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Recession or ‘Creative Destruction’?

Posted By Robert On Saturday, August 23rd, 2014 With 0 Comments

Recessions are seen as doom and gloom for most, however after reading this short article you may just change your mind.

This is the theory of Recessions being creative destruction

Did you know – Both Disney and McDonalds was founded in a Recession?

Recessions cause job losses and when there are less jobs around people are forced to innovate and start new businesses.

Hard Life

Creative Destruction

To survive, capitalists continually seek new profits through the pursuit of new markets.

The pursuit of new markets leads to innovations

As money shifts to new markets and innovations, existing sectors of industry are devastated – capitalism destroys the old and creates the new and this is where our lesson starts…

When a recession hits and companies and jobs start to disappear there is often a demand for government intervention to counteract these effects.

Many Economists disagree and insist that recessions are how capitalism moves forward, weeding out the inefficient and making way for new growth, in a process described as ‘creative destruction’.

How broke are we?

The heart of this new growth is said to be the “entrepreneur”, being a new class of person, an ‘upstart’ who innovates, creating new products and forms production in uncertain conditions.

Some Economists argue that although a new market may grow after an innovation, others soon imitate and begin to eat into the profits of the original innovator.

In time the market begins to stagnate. Recessions are a vital way of moving things forward again, clearing away the dead wood, even if the process is painful.

“Disruptive” innovations upset the market and really get things moving, changing the market through product innovation.

Innovation critical in a recession

Some Economists argue that although a new market may grow after an innovation, others soon imitate and begin to eat into the profits of the original innovator.

In time the market begins to stagnate. Recessions are a vital way of moving things forward again, clearing away the dead wood, even if the process is painful.

“Disruptive” innovations upset the market and really get things moving, changing the market through product innovation. 

For example, although Apple did not invent the technology for the digital music player – it combined a high-design product (ipod) with a music download program (itunes) to provide a new way of accessing music.

Creative Destruction gives capitalism huge energy, but also an explosive crisis may destroy it.

Recessions are a way of flushing old yesterdays companies and bringing in opportunities for new companies to prosper and shape the future.

Destruction opens the way for creation, just like the shortage of wood led to the use of coal.

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