No Free Lunch: Economics for A Fallen World

9 | P31W: Enter the Entrepreneur!

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.

Creative Destruction Shifts the PPF
Figure 9.2, Creative Destruction Shifts the PPF. When an entrepreneur creates a new product or innovation, this has the effect of shifting the PPF outward.

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2 total remarks have been added

  1. Jeff Haymond | Nov 11, 2016 12:36 pm

    Nathaniel Steel and corn are just illustrative of two possibilities for production in an economy. It may be helpful to refer back to chapter 2 in the section on gains from trade. The point of a PPF is simply to show that to produce more of one good requires the release of resources that produce an alternative good. So to produce more steel (or any other good we could think of) would require giving up corn. Or you could think of one axis having steel, and the other axis representing "all other goods". The point is not the good itself, but rather that producing any particular good comes at a cost of other goods that could have been produced using the same resources. In this case, entrepreneurship allows more of both goods to be produced.
  2. Nathaniel Gilbert | Jun 15, 2016 01:30 am

    Can you please give an explanation as to why steel and corn are used in figure 9.2 above?