Introduction to Destruction

April 21, 2010 at 6:56 pm 1 comment

The oldest form of creative destruction can be attributed to the Hindu god Shiva, who reveals the cycles of death and rebirth essential to the Eastern mystical worldview.

The economic concept of creative destruction came much later, and was developed mostly by Joseph Schumpeter (1883-1950).

In explaining creative destruction in his 1942 book Capitalism Socialism, and Democracy, Schumpeter put forth some eerily prophetic ideas. Though he agreed with Marx that the capitalist system would eventually collapse, he had his own ideas about how it would go down.

Schumpeter theorized that capitalism would eventually become so successful that it would become the subject of a widespread intellectual backlash. There will be no “communist revolution,” he wrote; rather, social democrats would rise in popularity and win elections, ultimately forming a democratic majority. The actions of these elected leaders would give rise to a welfare state that, in turn, would abate the class wars that characterize modern capitalist societies.

Here’s a simplified breakdown of the process, provided by Swedish economists Magnus Henrekson and Ulf Jakobsson:

1. The bulk of innovations will be made in large corporations.

2. Large corporations will be increasingly predominant in the economy.

3. New and smaller firms will play a declining role in the economy.

4. The concentration of ownership will grow over time.

5. The general public, not least the intellectuals, will grow increasingly hostile towards capitalism.

6. Socialism will eventually replace capitalism.

It’s important to note that although Schumpeter predicted the fall of capitalism, he did not advocate it. “If a doctor predicts that his patient will die presently, this does not mean that he desires it,” he wrote. The fact that Schumpeter’s theory did not align with his own interests lends even more credibility to a forecast that already appears to be materializing.

The Concise Encyclopedia of Economics

Where Schumpeter Was Nearly Right

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