Creative Destruction and Entrepreneurship

It was not long ago that social media was not a part of our life; still, it feels like so! Apps like Facebook, Instagram, and Whatsapp dominate the market as well as our screen time. It was not long ago that we brought DVDs to watch a new film or anxiously awaited a new episode of our favorite television series every Sunday (maybe Wednesday for some, or any other day). Today, Netflix and Amazon’s Prime have revolutionized the way we consume our content, giving users the freedom to choose from an array of latest shows and movies from all across the world.  

These innovations in technology have, without a doubt, had a tremendous effect on the growth of the global economy. The net worth of Facebook and Netflix, as of September 25, 2020, is $725.94 billion and $212.96 billion, respectively. (MacroTrends, 2020) This feature of innovation and sustained long-run growth, as explained by Joseph Schumpeter, is called the Theory of Creative Destruction (1942).

As the name suggests, the Theory of Creative Destruction is the process of constant innovation and creativity, leading to the destruction of the earlier mechanisms and techniques. The entry of new firms, ideas (or entrepreneurs) in the market drives the transformation of the process of production, the technology used, and shifts consumer preferences, at least in the long-run. It is well-conceived in free-market economics with entrepreneurs driving innovation and competition. However, in real-world economics, where regulation is prevalent and so are recessions, the proposition is apt. 

It is in Schumpeter’s Capitalism, Socialism, and Democracy (which is a long read, indeed) that he introduces entrepreneurship in a capitalist economy, preventing the formation of monopolies. Although this serves the idea of the revival of capitalism time and again, he did believe that capitalism will come to its demise as the proletariat, the working class, demand political power in a democratic society. This line of thinking contradicts the Law of the Tendency of the Falling Rate of Profit, provided by Karl Marx, as innovation and technological advancement stimulate an increased rate of profit. 

The economic interests of individual entrepreneurs also result in growing political interests and a backdoor to institutions. They are then responsible for unfair policies, just fair to them, and regulations. It concentrates power with some in the economic as well as the political arena. Legislation often begets loopholes, breeding more and more ordinances. 

Thus, it does create some winners but many losers. Google and Facebook rule the tech space, globally. As of August 2020, Facebook captures 75.15% of the social media market, whereas Google dominates with 92.05% market share in search engines. (StatCounter Global Stats, 2020) It creates an unequal distribution of wealth and power and discourages new entrants to the industry. Even if an enterpriser succeeds in penetrating the market, there is a high chance it the bigger fish in the pond merges or better – buys it out. Whatsapp, and in time TikTok, is a decent example of this. 

On a brighter side, new businesses do generate employment opportunities and boost the economic growth and productivity of the country. It helps to visualize ideas that once felt far-reaching. If it had been for it, the Industrial Revolution would never have occurred. Efficient alternatives to energy, in the form of solar, wind, and nuclear, would not have been imagined. Extensive advancement in the field of agriculture using drones and precision techniques would not have been possible. These once-smaller-looking ideas are the ones that changed the world for good. 

Another aspect of Schumpeter’s work – which I would like to append in here – lies in the availability of capital and credit to entrepreneurs. His theory assumed that choice of who turns out to be an entrepreneur is a process of random selection from a pool of all people, just like people with much higher mental abilities are rare to find. Using this logic, even a person with no means may develop a novel idea. The question that arises here is that how can one ensure enough credit to implement his plan. Not surprisingly enough, the answer to this is that the credit will find its way to reach him in one way or the other. So far, so good?

At least, in the current times, we do see funding opportunities for new businesses – investments by individuals, other companies, maybe relatives, banking, and the government. A myriad of Start-up Incubation Centers and business-plan pitching seminars take place across the world to promote new and upcoming ideas to shape the world into a better and sustainable space. Business schools, in particular, create an environment for students to delve deeper into entrepreneurship, providing them with managerial instincts. After all, profit is necessary to re-invest and, in turn, further one’s business prospects. 

In conclusion, the Theory of Creative Destruction provides insights into the cyclical behavior of macroeconomic fundamentals of unemployment, wages, and investment. The failure of institutions to cater and adapt to upcoming entrepreneurial innovations can result in inept resource allocation leading to dysfunctional markets, economic downturn, and if much severe, a recession.