Creative Destruction: A By-Product of Entrepreneurship

Key excerpt from “A World Without Entrepreneurs”


Reading Per Bylund’s interview ‘How Entrepreneurs Build the World’ inspired a thought: what would the world be like without entrepreneurs? Given that entrepreneurs are central to the market system, a world without entrepreneurs—or with only a few of them—would be a grim situation. Without entrepreneurs, we’d see few new products, little innovation, and few gains in the standard of living.
And without entrepreneurs, we would still be using archaic technology and services. The consumer would have no expectation of regularly find new and improved products available to him. Innovation might exist in a scientific sense, but the benefits would not be reaped in the marketplace, because no entrepreneurs would seek to find a way to make scientific innovations profitable.
Consider how our world was built by entrepreneurs. Most of what we purchase and use daily started in the minds of entrepreneurs, with their energy and capital. They thought of consumers’ needs and wants, and brought products into existence with continually more reasonable and affordable prices, making these products available to almost all people.

My Two or Three Cents

Entrepreneurs are vital to the marketplace. A successful enterprise has the ability to improve the lives of many. When a successful firm, one who makes a profit, improves the lives of people, it’s not just about the products that it creates. Consider all the ancillary firms and businesses that are spawned from a strong business. Other firms can act as suppliers to the main enterprise, more jobs are created, the local financial institutions are able to take in the deposits from the business’ transactions, and on and on. This is just a fraction of the benefit of that the successful business owner brings to society. The successful business owner is able to gather up the factors of production(land, labor, and capital), generate a product/service that individuals desire, and make a profit. Note: The profit is simply a return on the capital investment into the enterprise. He pours his blood, sweat, and tears into the enterprise, and takes on the entire risk of the success or failure of the business. He is also compensated last, as expenditures, wages, and everything else is paid before him. Of course, we benefit from the innovation that the business owner brings to the marketplace. Apple, SAS Institute, WalMart, Target, Amazon, and etc have developed products and systems that make our lives more efficient, which enriches our lives. This benefit is difficult to even quantify.

Consider the contrast: The Unsuccessful business owner. The marketplace, on average, does not accept the goods being provided by this enterprise. Over time, this owner loses money, which does not give him a return on his initial investment. His inability to optimize the factors of production is one of the reasons he isn’t successful. It is not the only reason. Since humans are not omniscient, the decision to open up a business is highly speculative and risky. Unforeseen Macroeconomic issues could wipe out a business, or other things that are out of the business owner’s control. Nonetheless, the collapse of the non efficient business does benefit society. It allows space for another person to utilize the factors of production and attempt at building a successful business. This is what the legendary economist Joseph Schumpeter labels as “creative destruction”.

This “creative destruction” is necessary. It is needed to ensure that the marketplace optimizes the available resources. A business that isn’t successful hinders this process, and the marketplace is impaired by this.

Read the article here: https://mises.org/wire/world-without-entrepreneurs

Turo: The Peer to Peer Car Rental Platform Angers Traditional Car Rental Firms

Turo: A magnificent invention spawned out of the creative process of voluntary exchange. It’s concept is simple: It allows individuals car owners to rent out their vehicles to others seeking to rent their cars for a period of time. This is a win/win for those involved: The owner of the vehicle earns cash from his car, and the renter can use the car to fulfill their needs. Sounds perfect? Not so quite..if you asked the traditional car companies.

Turo has raised the awareness of the mainstream rental car companies. The reason is quite simple: Turo is able to provide a similar service at a lower cost. Note: Cost does not always mean price. It could be more convenient. And that is subjective to the people involved in the transaction.

Having lower costs can come from increased competition. This increased competition benefits consumers, as firms seek to become more efficient, and attempt to provide a higher quality product at a lower cost. Still sounds great? For the consumers and Turo..YES! Avis et al…NO.

The issue with traditional rental car companies: They feel they can not compete effectively with the myriad of regulations they must contend with to stay in business, yet Turo’s car owners do not have to contend with this regulations. So, is it the fact Turo is competitive in the marketplace, or is it that the Government regulations are highly costly? I say the latter.

If I were a betting man, and I’m not by the way, the traditional car companies will lobby to make Turo have the same regulations as the main line firms. This sort of economic madness has been seen with other similar scenarios. It would make more economic sense to have the regulations reduced or removed! Oh no..to the traditional firms, the status quo is benefiting them. It also demonstrates that the economic cost of government regulation hurts smaller businesses and consumers. Allowing the creativity and ingenuity to prosper can produce more firms like Turo, and consumers will benefit from having reduced regulations and economic costs.

More thoughts on the concept of the Trade Deficit

Introduction

Mainstream commentators and analysts taut how the notion of having a trade deficit hurts the economy of the nation receiving the imports. They cite stats and these stats are never given any explanation or rational support. Next, the presuppose that the stats, can provide axiomatic proof that trade deficits are harmful for the economy.  As I have previously stated, the notion of a  trade deficit is fallacious. The notion of free trade benefits all parties involved, as it is a net benefit for the participants in the trade.

Empirical Evidence is misleading
In the attempt to transfer Economcs into a “hard” science, e.g. physics, chemistry, etc, many attempt to employee stats as empirical proof to uncover new Econ “laws”.  While these attempts should be applauded for an intrepid effort, the fact still reminds that economics is not a “hard” science, and it’s laws are uncovered via rational analysis, as it is done in geometry. Empirical evidence is done ex post facto(after the fact).
A Priori vs A posteriori analysis
Many mistakenly state that economics is a science that is developed using math models, stats and calculus. Of course, these tools are vital in assisting economists in understanding historical outcomes, but the science is developed from a priori analysis. An a priori analysis results in the development of axioms that are universally true and necessary. These things are true, prior to our understanding, cognition and existence. On the other hand, an a posteriori analysis is based upon our personal experience. With the notion of demonstrating the benefits, or better still, the flaws of Free trade, empirical evidence falls short. Empirical evidence must be structured in such a way that it is consistent of the a priori analysis in order for that proof to be relevant.  Critics of free trade use empirical evidence to claim the flaws of free trade. As this part demonstrates, this critique by those critics of free trade falls short.

Free Trade is a Benefit

Free Trade is determined as a benefit, not based on a posteriori, or empirical evidence, is determined by a priori analysis. It is a benefit for both parties involved in the trade. As previously stated on this blog, free trade action is rooted in the law of marginal utility. Both parties improve based on this unequal exchange of value. The accounting of the exchange is equal, despite the false claims by the critics of free trade, but the items traded have varying values respective to the two parties’ individual utility ranking of goods. However, since humans are constantly seeking to serve their self interest, both parties are trading for their benefit. It is not a zero sum game, or to wit: trade does not comprise a winner vs a loser in the exchange.

Conclusion

Critics of Free Trade are incorrect in stating that one party does not benefit from trade. This can be proven with a priori analysis. While using empirical evidence is helpful, it is limited in its use to debunk the benefits of trade. Trade, at its core, is between two parties, as both parties voluntarily seek to improve their situation with the end results of the trade. Placing restrictions, barriers, and additional regulation on that exchange, simply makes it more difficult for both parties to win. In short, trade is a win/win for all parties involved.