Whether applied to economies, ideas, systems, or politics — this model describes how something new and transformative can both be born from, and sweep away the old.
Creative Destruction describes the creation of something new that is born from existing models, systems or approaches and ultimately replaces and destroys them in the process.
This model, inspired in large part by Karl Marx’s critique of capitalism, was adopted by Austrian economist Joseph Schumpeter and has come to represent the struggle faced by innovative entrepreneurs.
The mental model generally refers to disruptive and transformational innovation that upsets and supersedes the status quo, as opposed to progressive improvement. In that sense, creative destruction can be seen as both a progressive and destabilising force.
APPLIED TO ENTREPRENEURS.
Schumpter explained: "The entrepreneur brings along something new. That's the source of profit. Others come into the market and whittle the profit away. As they copy, you get more investment. You get changes in investment. You get changes in profit. It starts a speculation cycle. Lots of people speculate on the markets and the market starts to boom. But it has to evaporate."
As per this quote, Creative Destruction is often associated with free markets which prioritise innovation and adaptation in a cycle of continuous improvement. Indeed, see the In Practice section for how Alan Greenspan, former Chair of the US Reserve, used the model to explain economic trends in the US.
APPLIED TO MINDSET.
The model can also be applied to mindsets and beliefs — disrupting and ultimately unlearning long-held mental models with new ones that better engage with the world as it has become. It’s a reminder that change will come and will often come at a cost of replacing the previous structures and systems.
You can use it as a call to action to reinvent yourself and/or your organisation, with an understanding that such transformation will likely make aspects of what, and even previously greatly valued, obsolete.
- Work with the impact of digital disruption accelerating creative destruction.
The accelerated rate of creative destruction has been fueled by digital innovation. The first Standard and Poor’s index of 90 major US companies was created in the 1920s, with companies on the original list staying there for an average of 65 years. At the end of the 20th century, the average tenure of a company in the index was 10 years, and the pace has accelerated even more since then.
- Consider changing the game rather than improving it.
Rather than focusing on continuous improvement and gradual progress, beware of possibilities where the entire game might change through creative destruction. Such approaches upend assumptions and current approaches. This references the Red Queen Effect.
- Sow the seeds for your own destruction, and reinvention.
Whether you’re part of a large corporation or work as an individual, consider what you can put in place to plant the seeds of destruction. For example, the corporation might create a small proto-startup from within to explore new possibilities, and the individual might incorporate work in new markets or services in a weekly schedule.
Creative Destruction in a free market context assumes that the market drives great practice solutions. Some critics might argue that instead, it drives better sales and profits, which is not always associated with high-quality products and services, or people’s needs being met more effectively.
Another criticism of this model is the contrast with models such as compounding, and the power of marginal gains as opposed to complete destruction and reinvention.
And finally, the model is sometimes used to justify the existence of global tech monopolies. Schumpeter argued that organisations grow to monopolies because they do what they do well - so a true embrace of more purist free-market ideas which I would argue is problematic.
Joseph Schumpeter, the originator of the term, cited the development of railroads in Illinois as an example of creative destruction. He explained: “The Illinois Central not only meant very good business whilst it was built and whilst new cities were built around it and land was cultivated, but it spelt the death sentence for the [old] agriculture of the West."
The rise of Silicon Valley
This New York Times article notes the popularity of this model to explain current economic trends impacted by digital disruption: “Schumpeter's theory and phraseology have become mainstream today for describing the current era, in which new-economy companies are being created at an astounding rate. No less an establishment figure as Alan Greenspan, chairman of the U.S. Federal Reserve Board and a Harvard-trained economist, has been using Schumpeterian economics to explain the remarkable noninflationary expansion in the United States over the past eight years.”
Greenspan went on to outline the impact of key innovations, from the microprocessor, lasers, fibre optics and particularly the role of information technology.
The creative destruction mental model is similar to the concept of disruptive innovation, in the way new approaches can replace and make previous ones obsolete.
Use the following examples of connected and complementary models to weave creative destruction into your broader latticework of mental models. Alternatively, discover your own connections by exploring the category list above.
- Red queen effect: in understanding the perpetual drive to be smart and disrupt.
- Disruptive innovation: in changing the game.
- Compounding: contrasting, in many ways opposite mental models, that benefit from being contrasted with one another.
- Design thinking and agile methodology: methods to seek out those new disruptive ideas.
- Scientific method: as a methodology to strive towards a greater understanding of the truth, relying on creative destruction of theories in some instances.
- Munger’s latticework: when applied to the development and unlearning of mental models.
Creative Disruption was coined by Austrian economist Joseph Schumpeter in 1942, deriving it from the work of Karl Marx, who pointed to the destructive nature of progressive social systems which he argued would eventually lead to socialism replacing capitalism.
In his 1942 book, Capitalism, Socialism and Democracy, Schumpeter explained: “the process of industrial mutation that continuously revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
It is ironic that this term, now associated with pointing to the benefits and resilience of free-market systems, was originally described as an inherent contradiction within capitalism, that would lead to its downfall.
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