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Opinion Editorials, June 2013
Creative Destruction of Capitalism:
A Marxist Notion Adopted by Joseph Schumpeter
Economics Library, July 10, 2013
From Wikipedia, the free encyclopedia
Creative destruction, sometimes known as Schumpeter's gale, is a term in economics which has since the 1950s become most readily identified with the Austrian American economist Joseph Schumpeter, who adapted it from the work of Karl Marx and popularized it as a theory of economic innovation and the business cycle. The term is derived from Marxist economic theory, where it refers to the linked processes of the accumulation and annihilation of wealth under capitalism. These processes were first described in The Communist Manifesto (Marx and Engels, 1848) and were expanded in Marx's Grundrisse (1857) and "Volume IV" (1863) of Das Kapital.
At its most basic, "creative destruction" (German: schöpferische Zerstörung) describes the way in which capitalist economic development arises out of the destruction of some prior economic order, and this is largely the sense implied by the German Marxist sociologist Werner Sombart who has been credited with the first use of these terms in his work Krieg und Kapitalismus ("War and Capitalism", 1913). In the earlier work of Marx, however, the idea of creative destruction or annihilation (German: Vernichtung) implies not only that capitalism destroys and reconfigures previous economic orders, but also that it must ceaselessly devalue existing wealth (whether through war, dereliction, or regular and periodic economic crises) in order to clear the ground for the creation of new wealth.
In Capitalism, Socialism and Democracy (1942), Joseph Schumpeter developed the concept out of a careful reading of Marx’s thought (to which the whole of Part I of the book is devoted), arguing (in Part II) that the creative-destructive forces unleashed by capitalism would eventually lead to its demise as a system (see below). Despite this, the term subsequently gained popularity within neoliberal or free-market economics as a description of processes such as downsizing in order to increase the efficiency and dynamism of a company. The original Marxian usage has, however, been maintained in the work of influential social scientists such as David Harvey, Marshall Berman, and Manuel Castells.
In Marx's thought
Although the modern term "creative destruction" is not used explicitly by Marx, it is largely derived from his analyses, particularly in the work of Werner Sombart (whom Engels described as the only German professor who understood Marx's Capital), and of Joseph Schumpeter, who discussed at length the origin of the idea in Marx's work (see below).
A few years later, in the Grundrisse, Marx was writing of "the violent destruction of capital not by relations external to it, but rather as a condition of its self-preservation". In other words, he establishes a necessary link between the generative or creative forces of production in capitalism and the destruction of capital value as one of the key ways in which capitalism attempts to overcome its internal contradictions:
In the Theories of Surplus Value ("Volume IV" of Das Kapital, 1863), Marx refines this theory to distinguish between scenarios where the destruction of (commodity) values affects either use values or exchange values or both together. The destruction of exchange value combined with the preservation of use value presents clear opportunities for new capital investment and hence for the repetition of the production-devaluation cycle:
Social geographer David Harvey sums up the differences between Marx's usage of these concepts and Schumpeter's: "Both Karl Marx and Joseph Schumpeter wrote at length on the 'creative-destructive' tendencies inherent in capitalism. While Marx clearly admired capitalism's creativity he [...] strongly emphasised its self-destructiveness. The Schumpeterians have all along gloried in capitalism's endless creativity while treating the destructiveness as mostly a matter of the normal costs of doing business".
