Creative Destruction

In 1942, economist Joseph Schumpeter coined the term "Creative Destruction" (from which the name of this blog is derived). Schumpeter was talking about the way innovation creates new things by destroying old things. The most commonly used example in economics textbooks describes how the advent of the automobile destroyed the industries surrounding horse-drawn buggies, such as manufacturers of buggy whips.

Creative Destruction is kind of a survival-of-the-fittest at the enterprise level. Just like organisms in nature, the economic battlefield comes filled with adapt-or-die scenarios, and some companies fail to adapt. These companies are not necessarily destroyed, but part of their business certainly is. Who benefits (besides the innovators)? Consumers do!

I haven't met anyone (other than Kodak and similar companies) who thinks that the digital camera revolution is a bad thing. No more hassle with changing the film in your camera, having your film developed, or any of that. You take the pictures, store them digitally on your computer, and e-mail them around to your friends and family. It's cheaper and easier for the consumers. The innovation of digital cameras has been bad for camera and film makers (like Kodak, Polaroid, and FujiFilm) but good for everybody else.

Another recent and well-documented exampled has been the evolution of music media. First came was records, then vinyl. After that, 8-track tapes came along and were, in turn, displaced by cassette tapes. Cassette tapes were replaced by compact discs, which are even now being creatively destroyed by mp3s.

And overall, the economy has benefitted from these types of changes. So how do we take advantage of this? By encouraging innovation. Our legislative landscape in recent years has become more favorable to larger businesses and less favorable to smaller businesses. The government needs to aid small businesses and encourage innovation, research and development, and entrepreneurship. The Chinese and Indian governments are already encouraging innovation in their countries, and if we don't embrace Creative Destruction in this country, all we're going to see is the destruction side of the equation.