Creative Destruction: How Capitalism Undermines Rule of Law
![handle is hein.journals/jecoplcy17 and id is 777 raw text is: CREATIVE DESTRUCTION: HOW CAPITALISM
UNDERMINES RULE OF LAW
Randall G. Holcombe*
THE EVOLUTIONARY NATURE OF CAPITALISM
Joseph Schumpeter described capitalism as a system of creative
destruction. Innovative new ideas, new products, and new production
methods displace the old. This system works to the advantage of
entrepreneurial individuals who bring profitable innovations to market,
enabling them to get ahead by producing more value for consumers. This
same process that works to the advantage of entrepreneurial individuals who
bring innovations to market threatens those who have succeeded by doing so
in the past. Their past successes can be undermined by the same
entrepreneurial forces they employed to displace those who came before-
them. Some individuals are in a position to benefit from the forces of creative
destruction. Those who have benefited in the past from those forces
eventually find themselves in a position of being threatened by the forces of
creative destruction.
Rule of law benefits entrepreneurial individuals because it creates a
level playing field that gives entrepreneurs the opportunity to introduce
innovations that can displace the products of established firms. Once they
become established, however, those same individuals have an incentive to
undermine rule of law, because a level playing field enables potential rivals
to challenge their established positions in the market. Once established, firms
have an incentive to use the connections that come with the economic power
they have accumulated to change the rules of the game to favor themselves-
to create barriers to entry to potential rivals. In capitalism, where the new
replaces the old, and the new benefit from a competitive environment where
they can challenge established firms, while the old look for ways to change
the rules to create stability rather than progress. Those who have risen to the
top in the competitive environment of capitalism want a legal framework that
stabilizes the status quo, rather than legal institutions that enable the creative
destruction that is an integral part of capitalism.
Schumpeter says:
The essential point to grasp is that in dealing with capitalism we are dealing with an
evolutionary process . ... Capitalism, then, is by nature a form or method of economic
change and not only never is but never can be stationary . . .. The fundamental impulse
that sets and keeps the capitalist engine in motion comes from the new consumers' goods,
* Florida State University. The author appreciates helpful comments from Jeremy Kidd, Alex
Tabarrok, and participants at a George Mason University Law School workshop.
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2022]](ViewImageLocal?handle=hein.journals/jecoplcy17&div=35&collection=&method=preview&ext=.png&size=3)
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Creative Destruction: How Capitalism Undermines Rule of Law
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