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.

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