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Source link: http://archive.mises.org/9913/creating-disequilibrium-and-benefiting-society/

Creating Disequilibrium, and Benefiting Society

May 7, 2009 by

It’s not just increases in production that create wealth but a radical reforming of the way production itself is done. Entrepreneurial innovations disrupt the unrealistic ideal of a stationary economy, writes Isaac Morehouse. 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. FULL ARTICLE

{ 19 comments }

Barry Loberfeld May 7, 2009 at 8:33 am

From “The Idiocy of ‘Smart Growth”:

Those on the left look at development the way their right-wing
counterparts look at immigration: It was fine before, but not anymore. Both
scramble to close the gates behind them — and to hell with those on the other
side. Incredibly, they imagine that they can freeze time or even turn back the
clock to a “more preferable” period (for them, that is). The fact is, property —
and freedom — will always attract new people, which means new development, which
in turn attracts more people. It is the history of human civilization, and it will
be the history of the human future. We cannot sacrifice that future to a
conception of “the environment” that, too obviously, signifies only all that is
not human.

READ THE ENTIRE ARTICLE.

Bogart May 7, 2009 at 9:44 am

From the Right: Close the borders, continue killing people in the Middle East. Build military machinery and the human machinery to support it. Steal money from inflation and give it to failed banks, old people, car companies, alternative energy providers etc.

From the Left: Close the borders less tightly, kill fewer folks in the Middle East, build slightly (Ever so slightly) less military machinery but make up for it by creating more human machinery to supporf it. Steal money from inflation and give it to banks, old people, car companies, alternative energy providers and buy out some of the aforementioned institutions.

All of this does not create stability, it creates chaos and destroys the only person on the side of goodness, justice and wealth creation: The entrepreneur.

cavalier973 May 7, 2009 at 9:44 am

This is the same sort of argument that George Gilder made in his book “The Spirit of Enterprise”, which I am currently reading. I would like to see a mises.org review of this (Gilder’s) book, but it’s really old, so I doubt they would take the trouble.

Arend May 7, 2009 at 9:47 am

Rhetorically I do not disagree with this article. From an economic theory standpoint I find the description of entrepreneurship as disrupting the economic order a bit inaccurate and fear that it can be used as an argument against it… so maybe I’m also disagreeing with the rhetoric after all…

Anyhow, there is a lot to learn from Schumpeter and entrepreneurship in the right sense (bearing uncertainty while aiming for improvement of oneself and therefor society as a whole), but not from the way Schumpeter used the concept to solve his Walrasian box of explaining equilibrium and disequilibrium states.

http://mises.org/journals/rae/pdf/R1_6.pdf

David Ch May 7, 2009 at 11:01 am

Im not sure of the point that Arend is trying to make, but the entrepreneur is the very definition of ‘disruption’. Not so much of the ‘economic order’ ( itself inherently dynamic), but of the economic status quo. The entrepreneurs role is innovation: to bring to market new products, or improvements on existing products, or at the very least more efficient ways of delivering existing products. All of these disrupt the status quo in so far as they force existing producers of existing products to either change or die.

Of course, if you are an investor or employee of the existing producer whose offering has been trumped by an innovative entrepreneur, you will regard this as a Bad Thing, and complain about ‘disruption of the economic order’. But if this was indeed universally regarded as a Bad Thing, we humans would still be banging rocks together, if we even got as far as coming down from the trees. The evidence is everywhere: All of the technology we take for granted around us today emerged at the expense of killing off what went before it. Does anyone today lament the demise of the Marchant calculating machine? The Remington typewriter? The telex machines that used to carry bank communications? These things were once their industry standards, pervading the economic order of the day. Had these things been suddenly magicked away, the world as we knew it would have ceased. But they all went the way of the horsedrawn carriage and Napier’s bones through the disruption of innovation.

It is almost certain that most of the lifeblood of the current economic order, everything that is produced and distributed, in all its diversity, is destined to be swept aside by better ways of meeting human needs in due course.

