Creative destruction plays a key role in entrepreneurship and economic development.
The theory of “creative destruction” coined in 1942 by the economist Joseph Schumpeter suggests that business cycles function under long waves of innovation. Particularly when the markets are disrupted, important industry clusters have an oversized impact on the economy.
Take the rail industry, for example. At the turn of the 19th century, the railroad fundamentally changed urban demographics and commerce. Similarly, the internet has turned entire industries upside down – from media to retail.
The infographic above shows how innovation cycles have impacted the economy since 1785 and what’s next in the future.
Innovation cycles: the six waves
From the first wave of textile and hydropower in the industrial revolution to the internet in the 1990s, here are the six waves of innovation and their most important breakthroughs.
|First wave||Second wave||Third wave||Fourth wave||Fifth wave||Sixth wave|
Internal combustion engine
|Digitization (AI, IoT, AV,
Robots & 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 played a crucial role in the manufacture of paper, textiles and hardware. In contrast to the mills of the past, large dams fed turbines through complex belt systems. Advances in the textile industry brought the first factory, and cities expanded around it.
With the second wave, between around 1845 and 1900, there were significant advances in rail, steam and steel. The rail industry alone affected countless industries, from iron and oil to steel and copper. In return, large railway monopolies were formed.
The advent of electricity, light and telephone communications through the third wave dominated the first half of the 20th. Henry Ford introduced the Model T and the assembly line changed the auto industry. Automobiles were closely associated with the expansion of the American metropolis. Later, in fourth wave, aviation has revolutionized travel.
After the advent of the internet in the early 1990s, information barriers were lifted. New media changed political discourse, news cycles and communication in the fifth wave. The Internet heralded a new frontier of globalization, a limitless landscape of digital information flows.
For the economist Schumpeter, technological innovations have boosted economic growth and improved living standards.
However, these disruptors can also tend to lead to monopolies. Particularly in the upswing of a cycle, the strongest players realize large margins, build trenches and ward off rivals. Typically, these cycles begin when the innovations become generalized.
You can see that today, of course – the world has never been so closely connected. Information is centralized like never before, with big tech dominating global search traffic, social networks and advertising.
Like today’s big tech giants, the 19th century rail industry had the power to control prices and crowd out competitors. Listed shares of railroad companies on the New York Stock Exchange made up the top 60% the total market capitalization.
Waves of change
As the lifespan of the cycles continues to shorten, the fifth wave could still have a few years behind it.
The sixth wave, shaped by artificial intelligence and digitization in the areas of Information of Things (IoT), robotics and drones, will likely paint a completely new picture. The automation of systems, predictive analytics and data processing could have an impact. In return, physical goods and services are likely to be digitized. The time it takes to get things done can shift from hours to seconds.
At the same time, clean tech could come to the fore. At the center of every technological innovation is the solution of complex problems, and climate issues are becoming more and more urgent. Lower costs for photovoltaics and wind also predict efficiency advantages.