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Creative destruction plays a key role in entrepreneurship and economic development.

The theory of creative destruction, coined by economist Joseph Schumpeter in 1942, suggests that business cycles operate under long waves of innovation. Particularly as markets are disrupted, major clusters of industries have disproportionate effects on the economy.

Take the railway industry, for example. At the beginning of the 19th century, the railways completely reshaped urban demographics and commerce. Likewise, the internet has disrupted entire industries, from media to retail.

The infographic above shows how innovation cycles have impacted economies since 1785, and what’s next.

Innovation cycles: the six waves

From the first wave of textiles and hydropower in the Industrial Revolution to the Internet in the 1990s, here are the six waves of innovation and their most significant breakthroughs.

Source: Edelsen Institute, Detlef Reis

During the first wave of the industrial revolution, hydropower played an important role in the production of paper, textiles and hardware. Unlike the mills of the past, large dams fed turbines through complex belt systems. Advances in textiles spawned the first factory, and cities around them expanded.

With the second waveBetween about 1845 and 1900, significant advances were made in rail, steam, and steel. The railroad industry alone affected countless industries, from iron and oil to steel and copper. In turn, large railway monopolies were formed.

The emergence of electricity that powers light and telephone communications through the third wave dominated the first half of the 1900s. Henry Ford introduced the Model T and the assembly line transformed the auto industry. Automobiles became closely associated with the expansion of the American metropolis. Later, in the fourth wave, aviation has revolutionized travel.

After the Internet emerged in the early 1990s, barriers to information were lifted. New media changed political discourse, news cycles and communication in the fifth wave. The internet ushered in a new frontier of globalization, a borderless landscape of digital information flows.

Market power

For the economist Schumpeter, technological innovations stimulated economic growth and improved living standards.

However, these disruptors can also tend to lead to monopolies. Particularly during an upturn in the cycle, the strongest players realize wide margins, establish moats and fend off rivals. Usually, these cycles start when the innovations are widely adopted.

This can of course be seen today, never before has the world been so closely connected. Information is more centralized than ever, with Big Tech dominating global search traffic, social networks and advertising.

Like the Big Tech giants of today, the railroad industry in the 1800s had the power to control prices and drive out competitors. At its peak, publicly traded shares of railroad companies on the New York Stock Exchange were doing well 60% of the total stock market capitalization.

Waves of Change

As the cycle life becomes shorter and shorter, the fifth wave may still have a few more years behind it.

The sixth wave, characterized by artificial intelligence and digitization in information of things (IoT), robotics and drones, is likely to paint a whole new picture. The automation of systems, predictive analytics and data processing can have an impact. In turn, physical goods and services are likely to be digitized. The time to complete tasks can shift from hours to even seconds.

At the same time, clean technology could come to the fore. Solving complex problems is at the heart of any technological innovation, and climate problems are becoming increasingly urgent. Lower costs in solar PV and wind also predict efficiency benefits.