Question

Discuss Schumpeter’s concept of creative destruction. Illustrate with an example, or examples, of digital disruption in a knowledge industry. What are some public policy implications?

Answer 1

The concept of creative destruction deals with how new processes and systems emerge from old ones resulting in innovation and the death of old processes and systems. This concept was given by the Austrian economist Joseph Schumpeter who derived it from the work of German economist and social scientist Karl Marx. Joseph Schumpeter defined the process of creative destruction as the process of 'industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one'. In other words, through the process of creative destructions, new processes, systems and new ways of doing things emerge and result in the destruction of old ones. Therefore, creative destruction is essentially the process through which innovation takes place.

For example, e-commerce has revolutionized the way businesses are conducted. E-commerce is changing the way people gather information regarding products or services, the way orders are placed, the way payments are made or the ways firm share information among its suppliers and partners. This is resulting at an end of various older ways of doing things.

Following are some public policy implications:

• Creative destruction results in innovation and a may efficient economic system. Therefore, the government needs to ensure there is no hindrance blocking creative destruction
• Creative destruction requires enabling infrastructure, which the government can put in place
• Creative destruction might result in new challenges and threats. For example, cybercrime is a threat to e-commerce. There should be effective public policies to deal with it.