Creative Destruction or Schumpeter’s Gale is a concept developed during the 1940s by Joseph Schumpeter and popularized as the Theory of Innovation and the Business Cycle.
This crisis is exposing all kind of weaknesses in our society. These are days when “bizarre things of the past” sound as the “new normal”. Along with the huge public health problem, the Portuguese economy continues to deal with a stumbling financial block from the past – the resolution of Novo Banco.
This private bank received this week a new injection of public money, €850 Million. Nothing new for an entity that is already used to absorb millions from the Portuguese economy.
This transfer was followed with an alleged lack of communication between the prime minister and the finance minister and president of Eurogroup. The first, António Costa, had ensured to the Parliament that no fresh money would be injected in the Novo Banco, or in the resolution fund, until the results of an ongoing audit are known. However, the second, Mário Centeno, authorized the transfer of public money without apparent consent of the first.
Anyhow, this is just another episode involving Novo Banco, which was introduced by the Bank of Portugal to rescue assets of the centenary Banco Espírito Santo. This institution made politicians balance between two options in 2014: drop the bank in the clutches of the market, or, rescue the bank as they did.
“What was will not be again” and we will never know what happen with a lost opportunity. But, with the rescue, we know that a message was transmitted to the economy – politicians fear the road of innovation and Creative Destruction.
Creative Destruction or Schumpeter’s Gale is a concept developed during the 1940s by Joseph Schumpeter and popularized as the Theory of Innovation and the Business Cycle 1. Initially, this theory gained popularity as a description of economic processes such downsizing and restructuring in order to increase the efficiency of the firm, but later was much more linked to sustainable development of economies 2.
The idea of a sustainable economy is gaining big support today. Indeed, there is a major insight from Creative Destruction for today’s impact of the pandemics on economy. The capitalism, in which the bank system operates, requires the perennial gale of Creative Destruction.
Mário Centeno and other ministers should avoid comments like that “(Banco Espírito Santo) was the most disastrous bank resolution ever made in Europe” because this is process is in progress, and, more money will be necessary (to be injected), and sooner than later market forces can feed on his words and show the strength of the Creative Destruction.
1 Schumpeter, J. A. (1942), Capitalism, Socialism and Democracy, Harper & Row, New York.
2 Hart, S. L. & Milstein, M. B. (1999), Global sustainability and the creative destruction of industries. MIT Sloan Management Review, 41, 1, pp. 23-33.