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Whether applied to economies, ideas, systems, or politics — this model describes how something new and transformative can both be born from, ...
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- Work with the impact of digital disruption accelerating creative destruction.
The accelerated rate of cr ...
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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.
Illinois Railroads.
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.
Connected models:
- Red queen effect: in understanding the perpetual drive to be smart and disrupt.
- Disruptive innovation: in changing the game.
Complementary models:
- 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.
My Notes
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