Thursday, June 30, 2005

Creative Destruction

I first heard about "creative destruction" in an economics course.

Fascinatinated, and of a curious nature, I began to read Joseph Schumpeter's Capitalism, Socialism, and Democracy.

Anyway, the book was an amazing insight into business cycles and how innovation contributes to these cycles. Essentially, by "creative destruction," Schumpeter means that innovations destroy equilibrium in business cycles, thus promoting social progress. (If you're in equilibrium, you are stuck in equilibrium; you cannot progress - not much fun).

On a different topic (and much more dire), Schumpeter believed that entrepreneurs will eventually disappear, as companies are consolidated to benefit from economies of scale. Does this mean that intrapreneurship (i.e. entrepreneurship within companies) is going to take centre stage? Where will these innovations emerge?

Tested and true, Wired provides a biography and overview of Schumpeter's work. Ah, Schumpeter: Europe's greatest horseman and economist... . (That's all I can vouch for...).


Blogger Bryan J. Watson said...


As you may or may not know, Schumpeter is a hero of mine. One thing I believe he was incorrect in was his dire predictions for entrepreneurs.

In this area there are two main voices I like to consider, Schumpeter and Kirzner. Kirzner, unlike Schumpeter, sees entrepreneurs as pulling the business cycle into equilibrium as opposed to out of it. I think both to be right! How?

I believe that, depending on the extent of the ‘market’ for the entrepreneurial role, it can experience a division of labour, characterized by the Schumpeter-Kirzner duality. Kirzner and Schumpeter talk about two different divisions of entrepreneurship – Kirzner the incremental, Schumpeter the radical. Both types of innovation are quite different in their organizational, capital, risk-bearing and intellectual needs. Both are also necessary to the growth and flourishing of an economy.

I think Schumpeter, in his dire predictions of entrepreneurial death, was a bit hasty. Both forms of entrepreneurship and innovation are necessary and thrive on the existence of one another, just as the pin factory thrives on having both a wire cutter and a sharpener!

Bryan J. Watson

8:50 AM  
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