What is
Creative Destruction?

The value of the
old is destroyed
by the new.

The value of old technologies…

… is destroyed by new technologies

You know the song ”Video killed the radio star”?
That’s Creative Destruction!

The term
Creative
Destruction
was used by
Joseph
Schumpeter,
an Austrian
economist.

To Schumpeter capitalism leads
to eternal structural changes
in firms, industries and
economies.
And he argued that
Innovation is what
drives this process…

Quote Schumpeter:
”In capitalist reality … it is not
that kind of competition
(price) which counts but the
competition from the…

… the new commodity…

… the new technology…

… The new source of supply…

…the new type of organization…

- Competition which … strikes …
existing firm … at their foundations
and their very lives…

… this kind of competition is … much
more effective that the other … and [is]
the powerful lever that in the long run
expands output” (End of long quote)
Old and New computer
Performance?
Resources?

Quote Schumpeter:
”A railroad through new country,
i.e., country not yet served by
railroads, as soon as it gets into
working order upsets all conditions
of location, all cost calculations, all
production functions within its
radius of influence; and hardly any
’ways of doing things’ which have
been optimal remain so afterward”.

Why does it look like this along a small
country road in Alabama?

If a new highway (an innovation) is built
next to the country road, noone’s going
to drive on the old road…

… The value of the old is
destroyed by the new creation…

Here’s another example…

Well, actually it is not!
The photo is taken in New Orleans
after the terrible Hurricane Katrina…

The views are terrible and strikingly similar!
Innovations can create the same
kind of views as a hurricane disaster…

And now a little game…
The next slide contains 4 photos
2 are from Hurricane New Orleans
2 are from old country roads
Guess which ones
are from New Orleans!

Don’t
cheat =)

Tricky?
Here’s the
answer…

TENNESSEE NEW ORLEANS
COUNTRY ROAD
NEW ORLEANS ALABAMA
COUNTRY ROAD
Amazing how hard it is to tell the difference!
Innovation is really about Creative Destruction!

Yesterday’s and today’s capitalist economy is
all about Innovation and Creative Destruction.

Innovation was what drove
the 19th century economy…
The telegraph Railway and the steam engine
Iron and steel
New energy (coal)

… And it drives today’s global economy as well
Oil
The container
The transistor
Plast

”From the steam engine
to the search engine”

Surviving Creative Destruction
is a challenge for firms…

… Surviving Creative Destruction is
a challenge for industries…

…a challenge for societies

It’s a challenge for people…
The tractor
innovation
destroyed the
peasant’s job

Other innovations create new jobs
somewhere else in the economy…

So, Innovation and Creative Destruction
drive structural change in society
Share of Swedish population working in
agriculture, industry and services over time.

Summing it up…
Innovations Destroy value at one place,
and Create a larger economic
value somewhere else.

Christian Sandström
www.christiansandstrom.org

Image attributions
http://www.flickr.com/photos/psd/40890499/
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http://www.flickr.com/photos/45097561@N00/2719658555/
http://www.flickr.com/photos/mikebaird/2931160632/
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http://www.flickr.com/photos/germanium/1370966194/
http://www.flickr.com/photos/seeingthings/301095573/
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http://www.flickr.com/photos/7175652@N02/2309545221/
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