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What is known as the process of creative destruction?

Level:
AS, A-Level, IB
Board:
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 4 Sept 2023

Creative destruction is a term coined by Austrian school economist Joseph Schumpeter. It describes the continuous process of innovation and change in a capitalist economy, where new technologies and business models disrupt and replace older ones, leading to the destruction of existing companies and industries.

While this process can lead to temporary economic hardship and job losses (including a rise in structural unemployment), it also drives economic growth and improves living standards over the long term. For example, the rise of online retailers like Amazon has led to the closure of many brick-and-mortar stores, but has also created new jobs and consumer benefits such as lower prices and greater convenience.

Here are some more real-world examples to illustrate this concept:

  1. Automobile Industry and the Horse-Drawn Carriage: The introduction of automobiles in the early 20th century is a classic example of creative destruction. As automobiles gained popularity, the horse-drawn carriage industry declined. The automobile industry not only replaced the horse-drawn carriage but also created new jobs, such as those in automobile manufacturing, repair, and service.
  2. Digital Photography and Film Photography: The shift from film photography to digital photography is another illustration of creative destruction. Digital cameras and smartphones with high-quality cameras disrupted the traditional film photography industry. While film and darkroom-related businesses declined, new opportunities arose in digital photography, image editing software, and online photo sharing platforms.
  3. Online Retail vs. Brick-and-Mortar Stores: The rise of e-commerce and online retail has transformed the retail industry. Many traditional brick-and-mortar stores faced challenges and closures due to online competition. However, this creative destruction also led to the growth of e-commerce platforms, digital payment systems, and last-mile delivery services, creating new opportunities for businesses and employment.
  4. Streaming Services vs. Cable Television: The emergence of streaming services like Netflix, Amazon Prime Video, and Disney+ disrupted the traditional cable television industry. While cable TV providers experienced declines in subscribers and revenue, streaming services gained prominence, leading to the production of original content and new forms of entertainment consumption.
  5. Smartphones and Landline Phones: The widespread adoption of smartphones revolutionized communication. Landline phones and traditional telecommunication companies faced challenges as people shifted to mobile devices. This transformation led to innovations in mobile apps, mobile internet services, and the creation of the app economy.
  6. Renewable Energy vs. Fossil Fuels: The transition from fossil fuels to renewable energy sources such as solar and wind power is an ongoing example of creative destruction. The fossil fuel industry faces the challenge of reduced demand, while renewable energy technologies create new opportunities for clean energy production and sustainability.

In each of these examples, creative destruction involves the replacement or transformation of existing industries and technologies by newer, more efficient, and innovative solutions. While it can lead to disruption, job displacement, and challenges for established businesses, it also stimulates innovation, drives economic growth, and ultimately benefits consumers through improved products and services.

Creative destruction is a dynamic process that shapes the evolution of economies and industries over time.

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