Joseph Schumpeter and “Creative Destruction”

Posted: 12/01/2011 - 00:00

My last two columns on Umair Haque and Joseph Stiglitz have shifted the focus a bit to the adaptations that global businesses face as more and more challenges to the traditional ideas surrounding capitalism and globalisation emerge.

This time I’ll take look back to a giant economist and political scientist, Joseph Schumpeter, who worried about the stagnation of capitalism and globalisation long before there was even a term called globalisation. Schumpeter, an Austrian-Hungarian-American who died in 1950, was one of the twentieth century’s great economic and political thinkers. Among other things, he was a professor of economics at the universities of Bonn, Tokyo, and Harvard. He was also the finance minister of a socialist government in Austria and a staunch defender of capitalism.

A central point of his life’s work was that capitalism on the world stage can only be understood as an evolutionary process of continuous innovation and “creative destruction”. This idea is becoming more mainstream with the work of Stiglitz (on making globalisation work) and Haque (on the need to “disrupt” capitalism and make way for “constructive capitalists”).

Schumpeter’s most popular book in English is probably Capitalism, Socialism and Democracy, published in 1942. The book opens with this famous quote: “Can capitalism survive? No. I don’t think it can.” While he was sympathetic to Marx’s theory that capitalism would collapse, he veered sharply away from Marx, arguing that it might be destroyed by its success. He borrowed the phrase “creative destruction” from Marxist thought, and made it famously his own by using it to describe a process in which the old ways of doing things are destroyed and replaced by new, better ways.

Capitalism he wrote, “is by nature a form or method of economic change and not only never is but never can be stationary”. But the problem he saw was that the success of capitalism would lead to a form of corporatism featuring values hostile to entrepreneurial capitalism. Does this sound familiar? As I look at today’s emerging version of capitalism and multinational corporation dominance of markets it seems very familiar. Schumpeter also worried that this process would hinder entrepreneurship.

But Capitalism, Socialism, and Democracy is more than a dire prognosis of capitalism’s future. It is also a defence of capitalism on the grounds that capitalism sparks entrepreneurship. Schumpeter was among the first to lay out a clear concept of entrepreneurship by identifying the distinction between an inventor’s inventions and an entrepreneur’s innovations. He noted that entrepreneurs innovate not just by figuring out how to use inventions, but also by introducing new means of production, new products, and new forms of organisation. These innovations, he argued, take just as much skill and daring as does the process of invention.

Innovation by the entrepreneur, he continued, leads to creative destruction as innovations cause old inventories, ideas, technologies, skills, and equipment to become obsolete. The question is not “how capitalism administers existing structures,” he wrote, “… [but] how it creates and destroys them”. This creative destruction, he believed, causes continuous progress and improves the standards of living for everyone.

He focused on innovation as the critical driver of economic change and progress. This seems obvious now but the debate about how best to foster an innovative climate of collaboration continues to the present day. Innovation and continuous improvement are buzzwords in the outsourcing industry but creating a framework for actually making them happen is why I think the Vested Outsourcing business model has arrived in the right place at the right time.

Schumpeter’s influence on the theory of economic development was enormous. The theory’s appeal lies in large measure in its simplicity and its power, characteristics evident when he wrote, “The carrying out of new combinations we call ‘enterprise’; the individual whose function it is to carry them out we call ‘entrepreneurs.'”

I really appreciate Schumpeter’s ideas on invention and innovation because it is the innovators and entrepreneurs who often make the invention take off and become larger and more useful than the original. The phone and the computer are but two examples of the importance of innovation.

And I also like the challenge and the tension implied in the concept of creative destruction.  It’s disquieting but also encouraging that 70 years after Schumpeter used the term it is needed now more than ever in outsourcing through the Vested model of collaboration, trust, innovation, continuous improvement and sharing value to achieve the win-win.

 
 
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About The Author

Kate Vitasek's picture

Kate Vitasek is an international authority for her award-winning research and Vested® business model for highly collaborative relationships.   Vitasek, a Faculty member at the University of Tennessee, has been lauded by World Trade Magazine as one of the “Fabulous 50+1” most influential people impacting global commerce.    Her work has led to 6 books, including: Vested Outsourcing: Five Rules That Will Transform Outsourcing, Vested: How P&G, McDonald’s and Microsoft Are Redefining Winning in Business Relationships and Getting to We: Negotiating Agreements for Highly Collaborative Relationships.

Vitasek is known for her practical and research-based advice for driving transformation and innovation through highly-collaborative and strategic partnerships.   She has been appeared on CNN International, Bloomberg, NPR, and on Fox Business News.  Her work has been featured in over 300 articles in publications like Forbes, Chief Executive Magazine, CIO Magazine, The Wall Street Journal, Journal of Commerce, World Trade Magazine and Future of Sourcing.