures of modernity.

Manuel Castells

The renowned sociologist Manuel Castells, in his trilogy on The Information Age (the first volume of which, The Rise of the Network Society, appeared in 1996),^[9] reinterpreted the processes by which capitalism invests in certain regions of the globe, while divesting from others, using the new paradigm of "informational networks". In the era of globalization, capitalism is characterized by near-instantaneous flow, creating a new spatial dimension, "the space of flows".^[40] While technological innovation has enabled this unprecedented fluidity, this very process makes redundant whole areas and populations who are bypassed by informational networks. Indeed, the new spatial form of the mega-city or megalopolis, is defined by Castells as having the contradictory quality of being "globally connected and locally disconnected, physically and socially".^[41] Castells explicitly links these arguments to the notion of creative destruction:

The "spirit of informationalism" is the culture of "creative destruction" accelerated to the speed of the optoelectronic circuits that process its signals. Schumpeter meets Weber in the cyberspace of the network enterprise.^[42]

Others

In 1992, the idea of creative destruction was put into formal mathematical terms by Philippe Aghion and Peter Howitt in their paper "A Model of Growth through Creative Destruction," published in Econometrica.^[43]

In 1995, Harvard Business School authors Richard L. Nolan and David C. Croson released Creative Destruction: A Six-Stage Process for Transforming the Organization. The book advocated downsizing to free up slack resources, which could then be reinvested to create competitive advantage.

More recently, the idea of "creative destruction" was utilized by Max Page in his 1999 book, The Creative Destruction of Manhattan, 1900-1940. The book traces Manhattan's constant reinvention, often at the expense of preserving a concrete past. Describing this process as "creative destruction," Page describes the complex historical circumstances, economics, social conditions and personalities that have produced crucial changes in Manhattan's cityscape.

Neoconservative author Michael Ledeen argued in his 2002 book The War Against the Terror Masters that America is a revolutionary nation, undoing traditional societies: "Creative destruction is our middle name, both within our own society and abroad. We tear down the old order every day, from business to science, literature, art, architecture, and cinema to politics and the law." His characterization of creative destruction as a model for social development has met with fierce opposition from paleoconservatives.^[44]

Alternative name

Per the following text, this process is also known as Schumpeter's Gale:

The opening up of new markets and the organizational development from the craft shop and factory to such concerns as US 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 ... [The process] must be seen in its role in the perennial gale of creative destruction; it cannot be understood on the hypothesis that there is a perennial lull.

—Joseph Schumpeter, The Process of Creative Destruction, 1942

Media reflections of creative destruction

The film Other People's Money provides contrasting views of creative destruction, presented in two speeches regarding the takeover of a publicly-traded wire and cable company in a small New England town. One speech is by a corporate raider, and the other is given by the company CEO, who is principally interested in protecting his employees and the town.^[45]

See also

• Creativity techniques
• Destructionism
• Disruptive technology
• Innovation saturation
• International Innovation Index
• Parable of the Broken Window

References

Further reading

• Philippe Aghion and Peter Howitt. A Model of growth through Creative Destruction. Econometrica 60:2 (1992), pp. 323–51.
• Philippe Aghion and Peter Howitt. Endogenous Growth Theory. MIT Press. 1997.
• Edward Cheung, "Baby Boomers, Generation X and Social Cycles". Long Wave Press. 1995, revised 2007.
• Clayton M. Christensen. "The Innovator's Dilemma". HarperBusiness. 2001.
• Richard Foster and Sarah Kaplan. "Creative Destruction: Why Companies that are Built to Last Underperform the Market - And how to Successfully Transform Them". Currency publisher. 2001.
• J. Stanley Metcalfe. Evolutionary Economics and Creative Destruction (Graz Schumpeter Lectures, 1). Routledge. 1998.
• Richard L. Nolan and David C. Croson, Creative Destruction: A Six-Stage Process for Transforming the Organization. Harvard Business School Press. 1995.
• Max Page. The Creative Destruction of Manhattan, 1900-1940. University of Chicago Press. 1999.
• Hugo Reinert and Erik S. Reinert. "Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter." In J.G. Backhaus and W. Drechsler, eds. Friedrich Nietzsche: Economy, and Society. Springer. 2006.
• Joseph A. Schumpeter. Capitalism, Socialism and Democracy (New York: Harper, 1975) [orig. pub. 1942]
• Thomas G. Osenton. The Death of Demand: Finding Growth in a Saturated Global Economy (New Jersey: Financial Times Prentice Hall, 2004)
• James M. Utterback. Mastering the Dynamics of Innovation. Harvard Business School Press. 1996.
• Roger D. Smith. "The Disruptive Potential of Game Technologies: Lessons Learned from its Impact on the Military Simulation Industry". Research Technology Management 50:Sept-Oct (2006), pp. 57–64.
• Thomas Homer-Dixon. Upside of Down: Catastrophe, Creativity, and the Renewal of Civilization. Island Press. 2006.