The concept goes way back in the intellectual history of the West, also the East. Simply put, “creative destruction” suggests that in the creation of the new, something of the old is destroyed. Innovation often makes “the old ways” of doing things obsolete. Not surprising. Examples abound in the history of the growth economies of the industrial era. An obvious case: The American family farm virtually disappeared with the mechanization of agriculture driven by fossil fuel energy mostly in the twentieth century.
What is Creative Destruction?
Like so many fundamental concepts, creative destruction has a history of ideological dispute, at least in the West. The Hindu god, Shiva, on the other hand, has offered a consistent vision of change. Shiva, “the transformer,” is the god of creation and destruction in the world of the Hindu — he creates and he destroys. Thus, he is seen as both the fearsome and beneficent agent of all change in the world.
In the West, however, the idea of creative destruction has been shaped by a history of philosophical debates about the politics of the economy. The Hindu idea was brought into German philosophy by Herder, then used by Hegel in his dialectic of history. Then Marx turned it on its head as his own dialectical principle of material (economic) change. Later, for Austrian-American economist Joseph Schumpeter the idea was used to explain how innovation transforms an economy from within.
Today, the Austrians, especially Friedrich Hayek, are the philosophical darlings of the quasi-libertarian anti-government neo-liberal economists. These are the economic ideologists whose ideas about innovation are used to justify corporate actions that may have destructive consequences for society. For Example, they use “free markets” to argue that the destructive consequences of unlimited financial “innovation” — manipulation of financial markets — are necessary and good for promoting economic progress.
That creative destruction is so easily adopted by both left and right economists should raise some questions. Does it explain everything and thus nothing? No. But it is important to understand why its application is so broad, and with such different political implications.
For the capitalist, the importance of creative destruction is found in the effect of innovation on markets. When capital is invested in new technologies, the result is said to be “disruptive,” and often is. That is defined as good and healthy for economic progress. In fact, it may wipe out existing industries and jobs. But new and better ones are expected to result. While people can be put out of work and factories shut down, the ultimate outcome is said to be good because of the growth and new products and profits that often result from such disruption. “That’s progress.” And, of course, it is all based on the idea that growth is always necessary for a healthy economy with full employment. The argument is all internal to economics, as if it were a closed system. But it is not.
Karl Marx admired the creative destruction he saw in capitalism resulting from the innovations it stimulates, but he saw within the capitalist system inherent “seeds of its own destruction.” Without external constraints, it was never clear when Marx’s internal contradictions might actually produce the revolutionary end of capitalism as he had predicted. Both the Russian and Chinese revolutions were largely agrarian in origin and did not really fit Marx’s model, although they adopted his terminology as their ideology.
The historical realization of Marx’s image of industrial revolution never quite materialized. But the vision of Werner Sombart — that capitalism’s internal contradictions would lead to periodic crises — has been repeatedly confirmed by historical events. The biggest and most obvious U.S. example was the Great Depression. The New Deal was capitalism’s relatively effective response to that crisis — it worked for several decades. The Great Recession of 2008 is another — it was caused in part by elimination of the New Deal financial reforms. But in this case the responses were denial and bailouts, which are pushing the crisis down the road without real economic adjustments. Be that as it may, Marx made the same mistake that today’s corporate economists make — they all treat the economy as if it were a closed system. Internal contradictions aside, they all assume that the economy is unaffected by any environmental constraints such as resource limits or ecological destruction.
The Destruction of Creation
Neo-liberal economists attempt to justify the concept of creative destruction as inherent in innovation, the driving force in developing the economy. It is required for capital growth and investment in new technologies, which have new resource-extraction and waste production requirements. But their vision of economic growth has no direction or meaning, except that of an irrational faith that whatever innovation occurs and whatever the destruction, the result will be good. After all, the illusion of Adam Smith’s “invisible hand” is still at play in their minds.
Economic theory is often not very empirical. Of course, money is the easy measure of all undifferentiated economic activity. But it says nothing of the value of an investment, an innovation, or a business decision or practice for humanity. It’s about that darn externalization of costs, which is always ignored in the investment of capital. What are all the consequences of an economic decision? Well, consequences external to the unit in which capital is invested are routinely ignored. The creation of phantom wealth by destroying the environment it attempts to dominate can be clearly seen as destroying creation.
Ending Destructive Capital, Creating a New Economy
One of the most important — and destructive — innovations in the use of capital today is the corporate application of micro-electronic computing power to the processes of capital investment, or, I should say, “programmed trading,” in the stock markets. “High-speed institutional traders” — computer programs — can “capture” minute differences in price from one nano-second to another and issue buy/sell orders that intercede into an ordinary trade and in effect steal pennies that the ordinary trader would have received in a trade while the price information is being transmitted to the trader. At super high rates of programmed trading, this results in millions of dollars skimmed off the market in any given week. Yet the SEC does nothing. This is only one of the many corrupt practices that are tolerated in a culture that deems whatever you can get away with as the highest value.
Only by setting human and ecological values as the primary criteria for allowing or banning economic system “features” can a new ecological economy be shaped in the public interest. The highest public interest in the economy is to foster practices that support the health and well-being of people and the planet. Any economic practice or institution that conflicts with that value must be destroyed. New practices and institutions that serve the interests of life on the planet must be created. Creative destruction is an economic process with limited justification. Only if an innovation supports life and the practices and institutions it destroys are damaging to human life and the biosphere that supports us, can it be justified.