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Creative destruction plays a key role in entrepreneurship and economic development.
Invented by economist Joseph Schumpeter in 1942, the “creative destruction” theory suggests that business cycles operate under long waves of innovation. Specifically, as markets are disrupted, clusters of key industries have disproportionate effects on the economy.
Take the rail industry, for example. At the turn of the 19th century, the railroad completely reshaped urban demography and commerce. Likewise, the Internet has revolutionized entire industries, from media to retail.
The above infographic shows how innovation cycles have impacted economies since 1785 and what the future looks like.
Innovation cycles: the six waves
From the first wave of textiles and hydropower from the industrial revolution to the Internet in the 1990s, here are the six waves of innovation and their main advances.
|First wave||Second wave||Third wave||Fourth wave||Fifth wave||Sixth wave|
|The power of water
Internal combustion engine
|Digitization (IA, IoT, AV,
Robots and drones)
|60 years||55 years||50 years||40 years||30 years||25 years|
Source: Edelsen Institute, Detlef Reis
During the first wave During the industrial revolution, hydropower was instrumental in the manufacture of paper, textiles and iron articles. Unlike mills of the past, large dams fed turbines through complex belt systems. Advances in textiles brought the first factory and cities developed around them.
With the second wave, between about 1845 and 1900, came important advances in the field of rail, steam and steel. The railway industry alone has affected countless industries, from iron and petroleum to steel and copper. In turn, large rail monopolies were formed.
The emergence of electricity powering light and telephone communication through the third wave dominated the first half of the 1900s. Henry Ford introduced the Model T and the assembly line transformed the auto industry. The automobile became closely linked to the expansion of the American metropolis. Later in the fourth wave, aviation has revolutionized travel.
After the emergence of the Internet in the early 1990s, information barriers were lifted. The new media have changed the political discourse, information cycles and communication in the fifth wave. The Internet has ushered in a new frontier of globalization, a borderless landscape of digital information flows.
For economist Schumpeter, technological innovations have boosted economic growth and improved living standards.
However, these disruptors can also tend to lead to monopolies. Especially during the resumption of a round, the stronger players achieve wide margins, build ditches and beat their rivals away. Typically, these cycles begin when innovations become of general use.
Of course, this can be seen today – the world has never been so closely connected. Information is more centralized than it ever has been, with Big Techs dominating global search traffic, social media and advertising.
Like today’s Big Tech giants, the rail industry had the power to control prices and oust competitors in the 19th century. At its peak, shares of rail companies listed on the New York Stock Exchange constituted 60% of total market capitalization.
Waves of change
As the longevity of the cycle continues to shorten, the fifth wave could have a few years under its belt.
the sixth wave, marked by artificial intelligence and the digitization of information about objects (IoT), robotics and drones, will likely paint a whole new picture. Namely, systems automation, predictive analytics and data processing could have an impact. In turn, physical goods and services are likely to be digitized. The time required to complete tasks can drop from a few hours to a few seconds.
At the same time, clean technologies could come to the fore. At the heart of every technological innovation is the resolution of complex problems and climate concerns are increasingly pressing. The lower costs of solar photovoltaic and wind power also mean advantages in terms of efficiency.