Schumpeter on Creative Destruction

Last week, I officially became a member of the McGuire Center for Entrepreneurship at The University of Arizona. Attending one of the top Entrepreneurship programs in the world has been one of my top goals in life. In 14 months, I will have completed that goal. I am excited to be studying Entrepreneurship with some of the most talented students, professors and Entrepreneurs in the world.

Matt Mars, one of our Entrepreneurship advisors, during the launch event quoted Joseph Schumpeter, one of my favorite authors. Schumpeter is one of the world’s greatest economists and is known most famously for authoring the 1942 book Capitalism, Socialism and Democracy. In my December 19th 2008 post called Qualities and Role of the Entrepreneur, I share a quote regarding entrepreneurship from Schumpeter on the importance of entrepreneurs to get things done.

Today, I share with you some of what Matt shared with our class at the launch of the McGuire Center for Entrepreneurship Class of 2010 with regards to Schumpeter on “creative destruction.” In Capitalism, Socialism and Democracy, Schumpeter states that every piece of business strategy “must be seen in its role in the perennial gale of creative destruction.”

Some of you are sitting there thinking to yourself “I have never heard of a business strategy that states as it’s goal ‘perennual gale of creative destruction.'” You have to admit, it sounds cool!

Let’s allow Schumpeter to share with us what he means by “creative destruction.” Schumpeter continues by saying “this process of creative destruction is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

Not only should our business strategy contain “creative destruction” but Schumpeter also states capitalism depends on it. Stop the presses, did we hear him correctly?

First, let’s understand how Schumpeter defines the process of “creative destruction.” “Creative destruction” is the process of “industrial mutation” that “incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.” Now you have to also admit, not only does Schumpeter sound cool, he must be one cool red-blooded American. Actually, Joseph Schumpeter was born in Austria-Hungary, now the Czech Republic, in 1883.

Schumpeter in one of his most famous statements summarizes “creative destruction” saying “the function of entrepreneurs is to reform or revolutionize the pattern of production by exploiting an invention or more generally an untried technological possibility for producing a new commodity or producing an old one in a new way.”

As the famous Paul Harvey would say “and now you know… the rest of the story.”

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