This process of change and evolution IS the economic order – a never-ending succession of shifts in the status quo. Innovation is inherently disruptive – you either surf the waves of disruption, or you let them drown you. No-one is exempt.

It is such a pity that mainstream ( neoclassical) microeconomics (which contains much in the detail detail that has merit, but which is packaged into an absurd whole), has such a hangup about ‘equilibrium’. It has misled generations of unsuspecting students into completely missing the point.

The fact is that markets are NEVER in equilibrium. Every single transaction entered into, in their untold millions every day, proves it, because if they were in equilibrium, all trade would by definition have ceased. Every act of production, every trade transaction,…. come to that, every conscious human action, is a response to a state of DISequilibrium, which in turn generates another state of disequilibrium to which others are moved to respond in turn.

Michael A. Clem May 7, 2009 at 11:37 am

I don’t disagree with the thrust of this article, but perhaps just semantically. “Invention” is not just some new technological development (although that is a common use of the term), but any innovation in any sense, including the entreprenurial functions listed in the article. Ford’s assembly line was an invention that reorganized the assembly of vehicles, and which led to increased productivity for his workers.
Also, “entrepreneur” is not necessarily a person, but a function that people of various positions and titles can take on at different times, although it’s possible for some people to be primarily entrepreneurs, and something else secondarily. The same can be said for “capitalist”.

Russ May 7, 2009 at 12:39 pm

Barry Loberfeld wrote: “Those on the left look at development the way their right-wing
counterparts look at immigration: It was fine before, but not anymore.”

Yes, let’s make sure we hold to the libertarian dogma of open borders, no matter what the consequence. *eyes rolling*

One difference between old waves of immigration and new is that the immigrants in the early 1900′s & before didn’t have welfare socialism to lean on. Although I certainly don’t worship Milton Friedman, he was right about one thing: You can have open borders, or you can have a welfare state. Having both is sheer folly, and last time I checked, the welfare state isn’t going away.

Also, the new (legal) immigrants vote predominantly Democratic. Obama wouldn’t have been elected if it weren’t for Latinos and Asians, who were for Obama 67% & 62%, respectively.

To be blunt, unless you think more socialism is a good thing, being for open borders is idiotic.

BigDen May 7, 2009 at 12:52 pm

It is true:

“Those on the left look at development the way their right-wing
counterparts look at immigration: It was fine before, but not anymore.”

Thanks!!!

Alan Smith May 7, 2009 at 1:04 pm

Russ,

Two wrongs don’t make a right. We’ll never get rid of government welfare by restricting immigration. Instead, we should force them to admit that welfare is not a “right”, if it can be restricted, and at the very least, restrict welfare from non-citizens. As a first step.

Enjoy Every Sandwich May 7, 2009 at 2:11 pm

In today’s political climate I can easily imagine some people trying to hold back the automobile for the sake of the buggy industry, particularly if its workers are union members.

I don’t know much about the history of the auto but I dimly recall reading that in the early days auto owners would be greeted with the catcall “get a horse”. Or is that a Hollywood fabrication? Could be, but it wouldn’t surprise me if there weren’t some opposition to the auto back in the day.

Are there any reliable history books that address this?

Bruce Koerber May 7, 2009 at 5:06 pm

Classical Liberalism Protection
Thursday, May 7, 2009

Schumpeter’s Creative Destruction Forgets About Praxeology.

We’re back to the question of “Which came first the chicken or the egg?” Since both the chicken and the egg exist neither can be denied but didn’t one come first?

Since entrepreneurship exists and since disequilibrium exists neither can be denied. It is possible that disequilibrium was first discovered by the entrepreneur and it is also possible that the entrepreneur’s action caused disequilibrium.

However, and perhaps Schumpeter went astray at this point, the consumer is sovereign. This is the key to understanding which comes first. All value ultimately comes from subjective valuation and all things have value because people value things.

