Free to Fail

Free to Fail

Creative Destruction Revisited

Hugh van der Mandele and Arjen C. van Witteloostuijn

This challenging book tackles one of the most fundamental questions in economics: Why are commercial organizations more efficient than organizations in the public domain?

Chapter 5: Organizational mortality and its fruits

Hugh van der Mandele and Arjen C. van Witteloostuijn

Subjects: business and management, organisation studies, strategic management, economics and finance, industrial organisation


A hundred years ago, Joseph Schumpeter wrote his seminal Theorie der Wirtschaftlicken Entwicklung [Theory of Economic Development]. In this book, he developed the now (in)famous concept of creative destruction. This involves the destruction and replacement of ‘old’ firms by new ventures, with these new ventures producing ‘new’ products, employing ‘new’ technologies, and/or using ‘new’ raw materials. Schumpeter forcefully argued that creative destruction is a critical engine of economic development. In so doing, Schumpeter gave evolutionary selection processes the main role in the act of economic development, similar to what was done later, in the 1970s, by Richard Nelson and Sidney Winter in economics (see their 1982 book) and Michael Hannan and John Freeman in sociology (see their 1989 book). From the late 1980s onwards, economists began to realize that the phenomenon of creative destruction was far more prevalent than could be explained by ‘Schumpeterian’ changes alone. Neither were changes in employment simply a combination of movements between sectors and of consequences of the business cycle (Foster et al., 1998, pp. 8–9). We leave the burden of scientifically grounding this observation to economists such as Eric Bartelsman, Stefano Scarpetta and John Haltiwanger.

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