Joseph Schumpeter was an Austrian economist born in 1883 who coined the term "Creative Destruction" to describe how innovation disrupts existing markets and drives economic growth. The term was first used by German sociologist Werner Sombart. Schumpeter argued that innovation allows new firms to gain temporary market power by eroding the positions of older companies, in a continuous dynamic process. While innovation causes short-term hardship, it provides long-term benefits to society through increased productivity and quality of life. Schumpeter made many other contributions and disagreed with mainstream economists like Keynes and Ricardo. He had a significant influence on later economists and business theories of innovation and entrepreneurship.
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Joseph Schumpeter was an Austrian economist born in 1883 who coined the term "Creative Destruction" to describe how innovation disrupts existing markets and drives economic growth. The term was first used by German sociologist Werner Sombart. Schumpeter argued that innovation allows new firms to gain temporary market power by eroding the positions of older companies, in a continuous dynamic process. While innovation causes short-term hardship, it provides long-term benefits to society through increased productivity and quality of life. Schumpeter made many other contributions and disagreed with mainstream economists like Keynes and Ricardo. He had a significant influence on later economists and business theories of innovation and entrepreneurship.
Joseph Schumpeter was an Austrian economist born in 1883 who coined the term "Creative Destruction" to describe how innovation disrupts existing markets and drives economic growth. The term was first used by German sociologist Werner Sombart. Schumpeter argued that innovation allows new firms to gain temporary market power by eroding the positions of older companies, in a continuous dynamic process. While innovation causes short-term hardship, it provides long-term benefits to society through increased productivity and quality of life. Schumpeter made many other contributions and disagreed with mainstream economists like Keynes and Ricardo. He had a significant influence on later economists and business theories of innovation and entrepreneurship.
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Joseph Schumpeter was an Austrian economist born in 1883 who coined the term "Creative Destruction" to describe how innovation disrupts existing markets and drives economic growth. The term was first used by German sociologist Werner Sombart. Schumpeter argued that innovation allows new firms to gain temporary market power by eroding the positions of older companies, in a continuous dynamic process. While innovation causes short-term hardship, it provides long-term benefits to society through increased productivity and quality of life. Schumpeter made many other contributions and disagreed with mainstream economists like Keynes and Ricardo. He had a significant influence on later economists and business theories of innovation and entrepreneurship.
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Joseph Schumpeter
&
“Creative Destruction”
“Again, however, from destruction a new spirit of creation arises”
Werner Sombart in 1913 on Creative Destruction
‘Joseph Alois Schumpeter’ was born on the 8th February 1883, and died on the 8th of January 1950 at the age of sixty six. He was Austrian born and therefore trained in the ‘Heterodox’ school of economics rather than the more Orthodox style, prevalent in England and America. He was taught by the famous economist ‘Eugen von Böhm-Bawerk’ at Vienna University. After the First World War he became the Austrian Minister for Finance, followed by a stint in the position of President of the private Biedermann Bank. This later crashed in 1924 and along with the growing Nazi presence in Germany encouraged his move to America where he taught at Harvard until his death.
Schumpeter is most well known for coining the phrase ‘Creative Destruction’ first brought up in his most famous book “Capitalism, Socialism and Democracy.” However it was not Schumpeter who first used the idea, it was introduced by the German sociologist Werner Sombart. Sombart was part of the Youngest Historical Economics School, which believed that economic theory could not be generalised around the world, as it was culture specific and would change according to situation in the country. Schumpeter’s vision of capitalism was that innovation would push economic growth forward, although it would destroy previous companies that had enjoyed the privileges of monopolistic power from previous innovative actions. Examples of innovative companies that have revolutionised the economy include Wal-Mart. With their new inventory management, marketing and personnel training techniques, they have been able to reduce prices to outcompete various other companies. However, Schumpeter foresees that companies such as this will succumb to the same fate as new innovative ideas come onto the market. Schumpeter theorised that innovation is the source of temporary market power, allowing new firms into the market, and eroding the older company’s positions, showing the dynamics of change from a competitive market into a monopolistic market and then back again, as changes are made to technology. These ideas have led the theories of evolutionary economics, which looks at competition within the market and steals the Darwinian idea of ‘survival of the fittest.’
