Introduction
This week’s assigned reading is a speech by Dr. Russell Sobel, which discusses creative destruction and how discoveries from entrepreneurs shape the world. His speech covers fundamental ideas in economics and entrepreneurship.
What is Entrepreneurship?
He begins by defining what entrepreneurship is. Some argue that a business owner is an entrepreneur, while others claim that entrepreneurs are innovators. Sobel highlights that entrepreneurship can take many forms, including non-business cases such as military, social, culinary, and academic entrepreneurship. He distills the concept into three definitions. The first is the narrow definition, which describes an entrepreneur as an innovator who introduces new, sometimes disruptive, goods, services, or methods of production into a marketplace through a new for-profit business venture they control. The second is the traditional definition, which defines an entrepreneur as someone who organizes, manages, and assumes the risks of a business or enterprise. The final definition, which Sobel favors, is the broad definition — an entrepreneur as an agent of change. I also agree with the final definition as it applies the role of the entrepreneur to more than just business owners.
Discovery and Profit
Sobel references economist Israel Kirzner’s idea that entrepreneurs are those who discover previously overlooked or unknown profit opportunities. He emphasizes that discovery is incentivized by profit, supporting this claim with a case study where participants were rewarded at varying prize amounts to carry water across a room. The higher the reward, the more participants devised winning solutions.
Invention vs Innovation
Sobel differentiates between invention and innovation. Inventions are new ideas, while innovations are new ideas that enter the market and become profitable. He illustrates this with the example of James Spangler, the inventor of the vacuum cleaner, who sold his patent to his cousin. According to Sobel, Spangler is the innovator, not his cousin. Sobel also mentions Joseph Schumpeter’s concept that entrepreneurs experiment with combinations of resources to create new products.
Profit and Loss
The profit and loss system determines whether a product is innovative. This system fuels creative destruction, a concept by Schumpeter that describes how economic progress occurs as new businesses replace old ones. Sobel uses Netflix replacing Blockbuster and the iPhone destroying the digital camera industry as examples. He argues that while creative destruction displaces jobs in the short term, it ultimately improves society and the economy.
Creative Destruction's Opposition
However, creative destruction has its opponents, particularly those who lose jobs due to innovation. Sobel compares this to horse-drawn carriage companies opposing the rise of automobiles. While the transition may cause hardship for some, he argues that resisting innovation would ultimately hinder progress. He insists that the continuation of creative destruction is essential for long-term societal progress.
Contestable Markets
Sobel introduces the idea of contestable markets — markets that don't need to be competitive but must be open to competition with low barriers to entry. He explains the innovator’s dilemma, where disruptive innovations often come from small, new firms. This dilemma highlights the importance of maintaining low barriers to entry as it allows smaller businesses to introduce these groundbreaking ideas. An example is a beer siphon company started by a college dropout. He also notes that innovation accumulates over time, pointing out that luxury cars from 50 years ago are less safe and efficient than today’s standard models. This example shows the importance of how innovations accumulate over time which leads to improving people’s quality of life.
Market Competition
Sobel concludes by emphasizing that market competition is the only way to determine what works. He cites how predictions about home computers and touchscreen phones were proven wrong by market forces. He also shares the story of a friend who became a leading wheelchair accessibility house renovator by accident. Finally, Sobel highlights that knowledge is embedded in new discoveries, continually shaping the world. His perspective encourages us to embrace change rather than fear it, recognizing that innovation is essential for long-term societal advancement.
Conclusion
Dr. Russell Sobel’s speech presents a compelling exploration of how entrepreneurship drives progress through innovation and creative destruction. I agree with his broad definition of entrepreneurs acting as agents of change. This highlights the transformative role people play across various sectors including not strictly business ventures. Sobel’s emphasis on discovery as the catalyst for innovation aligns with the idea that profit incentives push individuals to find overlooked opportunities which ultimately improves markets and daily life. I also agree that although the short-term consequences of creative destruction may be harsh, the innovations that result often pave the way for long-term economic growth. Additionally, I agree that contestable markets and the innovator’s dilemma further reinforce that competition and open markets are essential for fostering new ideas. Overall Sobel’s speech highlights how entrepreneurship continually reshapes the world, despite resistance from those who benefit from the status quo.