Creative Destruction Theory of Entrepreneurship

Joseph Schumpeter was an Austrian economist writing in the 1930s about the nature of capitalism. He criticized the classical approach to economics, which kept some variables fixed to deduce conclusions through logic, as too abstract and not grounded in reality. He believed that capitalism could only be understood as a disequilibrium caused by continual change from innovation.

Schumpeter viewed the entrepreneur as the key innovator and argued that entrepreneurship is the key driver of economies, creating economic growth through gales of creative destruction.

He distinguished between inventors and entrepreneurs, arguing that entrepreneurs are more important economic actors than inventors because entrepreneurs are responsible for the actual implementation and dissemination of inventions. Inventors create new technologies and techniques, whereas entrepreneurs transform them into economic forces.

Schumpeter is perhaps best known for his theory of creative destruction which celebrates the destruction of old ways, companies and legacies to make way for the new. Schumpeter’s dynamic theory contrasts with the older static theories of the circular flow of the economy. He argued that entrepreneurs produce innovations by creating new combinations with factors of production such as technologies and techniques. The entrepreneur innovates by introducing new products, opening new markets, new sources of inputs, or new forms of organization.

Schumpeter is credited with placing human actors at the center of economic development processes. He argued that entrepreneurs seek to gain power through a capacity to resist social pressure and to overcome the limitations of existing skill sets.

Perhaps one of the closest modern approximations to the notion of creative destruction is found in Clayton Christensen's disruptive innovation theory.

A great modern representation of Schumpeter’s theory of creative destruction in entrepreneurship are innovative start-ups (Stam, 2018). Start-ups aim to solve existing problems experienced by the market and current incumbent offerings and aim to create a new solution that will eventually overtake the existing product or service in the market, thus destroying it. This can be seen in the rise of streaming services such as Netflix, which effectively dominated the home entertainment industry and rendered businesses such as Blockbuster obsolete.

Stam, F.C. (2018) Enabling Creative Destruction : An Entrepreneurial Ecosystem Approach to Industrial Policy. Working Paper series, volume 18, issue 05. U.S.E. Research Institute

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This video illustrates the Netflix/Blockbuster example: