ENTR 301: Principled Entrepreneurship & The Free Enterprise System
Russell S. Sobel, Ph.D. Professor of Economics and Entrepreneurship Baker School of Business The Citadel ENTR 301 Outline Level
Section II: Capitalism & The Free Market: Understanding the Environment in which Entrepreneurship Takes Place
• Part 5: The Austrian View of Entrepreneurship: Discovery and Creative Destruction Austrian View of Entrepreneurship
Israel Kirzner Joseph Schumpeter F.A. Hayek
Austrians focus on the market as a continuous process of discovery and change. Kirzner: Discovery & Profit
An entrepreneur is someone who discovers previously overlooked or unknown profit opportunities
Pure ‘discovery’ cannot be subject to systematic search.
Discovery is incentivized by profit
Joseph Schumpeter’s Entrepreneur
Aspects He Stressed:
New Combinations of Resources • Profit & Loss Directed ‘Creative Destruction’ You can learn more about him and his ideas in this free book with videos: [https://www.essentialscholars.org/ Schumpeter] New Combinations of Resources
How many ways to make a pizza?
From 50 ingredients (pick 3) there are 19,600 possible different pizzas! New Combinations of Resources
The Hawaiian Pizza (ham, pineapple, cheese)
Invented by Sam Panopoulos in Ontario, Canada (1962)
Named it Hawaiian pizza after the brand of canned pineapple he used Profits & Losses
Not all combinations are ‘good’
Capitalism critically relies on the profit and loss system to direct this process
Losses and going out of business frees up resources for others to experiment Joseph Schumpeter’s Creative Destruction
Capitalism...is by nature a method of economic change... the new goods, the new methods of production or transportation ... that revolutionize the economic structure from within, incessantly destroying the old one, incessantly creating a new one.
This process of Creative Destruction is the essential fact about capitalism.
From Capitalism, Socialism and Democracy (1942)
Creative Destruction
An economy undergoes continuous change – some industries fail, others are born
According to Schumpeter this creative destruction is our main form of progress
A healthy economy will have a lot of failures!
Creative Destruction CREATES entrepreneurial opportunities Complements to new things Redeploy unemployed resources
Creative Destruction’s Opponents Contestable Markets
Schumpeter Quote (Capitalism, Socialism, & Democracy): The first thing to go is the traditional conception of the modus operandi of competition... in capitalist reality as distinguished from its textbook picture, it is not that type of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization... which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives....It is hardly necessary to point out that competition of the kind we now have in mind acts not only when in being but also when it is merely an ever-present threat. It disciplines before it attacks. The businessman feels himself to be in a competitive situation even if he is alone in his field...
Markets don’t need to be “competitive” but rather “contestable”
Big firms can replace big firms, the key is the challenge. Contrasting Kirzner & Schumpeter Kirzner’s view of entrepreneurship was more of it being an equilibrating force (discovering and acting on profit opportunities and eliminating them)
Schumpeter’s view was more of it being a disruptive, disequilibrating force
Really some of both (automobile/cell phone means market for accessories) Schumpeter Videos:
Entrepreneurship / Profit & Loss https://youtu.be/RqEetboK1s4
Contestable Markets: https://youtu.be/hTs41Juc6_0 Hayek: Competition as a Discovery Procedure We have already covered his views on Prices & Knowledge
Competition as a discovery procedure F.A. Hayek’s Discovery (Quote)
… wherever we make use of competition, this can only be justified by our not knowing the essential circumstances….
In sporting events, examinations, the awarding of government contracts, or the bestowal of prizes for poems, not to mention science, it would be patently absurd to sponsor a contest if we knew in advance who the winner would be.
I wish now to consider competition systematically as a procedure for discovering facts which, if the procedure did not exist, would remain unknown or at least would not be used. My friend Bubba…..