Question

At the end of Chapter 11, it mentioned "creative destruction." What is the main idea behind that term?

• 1-The idea that a competitive marketplace will also be a creative one and that we should see new technologies and inventions as entreprenueurs try to "out do" each other.

• When downloading music became popular this pretty much eliminated the need for physical audio CDs. This was an example of creative destruction.

• 2-It is highly doubtful that a centrally planned communist economy (i.e. North Korea, Cuba, China) or a rigidly controlled socialist economy (i.e. Venezuela) will be successful in inventing and creating new ideas, technologies, and innovations as their counterparts practicing in a free market, competitive, and capitalist system.

  3-Something to think about: Why do so many rigidly controlled economies end up stealing ideas, technologies, and inventions from free market economies?

• 3All of the above statements are true and help to discribe what creative destruction is all about.

Answer 1

In simple terms creative destruction mean how capitalism or capitalist create a changing economy by closure of old firms and the human capital shifting themselves to more productive firms. This idea of creative destruction explains the fact that firm closure and unemployment is good for the economy in the long run.

Statement 1 holds true as it is creative as it is allowing new inventions and technologies but at the same time the CD making firms are being closed.

Statement 2 holds true that in the process of creative destruction the government control should be nil. Banks should not give loans to bad firms as it can create financial losses for the banks.

Statement 3 tells that a centrally controlled economy steals idea and data for their own proficiency. In a free market economy there are new startups that benefit the labor force. New technology new data analysis new ideas come up with these startups. Therefore to sustain the firms in the international market and in the domestic market, research is the key and it allows the rigidly controlled economies to steal data and technology from the free market economies. Thus it can be said that new firms outperform the old firms.

Statement 4 holds true as all the above points are true in the case of creative destruction.