Creative Destructors

Abstract

Creative destructors are firms that create new taste, new products, new technologies, and new organizations; meanwhile, they destroy old taste, old products, old technologies, and old organizations. (The popular name for them today is “disruptors.”) In this chapter I ask how creative destructors change market shape, market size, and dominance. I build a simple model of “the perennial gale of creative destruction.” The model shows that creative destruction can promote welfare at a point in time as well as over time. That is to say, static efficiency and dynamic efficiency are compatible: there is no tradeoff between them. No apologies are necessary by anyone.

Appendix: A Model of the Gale of Creative Destruction

Figure 14.2 depicts the gale of creative destruction as a feedback loop. The simplest mathematical formulation of the gale consists of two linear differential equations:

$$ \frac{dN}{dt}={a}_1N-{a}_2\left[\frac{M}{N}\right]+{a}_3 $$

(14.1)

$$ \frac{dM}{dt}={a}_4N-{a}_5\left[\frac{M}{N}\right] $$

(14.2)

where

• N is the number of innovators;

• M is the number of imitators;

• t is time;

• a’s are the five forces of the gale.

The first equation captures three forces impinging on innovation, while the second equation captures two forces impinging on imitation.

We may examine several properties of this market, such as time path, stability, and convergence or non-convergence. I will focus on the “steady state,” where neither the number of innovators nor the number of imitators changes.

$$ N=\left(\frac{a_3{a}_5}{a_2{a}_4-{a}_1{a}_5}\right) $$

(14.3)

$$ M=\left(\frac{a_4}{a_5}\right){\left(\frac{a_3{a}_5}{a_2{a}_4-{a}_1{a}_5}\right)}^2 $$

(14.4)

The comparative statics are reported in Table 14.1.