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Creating Disequilibrium, and Benefiting Society

Mises Daily: Thursday, May 07, 2009 by

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'Print Gallery' by M.C. Escher
M.C. Escher (1898–1972)
"Print Gallery" (1956)

There is no denying that our economy is undergoing dramatic changes. That brings not just difficulty, but also opportunity for entrepreneurs. In fact, the "creative destruction" of the market is part of what drives economic growth.

Putting aside the causes of our current economic troubles (except to say free markets are not the culprit), we can't forget that, though massive bubbles are not necessary, markets are by nature dynamic even in the most stable of times. This dynamism is not an evil to be avoided at all costs but the very thing that makes free economies so productive.

Classical economists often treated economic growth as a mechanistic operation that happened at a stable rate as a result of unchanging levels of investment and production — as if economies simply grew on their own as long as production was steady and inputs were not disrupted. The problem with this view is that, quite simply, the real world doesn't work that way. In 1911, economist Joseph Schumpeter's Theory of Economic Development radically changed this view, and his insights are still relevant today.

Schumpeter stressed the role of the entrepreneur in economic growth and argued that, far from a static maintenance of equilibrium in production, it was the entrepreneurial ability to cause disequilibrium that created wealth. The constant innovation of these economic actors shakes the economy up, breaking down old methods and building up newer and better ones.

It's not just increases in production that create wealth but a radical reforming of the way production itself is done. Think Henry Ford's assembly line. Such entrepreneurial innovations disrupt the unrealistic ideal of a stationary economy. They do destroy the old order — like the classic example of buggy makers losing their jobs when the automobile took hold — but they cause growth because what they create is more valuable than what they replace. Can you imagine halting the progress of the automobile in order to preserve buggy makers?

Schumpeter argued that the role of the entrepreneur was different from that of the inventor, manager, laborer, or capitalist. Entrepreneurs need not be wealthy or even especially intelligent. They may be all or some of these things, but that's not what makes them entrepreneurs. Schumpeter said the entrepreneur was the person who creates new combinations in production.

The creation of a new good or service — a new way to produce the same good or service, a new market for the good or service, a new source of supply, a new organization of the industry — these are the entrepreneurial functions. Such innovation does not necessarily require new invention, just a different utilization of available knowledge and technology.

As Schumpeter said in a 1928 edition of the Economic Journal,

"[I]t is not the knowledge that matters, but the successful solution of the task … of putting an untried method into practice."

The entrepreneur, by seeing and acting on different combinations of existing knowledge, products, and services, disrupts the economic order and creates growth. There is evidence of this "creative destruction" all around us: every year millions of jobs are created and destroyed, yet the overall long-term trend is continued economic growth.

Finally a shirt to fight back!

The growth could not happen without both creation and destruction; it is the driver of growth, not a problem to be solved. If the economy were static — if jobs were never lost, prices never shifted up or down, investments never enjoyed large profits or major losses — we would not live in a stable utopia but a stagnant subsistence economy.

Don't be afraid to disrupt the economy. Look for ways that things can be done differently — goods, services, and production methods that can be rearranged, new technologies that can be better used. Right now, as the economy reshuffles, there are more opportunities to generate change than ever — the kind of dynamic change that we need to grow out of this slump.

Don't just sit there, create some disequilibrium!