Creative Destruction: Good or Bad for Economies?

What is Creative Destruction?

The term “creative destruction” was first discussed by economist Joseph Schumpeter in 1942. He described it as innovations in the manufacturing process which ultimately “revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”, or old inventions or products being replaced by new, more efficient ones. Although creative destruction might seem entirely beneficial to economies, we’ll also look into how it can disrupt existing systems.

The Industrial Revolution- A Positive Shift

In the 18th century, the Industrial Revolution in America sparked urbanization and increased productivity. Railroads spread across America, which increased transportation, trade, and productivity. While this replaced horses and boats, it also improved economic growth and living standards, showing the benefits of creative destruction. On the other hand, 41% of the American workforce was in agriculture in the 1900s, but was reduced to just 3% 80 years later.

The Digital Era- Winners and Losers

Many technological companies have been struggling to keep up with creative destruction. You might see this with streaming, cloud-computing and digital photography services. The rise of 3D Printing has caused high levels of unemployment with other manufacturing companies. Some regions can be hit harder than others with unemployment, and it could be hard to replace these jobs quickly enough.

The Transition to Renewable Energy

In 2020, during COVID-19, levels of energy demand decreased, and some plants closed down. However, some energy producers increased their efficiency by replacing old plants with new, renewable energy. This low demand and strong competition lead to an increased amount of unemployment, and only because of creative destruction.

A Double-Edged Sword

From what we have seen, creative destruction is an inevitable process that must take place for innovation to occur in economies. It can drive economic growth, but can still increase unemployment. Because of this, businesses must learn to adapt to changing times and the process of creative destruction, like new transportation, new digital companies and new renewable energy sources. Economies can use this innovation to their advantage by allowing for efficiency to come, while still embracing charge. Creative destruction is a process that will occur forever- out with the old, in with the new.