Destructive Creativity

“It is often assumed that an economy of private enterprise has an automatic bias towards innovation, but this is not so. It has a bias only towards profit. It will revolutionise manu-factures only if greater profits are to be made in this way than otherwise. ” (Hobsbawm, 1968 p.40). The drive to create new profitable sources of income that are not beneficial to society can be denoted destructive creativity. In this paper we are concerned with privately profit-able innovations that imply lower social efficiency. One example of such creativity is firms ’ profit motivated sabotage of their competitors, as studied by Veblen (1923). According to Posner (1975) an important, but often ignored, social cost of monopolies is the resources wasted in the competition to obtain the privileged monopoly position. Bhagwati (1982) provides a taxonomy of ”Directly Unproductive Profit-Seeking Activities ” which, in particular includes the approach of Tullock (1967) who points to the similarity between theft and monopoly rents. All these examples are in contrast to the Schumpeterian process of creative destruction where the monopoly positions that entrepreneurs achieve are temporary and grounded in superior technologies. Destructive innovations take many forms. For instance, the recent transition in Russia has not only generated new markets, but also new opportunities for creative criminals in the form of extortion, contract enforcement and ”protection”. The result is that the growth of the productive sector is hampered both by the ”business taxes ” imposed by mafia-like organizations and by the rise in protection expenses. In 1994 criminal gang