An Op-Ed on “Chapter 4: Unbeatable, Imperfect” Markets by P.L. Bylund and on “Chapter VII: The Process of Creative Destruction” by Joseph A. Schumpeter

Image Source

Module 6 Essay: An Op-Ed on "Chapter 4: Unbeatable, Imperfect Markets" by P.L. Bylund in The Seen, the Unseen, and the Unrealized: How Regulations Affect Our Everyday Lives and on “Chapter VII: The Process of Creative Destruction” by Joseph A. Schumpeter in Capitalism, Socialism and Democracy

Alexis Del Angel
School of Business, Oklahoma State University – Stillwater
EEE 2083: Entrepreneurship & Society
Professor Steve Trost
3.28.2023

Module 6 Essay: An Op-Ed on "Chapter 4: Unbeatable, Imperfect Markets" by P.L. Bylund in The Seen, the Unseen, and the Unrealized: How Regulations Affect Our Everyday Lives and on “Chapter VII: The Process of Creative Destruction” by Joseph A. Schumpeter in Capitalism, Socialism and Democracy

The summaries that follow are in addition to the assigned readings titled above. I will go sequentially and then conclude with some opinions. The point of this essay is to identify what each author is getting at while posing some of my own opinions at the end. With that in mind, the essay will approach the readings from an inquisitive perspective.

On: “Chapter 4: Unbeatable, Imperfect Markets”

In Chapter 4, P.L. Bylund describes the production process, the perspectives of economists in the past with regards to production, and its social implications.

Bylund starts by addressing the type of production he is going to analyze, one that is "market-based […], in which where production primarily aims to satisfy one’s own wants indirectly" (Bylund, 2016, p. 49). This does two things: it makes investments of one's time and effort into specialization possible and separates production from consumption. These two things are relevant because allowing people to specialize could increase satisfaction and production efficiency, while the "separation of production and consumption leads to social cooperation through markets" (Bylund, 2016, p. 49).

What follows is the production process as viewed by Smith, Ricardo, and Schumpeter, and whether or not it fits with Bylund’s theories. Smith stated that there are three primary benefits to specialization.

"It saves time because each worker no longer needs to switch between different tasks, workers develop expertise by repetition which further increases their productivity, and it allows for automation through the development of capital because single tasks tend to be much simpler than the whole production chain." (Bylund, 2016, p. 50)

To shorten that, specialization allows for a higher level of singular focus, fewer mistakes, and advancement in technology.

Ricardo brings the "comparative advantage dogma (Bylund, 2016, p. 50)" as the primary takeaway. The idea is that by specializing in something, even things that societies may be relatively better at, every society will be using its resources most efficiently. This can elevate the value of combined societal efforts.

Schumpeter brought out the idea of new combinations, and it posits those innovations "can take five different forms: new goods (or new quality of goods); new methods of production; the opening of new markets; new sources of input; and new types of organization (Bylund, 2016, p. 51)."
Schumpeter is basically quantifying the pressure of a constantly mutating market that revolutionizes its own economic structure periodically. This forces new methods to emerge. In fact, Bylund states Smith and Ricardo both point to the value and disruption innovation may have.

"Following a successful innovation, competitive pressures compel existing market producers and nascent entrepreneurs to adopt the better method or suffer losses." (Bylund, 2016, p. 51)

In other words, adapt or die.

Smith also seems to point out a contradiction between specializing in direct consumption and specializing in trade (indirect consumption). One has a greater impact on one's own standard of living, while the other has more of an impact on the standard of living in society. Smith continues that there is a self-balancing act, as "the division of labor is limited by the extents of the market (Bylund, 2016, p. 54)." A market will only specialize in, well, what it can specialize in.

Bylund posits that we cannot forget that regardless of specialization, production is still interdependent and related. This leads to his next major point: production as social cooperation. Bylund states that the economic organism is never separate. In order for certain production processes to even begin, we must acquire the outputs of other production processes. Staging out the production process can help us understand how it is all coordinated. Most importantly, he states we must respond to prices and adapt to the changes in the production processes. This is what drives a competitive market, and its interdependency—that "continuous effort […] to beat the competition, but part of it is also the chance for profit" (Bylund, 2016, p. 63). What holds it all together is the exchange being made within the production processes. Only through this exchange can entrepreneurs bring about the changes (read: disruption through innovation) to the market that they do. In order to make those changes, they must cooperate with society.

"As the purpose of entrepreneurs’ undertaking is their own consumption, however indirectly through production that satisfies others’ consumption, they are involved in contributing to the public good of value creation" (Bylund, 2016, p. 67).

Entrepreneurs must satisfy society in order for their own consumption to come to fruition. This makes them servants to society and, ideally, leads to value creation.

Bylund closes with the opportunity cost and optionality that entrepreneurs must contend with. There is always a tradeoff; as the saying goes, the grass is always greener on the other side. Opportunity cost refers to the value of what you did not choose "because you lose that option when choosing something else" (Bylund, 2016, p. 68).

