How should a new technology be regulated? As an example, consider the introduction and integration of renewable power generation and distributed energy resources. While this snapshot analysis can frequently be useful, it also risks obscuring an important issue – the effect of a policy on the initial steam turbine may have effects (positive and/or negative) that are unforeseen at the time of the policy on future generations of innovations in the world of electric power generation.įor the regulator, the importance of dynamism raises a series of difficult questions. Most economic analyses are performed in the static sense, where the economist looks at the world in its current state to estimate the effect of, say, the introduction of a new policy.

Schumpeter’s theory of creative destruction links closely with his view of the importance of economic dynamism. Parallels in the electric power market are easy to see, where we have seen the first steam turbines replaced, generation by generation, with the current fleet of combined cycle natural gas plants, solar panels, wind farms, and so on. Over time, newer and better innovations will continue to drive out worse ones, just as the Model T did the horse and buggy and numerous iterations of vehicles have subsequently driven out the Model T and generations of its successors. With the introduction of Ford’s Model T in 1908, however, these “technologies” were effectively driven out by a superior innovation. As an example, in the late 1800s and early 1900s incremental improvements to horse and buggy transportation continued to be valuable, and innovations in the buggy and buggy whip could fetch a considerable price in the market. Schumpeter argues in 'Capitalism, Socialism, and Democracy' that capitalism is never stationary and always evolving, with new markets and new products entering the sphere. He is perhaps most known for coining the phrase “creative destruction,' which describes the process that sees new innovations replacing existing ones that are rendered obsolete over time. Today I will be the trumpeter for Schumpeter – talking about Schumpeter’s theory of creative destruction (See: Schumpeter – Capitalism, Socialism, and Democracy' Chapters 7-8 “McCraw on Schumpeter, Innovation, and Creative Destruction,” EconTalk podcast).

Welcome to the IRLE blog! Here we’ll highlight some topics related to the readings before the Workshop in Aspen just a few weeks away.

Creative destruction definition