Why we need the 'destruction' in creative destruction

Creative destruction and its once cool cousin "disruption" seem to be on the outs lately.

While CEOs still yell "let's break shit" at bewildered staffers, those who don't regularly attend TechCrunch Disrupt are increasingly turning a skeptical eye at this venerable philosophy of economics. But hopefully the jargon won't lead to too much of a backlash. While it's true that creative destruction comes with real costs, the effects of reining it in are far worse.

Creative destruction is, of course, the phrase made famous by 20th century economist Joseph Schumpeter. ("Disruption," on the other hand, was coined by Clayton Christensen in the late 90s. It's largely the same idea, adapted for business school.) Creative destruction refers to the fact that the innovation that lifted us from subsistence farming to modern affluence involves not just ingenuity and invention, but breaking down the old order. Schumpeter called creative destruction an "industrial mutation... that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one."

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We're all quite familiar this process. The personal computer did not just usher in a new era of desktop publishing, gaming, spreadsheets, and eventually the internet, it also demolished the market for the typewriter. And this is the tension at the heart of creative destruction: we owe our livelihoods to it, but it is horrible to face down. People put food on the table and keep roofs over their heads in industries that end up being destroyed.

But it's easier to hate creative destruction than defy it.

It's clear from history that alternatives are possible — they're just not very desirable. Don Boudreaux aptly describes how "undestructive creativity" was very common in the thousands of years before the Industrial Revolution.

The amount of material progress possible within a given form of industrial organization is limited. Especially if there has been significant new knowledge created since the form was adopted, there comes a moment where the best way to provide broad-based gains is for the old way to be scrapped and largely replaced by a new one.

There's a parallel here to the entropy of information theory, as applied to software bugs — it's known that patching bugs creates future bugs, and patching those future ones will create more, and so on. At a certain point replacing your code entirely with something new and more elegant becomes the only viable path to real improvement. In industrial organization as in software, this transition is costly and painful, and so it can be tempting to simply stick with what you have. But in both cases, it's a recipe for sclerosis, and in industrial organization it is what kept 99 percent of history at the level of subsistence.

Such a thing is not merely a matter of history, either. The auto industry is a good case in point — the franchise system, where manufacturers must sell through dealerships rather than directly, was definitely the most efficient form of industrial organization at one point in history. But at this point it is an artifact of laws which force its preservation. Nor is it an isolated case — incumbent insurance brokers, taxi systems, and bed and breakfasts are resisting new forms of organization in these areas through policy.

Most pernicious, perhaps, are the immensely inflexible land use restrictions in most major cities. Such restrictions impose a vision of what the city should look like and how it should function — where a business is supposed to be, where residences go, and so forth — at the cost of flexibility and discovery. The result is not only a severe restriction on population density, which reduces the amount of traditional businesses that can serve the same number of people. The result is a severe restriction on discovery and invention.

To this end, Ed Glaeser's proposed "entrepreneurship zones" where more radical experimentation is allowed provides a more-polite intermediate between today's status quo and anything-goes disruption. But such zones would only provide value if the innovations generated there were eventually allowed off the reservation, to rudely "disrupt" the rest of the city. Such a trial and error model can work, and in fact is given the lion's share of the credit for China's dramatic modern growth by Ronald Coase, one of the greatest economists of the last 100 years.

Seeking to soften the edges of commerce through a basic social safety net is understandable and admirable. But we blunt it at our own peril.