Creative Destruction: Impact on Markets and Industries

This essay delves into the concept of creative destruction, a fundamental economic theory introduced by Joseph Schumpeter, which describes the process of innovation where new technologies and systems replace the old. It examines the role of creative destruction in driving economic growth, structural adjustments, and market dynamics, highlighting its significance in both microeconomic and macroeconomic contexts. The essay explores various examples of creative destruction, such as the impact of smartphones on traditional markets and the rise of online news. It discusses the importance of job creation and destruction, the effects of international competition, and the impact of deregulation. The analysis emphasizes the essential role of creative destruction in capitalism and its implications for society, concluding that barriers to this process can have significant economic consequences. The essay uses various academic sources to support its arguments and provides a comprehensive overview of the subject.

Running head: CREATIVE DESTRUCTION
Creative Destruction
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1CREATIVE DESTRUCTION
Creative destruction refers to the ongoing process of innovation where new things and
new systems replace existing things and the existing systems (Archibugi, Filipptti & Frenz,
2013). This means it refers to the mechanism of continual process and product innovation by
which the old and outdated production units are replaced by the new ones. It permeates the
major feature of the structural adjustments, macro-economic performances, and the
functioning of the markets. With the passage of time, the process of constructive destruction
illuminate for over 50% of the total productivity growth (Martin & Scarpetta, 2012). The
obstacles in this process may have a strong both short and long run macro-economic
outcomes.
Joseph Schumpeter first coined the term ‘Creative Destruction’ in the year 1942
(Sledzik, 2013). He has developed this concept of creative destruction from Karl Marx. He
considered it as an essential fact about the capitalism. Schumpeterian creative destruction
pervades the major face of the macroeconomic performance (Mitchell, 2013). Joseph
Schumpeter has used this term for describing the particular form of the economic growth,
which the entrepreneurs especially bring towards the capitalist structure. He further argued
that creative destruction was the introduction of entrepreneur of fundamental innovation in
the capitalist structure, which was real power that has sustained the continuing growth in
economy; even it has ruined the economic significance of the established enterprises that may
have relished a level of monopolistic authority earlier. He has described the creative
destruction as a process of total economic growth into the capitalist structure, where the
entrepreneur creates economic value through their radical innovations more than it is
destroyed when their innovations replace the already established process of doing the things.
However, the primary aspect of the belief of Schumpeter was “The essential point to grasp is
that in dealing with capitalism, we are dealing with an evolutionary process”.

2CREATIVE DESTRUCTION
According to this theory, the term leads to eventual failure of the capitalism as
economic system. The current business uses the term in order to refer it to the unappealing
choices, which is considered important for the sustainability. With the same, the corporate
executives uses the term ‘creative destruction’ in order to describe the unpopular measures of
cost-cutting like outsourcing and downsizing as the creative destruction. It could be used in
various different areas including product development, corporate governance, economic,
marketing and technology (Mazzucato, 2013). For example, in the field of product
development, creative destruction refers to disruptive technology. Smartphone is one of the
frequently cited examples that have killed earlier market for not only the day-to-day cell
phones but also the MP3 players, PDAs, calculators, wristwatches, voice recorders and
cameras as well. On the other hand, in the field of marketing, the ad campaign is one of the
examples of creative destruction. Ad campaigns targets the new and lucrative markets by
risking the alienation of the existing one.
Creative destruction not only permeates the long-run development but also the
structural modification, operation of factor markets and the economic fluctuations (Ogun,
2014). At the microeconomic level, creative destruction is typified by several decisions in
order to create as well as destroy the arrangements of productions. The decisions are very
complex and they involve several parties and that too with technological and strategic
considerations. Effectiveness of these decisions is not only dependent on the managerial
talents but also depends on the presence of the sound institutions, which provides appropriate
framework of transactions. The failure among the dimensions could have severe impact on
the micro-economic level, once it communicates with the restructuring process. Some of
these constraints are natural since they are derived from the utter complication of such
transactions. The rest others are human made and their origins are ranged from the eccentric
economic ideas for achieving higher human objectives like the inviolability of the human

3CREATIVE DESTRUCTION
capital. Such institutional limitation gives rise to the business cycle models for example,
those that are observed in most flexible and developed economies. In addition to that, they
also help in explaining the recurrent macroeconomic challenges like cyclical behavior of the
unemployment, wages and investment. At times, by restricting the potential of the economy
in order to tap over latest technological openings and reconstruct itself to a shifting
environment, failure in institution may result in the impaired factor markets, financial
inactivity, subjection to profound crises and resource misallocation.
The factors of reallocation, particularly the job flows, is the most commonly chosen
empirical substitutes for intensity of the creative destruction process (Brown, Lambert &
Florax, 2013). According to Bogliacino, Lucchese and Pianta (2013), job creation or
destruction is the positive or negative total employment change for the institution level from
period one to another. They concluded further that over ten percent of the total jobs, which
subsist at any point of time did not survive one year prior or would not survive one year later.
This means, more than ten percent of the existing jobs destroy every year and with the same,
same amount of job is created side by side (Rotman, 2013). Most of the authors have
established more or less likely equivalent measures of the job flows for various episodes and
countries. However, there is much significant dissimilarity among them but they do possess
some common differences as well. Hence, in sum, it can be said that both the job creation as
well as job destruction flows are ongoing, large and determined (Haltiwanger, 2012). In
addition, most of the job flow takes place within instead of between the narrowly defined
economical sectors. Furthermore, Hallward-Driemeier and Rijkers (2013) have stated that
reallocation (the industry-level productivity in between the plant) is most intimately linked to
the component of creative destruction. It accounts for more than 50 percent of the total
efficiency growth of ten years (1977 to 1987) in the United State manufacturing sector. With
the same, it was also concluded that the existing plants have comparatively lesser

