Creative Destruction

By Kurtis with a K.

One of the most interesting and subtle, yet still meaningful, phrases that I have come across is “creative destruction.”  In the context of economics, it refers to the process of businesses failing and succeeding, embodying some aspects of the business cycle.  But it means more than that- it implies that the process of destruction, of older and obsolete businesses failing, is essential for the progress of the system, and therefore crucial to make room for the manifestations of creativity to develop.  However, creative destruction did not always have this same meaning.  Surprisingly, this seemingly pro-capitalist term has its origins in the thought of perhaps the most influential anti-capitalist writer of all time, Karl Marx.

                

Marx saw that capitalism caused massive economic growth in some areas, but he also outlined how he saw capitalism cause massive destruction.  Whenever one business grew, its competitors faltered.  Whenever one business gained market share, others lost market share.  This insight is key to understanding the workings of capitalism.  Capitalism creates opportunities for entrepreneurship, but it does not guarantee success.  Failure goes hand in hand with risk, and, just as some companies will become wildly profitable, others will fail.  Some companies will fall behind the times or see their products become outdated by newer technologies.  Marx observed this, and he speculated that this destructive force was one of the ways that capitalism was used by the bourgeoisie to curb the power of the proletariat by preventing them from accumulating power in any one industry.

                

What Marx got wrong, however, was highlighted by Joseph Schumpeter approximately a century later.  In his book Capitalism, Socialism, and Democracy, Schumpeter revisited many of Marx’s claims about destructive processes in capitalism.  He identified these processes as being the lynchpin of capitalism’s success.  He saw that creative destruction, as he termed it, was capitalism’s way of constantly ensuring that the system was running at its fullest potential, much in the same way that Adam Smith’s invisible hand functions.  Creative destruction sees that those businesses that are not functioning optimally are weeded out, whereas those that are able to do so witness profits.  He praised the process of creative destruction as being the basis of economic growth and the source of the wealth that had been accumulating since the abandonment of the feudal system in the Renaissance Age.

                

The idea of creative destruction is still relevant today.  Because of its core importance in the function of governments, I believe that it is a process that should be fostered by governments.  By that, I don’t mean through the implementation of policies- I largely mean by the removal of policies.  Founding and running a business is a heavily regulated process in the modern world.  Getting through the red tape can take months, even years, sometimes, and the existence, even the possibility, of such delays causes massive inefficiency in the corporate world.  I would even go so far as to contend that the solution to many of the problems that were revealed by the recent financial crisis was obscured by government actions such as bailouts and regulations.  If we want to see creativity and growth, we have to learn to stop fearing destruction, and if we feel obligated to remove the destructive consequences of failure, we have to learn that we are actually stymieing the creative process.