The economy is an incredibly complex web of transactions that are happening all around us, all the time. It is a great indicator of supply and demand and tells entrepreneurs what other entrepreneurs are doing. This can be shown through what resources entrepreneurs are buying, how much they are buying those resources for, and what they are using the resources to produce. All of this is critical information that indicates the direction the market is heading and gives some insight as to what entrepreneurs should do in response to market shifts. This ever-changing nature of the economy requires creativity, innovation, and adaptability from entrepreneurs if they want to have success. It is in the entrepreneur’s best interest to meet the needs of his consumers, as the market will reward him for doing so, which shows how an unhampered market is an overall good for society. To get to the point where the economy is functional, however, individuals have to work together to indirectly satisfy their wants through production, rather than attempting to satisfy them on their own.
In order to effectively satisfy the wants of others, it is important for individuals to specialize in a certain good or service, or group of goods or services. This is better for each individual and society as a whole. When people are able to commit themselves to making a single product, they 1) save time because they are able to focus on a single task, and 2) become much better at producing their goods because they repeat it all day every day. Dividing this labor allows so much more to be accomplished and sets a higher standard for product excellence, which lays the groundwork for a successful economic system. In his book, Bylund states:
“Taken together, we can see the immense productive power available through specialization and innovation, neither of which would be possible without voluntary exchange” (p. 60, 2016).
I like this quote because of what he said about voluntary exchange. It’s true, as I stated earlier, that specialization and innovation are important for production, but their power would diminish tremendously if not for voluntary exchange. An individual’s right to enter an exchange with whomever he/she sees fit is crucial. People specialize and innovate not only to improve society but to accrue wealth which they can in turn use in an exchange of their own. This goes to show how production always precedes consumption, and how voluntary exchange is necessary for either process.
Creative destruction is a unique phrase that I had never heard that I find to be quite profound. It perfectly encapsulates how the market is ever-changing through new innovation that pops up and renders old innovation obsolete. It’s a sort of “race to the top” but the top is nowhere in sight. A free market is driven by unhindered competition. Giving companies the opportunity to creatively destroy one another pushes society forward and benefits the consumer through better and cheaper products. Companies that innovate and meet the needs of the consumer will have success in the free market. Schumpeter states:
“Capitalism, then, is by nature a form or method of economic change and not only never is but never can be stationary” (Schumpeter, p. 82, 1962).
This quote is equally as profound to creative destruction in my eyes. Capitalism is a mechanism for economic growth and the entrepreneurs that participate are the vessels that push and pull the market in different ways in response to what others are doing. In that sense, capitalism can never be stationary because the very individuals that are influencing the markets and responding to market changes are never stationary. The minute an entrepreneur quits innovating he is passed by many of his peers.
Any time an individual commits resources to a certain product, there is a cost associated with what they could have earned if they were to have committed those resources to a different product. This is the opportunity cost and it often communicates to entrepreneurs the optimal direction to go in production. Of course it is much easier to see what product to create when the alternative products have a low opportunity cost, but resources that lend themselves to multiple outcomes with high opportunity costs are not necessarily a bad thing. Entrepreneurs may make the wrong decision as to which turns out to maximize profit, but having the flexibility to put resources into other options lends itself to adaptability. This increased optionality allows entrepreneurs to change with the market in real time and respond to market shifts (Bylund, p. 71, 2016). If a certain alternative product has a higher demand it may be valuable to pivot, even if production has already begun. This optionality is another way that individuals can affect the market just like the market can affect the people. The constant ebbs and flows of the economy present opportunities for entrepreneurs to take advantage of, and tell a story about production, scarcity, and demand on a daily basis.
Bylund, P. L. (2016). Chapter 4: Unbeatable, Imperfect Markets. In Seen, the unseen, and the unrealized: How regulations affect our everyday lives (pp. 47–72). essay, Lexington Books.
Schumpeter, J. A. (1962). Chapter VII: The Process of Creative Destruction. In Capitalism, socialism and democracy (pp. 81–86). essay, Harper Torchbooks, Harper & Row.