Other early usage
In philosophical terms, the concept of "creative destruction" is close to Hegel´s concept of sublation. In German economic discourse it was taken up from Marx's writings by Werner Sombart, particularly in his 1913 text Krieg und Kapitalismus:
It has been argued that Sombart's formulation of the concept was influenced by Eastern mysticism, specifically the image of the Hindu god Shiva, who is presented in the paradoxical aspect of simultaneous destroyer and creator. Conceivably this influence passed from Johann Gottfried Herder, who brought Hindu thought to German philosophy in his Philosophy of Human History (Ideen zur Philosophie der Geschichte der Menschheit) (Herder 1790–92), specifically volume III, pp. 41–64. via Arthur Schopenhauer and the Orientalist Friedrich Maier through Friedrich Nietzsche´s writings. Nietzsche represented the creative destruction of modernity through the mythical figure of Dionysus, a figure whom he saw as at one and the same time "destructively creative" and "creatively destructive". In the following passage from On the Genealogy of Morality (1887), Nietzsche argues for a universal principle of a cycle of creation and destruction, such that every creative act has its destructive consequence:
Other nineteenth-century formulations of this idea include Russian anarchist Mikhail Bakunin, who wrote in 1842, "The passion for destruction is a creative passion, too!" Note, however, that this earlier formulation might more accurately be termed "destructive creation", and differs sharply from Marx's and Schumpeter's formulations in its focus on the active destruction of the existing social and political order by human agents (as opposed to systemic forces or contradictions in the case of both Marx and Schumpeter).
The expression "creative destruction" was popularized by and is most associated with Joseph Schumpeter, particularly in his book Capitalism, Socialism and Democracy, first published in 1942. Already in his 1939 book Business Cycles, he attempted to refine the innovative ideas of Nikolai Kondratieff and his long-wave cycle which Schumpeter believed was driven by technological innovation. Three years later, in Capitalism, Socialism and Democracy, Schumpeter introduced the term "creative destruction", which he explicitly derived from Marxist thought (analysed extensively in Part I of the book) and used it to describe the disruptive process of transformation that accompanies such innovation:
In Schumpeter's vision of capitalism, innovative entry by entrepreneurs was the disruptive force that sustained economic growth, even as it destroyed the value of established companies and laborers that enjoyed some degree of monopoly power derived from previous technological, organizational, regulatory, and economic paradigms. However, Schumpeter was pessimistic about the sustainability of this process, seeing it as leading eventually to the undermining of capitalism's own institutional frameworks:
Schumpeter nevertheless elaborated the concept, making it central to his economic theory, and it was later taken up as a major doctrine of the so-called Austrian School of free-market economic thought.
Schumpeter (1949) in one of his examples used "the railroadization of the Middle West as it was initiated by the Illinois Central." He wrote, "The Illinois Central not only meant very good business whilst it was built and whilst new cities were built around it and land was cultivated, but it spelled the death sentence for the [old] agriculture of the West."
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 MP3 players, which will in turn eventually be replaced by newer technologies. Companies which made money out of technology which becomes obsolete do not necessarily adapt well to the business environment created by the new technologies.
In more recent times, the internet has acted as a catalyst for creative destruction. The internet has allowed businesses to compete in markets outside of their geographic location, reach more consumers, create efficiencies and cut costs in manual processes as well as pioneer new techniques for doing business.
One such example is the way in which online ad-supported news sites such as The Huffington Post and Zero Hedge are leading to creative destruction of the traditional newspaper. The Christian Science Monitor announced in January 2009 that it would no longer continue to publish a daily paper edition, but would be available online daily and provide a weekly print edition. The Seattle Post-Intelligencer became online-only in March 2009. At a national level, employment in the newspaper business fell from 455,700 in 1990 to 225,100 in 2013. Over that same period, employment in internet publishing and broadcasting grew from 29,400 to 121,200. Traditional French alumni networks, which typically charge their students to network online or through paper directories, are in danger of creative destruction from free social networking sites such as Linkedin and Viadeo.
In fact, successful innovation is normally a source of temporary market power, eroding the profits and position of old firms, yet ultimately succumbing to the pressure of new inventions commercialised by competing entrants. Creative destruction is a powerful economic concept because it can explain many of the dynamics or kinetics of industrial change: the transition from a competitive to a monopolistic market, and back again. It has been the inspiration of endogenous growth theory and also of evolutionary economics.
David Ames Wells (1890), who was a leading authority on the effects of technology on the economy in the late 19th century, gave many examples of creative destruction (without using the term) brought about by improvements in steam engine efficiency, shipping, the international telegraph network and agricultural mechanization.
