When the Market Pushes Back: Creative Destruction and Its Limits
Competition is the most effective tool humans have found for stopping a producer from capturing the consumer. But it carries within it a tendency to abolish itself.
Editorial board
“That’s cute… but don’t tell anyone”
In 1975 a supervisor at Kodak asked a twenty-four-year-old engineer named Steven Sasson to see whether a new kind of electronic sensor chip could be put to use. He built a device the size of a toaster, weighing about four kilograms, that captured a black-and-white image of just ten thousand pixels and needed twenty-three seconds to record it onto a cassette tape.
It was the first digital camera. When Sasson showed it to the managers, their response, as he recounted decades later, was: “That’s cute, but don’t tell anyone about it.”
The managers were not fools. Kodak made money on every roll of film sold and developed, and the new camera needed no film. Why would the company tear down its most successful business with its own hands? Kodak patented the invention and later developed digital cameras, but it went on guarding film for longer than it should have.
In January 2012 Kodak filed for bankruptcy protection. It was not defeated by a stronger rival in the film business, but by the technology it had invented and then refused to push itself forward with, so that others pushed it aside with it.
Source: Steven Sasson’s interviews with The New York Times (2008) and IEEE Spectrum; Kodak filings (2012).
In the market, pushing back appears in its purest and least bloody form. Every producer wants to capture the consumer, and every other producer pushes it back with a lower price, higher quality or a new idea. The result, when pushing back works as it should, is that the consumer wins from a struggle in which they took no part.
﴿وَرَفَعْنَا بَعْضَهُمْ فَوْقَ بَعْضٍ دَرَجَاتٍ لِيَتَّخِذَ بَعْضُهُمْ بَعْضًا سُخْرِيًّا﴾[الزخرف: 32]
“And We have raised some of them above others in degrees, so that some of them may employ others in service.” (Al-Zukhruf 43:32)
Many commentators read “sukhriyyan” here as putting to work: some people engage others in meeting their needs. Difference in degree is what creates the exchange of benefits. The economy in this verse is not a static equality but a moving inequality in which each side pushes the other to work.
Creative destruction
In “Capitalism, Socialism and Democracy” (1942) the Austrian economist Joseph Schumpeter coined the idea of “creative destruction”: a new innovation does not merely add to the old, it destroys it. The car destroyed the carriage trade; email destroyed a large part of paper mail. Schumpeter saw this “perennial gale” as the essence of the modern economy, not a passing symptom of it.
The Kodak story with which we opened is a literal application of Schumpeter’s idea: the company that guards the old is destroyed along with it, even when it is itself the owner of the new.
The lesson here is twofold. Whoever does not push themselves forward will be pushed aside by others. And pushing back in the market shows no mercy to the big for being big; size itself may be what keeps a firm from moving.
Competition as a discovery procedure
In a 1968 lecture titled “Competition as a Discovery Procedure”, Friedrich Hayek added another argument: no one knows in advance which product is better or which method is cheaper. Competition is how we find out. In this sense, pushing back in the market is a tool of knowledge, not merely a struggle over profits.
The tendency to abolish the contest
But the market has a structural problem: the winner of the contest tries to abolish it. A firm that beats its rivals tries to prevent new ones from emerging, by buying up start-ups, raising the cost of entry or colluding with the remaining competitors. Adam Smith himself warned in “The Wealth of Nations” (1776) that people of the same trade seldom meet together, even for merriment, but the conversation ends in a conspiracy against the public or some contrivance to raise prices.
Here the normative check appears. On the distribution of spoils, God says: “so that it does not become a circulation among the rich among you” (Al-Hashr 59:7). The verse was revealed about a specific ruling, and we should not load a full economic theory onto it. But its stated reason works as a general principle: wealth circulating within a narrow group is a corruption, because it stops the contest that keeps the market alive. Antitrust laws in the modern economy are, from this angle, a tool for keeping the contest alive against the winners’ tendency to end it.
In sum
The market is a field in which pushing back works with high efficiency and low cost, but it does not protect itself. It needs a rule from outside that stops the winner from closing the field behind it. This is an example of what we set out in the foundational article: the law describes the movement, and the standard guards it from ending in monopoly.