What do you call an entrepreneurial action that causes disequilibrium but that nobody values or wants? First of all it is wasteful so in that sense it is destructive and it may even be ‘creative’ but it is the antithesis of economic.

As you can see, following the erroneous pathway of ‘creative destruction’ as the cause in a cause and effect analysis leads to something less than economic analysis. Schumpeter was ‘creative’ but he left praxeology behind and lost his way.

Horsing Around May 7, 2009 at 5:17 pm

“Can you imagine halting the progress of the automobile in order to preserve buggy makers?”

Yes, I can. If this idea gets to the right ears in government, I am sure there will be an initiative to bring back the horse and buggy as a green alternative.

General motors is going to need something new to offer the market under government ownership and UAW management. Since that that incestuous relationship is already full of what comes out of the horses’ back end, it is not much of a leap to get the whole horse and buggy thing going again.

But seriously, think about the benefits. Fantastic reduction in road fatalities. Even drunk driving would be safer since the horse could ignore the driver. Less noise and air pollution. Millions of new jobs for breeders, blacksmiths, horse traders. And used car salesmen would become the new buggy whip makers on the scrap heap of history. And for all you gardeners out there–unlimited mountains of manure courtesy of Uncle Sam!

What is not to like?

B. Ranson May 7, 2009 at 9:11 pm

I agree with Arend and Mr. Clem.

Emphasis on the destructive element of entrepreneurship is misleading. Entrepreneurs change the structure of production to better serve consumers. They earn profits by using existing factors of production in ways which are more value productive than previous methods. “Destruction” is not a particularly accurate term for of the improvements in efficiency which entrepreneurs bring about.

David Ch May 8, 2009 at 3:19 am

Bruce Koerber said: ‘What do you call an entrepreneurial action that causes disequilibrium but that nobody values or wants?’

A political action, surely? An entrepreneurial action that nobody values or wants will cause no more disruption beyond the loss of the investor’s capital. If nobody wants it, its hardly going to destroy anyhting geared to deliver what people currently DO want. Unless the action is implemented by force, in which case it is not entrepreneurial but ordinary plunder of the statist or criminal kind.

B Ranson does however make a good point: the ‘destruction’ or, rather, ‘disruption’ is not a first-order thing – it is not the intent of entrepreneurship – it is the residue of creation, in so far the new is valued by consumers more than the old it replaced. That doesn’t make the destruction any less real though.

In this respect it reflects the same error as the tired old (neoclassical)fallacy that ‘competition’ is THE distinguishing feature of the free market. ( whether regarded as a virtue by the right, or a vice by the left its still a fallacy). But it isn’t – the free market is primarily characterised by CO-OPERATION, and the competrition that results is the residual, second order effect of the consumer choosing to co-operate with seller A in preference to seller B. But again, that competition remains a reality – it just got unduly promoted to being regarded as a driver rather than a residue.

Barry Loberfeld May 8, 2009 at 8:37 am

“Can you imagine halting the progress of the automobile in order to preserve buggy makers?”

From “A Race to the Bottom”:

And the union workers in the other Central American countries, who are losing their jobs to the Ecuadorians—exactly what do they gain from all this? The answer: employment in those fields where they can better contribute to what will thus be a more productive economy. When the blacksmith “lost his job” to the automobile, he didn’t go without work for the rest of his life. Instead of working in a smithy, he now worked in Mr. Ford’s factory—and lived in a world where cars replaced horses. Unemployment is not eternal. No one benefits from the idleness of others.

READ THE ENTIRE ARTICLE.

gene May 11, 2009 at 12:13 pm

Wouldn’t this “disruption” or “destruction” that is said to be caused by the work of the entreprenuer, actually be the result of a market that isn’t totally free?

What negative effect could a new and better idea have in a free system?

If a carpenter becomes aware of a new framing method, how does that hurt him? A cleaner way to produce energy shouldn’t hurt anyone unless there is some market restriction or inefficiency or monopoly that inhibits positive change?

It seems whether we view the “entreprenuer” from the left or the right has more to do with how we view the market.

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