Antecedents to Economic Growth & Prosperity
Unbeatable, Imperfect Markets
In chapter 4 of Bylund’s book, he furthers his discussion of production and how it effects the market, as well as specialization and opportunity costs to maximize profits and production.
First, production can be undertaken with the intention of making possible immediate and personal consumption; it is, in essence, the means by which individuals manage to survive in a world that doesn’t exist solely for their own benefit (Bylund, 2016, p. 47).
He begins this section with this repeated point that he tries to get across in each chapter. We produce in order to consume because without production, we have no means of getting the things we need or want due to not having the funds necessary to receive them. This continues into his next point about how we work more efficiently when there are others there to help with production rather than doing it ourselves. Bylund (2016, pp. 47-48) uses an example of Crusoe, a shipwrecked character who must survive by finding resources. He spends every waking minute hunting and producing to stay alive, until Friday comes along and is able to assist him. We see this instance happen every day. One thing may take us hours, or even days, to complete alone, but with the help of someone else, we are able to do it twice as fast. When we divide our tasks with someone, we can efficiently maximize our time and resources because we are not multi-tasking. Bylund (2016, p. 50) mentions a study that confirmed multi-tasking’s negative effect on productivity and effectiveness. I agree that multi-tasking is not an efficient way of doing things, yet I still do it because I somehow still believe that it helps me to be more efficient with my time. However, when we do this, we are relying on our brain to remember different things at one time, which can slow us down which thing we were supposed to do for which task. When we specialize our tasks, we only need to remember and focus on one thing at a time and, therefore allows us to work faster and more efficiently when everyone is assigned a role. However, this is only possible when the product and business is valuable to others because if not, then production is not worth the time and resources put into it if it is not profitable. The next idea that Bylund mentions is alienation (2016, p. 56). One quote that stuck out to me is,
…the connection is obvious: a satisfaction in the sense of “I produced this” can be felt with respect to the very thing produced (Bylund, 2016, p. 56).
As an entrepreneur, it is important to feel a connection to your product because you are the one who put in the effort to create something to bring value to others. If your product does not bring you joy or a sense of accomplishment, then why are you spending your time and hard-earned resources doing something you do not enjoy? This decreases production because you do not have the motivation to maximize your output, making specialization in this sense worthless.
The next part of this chapter talks about the social aspects of production that fluctuate the market values. This furthers his discussion on the last chapter because as consumers and producers, we do not need to know why prices and product quantities increase and decrease; we just need to know that it has happened so we can fix it (Bylund, 2016, p. 63). Adjustments can be made by finder cheaper means of producing so that profits can be maximized, as well as maximizing quantities produced. His final point about opportunity costs helps summarize this chapter: the cost of value in every situation. When producing one thing, you are giving up the cost of the value of producing something else. When you buy one thing, you are giving up the cost of the value of buying something else. Everything is determined in value, and whatever is more valuable, is the path to take in order to maximize value for yourself and others.
What matters is therefore the relative value of what entrepreneurs do: in order to succeed, they must provide to consumers something that is not only valuable but relatively more valuable than what other entrepreneurs have to offer (Bylund, 2016, p. 69).
To stay ahead in the market, entrepreneurs must focus on creating the most value for consumers compared to their competition. This sets the opportunity costs that persuade consumers to go with what they have to offer rather than someone else who offers a similar product or service. This chapter effectively explains that markets are imperfect because of its many fluctuations, disruptive innovations, and opportunity costs that influence consumers’ choices of what is valuable to them more than others.
The Process of Creative Destruction
Schumpeter’s analysis of creative destruction brings about a different perspective of the effects of new innovations on the market.
The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates (Schumpeter, 1962, p. 83).
The market is constantly changing because of new product innovations that continuously improve to better the economy. We have a need to stay ahead, and by doing so, we must work to improve the things we already have, and additionally, create new products that will better the way we function. When we bring forth new technology, such as Apple does with their products, we discard the old to buy the new. This is what is known as creative destruction because when a new product comes along, we forget about the old one, which “destroys” it and makes it less valuable to consumers. One thing that Schumpeter (1962, p. 84) mentions is the problem of how capitalism creates and destroys existing structures is not as visualized as how capitalism manages them. What this is saying is that there is more focus on current practices and structures and not as much on how they were created and how they are destroyed by new product structures and innovations. We tend to stay so focused on the present that we do not always investigate how we started and what could happen. We miss some of the important details when we focus on trying to maintain what we currently have rather than how we can improve upon it to stay ahead of the competition. Schumpeter further explains this process with,
The businessman feels himself to be in a competitive situation even if he is alone in his field or if, though not alone, he holds a position such that investigating government experts fail to see any effective competition between him and any other firms in the same or a neighboring field and in consequence conclude that his talk, under examination, about his competitive sorrows is all make-believe (1962, p. 85).
