Joseph Schumpeter (1883-1950) was an Austrian-Born economist and political scientist who taught at Harvard University for most of his career. While his research spanned across a wide range of topics and areas, his most influential contribution to modern economics is the definition and rationalisation of the process of “creative destruction”.
In his 1942 Capitalism, Socialism and Democracy (page 83), Schumpeter writes:
“The opening up of new markets, foreign or domestic, and the organizational development from the craft shop and factory to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism”.
The importance of Schumpeter’s argument comes from the recognition that the economy, much like a living organism, evolves and changes over time. In the course of this evolution, entire sectors of the economy might be wiped out, but this destruction is necessary for the creation of new sectors, which will be made up of more efficient and productive firms.
In other words, the fact that at any point in time a large number of firms can shut down and jobs can be lost in certain sectors of the economy is an inevitable part of the process of economic development. In fact, economic development could not occur without destruction, and any attempt at preventing destruction would harm the long-term growth prospects of a country.
Learn more about Joseph Schumpeter by reading a short biography of him in the ‘see also’ section below.
Schumpeter, J. (2010). Capitalism, socialism and democracy. London: Routledge.
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