Question

In Labor Studies:Define "creative destruction."

Answer 1

Creative destruction is a process through which something new brings about the demise of whatever existed before it.  

The term is used in a variety of areas including economics, corporate governance, product development, technology and marketing. In product development, for example, creative destruction is roughly synonymous with disruptive technology. One frequently cited example is the smartphone, which all but killed the market for not only regular cell phones but also PDAs, MP3 players, point-and-shoot cameras, wrist watches, calculators and voice recorders -- among other things.

Joseph Schumpeter, an Austrian-American economist, developed the concept of creative destruction from the works of Karl Marx, in reference to capitalist development and the business cycle.

According to Schumpeter’s theory, creative destruction will lead to the eventual failure of capitalism as an economic system.

In current business use, however, the term is more likely to refer to unappealing choices that are considered necessary for sustainability.

In a business context, corporate executives often describe unpopular cost-cutting measures such as downsizing and outsourcing as creative destruction. The implication is that although the actions may be perceived as injurious – especially to the workforce -- they will enable a transformation of the business.

The effects of creative destruction are sometimes referred to as Schumpeter's gale.

Companies that once revolutionized and dominated new industries – for example, Xerox in copiers or Polaroid in instant photography – have seen their profits fall and their dominance vanish as rivals launched improved designs or cut manufacturing costs. In technology, the cassette tape replaced the 8-track, only to be replaced in turn by the compact disc, which was undercut by downloads to MP3 players, which is now being usurped by web-based streaming services. Companies which made money out of technology which becomes obsolete do not necessarily adapt well to the business environment created by the new technologies.

Schumpeter was the first to identify creative destruction as the process by which old products and modes of production are replaced by new ones.In the many decades since Schumpeter first wrote of creative destruction in 1942, accumulating evidence has supported the basic idea of creative destruction, though not all of the details of Schumpeter’s original account. One interpretation of Schumpeter is that he thought periods of creative destruction were interspersed at regular, predictable intervals with periods of Walrasian circular flow. In praising a Walrasian account of the equilibrium-maintaining circular flow process, Schumpeter did not see what Kirzner later did, that an entrepreneur alert to price differences (what we now call a “Kirznerian entrepreneur”) is required to achieve the efficiency benefits of equilibrium. We now understand creative destruction better than Schumpeter did and so we know that The main costs are borne by those who lose a job because their skills have been made obsolete by creative destruction, especially the job losers who remain unemployed for a long time or whose new jobs are less satisfying or lower paid. Although the changes wrought by creative destruction are arguably not Pareto optimal, the benefits are great enough that a large majority of us would arguably assent to the changes from behind a Rawlsian veil of ignorance (Rawls, 1971), especially insofar as the costs can be made less onerous.

Because the benefits of creative destruction outweigh the costs, wise governments and workers will seek to enable the benefits and reduce the costs. The labor policies enacted by governments and workers can greatly affect the success of creative destruction in two important ways. First, they can make it easier or harder for the innovative entrepreneur to bring us the benefits of creative destruction. Second, they can lessen the frequency or severity of job loss caused by creative destruction.