Creative Destruction: From Schumpeter to AI (2/3)

June 2025 

The Historical Origins of Creative Destruction: From Myth to Nietzsche to Schumpeter

The concept of creative destruction, while most commonly associated with Joseph Schumpeter and modern economic theory, has far older and deeper roots. It is a universal idea that has shaped mythologies, philosophies, and natural sciences long before it entered the lexicon of capitalism. Across cultures and disciplines, the cycle of destruction and renewal has been recognized as a fundamental law of life—a force that governs ecosystems, civilizations, and the human spirit.
It is one of the paradoxes of modern industrialism that the very force which propels the economic machine—namely, innovation—is also capable, in its unguarded extremity, of impeding its forward motion. Firms, impelled by the prospect of profit, undertake novel enterprises not out of benevolence, but with the calculated aim of acquiring temporary monopolies, or what one might more delicately term advantageous positions. Yet, once such positions are secured, it is an unhappy tendency of human affairs that the vigour which first bore fruit is turned toward its own preservation, too often at the expense of future fecundity. Lobbying becomes a substitute for enterprise, and regulation a fortress for incumbents. Thus it falls upon the state, not as master, but as steward, to preserve that delicate equilibrium in which innovation may flourish, without being smothered by its own progeny.
In this connection, it is impossible not to remark upon Schumpeter’s most enduring contribution—the conception of capitalism as a system animated not by balance, but by upheaval. "Creative destruction"—the phrase has become common currency, yet its import is profound. It implies that the capitalist process is not one of quiet accretion, but of recurring cataclysm. New enterprises do not merely improve upon the old; they often render them obsolete, casting aside once-mighty institutions like autumn leaves in a gust of wind. This is no mere metaphor. Entire industries dissolve, labour must reconstitute itself, and societies must adjust, often painfully, to the shifting foundations of production and exchange.
That this cycle continues—from the furnaces of the industrial revolution to the silent arithmetic of algorithmic computation—is not merely a testament to technological ingenuity, but also a warning. For the same engine that propels us forward can, if ungoverned, fracture the social contract upon which stable civilization rests. It is, therefore, the task of the economist—and indeed, of the statesman—to understand these dynamics not as inevitabilities, but as tendencies that must be guided, restrained, and, when necessary, opposed.
In short, innovation is not self-justifying. It must be placed within the framework of a managed capitalism, one that preserves liberty not only for the innovator, but for the society that must live with his consequences.

Universal Origins of Creative Destruction

It has long been the conceit of the modern age to imagine that its insights are novel. Yet, the doctrine that creation and destruction are not opposites but partners is older than commerce, older even than philosophy. From the earliest reckonings of the world, man has conceived of existence not as a linear progression but as a wheel—spinning, renewing, devouring its own spokes. In the venerable traditions of Hindu thought, we find this wisdom codified with remarkable clarity: Brahma creates, Vishnu sustains, and Shiva destroys—not in opposition, but in concert, their roles inseparable in the choreography of the cosmos.
The Phoenix, too, in Greco-Roman mythology, makes plain the same truth. It is consumed by fire only to be born anew, a fitting emblem for a world where permanence is a fiction and becoming the rule. Historians of profound vision—Khaldun among the Arabs, Vico among the Italians—have traced the fortunes of empires and epochs through cycles of ascendance and decline, proposing not a march of progress but a dance of ruin and renewal.
And in nature, ever the unacknowledged tutor of man, this dialectic is no less visible. The forest, charred by fire, returns greener. The flood, the quake, the eruption—all devastate, and yet, curiously, prepare the earth for new life. Death itself, at the level of the cell, is not an error but a program: the very logic of growth encoded in the necessity of loss. Even the stars must collapse if they are to give birth to heavier elements and brighter skies. The world, it seems, is forever being made by unmaking.

