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Journalism of Courage
Consider the evolution of the telephone: from the rotary dial models of the early 1900s, each new version refined and reinvented the last, culminating in today’s smartphone. This example was cited by the Nobel Prize committee on Monday to illustrate the monumental economic significance of the theory of ‘creative destruction’. Three economists–Joel Mokyr of Northwestern University, Philippe Aghion of College de France, and Peter Howitt of Brown University–were awarded the prize this year for their research into the theory, a concept widely regarded by economists as a defining feature of capitalist economies.
Human history is brimming with evidence of what economists call creative destruction—the process of innovation that drives economic growth. Take the case of agriculture, which underwent drastic transformations through mechanisation and improved forms of transportation. The evolution of transportation itself, from the use of animals to the invention of the wheel, railways, and finally the aeroplane, has been a long process of inventing newer, more efficient ways of travelling, often dismantling obsolete ones.
Joseph Schumpeter, a 20th century Austrian economist credited with giving birth to the modern theory of creative destruction, had called it to be the “essential fact about capitalism”. In his groundbreaking work Capitalism, Socialism and Democracy (1942), he wrote, “It is what capitalism consists of and what every capitalist concern has got to live in.”
Commentators suggest that the timing of the Nobel Prize is revealing—coming at a moment when artificial intelligence has emerged as a transformative force reshaping nearly every industry. Yet, the theory of creative destruction itself is far older, its origins tracing back to the writings of Karl Marx.
Although the phrase ‘creative destruction’ is typically associated with Schumpeter, many of its conceptual roots go back to Karl Marx. In the Communist Manifesto that Marx wrote along with Fredrick Engels, they described the crisis tendencies of capitalism as the “enforced destruction of a mass of productive forces”. “In these crises, a great part not only of existing production, but also of previously created productive forces, are periodically destroyed,” they wrote.
Later in his other work, Grundrisse, Marx wrote that capital must periodically destroy its earlier forms of productive capacity, not due to external factors, but rather due to capitalism’s own internal dynamics. These periods of destruction, he wrote, often involve explosions, cataclysms, crises, momentous suspension of labour, and annihilation of a great portion of capital. And yet these violent phases lead back to the point where productive powers can be fully employed.
Among the others who paved the way for modern theories of creative destruction was Werner Sombart, a German economist and sociologist. Inspired by Marx’s writings, he wrote in his 1913 work Krieg und Kapitalismus: “Again, however, from destruction a new spirit of creation arises; the scarcity of wood and the needs of everyday life…forced the discovery or invention of substitutes for wood, forced the use of coal for heating, forced the invention of coke for the production of iron.”
There are several other prominent intellectuals as well, whose works have directly or indirectly contributed to the idea of creative destruction. Biologist Charles Darwin, best known for his contribution to the field of evolutionary biology, for instance, wrote that “the extinction of old forms is the almost inevitable consequence of the production of new forms”. German philosopher Fredrick Nietzsche, on the other hand, suggested a universal cycle of creation and destruction. The concept also finds resonance in Hindu mythology, where Lord Shiva performs the tandava—the cosmic dance that embodies both creation and destruction.
The modern canonical theory of creative destruction is almost always traced to the writings of Joseph Schumpeter. He used the phrase as a metaphor to explain how capitalism advances. Capitalism, he wrote, is by nature a form or method of economic change and is never stationary. This evolution of capitalism, he suggested, is not merely a product of the changes in society and the natural world in which it functions. Rather “the fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organisation that capitalist enterprise creates,” he wrote.
One of the most famous examples suggested by Schumpeter to illustrate his theory was the creation of a network of railroads in the United States by the Illinois Central Railroad. He argued that “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 spelled the death sentence for the [old] agriculture of the West”.
The research of Mokyr, Aghion and Howitt spans both historical analysis and growth models that build upon the insights of Schumpeter.
Mokyr, an American-Israeli economic historian, was awarded half the share of the prize. Mokyr’s work in the history of economic growth showed that prior to the industrial revolution, technological advancements were often based on ‘prescriptive knowledge’. In other words, people understood ‘how’ things worked, but not ‘why’ things worked. The scientific revolution and Enlightenment of 16th and 17th century Europe changed that. Armed with a better understanding of the scientific processes behind technology, Europe was able to make huge advancements. Mokyr further argued in his book A culture of growth: Origins of the modern economy that a key factor driving sustained economic growth is society’s openness to change.
Aghion and Howitt, who shared the other half of the award, built a mathematical model for growth, with creative destruction as a core element. In their landmark paper, ‘A model of growth through creative destruction’, they used the Schumpeterian theory to show that while creative destruction can be massively upsetting at the level of an individual company, it could lay the foundation for a stable macroeconomic growth.
Speaking about the significance of creative destruction and the work by the three Nobel winners, Kerstin Enflo, a member of the economics prize committee, said, “During the last 200 years, the world has seen more economic growth than ever before in human history. The laureates’ work reminds us that we should not take progress for granted. Instead, society must keep an eye on the factors that generate and sustain economic growth.”
