Definition and origin
In a 2014 episode, Bob Zadek introduced creative destruction as “an important Austrian economics concept” and asked guest Derek Khanna to explain it for listeners unfamiliar with the term. Khanna attributed the term to the economist Joseph Schumpeter, describing it as new companies coming to the fore, providing new services, and forcing incumbent firms to innovate or die. Khanna stressed that the “die” part is critical: if old companies that refuse to innovate are not allowed to die, they hold on to old market models, and the economy continues using vacuum tubes when it could be using transistors. Derek Khanna - What’s Stifling Innovation? (2014)
Khanna offered the Fortune 500 as evidence of churn, saying that over the past 80 years only about 12 companies remain on the list. He described the process as economic growth coming from figuring out new ways to do things that are more efficient—new products and services that are better than before. Derek Khanna - What’s Stifling Innovation? (2014)
Regulatory capture as the response to disruption
Khanna argued that when big companies face a challenger—particularly disruptive innovation, meaning small challengers with perhaps an inferior product but gaining market share—they often do not innovate because that is hard. Instead, they go to Washington, D.C., open a lobbying office, and lobby Congress for a law or regulation to protect their market model. He said this is happening more and more every day and that innovation is slowing down in the country as a direct result. Derek Khanna - What’s Stifling Innovation? (2014)
Bob Zadek framed the same dynamic as companies that cannot compete on the merits running to Washington or to state houses and seeking governmental protection so they are kept on life support artificially, which means everybody in America pays out of their own pocket just so an inferior product can not be competed out of existence. He compared it to a sporting event where the losing team gets the referee to skew the result in favor of the inferior team. Derek Khanna - What’s Stifling Innovation? (2014)
Uber, Tesla and franchise laws
Khanna said Uber is banned in a number of jurisdictions, specifically cities where Republicans have had difficulty competing historically, and argued Republicans should champion the issue in every city across the country where such bans exist, naming Austin, Texas. He also said that in Texas it is illegal for Tesla to sell cars to the consumer through a Tesla dealership, and that they cannot even tell you how much the car costs. Derek Khanna - What’s Stifling Innovation? (2014)
Bob Zadek noted that Texas had a Republican governor and also mentioned Chris Christie as unsympathetic to Tesla and therefore sympathetic to Big Auto because he was protecting the franchise network. Bob said he had done an entire show on Tesla and the fight they were having in overcoming archaic franchise laws that protect automobile franchisees. He argued the platform should not be supporting Tesla per se but rather supporting innovation, and that if Republicans became the party of innovation and technology and opposed any policy that protects the old and stifles innovation, they would grab young people. Derek Khanna - What’s Stifling Innovation? (2014)
Khanna cited studies saying these types of rules add about 12% to the cost of buying a car, calling it a 12% tax paid not to the government but to crony capitalists who are getting rent from the economy. He argued those laws are the reason there has been almost no innovation in the automobile sector in the United States, because one measure of innovation is how many new market participants there have been. Derek Khanna - What’s Stifling Innovation? (2014)
The safety-net complement
In a 2017 episode, Will Wilkinson told Bob Zadek that free markets and a robust safety net are not in tension but complementary and part of a mutually reinforcing system. He said that if you want free markets and unfettered capitalism, you want entrepreneurs free to start businesses without government getting in the way, and you want a high level of innovation and a high rate of growth because economic growth produces the resources that make people better off. Will Wilkinson: G.O.P. Should Embrace the Welfare State (2017)
Wilkinson then said that if the dynamic process really lets loose, it creates a lot of creative destruction, as Schumpeter called it, and that the term these days is “disruptive innovation.” He said that a lot of disruptive innovation means a lot of people get disrupted: people lose jobs, whole industries might go under, and people have to find jobs elsewhere. He described the dislocation as the more dynamic, the more dislocating, and the more destruction there is. Will Wilkinson: G.O.P. Should Embrace the Welfare State (2017)
Wilkinson argued that people who feel anxious about being left behind do not open up to deregulation; instead they reach out for populist politicians like Donald Trump, who makes empty promises that sound good to people who reasonably do not know a lot about how economies work. He said people like hearing that coal mines will come back, that companies will be bullied not to move a plant to Mexico, and that borders will be closed. He called all of those things terrible for the economy and said they leave people worse off, but that people demand them because they feel anxious about living in a dynamic economy. Will Wilkinson: G.O.P. Should Embrace the Welfare State (2017)
