Creative destruction

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This process of Creative Destruction is the essential fact about capitalism.
- Joseph Schumpeter, 1941

Creative destruction in macroeconomics is the concept, that every economic development (both non-quantitative and quantitative) is based on the process of creative or creative destruction. New combination of production factors work to displaced and eventually destroy the old structures. The destruction is therefore necessary - and not a system error - so that reorganization can take place.

CONTENT : A - F , G - L , M - R , S - Z , See also , External links


Quotes are arranged alphabetically by author

A - F[edit]

  • Globalisation is highly selective. It proceeds by linking up all that, according to dominant interests, has value anywhere in the planet, and discarding anything which has no value or becomes devalued, in a variable geometry of creative destruction and destructive creation of value.
    • Manuel Castells, Materials for an exploratory theory of the network society (2000)

G - L[edit]

  • We have far more people selling derivatives, index funds and mutual funds (as we call them) than there is intelligence for the task. I am cautious about prediction; I discovered years ago that my correct predictions are forgotten, the others meticulously remembered. But some things are definite; when you hear it being said that we have entered a new economy of permanent prosperity with prices of financial instruments reflecting that happy fact, you should take cover. This has been the standard justification of speculative excess for several centuries — for a good part of the millennium. My one time Harvard colleague Joseph Schumpeter thought inevitable and even beneficial what he called “creative destruction” — the cyclical process by which the system eliminates the people and institutions which are mentally too vulnerable for useful economic service. Unfortunately the process has larger and less benign effects, including the possibility of painful recession or depression.
  • It's hard to overemphasize how important Ford's deregulation was. True, most of the benefits took years to unfold-rail freight rates, for example hardly budged at first. Yet deregulation set the stage for an enormous wave of creative destruction in the 1980s:...
  • The developed economies are currently experiencing profound changes. A technological revolution is creating entirely new sectors, based on biotechnology, microprocessors, and telecommunications, whose prod­ucts are transforming business practices across the economy. A wave of managerial innovations has seen companies around the world adopt new forms of supplier-client relations, just-in-time inventory systems, quality control and team production. Economic activity is shifting from the industrial sector into the service sector. Capitalism seems to be in the midst of one of those 'cycles of creative destruction' that Schumpeter (1950) identified.
    • Peter A. Hall and David Soskice. "An introduction to varieties of capitalism." in Varieties of capitalism: The institutional foundations of comparative advantage (2001)
  • I do not want to avoid immersing myself in trouble — to be a mess — to struggle out of it. I want to invent, to discover, to imagine, to speculate, to improvise — to seize the hazardous in order to be inspired. I want to experience the manifestation of the absolute — the manifestation of the unexpected in an extreme and unique relation. I know that only by following my creative instincts in an act of creative destruction will I be able to find it.
    • Hans Hofmann Statement of April 1950, as quoted in Hans Hofmann' (1998) by Helmut Friedel and Tina Dickey
  • Schumpeter’s work, his dynamic view of the entrepreneur and creative destruction has had a great impact on me. He indeed wrote a book, Capitalism, Socialism and Democracy, which intended to give a complex analysis of the two systems. But these two books, and a few others (e.g., some of Mises’s and Hayek’s works) are rather exceptional. A typical American textbook on economic systems is not written with the same ambition about capitalism with which I wrote about socialism. It doesn’t give you a general model of capitalism, including the characterization of the political, ideological, and social spheres.
    • János Kornai, in "An Interview with János Kornai : Interviewed by Olivier Blanchard", Macroeconomic Dynamics, 1999

M - R[edit]

  • We are far from understanding how to achieve adaptively efficient economies because allocative efficiency and adaptive efficiency may not always be consistent. Allocatively efficient rules would make today's firms and decisions secure - but frequently at the expense of the creative destruction process that Schumpeter had in mind.
    • Douglass C. North, Institutions, institutional change and economic performance (1990) Ch. 9 : Organizations, learning, and institutional change
  • Schumpeter’s approach has an important implication for political behavior. If the constellation of economic interests regularly changes because of innovation and entry, politicians face a fundamentally different world than those in a natural state: open access orders cannot manipulate interests in the same way as natural states do. Too much behavior and formation of interests take place beyond the state’s control. Politicians in both natural states and open access orders want to create rents. Rent-creation at once rewards their supporters and binds their constituents to support them. Because, however, open access orders enable any citizen to form an organization for a wide variety of purposes, rents created by either the political process or economic innovation attract competitors in the form of new organizations. In Schumpeterian terms, political entrepreneurs put together new organizations to compete for the rents and, in so doing, reduce existing rents and struggle to create new ones. As a result, creative destruction reigns in open access politics just as it does in open access economies. Much of the creation of new interests is beyond the control of the state. The creation of new interests and the generation of new sources of rents occur continuously in open access orders.
    • Douglass C. North, John Joseph Wallis, and Barry R. Weingast, Violence and Social Orders (2009), Ch. 1 : The Conceptual Framework
  • A final aspect of all open access orders is Schumpeter’s notion of creative destruction, one of the most powerful descriptions of a competitive, open access economy. When Schumpeter wrote Capitalism, Socialism, and Democracy in the early 1940s, the economic theory of perfect competition among atomistic firms (i.e., firms too small to have market power) had come under sustained attack as unrealistic. Large and powerful economic organizations dominated the new economy, and their behavior did not match the textbooks. Despite this dominance, the economy produced historically unprecedented, sustained economic development. Schumpeter asked, How could large businesses that were supposed to choke off competition and growth nonetheless generate such spectacular productivity increases in a world that seemed ever more competitive?
    • Douglass C. North, John Joseph Wallis, and Barry R. Weingast, Violence and Social Orders (2009), Ch. 4 : Open Access Orders

S - Z[edit]

  • The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U. S. Steel illustrate the same process of industrial mutation-if I may use that biological term-that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.
    • Joseph Schumpeter, Capitalism, Socialism and Democracy, 1942; Third Edition, 2014. Part II, Chapter VII, pg.83
  • Situations emerge in the process of creative destruction in which many firms may have to perish that nevertheless would be able to live on vigorously and usefully if they could weather a particular storm.
    • Joseph Schumpeter, Capitalism, Socialism and Democracy, 1942; Third Edition, 2014. Part II, Chapter VIII, pg.90
  • Schumpeter argued that the economy was characterized by a process of creative destruction. An innovator could, through a new product or lower costs of pro duction, establish a dominant position in a market. But eventually, that dominant position would be destroyed, as another new product or process was invented.
    He worried that the giant corporations he saw being formed during his lifetime would stifle innovation and end this process of creative destruction. His fears, so far, have been unfounded; indeed, many of the largest firms, like IBM, have not been able to manage the innovative process in a way that keeps up with upstart rivals.
    • Joseph E. Stiglitz and Carl E. Walsh, Economics (4th ed) (2006) Ch. 20 : Technological Change
  • Creative destruction can apply to economic concepts as well. And this downturn offers an excellent opportunity to get rid of one that has long outlived its usefulness: gross domestic product. G.D.P. is one measure of national income, of how much wealth Americans make, and it’s a deeply foolish indicator of how the economy is doing. It ought to join buggy.

External links[edit]

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