Creative destruction can cause temporary economic distress. Layoffs of workers with obsolete working skills can be one price of innovations valued by consumers. Though a continually innovating economy generates new opportunities for workers to participate in more creative and productive enterprises (provided they can acquire the necessary skills), creative destruction can cause severe hardship in the short term, and in the long term for those who cannot acquire the skills and work experience.
However, some believe that in the long term society as a whole (including the descendants of those that experienced short-term hardship) enjoys a rise in overall quality of life due to the accumulation of innovation - for example, 90% of Americans were farmers in 1790, while 2.6% of Americans were farmers in 1990. Over those 200 years farm jobs were destroyed by exponential productivity gains in agricultural technology and replaced by jobs in new industries. Present day farmers and non-farmers alike enjoy much more prosperous lifestyles than their counterparts in 1790.
In terms of individuals recovering from obsolescence caused by creative destruction, when a small entity lacks sufficient resources to retrain, this can lead to an absorbing state[clarification needed] which may persist due to information asymmetries that restrict borrowing. Small entities or individuals may prefer in such cases to obtain insurance (particularly if they are risk averse), although again this may be a problem due to adverse selection. Large entities may wish to drive smaller entities to an absorbing state as an anticompetitive practice. (See also Kreps et al.'s solution to Selten's chainstore paradox)(This can also be conceptualized as raising the stakes in no-limit poker). As a result, it may be more efficient for the overall economy to provide insurance - (perhaps even mandatory insurance in order to obtain a pooling equilibrium) - since insurance can give small entities and individuals sufficient resources to have the activation energy needed to retrain and escape the absorbing state.
Geographer and historian David Harvey in a series of works from the 1970s onwards (Social Justice and the City, 1973; The Limits to Capital, 1982; The Urbanization of Capital, 1985; Spaces of Hope, 2000; Spaces of Capital, 2001; Spaces of Neoliberalization, 2005; The Enigma of Capital and the Crises of Capitalism, 2010), elaborated Marx's thought on the systemic contradictions of capitalism, particularly in relation to the production of the urban environment (and to the production of space more broadly). He developed the notion that capitalism finds a "spatial fix" for its periodic crises of overaccumulation through investment in fixed assets of infrastructure, buildings, etc.: "The built environment that constitutes a vast field of collective means of production and consumption absorbs huge amounts of capital in both its construction and its maintenance. Urbanisation is one way to absorb the capital surplus". While the creation of the built environment can act as a form of crisis displacement, it can also constitute a limit in its own right, as it tends to freeze productive forces into a fixed spatial form. As capital cannot abide a limit to profitability, ever more frantic forms of "time-space compression" (increased speed of turnover, innovation of ever faster transport and communications' infrastructure, "flexible accumulation") ensue, often impelling technological innovation. Such innovation, however, is a double-edged sword:
Globalization can be viewed as some ultimate form of time-space compression, allowing capital investment to move almost instantaneously from one corner of the globe to another, devaluing fixed assets and laying off labour in one urban conglommeration while opening up new centres of manufacture in more profitable sites for production operations. Hence, in this continual process of creative destruction, capitalism does not resolve its contradictions and crises, but merely "moves them around geographically".
In his 1987 book All That is Solid Melts into Air: The Experience of Modernity, particularly in the chapter entitled "Innovative Self-Destruction" (pp. 98–104), Marshall Berman provides a reading of Marxist "creative destruction" to explain key processes at work within modernity. The title of the book is taken from a well-known passage from The Communist Manifesto. Berman elaborates this into something of a Zeitgeist which has profound social and cultural consequences:
Here Berman emphasizes Marx's perception of the fragility and evanescence of capitalism's immense creative forces, and makes this apparent contradiction into one of the key explanatory figures of modernity.
