What is creative destruction in economics? What is the definition of Schumpeter’s creative destruction theory? What good and recent examples of creative destruction are there? Let’s take a closer look at these questions.

What Is Schumpeter’s Creative Destruction? A Simple Definition

Creative destruction can be defined as the decay of long-standing practices, procedures, products or services followed by more innovative, disruptive ones. It is based on the principle that old assumptions need to be broken so that new innovations can benefit from existing resources and energy.

What Is Behind Schumpeter’s Ideas? What Is Creative Destruction?

The economy is based on the principles of supply and demand, where competition has an influence on market prices. In 1976, Schumpeter, an Austrian-American economist, developed the concept of creative destruction from the based on the works of Karl Marx. According to Schumpeter’s view, capitalism is a constantly changing, dynamic, and innovative process in which a set of new ideas and processes challenge the existing ones (the status quo) and change existing paradigms.

According to Schumpeter’s creative destruction perspective, the great engine of capitalism is imbalance and not the common idea of ​​market equilibrium. He calls this imbalance creative destruction based on the idea that innovation leads to chaos. This chaos can be the result of obsolete or not very innovative products, companies that close, workers becoming irrelevant… These apparently negative outcomes are, he beliefs, necessary to bring along new solutions and improvements in quality of life, followed by an even greater economic growth.

An example of Schumpeter’s creative destruction theory in history was the transition from the industrial revolution to the use of oil and today until we get to today’s highly technological society where renewables are growing exponentially. The waves of innovation make the previous models obsolete and force everyone and everything to innovate – and the transformation is drastic.

Only companies with a great strategic vision can survive an episode of creative destruction. Inevitably, there will be losers – usually, producers and workers who keep working with obsolete technologies. But there will also be winners, i.e., entrepreneurs, innovators, and first-movers who will create market disequilibrium and explore new and profitable opportunities.

Schumpeter’s Creative Destruction, Sustainability, And CSR

And when it comes to sustainability as a management tool, we are also going over a moment of creative destruction. Many businesses still work in the old, business-as-usual paradigm, ignoring the supply-chain impacts of the materials they purchase and transform, the waste they produce and how it is disposed of, or what energy they use.

There is a traditional path of continuous improvement which is what many companies are developing. Instead of creating true CSR strategies and reports they put together a few cosmetic actions and announce a few green policies, mostly for reputational reasons. Nonetheless, in reality, what is needed is a more radical transformation and the development of effective sustainability strategies. It will allow companies to become more resilient, better prepared for climate change-related risks, reduce costs, and potentially explore new markets.

Creative Destruction Examples

  • Photography companies whose business was greatly replaced by smartphone incorporated companies;
  • Traditional watches increasingly becoming replaced by smartwatches;
  • Tablets and kindles replacing conventional printed books;
  • Music streaming services (spotify, apple…) replacing digital shopping of music songs or albums;
  • Video streaming services replacing DVDs.