In order to then succeed, one must provide customers with something not only valuable but more valuable than what the customer will not buy. This establishes our choices: the higher the opportunity cost, the greater the freedom to choose. This is because the lower the opportunity cost, the more direct and obvious your investment choice becomes. Bylund posits that we should "wish to have as high an opportunity cost for our choice as possible (Bylund, 2016, p. 70)." He says so because, as opportunity costs increase, this implies an increase in options, or optionality. Optionality is important because it helps increase the power of the market and market production through the freedom that choices give. This gives entrepreneurs another means to cooperate with society.

On: “Chapter VII: The Process of Creative Destruction”

Peter A. Schumpeter approaches the topic of economic competition through the lenses of capitalism, socialism, and democracy.

Schumpeter opens up with some uncomfortable truths. That is, big businesses are the precursors to the modern standard of living of the masses, if we measure labor in time and not payment.

"If we list the items that enter the modern workman’s budget and from 1899 on observe the course of their prices not in terms of money but in terms of the hours of labor that will buy them—i.e., each year’s money prices divided by each year’s hourly wage rates—we cannot fail to be struck by the rate of the advance which, considering the spectacular improvement to qualities, seems to have been greater and not smaller than it ever was before (Schumpeter, 1962, p. 81)."

Here Schumpeter is reinforcing the notion that, in many ways, the things we thought we were concerning ourselves with in regard to capitalism may very well be the things that got us here. Capitalism is an evolutionary process, thus constantly changing and "can never be stationary (Schumpeter, 1962, p. 82)." This fact is important because this constant movement is what impulses capitalism to produce new consumer goods, new methods of production or transportation, new markets, and new forms of industrial organizations that are able to impulsively disrupt the market. As the new forms rise, the old ones go by the wayside. That new creation, destroying the old, is what Schumpeter calls the process of Creative Destruction. He then states that this leads to two problems. The time it takes to see if your system is actually a sound or great one, and every business strategy is by default a product of its time and space within that economic process of Creative Destruction.

Schumpeter posits that economists miss this point by focusing on how capitalism administers existing structures instead of how it creates and destroys them. This point changes what the competition is; it is now about what is new: "the new technology, the new source of supply, or the new organization type" (Schumpeter, 1962, p. 84). This type of competition can be more beneficial for society as it strikes at the profits of those producing. Although it is not always successful in not chasing the new, too much of the same thing can flood the market, causing an instability in value as they try to adjust. Eventually, if they do not, the competition will not only be from the same production shops but from other market sectors.

Ultimately, Schumpeter points out that "a theoretical construction which neglects this essential element of the case neglects all that is most typically capitalist about it; even if correct in logic as well as in fact, it is like Hamlet without the Danish prince. (Schumpeter, 1962, p. 86)" Basically, even if it works logically and theoretically, neither of those are reality, and it would be a big mistake to ignore that

Conclusion

It was nice to see Bylund dig into what other economists thought of the market. I really agree with him that having a higher opportunity cost should be something we seek. As having competitive prices and products can lead to greater satisfaction with my purchases.

Personally, I would say the best choices are those where you cannot go wrong, but to others, those are the worst kind of choices. Whether due to fear of missing out, indecisiveness, lack of direction, or fear of choosing wrongly, simply put, no matter how good all the choices look, one might think there has to be a "good good" choice. This is why I cannot help but feel that this is one of those cases where reality does not align with theory.

When I think of low opportunity costs, most American consumer options come to mind. Maybe I am being pessimistic, but when shopping for phones, do we dig into all of them? I would wager the vast majority of people go into a cellphone shop and get either the newest iPhone or Samsung. While yes, there are in fact other options, in practice it seems like people only want higher opportunity costs at a surface level. The vast majority of people frequent the same general stores over and over again, and while that may be using our investments where we want, I cannot help but feel like this is the consumer equivalent of stagnation. TVs are now essentially either expensive or Walmart brands. Tablets are effectively reduced to iPads and Samsungs (and the Surface if we want to be generous). Since the pandemic increased laptop usage, it has become easier to find great steals at budget prices (granted, the chip shortage ruined this, and funny enough, something Schumpeter touches one).

Schumpeter touches on some interesting critiques. The idea that we have to thank big businesses for our advancement is something many people would scoff at. Yet, it sticks out to me because it is true to quite an extent, even when disregarding the time and labor aspects. If commercial flights had not been established, the average person would have never had the opportunity to travel across the globe; if Henry Ford hadn’t established a baseline affordable model, we would not be able to so easily traverse this expansive country. (Although its cities would have become more pedestrian friendly with less urban sprawl, but I digress.) My point is that, whether it was for the pursuit of selfish monetary gain or not, these innovations advanced our society. People less than five generations ago would call you crazy if you told them we could get from New York to London in under 9 hours over flight or that you could go across two-thirds of the U.S. in under 48 hours in a car on Route 66.

Both Bylund and all the economists he referenced had a lot to say, and I am glad to have picked up this knowledge.

References

Bylund, P. L. (2016). Chapter 4: Unbeatable, Imperfect Markets. In The 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.