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The phrase "creative destruction" was developed by economist Joseph Schumpeter to explain how capitalism results in a dynamically shifting economic structure. It refers to the phenomena whereby outdated businesses and industries that are no longer competitive or profitable are replaced by new ones that implement innovations such as new technology, methodologies, business models, services, or products.
According to the theory of creative destruction, economic growth depends on the formation of new markets and the destruction of existing ones as resources (labor and capital) are redistributed from less productive to more productive processes. Furthermore, it suggests that innovation is a necessary and unavoidable force that propels social and cultural change in addition to economic growth and advancement.
The horse-drawn carriage was replaced by the vehicle, the typewriter was replaced by the personal computer, the landline phone was replaced by the mobile phone, and the physical bookstore was replaced by the online bookshop, to name a few instances of creative destruction in history.
The economy and society are affected by creative destruction in both positive and harmful ways. One the one hand, it encourages innovation, competitiveness, efficiency, and productivity, which result in greater living standards, reduced prices, and more options for customers. On the other hand, it leads to unemployment, inequality, instability, and uncertainty, which have an impact on the welfare, security, and identity of employees, businesses, and communities.
Different schools of economic thought have disagreed on the subject of creative destruction. Some economists, particularly those who support free-market and laissez-faire policies, view creative destruction as a normal and desirable process of economic progress and typically oppose government action to impede or limit this process. Other economists, particularly those who support more active and interventionist policies, view creative destruction as a disruptive and damaging process of economic development and generally support government action to lessen or manage its adverse impacts.
