Introduction
Joseph Schumpeter was a economist, former finance minister of German-Austria, and Harvard professor. Dr. Russell Sobel is lecturing about his book ‘The Essential Joseph Schumpeter’. This book has four main ideas, which are: How do we define what entrepreneurship is? What do we know about discovery innovation? What is the role of profit and loss system? What about his most famous idea ‘creative destruction’?
How to define entrepreneurship
Entrepreneurship is harder to define than most people think. Dr. Sobel uses the example of Elon Musk, simply because he is investing in the electric car business and in turn creates value for consumers. On the other hand, there are many different types of business people that may be considered entrepreneurs and may not, depending on what people think. There are many types of entrepreneurs that most people do not realize exist. To begin, military entrepreneurs create physical protection in our country. Social entrepreneurs create nonprofit organizations. Culinary entrepreneurs change food organizations. Academic entrepreneurs create value in society for learning. Sports entrepreneurs exist as well; for example, the creation of the forward pass is an example of entrepreneurship in sports. Furthermore, who is to decide whether or not someone is an entrepreneur and how do they decide that? There are also political and legal entrepreneurs who create value in politics and in the laws of society. Dr. Sobel believes there are three ways to define entrepreneurship. First off, there is a broad definition that says “an entrepreneur is an ‘agent of change’”. Second, the traditional definition from a textbook says “An entrepreneur is someone who organizes, manages, and assumes the risks of a business or enterprise.” Lastly, the narrow definition of this is “an innovator who introduces new, often disruptive, combinations of resources (goods, services, methods of production, etc.) into the marketplace embodied in a new for-profit business venture they control and for which they have secure funding”.
Entrepreneurial Discovery and Innovation
NYU economist, Israel Kirzner, expanded on Schumpeter’s ideas. He said that “an entrepreneur is someone who discovers previously overlooked or unknown profit opportunities”. Kirzner also said that discovery is incentivized by profit, meaning the larger the reward, the larger the incentive is for people to want to come up with ideas and discover something new. This is why it’s so important for entrepreneurs to make money, because they are our answer to innovation in the world. Without entrepreneurs, there would be no developments, creations, and innovation.
Profit and Loss System
The difference between invention vs. innovation is simply whether or not you can market something and make profit from it. Entrepreneurs create different combinations between “different ingredients” essentially. For example, there was someone who thought of a way to turn chicken manure into fuel, but it was going to take $500 to turn chicken manure into one gallon of fuel. No one is going to pay for this, therefore it is not profitable! Capitalism relies on profits and losses to direct entrepreneurship and discovery. Losses and businesses shutting down because of the lack of consumers are another way for others to experiment and innovate. Are enough people buying the product, item, etc. to cover the costs? If not, it is not worth spending time, energy, and money into!
Creative Destruction
“Capitalism is by nature a method of economic change-the new goods, new methods of production and transportation… that revolutionize the economic structure from within, incessantly destroying the old one, incessantly creating a new one.”
This idea of Schumpeter is essentially just businesses dying off and new, better business taking their places, which is like innovation. This can only be beneficial for consumers because a better thing is always coming along creating lots of prosperity and economic growth. Big businesses are essential for consumers because they are always threatened to be replaced, therefore they are always trying to come out with bigger and better products and keep their products as low as possible. This process of creative destruction is the essential fact about capitalism. The rate of destruction is increasing as time goes on; furthermore, large businesses last around ten years today, whereas they used to last around 25-30 years.
F.A Hayek’s Discovery
The marketplace is the only thing that will tell whether an idea, product, or innovation is going to be successful. No one will be able to tell prior to experimenting with it by placing it into the market. You should just go for it if you have an idea.
My Opinion
I think entrepreneurship is a difficult thing to define exactly when hearing what Schumpeter’s thoughts were on it. Whose job is it to say whether someone is an entrepreneur? They may not be ideal entrepreneurs like Jeff Bezos or Bill Gates, but that doesn’t mean they aren’t one. The idea of entrepreneurial discovery and innovation basically says if someone can create profit in a certain marketplace gap, then they can be considered an entrepreneur. This may be a very popular thing like Amazon, or it may be or a local artist in a town.
As for the profit and loss system, it makes total sense to me that an idea is only worth studying depending on the prices that it takes to develop it and if they are feasible for the consumer.
I believe that Creative Destruction is overall a good idea. The only way to ensure that our market will continue to grow, get better, and continue innovations is by essentially threatening the current businesses that are alive. This will in turn make them want to innovate new things all of the time, keep their prices low, and try to please the consumers.
‘Image Source’
“Joseph A. Schumpeter Quote.” A, www.azquotes.com/quote/725299#google_vignette. Accessed 26 Feb. 2025.