German Intellectual Roots

The Germans, with their habit of penetrating beneath appearances and finding metaphysical significance in the ordinary, were peculiarly well suited to refine this intuition. Thinkers such as Herder and Goethe—indeed, the latter more poet than philosopher—infused their vision of history and of man with this cyclical sensibility. They did not recoil from suffering, but sought to comprehend its generative role. Goethe’s Faust does not achieve salvation by avoidance of turmoil but through his very striving and surrender.
Nietzsche, the most volcanic of this lineage, transformed these intimations into thunderbolts. In Thus Spoke Zarathustra, he did not merely describe man—he prescribed his transformation. “Whoever must be a creator always annihilates”—a dictum that is both terrifying and liberating. Creation, in Nietzsche’s hands, was not a gentle refinement but a heroic overcoming. His parable of the camel, the lion, and the child sketches a sequence of spiritual transfiguration, where burdened obedience gives way to defiant negation and finally to innocent affirmation.
Stagnation, for Nietzsche, was not a condition—it was a sin. He warned of the Last Man, that tepid relic of a civilization which has sacrificed vitality for safety. His famed will to power—so often caricatured—was no brutish will to dominate, but a striving for expression, for differentiation, for greatness. His was a moral revolution, an invitation to clear away the husks of exhausted ideals and to plant, in the ashes, the seeds of a new valuation.
From Nietzsche to Sombart to Schumpeter
This moral philosophy, brimming with tragic grandeur, did not remain confined to aphorism and myth. Werner Sombart, the economic historian of no mean stature, transposed Nietzsche’s drama into the domain of industry. It was Sombart—not Schumpeter—who first named the thing creative destruction, drawing from the furnaces of coal and the memories of wood to illustrate the transformative pulse of the industrial age.
For Sombart, economic life was not merely an exchange of goods, but a crucible of culture and a theatre of the will. He saw in the entrepreneur not merely a calculator of profit but a creature of impulse, of ambition, of longing to remake the world. He read Nietzsche not as decoration, but as instruction.
Schumpeter, for all his brilliance, was in this sense a systematizer, not an originator. He brought the concept into the realm of formal economics, gave it charts and curves, but did not deepen its soul. His was a secular rendering of a spiritual insight. Yet by placing creative destruction at the centre of capitalism’s logic, he restored to economics its tragic core: that growth demands sacrifice, and innovation consumes its own parents.

Beyond Economics: A Philosophy of Life
It would be an error—one too often committed by economists—to suppose that the lesson ends with the ledger. The law of creative destruction, if such it may be called, is no parochial doctrine of industry; it is the signature of life itself. It governs the rise and fall of civilizations, the renewal of ecologies, the formation of character. It explains why institutions rot, why revolutions erupt, why beauty is fleeting and memory enduring.
To create, we must first clear. The gardener prunes; the sculptor chisels; the statesman reforms. Whether in the myth of the Phoenix, the poetry of Zarathustra, or the innovation of the Valley, the message is unchanging: the new cannot emerge unless we dare to relinquish the old.

Schumpeter’s Definition from Capitalism, Socialism and Democracy (1942)

