The Entrepreneur as Creative Destroyer
The Austrian economist Joseph Schumpeter identified another important function of entrepreneurship: creative destruction. Schumpeter focused on the creative technologies that market systems tended to create—technologies that revolutionized the way the world works. When those revolutions happened, fortunes would be made, but others’ livelihoods would be destroyed. The invention of the automobile put a whole line of industry, blacksmiths, effectively out of business. These innovations are continuous, and are seemingly being created at an increasing rate. Moore’s law has computer processing speeds doubling every two years, and information is flowing phenomenally throughout the world, courtesy of the Internet (including the gospel!). As economist Deirdre McCloskey says, “Efficiency is not the chief merit of a market economy: innovation is.”
This rapid rate of change is both creative and destructive, according to Schumpeter. It is only a matter of a few years when a big business of the not-so-distant past, Blockbuster Video, will be completely out of business as online downloads and Netflix are creatively destroying them. Barnes and Noble (and most retail bookstores) are similarly on borrowed time as digital books are increasingly taking market share. While good for the consumer, producers and their employees are continually at the mercy of the changing tastes of consumers. The message is clear: continually innovate, or you too will be creatively destroyed!
Serve the consumer well, however, by presciently foreseeing their future desires and changing your business as necessary, and you will be rewarded! Apple Computer is probably today’s best example of a producer that continually redefines itself and its products in anticipation of consumer needs. From its original computers to creating the iPod, the iPhone, and the iPad, Apple continually innovates to meet anticipated consumer demand. But markets continue to wonder, can they keep it up?
We can see the benefits from this creative destruction in the PPF shown in Figure 9.2. With creative destruction, the entrepreneur is shifting the entire PPF curve outward— she is creating something new and adding to the total stock of production possibilities. Yes, the destruction part is taking production possibilities away, but only if the new possibilities are more highly valued by consumers. Notice that this is different from the Kirznerian alert arbitrageur, who may simply be rearranging productive assets to make the existing production more efficient. This entrepreneurship is creative in nature, although hopefully efficient as well.
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