4CREATIVE DESTRUCTION
productivity than the continuing plants. In contrast to this, the new plants experience a
selection and learning period through which they moderately reach with the incumbents.
However, there are some other studies conducted on a bit different methodologies, which
have coincide with the closure that, the reapportionment accounts for primary element of
within the industry output growth.
Recent evidences on cyclical features of the creative destruction have found out that
rise in job destruction or sharp liquidation constitutes the most eminent affects of contractions
on the creative destructions. On the other hand, the job destruction is comparatively less
volatile as well as pro-cyclical (Gallipoli & Pelloni, 2013). For every practical purpose, some
or the product or innovation of process is taking place at each instant in time. Continuous
innovation and absence of obstacles to adjustments would necessitate infinite restructuring
rates. However, there are few economists, who have objected to the hypothesis of- Regulation
of labor market obstructs the course of the creative destruction and that its pragmatic support
is very limited. Furthermore, it is an old concept that the well functioning of markets and
financial institutions are very important factors after the economic growth. In modern days, it
is considered that the creative destruction process is likely to play a chief role behind this
link.
International competition is one of the important sources of creative destruction.
Brandt, Van Biesebroeck and Zhang (2012) has concluded that there are notable reallocation
and productivity effects from the trade openness. He finds that, in industries, which have
experienced deepest reduction in Canadian tariff, shrinkage of less productivity plants have
reduced the employment by twelve percent by raising the labor productivity n the industry
level by fifteen percent. He further finds that this increase is partially linked with the exit or
the contraction of less productivity plants. Lastly, the industries, which have experienced the
biggest reductions in US tariff, the labor productivity at the plant level have soared by

5CREATIVE DESTRUCTION
fourteen percent. The conjugal deregulation of the goods markets may have same effects,
such as Dogramaci and Fare (2012), have found that deregulation in the United State’s
industry of telecommunications has increased the productivity mostly through the factor of
reallocation towards more productive plants instead of productivity gains through intra-
plants. The consequences of the creative destruction often referred to as the Schumpeter’s
gale.
In today’s world, creative destruction is a throwaway term that is mostly used by the
economists in order to describe the free messy way of the markets to deliver progress. In one
of the most famous book of Schumpeter namely the Capitalism, Socialism, and Democracy
(1942), he has stated that, “This process of Creative Destruction is the essential fact about
capitalism” (Schubert, 2013). He in fact, has eexplaind it as- “The perennial gale of creative
destruction.” He observed that the creative destruction has provided a strong force in order to
make the societies more wealthy as it has made the sparse resources far more productive
because they proceed from the slightest to the more effective industries.
With the same, transportation too provides an ongoing and dramatic instance of the
creative destruction at the work (Haltiwanger, 2012). Amid the emergence of the steam
power in the 19th century, the railroads have flounced across United States by enlarging the
markets, building new industries, reducing the shipping costs and serving thousands of new
and productive jobs. The automobiles’ ripples surge into tourism, oil, retailing, entertainment
and other industries. Internal ignition engine has covered the means for the automobiles prior
in the upcoming century. Similarly, the Americans assisted as the horses and the mules have
opened ways for the airplanes and the cars but these innovations too did not entered into the
world without destructions. Each of the new modes of transportations has taken a count on
the existing industries. Along with that, the emergence of internet has spawned a high need
for thousands of web masters, which is an occupation that did not even exist earlier.

6CREATIVE DESTRUCTION
Similarly, the famous LASIK surgery lets the consumers throw away the glasses and reduces
the visit of the opticians and the optometrists but it, on the other hand has increased the need
for the ophthalmologists (Anghart, 2012).
One of the latest examples of creative destruction is the manner in which the iPod has
destroyed the market of CDs, as it made the experience of listening music far more
convenient for the people. The emergence of iPods have completely spurred and destroyed
the economic value of the CDs by creating its own economic value (Ng, 2014). However,
overall, the societies and the consumers feel better off in the process of satisfying more of
their demands by making use of lesser resources. Another best example of creating
destruction, which is slowly taking place in front of us, is the emergence of online news.
Online news now a day is so in trend that it is slowly declining the use of newspapers (Xiang
et al., 2015). The immediacy and easy accessibility of the online news in current days is
leading the newspapers towards their declination and, it is predictable that newspapers would
lose its importance in the coming days. However, the most ironic part of the Schumpeter’s
iconic line is- “The societies, which try to reap the gain of the creative destruction without
the pain find themselves enduring the pain but not the gain”.
From the above analysis, it is clear that the creative destruction process is an essential
and fundamental part of the economic fluctuations and growth and barriers to this process
could have serious short and long-term macro economic impact. Hence, it can be said that
people are witnessing the development of the creativity in the form of new industries by
watching the destructions of the old ones and this in turn is referred to as creative destruction.

7CREATIVE DESTRUCTION
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