Ecology teaches us that forest fires can be a form of creative destruction, in that they stimulate ecosystem diversity. Fires create openings in the woods that allow sunlight to reach smaller plants, while burning also enriches the soil by depositing minerals.
In economics, creative destruction is the process by which entrepreneurs introduce innovations that force established businesses to adapt or die. The phrase is attributed to economist Joseph Schumpeter (1883-1950). Anders Olshov, CEO at Øresundsinstituttet – a non-profit Danish-Swedish association founded with the purpose of encouraging integration within the Øresund region – views creative destruction in a positive light.
“Although creative destruction might not be attractive if you are in an industry on the brink of obsolescence, it is obvious that in economics and capitalism, some companies and industries must fail if the economy is to grow and progress,” he says.
Olshov adds that an economic recession is very valuable in many ways. “In a recession there is creative destruction, with stagnant operations disappearing while innovative new companies form and create a foundation for the future,” Olshov says. “Many projects within companies are questioned during a recession, which is good. Meanwhile, resources are released to companies and people with the best ideas and survival potential.”
Already there are many signs that radical innovators are working in alternative energy, water treatment, sustainable agriculture, construction, manufacturing and transportation to offer products that promise dramatic reductions in energy consumption, pollution and waste.
The challenge of global sustainability has begun to drive the process of creative destruction. Accepting the commonly held definition that sustainable development is the ability of the current generation to meet its needs without compromising the capability of future generations to meet theirs, it is not difficult to see how most existing products and processes fail to meet this condition. It is becoming increasingly obvious that today's material-intensive industries are not environmentally sustainable.
“This challenge presents an opportunity over the next decade for visionary companies to drive the redefinition and redesign of their industries toward sustainability,” Olshov says. “Material- and energy-intensive industries will find global sustainability a challenge that calls for radical repositioning and new competence development.”
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Joseph Schumpeter and his creative destruction
The economic concept of creative destruction was first introduced by the Austrian School economist Joseph Schumpeter.
In his book “Capitalism, Socialism and Democracy”, Schumpeter popularized and used the term to describe the process of transformation that accompanies radical innovation. In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the force that sustained long-term economic growth, even as it destroyed the value of established companies that enjoyed some degree of monopoly power.
Schumpeter went as far as saying that the “process of creative destruction is the essential fact about capitalism.”
Unfortunately, while an important concept, this also became one of the most overused buzzwords of the dotcom era of the new millennium, with nearly every technology executive talking about how creative destruction would replace the old economy with the new.
