Creative destruction in local markets
Last Updated: 05/19/04
Competition from entrepreneurs with innovative business strategies continually forces established firms to either keep up with their younger counterparts or exit. Many firms fail to adapt to new competitive conditions. The consequent failure of unprofitable firms and their replacement by new firms is a familiar aspect of competition. Because a firm’s failure frees the labor and capital it employed for use at a more profitable entrant, this process may be described as creative destruction. Although there are costs associated with creative destruction, such as the lost labor of temporarily unemployed workers, it benefits an economy in the long run by moving productive resources into more profitable uses.