Tuesday, 3 December 2019

Schumpeter’s Theory of Creative Destruction

In his 1942 book Capitalism, Socialism, and Democracy, Joseph Schumpeter presents the thesis that capitalism will not die due to its economic failures, as Karl Marx had predicted, but due to its economic success. The following sentence from his book can be seen as a good summary of his thesis: “Capitalism, while economically stable, and even gaining in stability, creates, by rationalizing the human mind, a mentality and a style of life incompatible with its own fundamental conditions, motives and social institutions.”

Schumpeter devotes six pages in his book to discussing the “perennial gale of creative destruction” that capitalism faces. He writes: “The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism.”

In a capitalist system, things are always in a flux, and society is never stable. As capitalism creates new products and services, and develops new ways of manufacturing and trading, it obliterates old ways of doing business—this leads to fundamental changes in peoples lives. Not everyone can keep pace with the high speed motion of the capitalist marketplace and many people get left behind, not just for a short period of time, but, in many cases, forever. Capitalism offers people several ways of succeeding in the marketplace, but it also creates as many ways of failing.

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