Creative Destruction, Entrepreneurship, & Discovery Russell S. Sobel, Ph.D. Professor of Economics and Entrepreneurship Baker School of Business The Citadel

What is Entrepreneurship? Harder than you might think…. An inventor in an existing company? A Subway franchise owner? What about non-business cases like..

Military Entrepreneurship? To This: From This:

Social Entrepreneurship?

Political or Legal Entrepreneurship? Gerrymandering – Gov. Elbridge Gerry (1812) Illinois NC

Possible Definitions? Traditional (narrow) definition: An entrepreneur is someone who organizes, manages, and assumes the risks of a business or enterprise. Broader definition: An entrepreneur is an agent of change.

Allocation of Entrepreneurial Talent Entrepreneurial people are everywhere The relative “rates of return” allocates this talent across industries and between “productive” and “unproductive” activities

Israel Kirzner Joseph Schumpeter F.A. Hayek

Kirzner: Discovery & Profit An entrepreneur is someone who discovers previously overlooked or unknown profit opportunities Discovery is incentivized by profit

Joseph Schumpeter’s Entrepreneur Aspects He Stressed: Innovation New Combinations of Resources Profit & Loss Directed ‘Creative Destruction’

Invention vs. Innovation

New Combinations of Resources How many ways to make a pizza?

New Combinations of Resources If you had 20 ingredients to choose from, and could only pick three… 1,140 different possible pizzas! From 50 ingredients (pick 3) there are 19,600 possible different pizzas!

New Combinations of Resources The Hawaiian Pizza Sam Panopoulos, 1962 Ontario, Canada Named it Hawaiian pizza after the brand of canned pineapple 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 Shumpeter this creative destruction is our main form of progress Creative Destruction CREATES entrepreneurial opportunities Complements to new things Redeploy unemployed resources

Why No Union Pacific Airlines? The Innovator’s Dilemma (Clayton Christensen) incremental vs disruptive innovation New small firms vs large existing firms

Why No Union Pacific Airlines? Royal Sims a concrete producer from Utah (Terex)

Josh Springer, college student invented this

Creative Destruction’s Opponents

Hayek: Competition, Prices, Knowledge Competition as a discovery procedure Knowledge Prices

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…..

Ideas matter… but sometimes prices matter more Eggs at Easter P ↑ 20¢ / doz Q ↑ +50m / doz

The Mysterious McRib

The McRib & Prices

Thank You / Q&A Russell S. Sobel, Ph.D. Professor of Economics and Entrepreneurship Baker School of Business The Citadel