Schumpeter and the Fashion Industry

Today we are treated to a discussion of the fashion industry from Ms. Richter & Ms. Li.   The first from the Schumptoberfest collection.  Enjoy!


“The evolution of the capitalist style of life could be easily – and perhaps most tellingly – described in terms of the genesis of the modern Lounge Suit.” -Joseph Schumpeter

Creative destruction saturates the fashion industry; you must be the trend-setter otherwise the “foundation of your very life” will be in jeopardy. Large firms enjoy an advantage in spreading risk over many projects (e.g. inventions that never “catch” as a trend) and have the resources and brand power to set trends, thus helping their inventions turn into successful innovations, driving the fashion cycle forward through induced obsolescence. Due to lack of IP laws, large firms do not enjoy the monopolistic protectionism that IP rights provide, but they have other means justifying their investments. Schumpeter’s hypothesis suggests that large firms foment innovation for factors other than scale economies, and in the fashion industry, and the fashion cycle is a key example of this phenomenon.

The fashion industry, a $200 billion industry in the United States alone, is comprised of nearly 150,000 establishments, ranging in size from large fashion houses to smaller start-ups. Although there are a large number of firms competing in the industry, according to the 2002 Census, five percent of firms in the clothing industry accounted for twenty percent of total revenue and sales. These large firms, , also play an important role in the diffusion of new design trends and the continuation of induced obsolescence, the dynamic force driving the fashion cycle forward; the influence of large firms contributes to the top-down structure of the industry.

Consumers are not strictly motivated by price, but also pay attention to  brand, quality, design differentiation, or trendiness (flocking). Because of complex consumer decision-making, product differentiation and new designs are essential to driving the industry forward Raustiala and Sprigman (2009) argue that  induced obsolescence is the process by which designs, through copying and diffusion into mainstream fashion, become obsolete and therefore undesirable to fashion-forward consumers. These fashion-forward people then demand new designs, which are invented by top firms and diffused downward through trends, again, through copying. This process is called the fashion cycle. This cycle is very rapid and is completed each season.

While heterogeneity is important in driving the fashion cycle forward, the homogenization of products completes the cycle. As the original designs of elite brands are copied and filter down, these derivative reworkings meet consumers’ desire to “flock”, or fit in with a trend, because the derivatives contain a common design element and provide a shared design vocabulary. Hence, the lack of fashion IP protection is crucial to the continuance of this induced obsolescence. Raustiala and Sprigman even assert that “the low-IP regime acts as an accelerant of innovation” (1209). Copying helps to anchor designs as trends, thus moving them from inventions to industry-wide innovations, and induces consumer desire for new designs. Thus, it is imperative for firms to continue to innovate with new designs each season, or else be left behind and considered “out of style” by fashion-forward consumers.

Piracy in the fashion industry, while undoubtedly harming some individual firms, in the aggregate foments innovation.  Large firms, due to their size and market share, are better able to bear any negative effects of piracy and enjoy an advantage over smaller firms in that respect. Often piracy does not interfere with the innovator’s ability to appropriate rents from their innovation largely due to brand differentiation in the mind of the consumer. For example, for a fashion-forward consumer, there is a difference in buying a pair of Prada sunglasses, with the brand name prominently displayed on the temple, as opposed to a similar discount retailer replica. Therefore, due to branding, the investment in the design innovation can be justified, as Schumpeter asserts is a precondition for innovation. Trademarks may induce monopolistic advantage, especially to the fashion-forward consumers.

Legally defining what constitutes a copying infringement is also a difficult roadblock to the establishment of fashion IP protection. Tim Gunn of Project Runway’s description, “if you squint your eyes, you really can’t discern it from the original” hardly seems like an objective measurement. However, if copying were to be defined as Gunn suggests, imposing IP protections would make the diffusion of trends difficult, if not impossible, as specific design elements (what differentiates a certain design from another; the “innovation”) would be protected and therefore “off limits” for firms lower down in the fashion cycle to copy and disseminate for “flockers”; this protection would thus hinder the fashion cycle, which innovates due to induced obsolescence from copying.

It is interesting to examine whether new designs truly constitute “innovation” in the Schumpeterian sense. In Capitalism, Socialism and Democracy Schumpeter describes innovation: “The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumer’s goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates.” Raustiala and Sprigman argue that in the fashion industry “piracy substitutes for functional innovation” as described by Schumpeter: “piracy is the fashion industry’s equivalent of the new feature on a cell phone. It is a force that encourages a consumer to discard a perfectly serviceable garment and purchase the new, new thing” (1209). In other words, the fashion design innovations may not have a practical function, but nevertheless, they function in the same way that Schumpeter envisioned to propel the industry forward.

In contrast,  McGowan (2009) asserts that fashion designs are not functional innovation, and therefore cannot be true Schumpeterian innovation. McGowan asserts that Schumpeter would view new designs as “no more than different choices between existing commodities and, if unsupported by a change in real income, which they do not in themselves entail, create a situation to which industry can and will passively adapt itself.” He argues Schumpeter views new designs not as true innovation but rather “leaders of fashion…creating new forms and habits of private life.”

However, McGowan’s approach seems to ignore the complex nature of consumer purchasing decisions and fashion-forward consumers who demand new designs in order to be differentiated. Firms must innovate and create new (or new combinations of) designs in order to stay at the top of the cycle and anticipate these consumer demands each season. Powerful fashion houses, or the “leaders of fashion” as Schumpeter calls them, in order to maintain their power, which is derived from brand image (in the absence of IP laws), must innovate in order to stay at the top of the fashion cycle and to maintain their brand image; they must innovate in order to be considered a “fashion-forward” brand, and thus, stay on top as an elite fashion house. McGowan’s argument also raises the question of art as innovation: just because art has no “functional” purpose, does it cease to be innovative or useful to society? Clearly, the $200 billion industry in the United States is a testament to the real economic value of the art of fashion and consumer demand for this art.


McGowan, David. “Innovation and Liability for Contributory Copyright Infringement.”      Northwestern Journal of Technology and Intellectual Property Volume 8, Number 1 (Fall 2009): 4, 8.

Raustiala, Kal and Christopher Sprigman. “The Piracy Paradox Revisited.” Stanford Law Review Volume 61, Issue 5 (2009): 1201-1225.

Schumpeter, Joseph. Capitalism, Socialism and Democracy.