Academic journal article Iowa Law Review

Promoting Innovation

Academic journal article Iowa Law Review

Promoting Innovation

Article excerpt


The economist Joseph Schumpeter recognized two essential facts of modern capitalism: (1) the sudden displacement of the old by the new-a process he eloquently termed "creative destruction"-and (2) the primacy of innovation over incremental improvements in allocative efficiency to long-run economic growth.1 Examples of creative destruction are easy to come by. In the early 20th century the automobile decimated the blacksmith and carriage-maker trades. More recently, email has upended the economics of the postal service, Craigslist has devastated newspaper classified ads, online shopping has imperiled bricks-and-mortar retail, and the smartphone has relegated former mobile handset market leaders, such as Nokia and Blackberry, to obscurity.

The twin Schumpeterian insights-that innovation is the key to growth and that creative destruction is a vital source of innovation-are now well accepted.2 How these insights should be incorporated into laws regulating the market place, such as antitrust and intellectual property, is far less clear. Antitrust minimalists and skeptics tend to equate Schumpeter with laissez faire.3 After all, if even the most entrenched market behemoths are vulnerable to seismic shifts in technology, are not all supposed monopolies merely fleeting?

We disagree. This view misreads Schumpeter and misunderstands markets and business strategy. Modern businesses are well aware of the threat of disruptive outsiders and, left unchecked, will do their utmost to prevent future waves of creative destruction from threatening the status quo.4 We propose thinking of creative destruction and competition policy as a two-stage process rather than a single event where the victor enjoys the spoils of innovation indefinitely without legal constraints. Instead, competition law as we currently understand it would remain in place while being somewhat more forgiving as to the acquisition of market power, yet still vigilant in policing the maintenance of such power. We focus on historical, current, and hypothetical examples from US and EU competition and intellectual property law to show how contemporary law has already incorporated many of these insights and how the law can maximize consumer welfare by doing so more thoroughly. Under such a two-step approach, some areas of antitrust and IP law would expand, some would contract, but all areas of the law would more clearly promote innovation and help create real Schumpeterian antitrust.

This Essay proceeds as follows. We briefly introduce the concept of creative destruction and its place in Schumpeter's work in Part II. In Part III we explain why a truly Schumpeterian competition policy demands more than a laissez faire approach. We explain why the law must preserve opportunities and incentives for creative destruction at all stages of innovation and we review four key policy areas of antitrust law from this innovation-focused perspective: unilateral conduct cases (Part III.A), cases at the intersection of IP and antitrust (Part III.B), Sherman Act section 1 cases (Part III.C), and merger policy (Part III.D). In Part IV we turn our attention to how the federal antitrust agencies can prioritize innovation through case selection and competition advocacy.


Joseph Schumpeter was one of the most prominent economists of the 20th century. Born in Austria, he began his professional career as an economist with a series of economic histories of European industry and a prolific outpouring of other theoretical work.5 He briefly served as Minister of Finance in the 1919 Austrian government.6 In 1932, Schumpeter left Europe and joined the faculty of Harvard University, continuing his long and fruitful career until his death in 1950.7

He is best known for his 1947 work Capitalism Socialism and Democracy. Schumpeter famously wrote:

The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers' goods, the new method of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates . …

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