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Is creative destruction the culprit?

2 November 2009

Much has happened since December 2008 when I made the final revisions to Winners and Losers. Capitalism has survived its worst crisis since the 1930s, though confidence in free markets has crumbled. Keynesian solutions have played a major part in averting another depression, while the reputation of Schumpeter may have suffered. If this was creative destruction at work, who would want more of it?

But was it really creative destruction?

This was a crisis of financial capitalism, caused by easy credit, frantic speculation, incompetent corporate governance and inadequate regulatory oversight. Such crises have occurred periodically for centuries and may be as intrinsic to capitalism as creative destruction, but they are not at all the same thing.

Creative destruction is the term Schumpeter used to describe the continuous evolutionary process ‘ that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process . . . is the essential fact about capitalism.’ Innovation in new technology and new methods is what increases wealth, but often undermines incumbent businesses. Sooner or later most are swept away or marginalised, but most consumers benefit from new products and lower prices.

Innovations in new products played a big part in the financial catastrophe, but much of the wealth they appeared to have created turned out to be illusory, so the net effect was highly destructive. The only winners so far have been those bankers who were able to cash their chips, and the main benefit for the rest of us some painful lessons.

That is probably my last word on financial matters. I may contribute occasionally to the broader debate about markets and institutions, but I intend to concentrate on issues where I have something distinctive to say. Winners and Losers started life as an examination of how creative destruction has worked in the last thirty years and I became, if not a devotee of Schumpeter, profoundly grateful to him for his great insight. Like all metaphors it is not a complete explanation of an ever-changing world, but it is indispensable to understanding it. It is certainly a fact of life that affects every business – and all our lives. In my next post I will consider some objections to creative destruction and try to explain why those who demonise it or minimise its importance are not living in the real world.

In later posts I will argue that reports of the death of email are greatly exaggerated and that too much focus and efficiency can be bad for corporate health. Mostly though I will elaborate on the main ideas of Winners and Losers: how markets are created, disrupted and transformed by innovations in technology and business models, why so few emerge as winners, and the qualities of those who do.

6 comments to Is creative destruction the culprit?

  • Maybe creative destruction hasn’t yet started working in connection with the financial crisis. Companies, corporations, businesses, banks – they’re all merely social institutions and all subject to evolutionary change, some of it successful, some of it not. Maybe the financial crisis and the widespread public disgust at the conduct of the social institutions at its epicentre will trigger a bout of creative destruction that has yet to commence. The intellectual capital required (financial understanding, former retail bank employees, credit unions, the Internet, social networks, wiki-tech etc.) is abroad in component form – how long before somebody starts to assemble the pieces into an honourable online alternative to the corporate monsters that our elected representatives failed to regulate and contain? How long before the entire banking business model (the retail one by consumers, the ‘merchant’ one by trade associations and disaffected corporate captains) is replaced by another?
    I hear a faint rustling: a queue forming to say “it can’t be done”. True, but only until somebody does it. Then, with the benefit of hindsight, the same folk will point out that “it was always on the cards”, and remind us that social institutions like banks, quite naturally, evolve over time – from family businesses and self-help organisations, into big businesses, into bigger businesses, into monsters that challenge governments and electorates, and then, almost overnight, back into family businesses and self-help organisations once more….

  • TimDownUnder

    Hi Kieran

    I would agree that there was little creative about the GFC (as its known down here) – correctional, maybe, but like most correctional facilities there are very few lessons being learnt.

    Credit squeezes are indiscriminate in their damage and, in the real economy, I have seen small innovative businesses suffer badly. The telecoms behemoths which I live amongst seem largely untouched and yet are probably the most in need of creative destruction. Investment and licensing barriers have so far provided secure rents and obviate the benefit of change, perhaps that is until a google or equivalent totally changes the game 😉

    Looking forward to your later posts

  • TimDownUnder makes a good point in connection with Google. A banking bolt-on to a major social network would be my bet. Once initiated it could soon be templated, and then the floodgates might open. ‘Facebank’ anyone?

  • Winners & Losers is superbly written and very apt – at any time – should be a schoolbook, certainly a business school standard course book.
    “Creative Destruction” puts a glossy ‘hidden hand’ Shumpeterian as also Adam Smith view on what may be catastrophic, depending on its ‘community’ or wider ‘social’ scale and sudden shock damage e.g. sudden demise of big sunset industries like coal and shipbuilding, or asset shocks of property, shares and other financial markets, or indeed, the shock-treatment meted out to E.Europe in the 1990s or to economies struck down by war – obviously in latter case destructive destruction. Shumpeter did not suggest there is no ‘destructive destruction’ or suggest no overlap between creative and destructive destruction i.e. no always straightforward a matter to draw a firm line between the two qualities, whereupon we probably have to assume a lot of grey areas, degrees of creativety and destructivety.
    Creative destruction has to be an ex-post assessment based on some measure of recovery. Ireland, for example, experienced the first de-industrialisation (first half of 19th C, all of it pre-famine) and receovery (evidenced in extremis by population continuing fall before eventual re-growth) took 130 years! In that case, he destruction was macro-economic. We might suppose creative destruction (recoverable within medium term) to be micro-economic and the destructive kind to be macro-economic.
    However, there seems to be implicit in the ‘creative’ idea some idealised notion about ‘progress’ i.e. technology redundancy when replaced by a superior marketplace offering e.g. off-air terestrial comms goes cable or satellite, and cable comms goes terestrial off-air and to satellite. This is a type about which no-one cares. Loss of railways to road transport or privatisation of social public utilities seems in hindsight at least definitely destructive, whether of the planet or just public service ethics.
    My area, financial services, has been demonised rightly for ignoring social responsibility. Factor that into any business sector and we have a recipe for taming creative or destructive destruction much as planning permission requires an environmental audit, or in this case a social audit that might insist on ‘planning gain’ compensation or on less painful ‘transition adjustment periods.’ Shumpeter did not calculate the restructuring adjustment costs – or did he? – of whatever may be deemed creative.
    -RM

  • I wanted to thank you for this nice read. I surely liked every little part of it. I have you bookmarked and will be coming back.

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