Wilkinson’s proposed remedy was social insurance: if you give people a little bit of insurance—the idea the modern welfare state is based on, that you should insure people against the downside risk of a dynamic economy—then they are less anxious and less likely to endorse nationalist, populist policy that would hurt them and the entire country. He said the upside of the dynamic system is much greater than the downside of paying a little bit more in taxes and more than compensates for it. Will Wilkinson: G.O.P. Should Embrace the Welfare State (2017)
Property rights and wealth transfer
Bob Zadek asked Wilkinson about the principle that it is wrong for a policy to say that something he earned belongs to a stranger he never met by dint of government edict, calling wealth transfers a bedrock core libertarian principle. Wilkinson answered that you first need a justification for the institution of property, and that the compelling argument for robust property rights is that it creates clarity, allows people to plan, and gives people incentives to work hard and create the most value they can because they know they will be able to keep it. He said the empirical evidence that places with strong property rights do better economically is airtight. Will Wilkinson: G.O.P. Should Embrace the Welfare State (2017)
Wilkinson extended the same logic to the welfare state: if you want to think about what institutions leave everybody better off over the long run, you have to understand that the dynamic nature of capitalist economies stirs things up and leaves some people vulnerable, and that economic systems are embedded within political systems. He said you have to maintain a certain level of political buy-in to a relatively liberal free-market order, and the best way is to give people assurance they will not fall below a certain minimum income. He said a system dogmatic about taxation being theft would find it very hard to finance anything the government does, and he submitted that people with the most property would not end up with as much property in a system where taxation is treated like theft. Will Wilkinson: G.O.P. Should Embrace the Welfare State (2017)
A caller’s qualification
In a 2015 episode, a caller identified as Nick from San Carlos told guest Sean McElwee that after traveling to Europe, Eastern Europe, Africa and Latin America, he thought the guest’s model was great on paper. He said Europe post-World War II had failed miserably and cited an article by David Cameron in the Economist about innovation being dead in Europe. Nick said he truly believed Schumpeter had a point that creative destruction creates new opportunities for people, and that he agreed education is vital and access to healthcare matters. Inclusive Capitalism: Economic Savior or Socialism in Disguise? (2015)
Nick added that more importantly he thought the family and the environment in which children grow up have an impact. He said his father died very young, his mother raised the family herself, and they were a WIC victim on food stamps; all of the children went to the military and all went to university and grad school, which he attributed to his mother taking the time to provide an environment where they could be successful. He asked how McElwee’s idea could provide such an environment for children, and cited the book Dead Aid about Africa, arguing that money poured into Africa for infrastructure had failed to help people develop infrastructure. Inclusive Capitalism: Economic Savior or Socialism in Disguise? (2015)
McElwee responded that he wanted to table the discussion of developing countries because the issues they face are very different and they do not even have the governance structures to begin doing the type of stuff he was talking about. Focusing on the United States, he said family structure can be very important and that it is important for children to go home to a stable environment, but that the thing that really prevents that from happening a lot of times is poverty. He said it is great when people on different public assistance programs can provide a good environment, and that more robust public assistance programs can make that job easier, asking why not give families more of a chance by making sure none of the families are ever faced with poverty. Inclusive Capitalism: Economic Savior or Socialism in Disguise? (2015)
Across episodes
The 2014 episode treats creative destruction as a process that incumbents try to arrest through lobbying and protective regulation, with Derek Khanna and Bob Zadek naming Uber, Tesla and automobile franchise laws. The 2017 episode treats the same process as a source of dislocation that requires a safety net to sustain political support, with Will Wilkinson arguing that free markets and social insurance are complementary. The 2015 episode adds a caller’s qualification that creative destruction creates new opportunities but that family environment matters, with Sean McElwee responding that poverty is the obstacle and public assistance can help. The excerpts show no development of the concept itself across the three episodes; each speaker uses it for a different argument.
What the sources do not cover
The excerpts do not state the founding date of the term, the full title or publication venue of Schumpeter’s work, or any definition of creative destruction beyond what Khanna and Wilkinson say. They do not state which bill, statute or amendment any of the regulatory or franchise disputes turned on, nor the outcome of any case. They do not give the title or field of any speaker beyond what the labels show. The 2015 caller’s remarks break off mid-sentence, and the 2014 excerpt ends mid-sentence as well.