Though you may be alone in a specific field, there is always competition, even if it is not visible because someone else can easily swoop in with a disruptive technology that takes over the market. You always have to be one step of everyone else by analyzing all aspects of the business: prices and products. Schumpeter (1962, p. 85) explains that price is a major factor in creative destruction because consumers are always looking for the best priced product. You must set your prices just high enough to make a profit, but low enough that you have the competitive advantage. Creative destruction is a common problem that all entrepreneurs face, and learning how to watch for it and staying ahead of the competition is vital to being successful in your field.
Resources
Bylund, P. L. (2016). Chapter 4: Unbeatable, Imperfect Markets. In Seen, the unseen, and the unrealized: How regulations affect our everyday lives (pp. 47–72). essay, Lexington Books.
Schumpeter, J. A. (1962). Chapter VII: The Process of Creative Destruction. In Capitalism, socialism and democracy (pp. 81–86). essay, Harper Torchbooks, Harper & Row.
I agree with a lot of what you had to say about the markets, but I even more so enjoyed your discussion about Schumpeter’s work on capitalism and creative destruction.
I thought this quote concisely summed up the idea of creative destruction. The concept that new innovation constantly comes in and overtakes older products, essentially making them obsolete. This phenomenon is essential to capitalism because the market is always changing, and entrepreneurs need to constantly innovate to find success. I think the name “creative destruction” is beautiful because it sounds kind of dark, but it also encapsulates the mechanism that drives forward the economy. Competition is a tenant of capitalism and serves to benefit the consumer because entrepreneurs compete to create the best product to sell at a price that gives them a competitive advantage. Consumers get quality products for less money and the entrepreneur who innovates the best will be rewarded with business. All of this is made possible by the free exchange. Without it, competition would not exist, and the market would not experience the same ebbs and flows it currently does, which affords entrepreneurs opportunities to pivot in production and allocate their resources toward something else. Another key component of a successful economy, which you discussed, is specialization and the division of labor. It is impossible for a single person to produce everything they need for themselves in life. When people specialize in making certain goods, productivity and quality goes up and they lays the foundation for a market based on exchange. Now individuals have produced goods that they can exchange in order to consume. In that sense, production always precedes consumption. When individuals become highly specialized and there are many people making the same product, innovation becomes necessary to remain a relevant player in the economy. This goes to show how the market can drive itself forward. Entrepreneurs take cues from the market about what to produce, how to allocate resources, how much to charge for their product, and so much more. The market will then react to what all the entrepreneurs are doing, and it will shift again.
I really liked your statement right here. I feel like it is a timeless statement and a major human flaw sometimes I think. Whether we continue to try to maintain it because it's making a profit or we are just so committed top it that we lose sight of better avenues that we could take. Even though we as humans seem like we are changing all the time it is a very slow process and sometimes our old processes have to become obsolete before we decide to make the change or even realize it is time to make a change and sometimes when you start seeing the ground shake from a problem or the onset problems that have developed from that problem it's too late at that point.
From Bylund's reading you of course notice he repeated point that in order to consume we must produce which makes sense in any setting because if everyone just consumed there would be nothing left and our economy if not us wouldn't last long. I like your point to Entrepreneurs having a connection to their product, but I think Bylund meant the inherent satisfaction that comes from producing something desired by people, but both make sense. If you don't enjoy what you do then it won't be as fulfilling either. AN example for that would be I do landscaping and I do not enjoy the work much, but the end result when it's prettier from my toil and the customer loves it that gives me satisfaction from producing something desirable for them, but I mainly just do it for the money, because I think that I could make more money running my own business and being in charge of my time then giving it up to someone else for a by the hour wage. It's difficult though because I'm in charge of everything and the business doesn't move unless I do. Sometimes I have had a good worker to give me a little break, but I am always responsible for the work when they get burned out and I haven't met anyone who wants to work longer than a couple months because it's hard.