However there are some downsides to Schumpeter’s innovative theory. It has been shown to be responsible for temporary economics problems. ‘Creative Destruction’ can cause hardship in the short term as well in the long term for those workers who cannot adapt and develop new skills quickly enough. An example of this is manufacturing labourers, when automation was brought into the mainstream of work, and the large excess of labour was not needed for mass production. The workers that were laid off could not use their skills into the many number of technical IT jobs that were becoming available, but had to go into lower paid jobs, and therefore lost out in both the short term and the long term. However, it has also been shown that the overall long term benefit to society, including the problems of short term hardship give an increase to the quality of life. This can be shown in the following example of American agricultural labour. In 1790, 90% of Americans were farmers, while in 1990 this had fallen to 2.6%. Over these 200 years of innovation and ‘Creative Destruction,’ farming jobs were destroyed by exponential productivity gains in agricultural technology which gave America the lowest food prices in the world at the time. This freed up labour to fill up jobs in other industries. Through this, present day farmers and those who left the industry alike enjoy a much better and prosperous lifestyle than their 200 year old counterparts.
The original concept of ‘Creative Destruction,’ formulated by ‘Sombart,’ was influenced
by Eastern mysticism, most importantly by the Hindu god Shiva, who is paradoxically seen as a simultaneous destroyer and creator. The idea of ‘Creative Destruction,’ was used in many other places, including the Russian anarchist ‘Mikhail Bakunin’ who wrote “The passion for destruction is a creative passion too!” The Communist Manifesto of ‘Karl Marx’ described how capitalism would reinvent itself, by “Constantly revolutionising the instruments of production and thereby the relations of production, and with them the whole relations of society.” However, the term is most popularly associated with Schumpeter, particularly in his book “Capitalism, Socialism and Democracy,” which was published in 1942, which looked into how the business cycle was linked to innovation speeds. In 1992, the idea was picked up on again by ‘Philippe Aghion’ and ‘Peter Howitt’ in their paper “A Model of Growth through Creative Destruction,” putting it in terms of a mathematical formula. Many more books have been written on this concept, and Schumpeter defined it in his book “The process of Creative Destruction,” by saying “the process of industrial mutation that incessantly revolutionises the economics structure from within, incessantly destroying the old one, incessantly creating a new one.” Apart from ‘Creative Destruction,’ Schumpeter contributed to many of the economic theories known today. He disagreed with many mainstream assumptions of the economic world. He believed that the greatest 18th century economist to be ‘Turgot,’ not ‘Adam Smith’ as most considered him to be and viewed ‘Léon Walras’ to be the greatest of all economists. As well as this Schumpeter was very critical of ‘Keynes’ and ‘Ricardo,’ for the “Ricardian Vice,” which is the viewing of abstract models by freezing all but a few variables. This led to misconceptions as to how the model would work in the real world. Schumpeter’s view on the business cycle is very unique, as he does not follow ‘Walras’ or ‘Keynes,’ but takes his own stand in his book “The Theory of Economic Development” which looks at circular flow leading to a stationary state. He looks at multiple styles of business cycles, which lasted: 54 years, 18 years, 9 years and 4 years. Schumpeter states that if all four of these cycles were in phase, or worse on the downward arc of each wave, then a disastrous depression would occur, which is similar to the recent economic global problem. Schumpeter also compounded a theory on democracy and the way that politicians manipulate the public who vote them in. He believed that democracy is the mechanism for competition between political leaders, much like a market structure. This theory was much influenced by ‘Max Weber’ who was a sociologist and political economist, who theorised about the ‘Protestant Work Ethic.’
For a long time after his death Schumpeter was a very influential figure amongst ‘Heterodox’ economists, especially within the Austrian school who studied industrial organisation and evolutionary theories of economic growth. Despite this, these group of economists leant towards the other side of the political spectrum to Schumpeter, and more in line with ‘Keynes,’ ‘Marx’ and ‘Veblen.’ He influenced many leading economists including ‘Friedman,’ ‘Tobin,’ ‘Bergson’ and ‘Heilbroner.’ The latter who was one of his most renowned pupils, who wrote extensively about him in his book “The Worldly Philosophers.” Even now, the well known magazine, “The Economist” named a column on business and management after him, praising him as a “champion of innovation and entrepreneurship.” In conclusion we can see that ‘Joseph Schumpeter’ was a great economist who changed the world’s views on how innovation effects global economic growth with his theory of ‘Creative Destruction.’