There are moments in the development of economic thought when a singular mind, by turning his gaze away from the familiar arc of marginal curves and equilibrating tendencies, restores to our understanding the element of time, the quality of upheaval, and the force of personality. Joseph Schumpeter, in Capitalism, Socialism and Democracy, performed such a service. He offered us not a system in repose, but a vision of capitalism in motion—a tumultuous pageant of innovation, enterprise, and decay.
To the classical and neoclassical traditions—those that presumed the market to be an instrument of perfect competition, allocating resources with the silent elegance of the price mechanism—Schumpeter posed an alternative grammar. Capitalism, he contended, is not chiefly an affair of price and quantity, nor a steady march toward Pareto optimality. It is a storm, not a balance; a gale of creative destruction, not a gentle tide. The essential feature of this system is its restlessness: the relentless substitution of the old by the new. Here is the entrepreneur, no mere shopkeeper nor functionary, but a heroic agent of transformation—conjuring new goods, methods, markets, and institutions into being, thereby unsettling and displacing the established order.
In this conception, progress is not smooth, but violent; not harmonious, but disruptive. It is not equilibrium but revolution—of a commercial rather than a political kind—that moves the capitalist engine forward. Yet this revolution is perpetual, not final.
Though indebted in form to Marx, Schumpeter deviated from him in temperament and in prognosis. Where Marx saw history as a drama of classes, driven by the inexorable logic of accumulation and exploitation, Schumpeter replaced the dialectic with the dynamic. The entrepreneur stands where the proletarian once stood: not as a victim of the system, but as its animating spirit. Schumpeter’s was a less tragic and more ironic vision. Capitalism, he thought, would not perish in fire and fury, but through fatigue—through the dulling of its edge, the waning of its élan. Its undoing would be cultural as much as economic: a society grown skeptical of risk, a bureaucracy allergic to disruption, and an intelligentsia reflexively critical of the very system that sustains its comforts.
Thus, the forecast was not of collapse but of senescence; not revolution, but replacement. In this, he offered a melancholy inversion of the Marxian hope: that capitalism might be too successful for its own good, and in satisfying material wants, lose the spirit that made it vital.
It is a sobering vision. And while I may quarrel with elements of it, as all economists are inclined to do, I cannot help but admire the breadth of imagination and the moral seriousness with which it was composed. It is no small thing to remind us that economies are not mere mechanisms, but processes of becoming—always in motion, always incomplete.
In the landscape of twentieth-century economic thought, few contrasts are as striking as that between Joseph Schumpeter and John Maynard Keynes. Where Keynes regarded capitalism as a system susceptible to episodic shortfalls in demand—a sophisticated yet temperamental machine requiring careful tuning—Schumpeter saw in it something more elemental: a ceaseless process of transformation, driven by the disruptive energies of innovation. For Keynes, stability was both desirable and achievable. For Schumpeter, stability was illusory—a brief pause in the onward march of creative destruction.
It was Schumpeter’s view that Keynesian economics, for all its theoretical elegance and practical utility, erred in its diagnosis. It mistook symptoms for causes, treating downturns as correctable imbalances in aggregate demand rather than as manifestations of deeper structural dislocations. The business cycle, in Schumpeter’s schema, was not merely a deviation from equilibrium but an essential feature of capitalism’s evolutionary character. Ironically, the ascendancy of Keynesianism in the mid-century—its triumph in universities, ministries, and treasuries—can itself be read as a Schumpeterian episode: the victory of one intellectual paradigm over another, destined in time to face its own eclipse.
Yet if Schumpeter’s theory invites admiration for its explanatory breadth, it also demands scrutiny for its moral detachment. Creative destruction, though invigorating in theory, is often brutal in practice. Like revolution in politics or mutation in biology, it produces gain only through displacement, renewal only through ruin. The very phrase, with its juxtaposition of opposites, gestures at the unresolved tension between progress and suffering.
In the modern era, this tension has sharpened. Critics of creative destruction point not only to its asymmetries—between winners and losers, centres and peripheries—but to the inadequacy of the instruments by which economic success is measured. Metrics such as GDP, though convenient, are too coarse to capture the subtler dimensions of human welfare. True progress, as contemporary thinkers such as Steven Pinker have argued, lies less in the abstract growth of output and more in the concrete elevation of life: in health, education, longevity, sanitation, and public safety. By such measures, the discovery of antibiotics or the spread of clean water systems may constitute greater triumphs than any innovation celebrated in financial markets.
Nevertheless, Schumpeter’s central insight retains enduring relevance. Creative destruction remains a potent heuristic for understanding the tempo of capitalism—not a smooth ascent, but a pattern of collapse and reconstruction, decay and invention. It is a vision not of steady accumulation but of upheaval and reconstitution. And while it lacks the precision of a formal model, it captures something essential about the dynamics of social change.
The evolution of this process over time reveals a structure more intricate than the simple clash of old and new. At its heart lies a triangular relationship: between the firm, the state, and civil society.
The firm, as the principal agent of innovation, acts first. Its fortunes rest on its ability to reinvent—through novel products, methods, and markets. But the firm does not innovate in a vacuum. Its environment is shaped by the state, which sets the parameters within which enterprise can flourish or falter. The state does not direct innovation but makes it possible. It establishes the legal and institutional scaffolding—property rights, contract enforcement, competition policy—and invests in the public goods that private actors neglect: education, research, infrastructure, and, not least, social insurance.
Civil society, meanwhile, serves as the system’s conscience and corrective. Comprising universities, media, non-governmental organisations, and civic associations, it scrutinises the directions in which innovation proceeds, demanding that the gains of progress be shared, and that the costs not fall too heavily on the vulnerable. It is civil society that insists innovation be not merely clever, but just; not only profitable, but purposeful.
In recent decades, the cadence of creative destruction has accelerated. Technological change arrives with greater frequency and amplitude. Firms are compelled to adapt at unprecedented speed. States, often ponderous by design, struggle to respond with matching agility. Civil society, overwhelmed by complexity and distracted by noise, is compelled to discover new forms of vigilance and voice.
Whether this intensification leads to renewed prosperity or to widening fissures will depend not on the brilliance of invention alone, but on the resilience of this tripartite order. Only when the firm, the state, and society operate in a kind of uneasy harmony can the turbulence of transformation yield a durable and inclusive future.
Innovation is no accident. It is a wager—an explicit deployment of capital, talent, and time in search of future rents. But the odds are stacked against permanence. In capitalist economies, success invites imitation; advantage is fleeting. And so societies offer innovators a shield: temporary monopolies via intellectual property, data moats, first-mover edge or network effects. These offer some insulation, but none is eternal. Profit, for the innovator, is a race against time—dependent on markup, volume, and how long the lead can be sustained.
The economics of innovation is brutal in its arithmetic. Profit flows from three variables: how much more an innovator can charge than it costs to produce (markup), how much it can sell (output), and how long before a rival catches up (duration). In dynamic markets, this window is narrow. Success attracts emulators. Technology advances. The frontier moves. As Joseph Schumpeter noted, capitalism is not a process of equilibrium, but of incessant disruption—a gale of creative destruction that topples the old as it ushers in the new.
The cycle is relentless. Industries appear stable only from a distance. Peer closer, and churn is constant. The number of firms may remain steady, but their names change. For every company that rises, another fades. Today’s disruptors are tomorrow’s defenders—and, eventually, victims.

