Creative Destruction

Joseph Schumpeter (1883-1950) was a distinguished Austrian economist who proposed that capitalism is characterised by creative destruction.  He suggested that destructive economic crises were an inherent, but positive, feature of capitalism because they facilitated economic growth by encouraging creativity through destruction of old production methods.  He also recognised that capitalism had been central to the impressive economic growth of many western societies, but suggested that in the future inhibiting free markets with increased bureaucracy would impede the creativity of capitalism.  Hence, as democracies matured and became more bureaucratic, they should move toward a more socialist system under Schumpeterian theory.

Schumpeter also advocated that these destructive crises should not be avoided through fiscal intervention since they liberated economic innovation.  In particular, he was critical of the government intervention initiated under Roosevelt during the Great Depression which he suggested possibly exacerbated the crisis.  Andrew Gamble (2009) in his book “The Spectre at the Feast” suggests that Schumpeter was correct in his assertion that an advancement of democracy would lead to greater state involvement in the economy, but argues that Schumpeter underestimated the ability of innovation even in the face of greater government intervention.

In summary, Schumpeter’s creative destruction proposition appears to effectively describe the cyclical pattern observed in capitalist systems.  Furthermore, his positive attitude to creative destruction seems reasonable given that it may act as a mechanism to improve market efficiency.  With regards to government intervention, whilst it may inhibit the corrective ability achieved through creative destruction, non-action may lead could lead to more a pronounced and broader economic crisis. 

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