Creative destruction (Also sometimes known as Schumpeter’s gale), is a concept of economics which is known primarily from Joseph Schumpeter who was an Austrian economist. The theory of creative destruction originally came from the writings of Karl Marx and it became a popular theory for the business cycle of innovation and destruction.
Schumpeter said that “creative destruction is the process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one”. In Marxist theory this economic concept refers more to the big picture of the system of accumulation and destruction of wealth under capitalism.
Karl Marx’s idea of creative destruction or annihilation states that capitalism destroys and re-configures past economic winners and also devalues current wealth through cycles of war, abandonment, dilapidation, or economic crashes. These destructive factors reset the markets for the creation of new wealth from entrepreneurs and business innovation.
Some current examples of this in the stock market was the rise of Amazon, Netflix, and Apple. The creation and growth of Amazon online shopping was also the destruction of the majority of brick and mortar book stores and electronic stores along with the decline in shopping malls. The rise of Netflix first as a mail order movie rental service and then a streaming service was the destruction of the movie rental store business as well as the decline of cable and television networks. Apple iTunes lead to a destruction in record and music stores as well as the iPhone destroying other early smart phone rivals like Blackberry.
With creative destruction the new replaces the old for a net gain to customers and investors as the new is better than the old, that is why it wins. In trading and investing you want to be going with the trend of where consumer dollars are flowing. Investing in a dying company in the hopes that it returns to former glory is almost always a bad bet. Buying a company that has the potential parabolic growth is the usually the easiest path to wealth if you follow the trend in price action.
