The law of nature is such that an ending precedes every new beginning, every birth signifies the death of something existing. While this may be fairly obvious for living organisms and all naturally occurring phenomena, it doesn’t seem so in the case of the market and industries. This is where it becomes essential to understand the concept of creative destruction. The term Creative Destruction appears to contradict itself. How can creativity possibly cause any destruction? Paradoxical as it may seem, the phenomenon completely encapsulates our capitalist world. It serves as evidence that capitalism is not static but an ever-changing process. First coined by Joseph Schumpeter in 1942 in his book, Capitalism, Socialism, and Democracy, it describes the "process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one." In simpler words, creative destruction is a process through which something new brings about the demise of things that existed before it. The word destruction in this context implies that along with the benefits of innovation and new developments, this process has a few losers too. In pure economics where efficiency is to be achieved under equilibrium, creative destruction creates tremendous profit-seeking opportunities by causing disequilibrium in the system. The word destruction is indicative of the economic inefficiency and losses generated by innovations. The losers of this process, therefore, include those who are unequipped to adapt to the changing environment.
Examples of Creative Destruction and their impacts
An example of creative destruction is the introduction of smartphones in the market that eventually killed the market for cell phones, DVD players, MP3s, cameras, wristwatches, calculators and voice recorders and others. The movie industry that challenged theatres also serves as an apt example. The television industry further challenged movies. Various other sectors also went through a similar process of evolution such as aluminium cans and plastic bottles that displaced glass bottles and emails that have been a challenge for postal service. Slowly but steadily, the market for newspapers is also on the decline. While the economics of journalism is complicated to attribute to just one phenomenon, as is any other economics, creative destruction has played a dramatic role in this decline. These examples are indicative of the all-encompassing nature of creative destruction and that it is an essential aspect of the growth and development across all sectors and industries.
The Netflix Effect
The most significant example of the phenomenon and the most relatable to the current context is the recent success of Netflix. The rise of Netflix has become so disruptive to various other industries that its impact is now being referred to as the Netflix Effect. Industries that have perished and are continuing to suffer due to this include the movie rental industry and several traditional media houses. The impact on each is of a varying degree if we consider the case of the movie rentals it is clear that Netflix has driven companies like Blockbuster entirely out of business. Once a bubbling industry, the success of Netflix has led to a 93% decline in employment in these companies. As for other companies such as Disney, CBS, Time-Warner and Fox, they have seen substantial declines in their stock returns. However, all is not dark in the entertainment business, the ultimate beneficiaries of this entire process of creative destruction and the overwhelming success of Netflix have been the consumers, who not only have access to superior quality of cinema and more exciting content but also get it at much lower prices. Cutting edge, intense competition ensures that every company struggles to find its niche and in the process provides better, faster and innovative products to the consumer. (Perry, 2015)
The Amazon Effect
Amazon has revolutionized the shopping arena; to the loss of the retail industry. Everything that one can need is now available at the click of a button which makes it extremely difficult for retailers both big and small to keep up. As online shopping permeates throughout the society and revolutionizes the shopping experience, it renders various members of the retail sector struggling to attract shoppers. The disruptive effects of the increasing prominence of Amazon as a shopping platform, which focuses on creating value for the consumers, are collectively known as the Amazon effect. The Amazon doctrine that states -Above all else, align with customers, Win when they win, Win only when they win, is enough proof that the company is willing to go to any lengths to keep its consumers satisfied. Two economic concepts that Amazon focuses on of are those of creative destruction and consumer sovereignty indicating that the maximum benefit from this development is that of the consumers. As a result of intense competition to the retailers from Amazon, the quality and prices of various products have improved much to the benefit of the consumers. (Perry, 2017)
Consequences of Creative Destruction
Although creative destruction is an essential part of today’s world, it does have shortcomings. First, it leads to massive unemployment. The process causes several industries to close down, workers who are skilled in specific tasks are rendered jobless, and this is known as structural unemployment. Second, there exists the possibility that the existing firms may lead to positive externalities that have an impact on social efficiency. We may use the example of the UK railways to explain this. With the increasing popularity of cars, various UK railway lines were shut down. However, the shutting down of these railway lines was later regretted when cars started causing pollution and congestion. Third, the process of creative destruction may also cause regional unemployment. Loss-making firms often close down; however, closure due to losses may not lead to an economically efficient outcome. Short-term fluctuations may lead to a firm being unprofitable, but this might not be the case in the longer run. The displacement of workers and resources may take a significant amount of time to be redistributed from the failing industries to the new and upcoming ones. (Pettinger, 2018)
Creative destruction lies in the core of economic growth and development. It signifies the transition into to a more competitive and a superior world, one driven by consumer preferences. The consumer benefits significantly from this process and those who are resistant to change suffer the most. It is a consumer’s world where the consumer is the king, and innovations are focused on improving the quality of life of the said consumer. Creative destruction has contributed immensely in explaining this process with innovations such as the mobile phone, Amazon and Netflix that have increased the convenience of the consumers. These have successfully displaced pre-dominant industries and have made a place for themselves in the market.
Pettinger, T. (2018, January 21). Creative destruction [Blog post]. Retrieved from https://www.economicshelp.org/blog/20255/economics/creative-destruction/
Perry, M.J. (2015, August 6). The ‘Netflix effect’: an excellent example of ‘creative destruction’ [Blog post]. Retrieved from http://www.aei.org/publication/the-netflix-effect-is-an-excellent-example-of-creative-destruction/
Perry, M.J. (2017, March 14). Some economic lessons from the demise of Gander Mountain: creative destruction, consumer sovereignty, Amazon effect [Blog post]. Retrieved from http://www.aei.org/publication/some-economic-lessons-from-the-demise-of-gander-mountain-creative-destruction-consumer-sovereignty-amazon-effect/?utm_source=paramount&utm_medium=email&utm_content=AEITODAY&utm_campaign=031517
Image Credit: Rude Baguette
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