The Economics of Creative Destruction

Among other remarkable characteristics, humans are intelligent, bipedal, and have opposable thumbs. But so do other great apes, albeit to a comparatively limited degree. What is uniquely human? What distinguishes humans lies in their phenomenal ability to transform matter.

Broadly understood, humans take existing matter and make stuff out of them. They cut down trees to make lumber; they smelt ores to make metals, etc. They build houses and make metal pots and pans. They do it deliberately, consciously and purposefully. To create anything, some materials have to be transformed from their original form — which necessarily means the destruction of the original form or function. Creation and destruction are inseparable. You cannot have one without the other.

One can always create a pile of rubble by destroying a building (say, by flying a commercial jetliner into it). But that’s destructive destruction, a distinctive and much beloved occupation of the follower of the RoP.

Creative destruction is not that.

Creative Destruction

The phrase “creative destruction” was popularized by Joseph Schumpeter (1883 – 1950) in economics in his book Capitalism, Socialism and Democracy: The essential feature of a capitalist system is product and process innovation driven by profit-seeking entrepreneurs that leads to competition and thus to the creation of new products, methods of production and organizations which in time replace the existing ones. The capitalist economy is, as Schumpeter described it, propelled by “gales of creative destruction.” It is that which

incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. 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.

Note that the Schumpeterian gale refers not to the failure of particular firms in an industry, such as one car company going out of business because of a loss of market share to other car manufacturers. That’s just plain competition. Creative destruction refers to an entire industry going out of business. The horse and buggy industry was destroyed by the car industry. The result was transportation that was both qualitatively and quantitatively superior.


Let’s note a side issue. Competition within an industry leads to the weeding out of inefficient firms that fail to deliver value to customers. That is, they fail to make a profit. The failure of firms within an industry is bad for the firms that fail but it is good for the industry. By taking out the weak, the herd gets healthier. Therefore allowing firms to fail quickly is good for the economy. Governments that keep their loss-making public sector firms from exiting the market impose avoidable costs on their citizens. India is a prime example of that sickness.

But that retardedness of contemporary India aside, there’s an interesting connection of the idea of creative destruction. The idea of creative destruction is of Indian origin, going back millennia.

A Dharmic Concept

In their 2006 paper, Reinert and Reinert[1] write that the key concept of creative destruction is a very old one:

In this paper we shall argue that the idea of ‘creative destruction’ enters the late 19th Century Zeitgeist through the works of Friedrich Nietzsche. Going back further in time, the process of creation and destruction plays a central role in Hinduism, the religion which so inspired Nietzsche’s Erzieher (educator) Arthur Schopenhauer. … We shall further argue that – contrary to the firm beliefs of the economics profession – the term ‘creative destruction’ was brought into economics not by Schumpeter but by Werner Sombart (1863-1941), the economist who was probably most influenced by Nietzsche.

So here’s how it goes: Arthur Schopenhaur (1788 – 1860) was a student of the Upanishads and other Hindu ideas. Friedrich Nietzsche (1855 – 1900) learned those ideas from Schopenhauer, who influenced Werner Sombart, and Sombart brought the idea to economics. And the Austrian Schumpeter got credited for inventing the term.

The Dance of Creative Destruction

Now to India. At the center of Hindu cosmology is the trinity of Brahma the Creator, Vishnu the Preserver, and Shiva the Destroyer. They are all in synch: you cannot have creation without destruction. Shiva, as Nataraja (the Lord of Dance) dances the Tandava, that brings the universe into being in a process of continual creation and destruction.

There’s a beautiful description of the Nataraja in Heinrich Zimmer‘s (1890 – 1943) Philosophies of India. Except:

On a universal scale, Shiva is the Cosmic Dancer; in his Dancing Manifestation (nritya-murti) he embodies in himself and simultaneously gives manifestation to Eternal Energy. The forces gathered and projected in his frantic, ever-enduring gyration, are the powers of the evolution, maintenance, and dissolution of the world. Nature and all its creatures are the effects of his eternal dance. …

The upper right hand, it will be observed, carries a little drum, shaped like an hour-glass, for the beating of the rhythm. This connotes Sound, the vehicle of speech, the conveyor of revelation, tradition, incantation magic and divine truth. Furthermore, Sound is associated in India with Ether, the first of the five elements. Ether is the primary and most subtly pervasive evolution of the universe, all the other elements, Air, Fire, Water, and Earth. Together, therefore, Sound and Ether signify the first, truth-pregnant moment of creation, the productive energy of the Absolute, in its pristine, cosmogenetic strength.

The opposite hand, the upper left, with a half-moon posture of the figure (ardhacandra-mudra), bears on its palm a tongue of flame. Fire is the element of the destruction of the world. At the close of the Kali Yuga, Fire will annihilate the body of creation, to be itself then quenched by the ocean of the void. Here, then, in the balance of the hands, is illustrated a counterpoise of creation and destruction in the play of the cosmic dance. Sound against flame. And the field of the terrible interplay is the Dancing Ground of the Universe, brilliant and horrific with the dance of the god.

The “fear not” gesture (abhaya-mudra), bestowing protection and peace, is displayed by the second right hand, while the remaining left lifted across the chest, points downward to the uplifted left foot. This foot signifies Release, and is the refuge and salvation of the devotee. It is to be worshipped for the attainment of union with the Absolute. The hand pointing to it is held in a pose imitative of the outstretched trunk or “hand of the elephant” (gaja-hasta-mudra), reminding us of Ganesha, Shiva’s son, the Remover of Obstacles.

The divinity is represented as dancing on the postrate body of a dwarfish demon. This is “Apasmara Purusha,” The Man or Demon (purusha) called Forgetfulness, or Heedlessness (apasmara). It is symbolical of life’s blindness, man’s ignorance. Therein is release from the bondages of the world.

A ring of flames and light (prabha-mandala) issues from and encompasses the god. This is said to signify the vital processes of the universe and its creatures, nature’s dance as moved by the dancing god within. Simultaneously it is said to signify the energy of Wisdom, the transcendental light of the knowledge of truth, dancing forth, from the personification of the All.

I have had that page on this blog for years: Tandava — Shiva’s Cosmic Dance.

And then there’s the brilliant Carl Sagan. In his Cosmos television series, he had this to say about Hindu cosmology. “It’s the only religion in which the time scales correspond, no doubt by accident, to that of scientific modern cosmology.”

That video excerpt is about 15 minutes long. Watch the whole thing. At the start of that clip Carl recites part of the Rig-Vedic hymn to creation. He does say his trademark “billions” in the clip. (Sagan was brilliant. Too bad he died young.)

Further reading: There’s a good article on Creative Destruction by Richard Alm and W. Michael Cox at the Library of Economics and Liberty.


[1] Creative Destruction in Economics: Nietzsche, Sombart, Schumpeter. Hugo Reinert (Cambridge Univ) and Erik S. Reinert (Tallinn University of Technology, Estonia).