Innovation itself is not costless. It requires inputs: scientists, labs, capital. When these are scarce or contested, the cost of innovation rises. In contrast, economies rich in skilled labour and patient capital can generate breakthroughs at lower cost. The rate of innovation, then, is a function not just of talent and ideas, but of allocation. When resources are misdirected—towards rent-seeking or redundancy—the machine stalls.
At heart, innovation decisions obey a simple calculus: are the future returns worth today’s cost? If yes, the economy innovates. If not, it stagnates. Competition drives this balance back toward parity. Profits fall as copycats emerge. Only innovations with expected returns above the rising cost threshold get funded. Over time, this produces a kind of equilibrium—not a stasis, but a dynamic one, where churn is constant but bounded.
Schumpeterian growth, unlike the neat models of endless expansion, is grounded in replacement. Progress occurs not by building on the old, but by displacing it. The ice industry is a case in point. In the 1800s, natural ice harvesting was big business—employing tens of thousands across thousands of firms. By mid-20th century, mechanical refrigeration had all but eliminated it. Today, ice is cheap, clean, and everywhere. The industry shrank. Living standards soared.
This is the essence of creative destruction: decline at the micro level, gain at the macro. Job losses, firm failures, and industry obsolescence are not bugs but features of the system. Painful, yes—but necessary for progress.
The implications for business are sobering. Most forecasting assumes continuity. But markets are discontinuous. Industry lifecycles follow S-curves—slow starts, sudden takeoffs, and sharp falls. The dot-com boom, the rise of semiconductors, the proliferation of mobile computing—all began with underestimation, crested into euphoria, and corrected violently. Traditional firms are often blindsided. The attacker’s advantage is real, but short-lived. Most new entrants fail. Most incumbents ossify. Only a few—Apple, Microsoft, Disney—reinvent themselves. They are the exceptions that prove the rule.
Capital markets reward variety; corporate systems suppress it. Firms optimise for predictability. Budgets, KPIs, and governance structures favour stability. Yet in a world shaped by churn, this becomes a liability. The challenge is strategic, not operational: to experiment at the frontier, embrace ambiguity, and allocate capital toward possible futures, not just proven pasts.
The coming of artificial intelligence has accelerated this clock. Innovation cycles have shortened. Moats are shallower. In law, logistics, software, and finance, machines are reshaping value chains. Entire professions face redefinition. The firms that endure will be those that act less like incumbents and more like insurgents. In a Schumpeterian world, the surest path to extinction is believing that advantage lasts.