The renowned sociologist Manuel Castells, in his trilogy on The Information Age: Economy, Society and Culture (the first volume of which, The Rise of the Network Society, appeared in 1996), reinterpreted the processes by which capitalism invests in certain regions of the globe, while divesting from others, using the new paradigm of "informational networks". In the era of globalization, capitalism is characterized by near-instantaneous flow, creating a new spatial dimension, "the space of flows". While technological innovation has enabled this unprecedented fluidity, this very process makes redundant whole areas and populations who are bypassed by informational networks. Indeed, the new spatial form of the mega-city or megalopolis, is defined by Castells as having the contradictory quality of being "globally connected and locally disconnected, physically and socially". Castells explicitly links these arguments to the notion of creative destruction:
In 1992, the idea of creative destruction was put into formal mathematical terms by Philippe Aghion and Peter Howitt in their paper "A Model of Growth through Creative Destruction," published in Econometrica.
In 1995, Harvard Business School authors Richard L. Nolan and David C. Croson released Creative Destruction: A Six-Stage Process for Transforming the Organization. The book advocated downsizing to free up slack resources, which could then be reinvested to create competitive advantage.
More recently, the idea of "creative destruction" was utilized by Max Page in his 1999 book, The Creative Destruction of Manhattan, 1900–1940. The book traces Manhattan's constant reinvention, often at the expense of preserving a concrete past. Describing this process as "creative destruction," Page describes the complex historical circumstances, economics, social conditions and personalities that have produced crucial changes in Manhattan's cityscape.
In addition to Max Page, others have used the term “creative destruction” to describe the process of urban renewal and modernization. T.C. Chang and Shirlena Huang referenced “creative destruction” in their paper Recreating place, replacing memory: Creative Destruction at the Singapore River. The authors explored the efforts to redevelop a waterfront area that reflected a vibrant new culture while paying sufficient homage to the history of the region. Rosemary Wakeman chronicled the evolution of an area in central Paris, France known as Les Halles. Les Halles housed a vibrant marketplace starting in the twelfth century. Ultimately, in 1971, the markets were relocated and the pavilions torn down. In their place, now stand a hub for trains, subways and buses. Les Halles is also the site of the largest shopping mall in France and the controversial Centre George Pompidou.
The term “creative destruction” has been applied to the arts. Alan Ackerman and Martin Puncher (2006) edited a collection of essays under the title Against Theater: Creative destruction on the modernist stage. They detail the changes and the causal motivations experienced in theater as a result of the modernization of both the production of performances and the underlying economics. They speak of how theater has reinvented itself in the face of anti-theatricality, straining the boundaries of the traditional to include more physical productions, which might be considered avant-garde staging techniques.
Neoconservative author Michael Ledeen argued in his 2002 book The War Against the Terror Masters that America is a revolutionary nation, undoing traditional societies: "Creative destruction is our middle name, both within our own society and abroad. We tear down the old order every day, from business to science, literature, art, architecture, and cinema to politics and the law." His characterization of creative destruction as a model for social development has met with fierce opposition from paleoconservatives.
Creative destruction has also been linked to sustainable development. The connection was explicitly mentioned for the first time by Stuart L. Hart and Mark B. Milstein in their 1999 article Global Sustainability and the Creative Destruction of Industries, in which he argues new profit opportunities lie in a round of creative destruction driven by global sustainability. (An argument which they would later on strengthen in their 2003 article Creating Sustainable Value and, in 2005, with Innovation, Creative Destruction and Sustainability.) Andrea L. Larson agreed with this vision a year later in Sustainable Innovation Through an Entrepreneurship Lens, stating entrepreneurs should be open to the opportunities for disruptive improvement based on sustainability. In 2005, James Hartshorn (et al.) emphasized the opportunities for sustainable, disruptive improvement in the construction industry in his article Creative Destruction: Building Toward Sustainability.
Per the following text, this process is also known as Schumpeter's Gale:
Media reflections of creative destruction
The film Other People's Money provides contrasting views of creative destruction, presented in two speeches regarding the takeover of a publicly traded wire and cable company in a small New England town. One speech is by a corporate raider, and the other is given by the company CEO, who is principally interested in protecting his employees and the town.
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