Old theory helps explain new reality
'Creative destruction,' the latest concept to explain today's economy, was put forth by an economist who died in 1950
By D.C. Denison, Globe Staff, 7/20/2001
He could be the economist most in tune with our times. His concept of ''creative destruction'' has provided the inspiration, and the titles, for two recent business strategy books. Yet you won't find Joseph Schumpeter opining on CNNfn or Wall Street Week. Schumpeter, who was born in Moravia during the waning years of the Austro-Hungarian Empire, died more than 50 years ago.
Still many financial analysts, academics, and economists say that Schumpeter's theories go a long way to explaining the dynamics driving today's economy.
''Schumpeter's theories capture the duality that many of us see,'' according to Lee W. McKnight, associate professor and director of the Edward R. Murrow Center at Tufts University's Fletcher School of Law and Diplomacy. ''Not just the bursts of creativity and innovation but also the destruction and collapse of companies and entire industries.''
Schumpeter's current popularity is primarily based on his description of a process he called ''creative destruction,'' in which innovations sweep away obsolete products and production methods. Those innovations and the companies built on them, in turn, are eventually destroyed by even newer and more efficient advances. According to Schumpeter, this process is intrinsic - even desirable - to capitalism.
McKnight, whose research focuses on international technology policy and the convergence of the Internet and telecommunications industries, recently co-edited a book with two colleagues. The title, ''Creative Destruction,'' was a clear homage to Schumpeter.
''The more we studied the telecommunications industry, the more we realized that it's less about incumbents taking a commanding position and putting up long-term barriers to entry,'' said Paul Vaaler, a co-editor of the book and an assistant professor of international business and director of the Hitachi Center at the Fletcher School. ''Instead, it's increasingly about smaller innovators smashing through the barriers and challenging, if not displacing, the established players. The result is an industry with hypercompetitive dynamics that Schumpeter described in another era. That seems to be a better description of what is going on.''
Schumpeter's concept of creative destruction helps explain what's happening to Cisco, Motorola, Intel, and the entire telecommunications industry.
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