When Schumpeter coined creative destruction, he was talking about the cycle of innovation that has been going on since we slipped from the Stone Age into the Bronze Age. Creative destrcution happens due to all the inventions that follow and replace each other. The advent of steam ships was the start of the creative destruction for commercial sailing ships. A challenge for society is when innovation happens and afterwards proves to be harmful to society. In the field of finance such things have happened frequently in our modern history. Recently the scale of destruction was very large, so we call it a global financial crisis or more particularly a derivatives tsunami. In such bad times, a destructive mechanism can emerge from the electronic financial markets that attacks and destroys value in the real world. People like Warren buffet have talked about financial weapons of mass destruction.
What strikes me most is that the economic agent, the financial trader behind his desk, as a reward only touches a tiny fraction of the value that he/she potentially destroys in the real world economy. So essentially this forms an interesting economic leak. Again, I feel a law coming. I am curious when law makers globally will agree that certain financial destructive games are not to be played.
Investopedia explains it further: “We talk about destructive creation when innovation leads to destruction. Destructive creation was coined as a play on Joseph Schumpeter’s famous term “creative destruction”, which suggests that innovation leads to changes and economic growth. The term destructive creation was popularized during the financial crisis of 2007-2009, when large banks and insurance companies ceased to exist as a result of financial innovations.
Financial innovation is a different animal than other types of innovation. For example, when the PC was invented, it replaced the typewriter and increased efficiency; as a result, the economy profited. In other words, there was little downside to this innovation. However, some recent financial innovations could be said to me more destructive than productive. Derivatives, structured investment products and non-conventional mortgages have all fallen under public scrutiny in recent years as innovations that proved to bring more harm than good.”