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creative reconstruction

One of the most famous passages in economic thought is Schumpeter’s description of markets as an arena for “creative destruction.” This conjures images of the rust belt with its abandoned factories and warehouses. In the Internet age, I think the story is a bit different. Sure, we have Pets.com and other collateral damage of innovation, but it seems that the Internet allows some firms and brands a bit more flexibility. You have creative reconstruction.

For example, people laugh at MySpace and Friendster for losing their early advantage in social networking to Facebook. It sounds as if these firms became the 21st century equivalent of horse and buggy firms (which is also a myth – these firms didn’t just go bankrupt but slowly morphed and merged with auto makers). But if you actually look, you see that MySpace is attracting a million visitors per month and ranks in the top 500 web sites in the United States. Similarly, Friendster is now a gaming web site with a few million users, mainly from Asia.

Make no mistake, these firms will likely never regain their position of dominance. They are quite close to failure (see here for recent MySpace pessimism). But they still seem to have quite a bit of value, nearly a decade after their collapse. If I told you about a company with a few million visitors, but didn’t tell you the origin, you’d probably be impressed. The lesson I take is that the market can allow opportunities for reconstruction.

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Written by fabiorojas

August 7, 2014 at 12:01 am

Posted in fabio, markets

2 Responses

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  1. Interesting thoughts.

    Worth noting that “creative destruction” (in Schumpeter’s original formulation, not so much the modern memes that attach to it) is very much a continual and effectively gradual process on the scale of economy/society. It’s pointless to argue about “what Schumpeter meant” but the original formulation talks about mutation, which is very much in line with the possibility of “creative reconstruction.”

    What makes this important perhaps is that the modern memes tend to a “punctuated equilibrium” metaphor rather than continual evolution – and yet the empirical evidence is that our economies look much more like continual evolution than punctuated equilibrium AND there’s much less evidence for the economic benefits of the explosive moments of punctuated equilibrium than generally assumed.

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    Metatone

    August 7, 2014 at 11:38 am

  2. Metatone: Indeed, I think we live more in a Gladwellian “tinkering” world than a Schumptere “creative destruction” world.

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    fabiorojas

    August 7, 2014 at 4:54 pm


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