Posted in Finance, Accounting and Economics Terms, Total Reads: 369
Definition: Destructive Creation
A word play on Joseph Schumpeter’s famous term ‘Creative Destruction’ which meant innovation advancing changes and economic growth, Destructive Creation means innovation guiding to destruction. In common terms, it can be understood by the following example – introduction of Personal Computer meant replacement of typewriters.
In financial world, Destructive Creation became a popular term during the economic crisis of 2007-09 when many big banks and insurance firms wrapped up shop as a result of latest financial measures undertaken. Although innovations are generally associated with bringing increase in efficiency and productivity, the results of some innovations can be questionable such as derivatives, unconventional mortgage structures (ultimately resulting in sub-prime mortgage crisis).
Destructive creation is also characterized sometimes as benefiting a few rather than many, hence creating unfair advantages and unforeseen consequences that may be negative in effect. For example, Asian financial crisis triggered in late 1990’s led to the policy changes but not before large scale financial destruction.