AI ushers in a new era of creative destruction

Joseph Schumpeter, an Austrian-born economist, describes capitalism in his 1942 book ‘Capitalism, Socialism and Democracy’ as a dynamic process. Schumpeter writes that through this continuous process, new firms, products, technologies, and methods of production are continuously replaced with new ones. Schumpeter states that it ‘destroys’ old economic structures while creating new ones, a process known as creative destruction.
Philippe Aghion and Peter Howitt jointly shared half of the 2025 Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel for the model of sustainable economic growth through creative destruction. Their model explained how repeated innovation can increase productivity and sustain long-term economic growth. Capitalism is dynamic, never stagnant; it produces innovations that replace old technologies, firms, products, and sometimes even employment. Economic growth is driven by more workers participating in the economy, greater investment in machinery, infrastructure, and factories, better education and skills, and higher productivity, producing more value with the same amount of time, labor, and resources. In the long run, sustained growth in productivity and income per person depends importantly on technological progress and productive investments. Fundamentally, technological progress is necessary but not the only determinant of economic growth. An efficient ecosystem and diffusion of technology are important.
Creative destruction is part of the innovation process. A new technology allows an economy to produce goods or services faster, more cheaply, or of higher quality. When it replaces an inefficient old method, total productivity can rise. However, new technologies render previous technologies, business models, tasks, and some jobs ineffective and obsolete, creating tension between innovators and incumbent firms. It can also create adaptability challenges for employees whose skill sets are no longer industry-relevant. Actors that expect to lose from technological change may try to slow adoption through lobbying, protecting existing markets, or raising barriers to entry. Nevertheless, evidence shows that, despite the challenges, economic growth can occur with sustained technological development through creative destruction, a part of the innovation process, when accompanied by competition, innovation, investment, skill development, and support for displaced workers.
When technologies like artificial intelligence emerge and diffuse across almost all industries, the world experiences the opportunities and challenges of creative destruction. However, new technologies not only take away jobs; they also create new occupations, transform existing roles, and enhance workers' productivity. In this process, growth is driven by new talent, entrepreneurs, and new innovators entering the market. The innovation ecosystem must accept failure and provide support at every stage from conceptualization to commercialization and scale-up. Governments should enforce competition policy effectively to prevent anti-competitive conduct, reduce unnecessary barriers to entry, and limit the ability of incumbent firms or vested interests to block innovation.
The IT revolution of the mid-1990s and early 2000s illustrated creative destruction in practice. Internet-based firms such as Amazon and Google emerged and transformed established industries. Investment in information and communication technologies contributed to faster US productivity growth. Over time, however, the increasing concentration of digital markets raised concerns about whether competition policy could keep pace with technological change and preserve opportunities for new entrants.
At present, artificial intelligence is creating a new wave of creative destruction. With broader applicability across industries, it could become a general-purpose technology. As with other general-purpose technologies, like electricity and information technology, the full economic value of AI will depend on complementary downstream innovations, digital infrastructure investment, organizational redesign, and the development of human skills.
At the upstream end of the AI value chain, advanced chips, cloud computing, data centers, and foundation models are concentrated in the hands of a small number of powerful firms. Amazon Web Services, Microsoft Azure, and Google Cloud are major providers of cloud infrastructure for developing and deploying AI systems. This concentration can support large-scale investment, but it can also create risks for competition, access, and innovation by new entrants.
The world has seen earlier technological transformations, and AI is the current tide, with uncertain outcomes. It is disrupting established business models and pushing the future of work into uncharted territory. To ride the tide, we cannot rely on the technology itself; we need an ecosystem in which institutions and governments promote open competition, broad access to infrastructure and skills, responsible innovation, and support for workers and firms adapting to change.