What Causes Creative Destruction?

Abstract

Schumpeter’s descriptive metaphor “creative destruction” has inspired a great deal of important research. He was clear that the continual transformation underlying economic growth is an intrinsic feature of the system, but left no clear causal account of the underlying process. His principal narrative concerned the entrepreneur, an “agency” explanation rather than a causal one in the usual sense. However, closer examination reveals that this does not fit with the observed historical pattern of continuing per capita growth, which is specific to the type of capitalist economy that has only existed in the past two centuries. He also introduced a more systemic view, but this is not very well developed in his writings and the causal mechanism is unclear. Connected with the ambiguity in respect of causation, Schumpeter was also unclear about the relative roles of large and small firms in innovation, at times seeing large corporations as the engine of growth, but at other times seeing them as a threat to the dynamism of the entrepreneur. Comparison with the historical record shows that neither view well represents the general process of capitalist transformation.