May 3, 2021

Creative destruction or how to save capitalism from the capitalists

The Power of Creative Destruction. Economic Upheaval and the Wealth of Nations

This book is an invitation to a journey: a journey through economic history, more specifically a journey to explore the enigmas of economic growth through the lens of creative destruction.

Creative destruction is the process by which new innovations continually emerge and render existing technologies obsolete, new firms continually arrive to compete with existing firms, and new jobs and activities arise and replace existing jobs and activities. Creative destruction is the driving force of capitalism, ensuring its perpetual renewal and reproduction, but at the same time generating risks and upheaval that must be managed and regulated.

This is precisely what this book explains. And behind the driving force of capitalism, you'll find ideas, as Deirdre McCloskey dixit

From Shumpeter:

The first idea is that innovation and the diffusion of knowledge are at the heart of the growth process.

The second idea is that innovation relies on incentives and protection of property rights

The third idea is creative destruction: new innovations render former innovationsobsolete. In other words, growth by creative destruction sets the stage for apermanent conflict between the old and the new: it is the story of all incumbent firms, all the conglomerates, that perpetually attempt to block or delay the entryof new competitors in their sectors.

Creative destruction thus creates a dilemma or a contradiction at the very heart of the growth process. On the one hand, rents are necessary to reward innovation and thereby motivate innovators; on the other hand, yesterday’s innovators must not use their rents to impede new innovations. As we mentioned above, Schumpeter’s answer to this dilemma was that capitalism was condemned to fail precisely because it was impossible to prevent incumbent firms from obstructing new innovations. Our response is that it is indeed possible to overcome this contradiction, in other words to regulate capitalism or, to take the title of Raghuram Rajan’s and Luigi Zingales’ 2004 book, to “save capitalism from the capitalists.”

PS. Shelling on the strategy of conflict.