Set Up
In his 1934 book, The Theory of Economic Development, economist Joseph Schumpeter defined entrepreneurship this way (emphasis added):
To produce means to combine materials and forces within our reach. To produce other things, or the same things by a different method, means to combine these materials and forces differently. . . . Development [or entrepreneurship] in our sense is then defined by the carrying out of new combinations.
Schumpeter was clear that his definition did not include the idea of invention in the idea of innovation/entrepreneurship. He wanted to focus on the idea that entrepreneurship meant the recombination of existing resources (means of production) in new ways that created greater economic value.
Economists Thorbjorn Knudsen and Richard Swedberg in an article titled “Capitalist Entrepreneurship: Making Profit through the Unmaking of Economic Orders” (in Capitalism and Society, Vol. 4, No. 2, Article 3, 2009) expounded on Schumpeter’s definition this way (p. 8):
Schumpeter says that not only a whole economy but also an enterprise may be conceptualized as a combination (Schumpeter, 1934:14). This makes us think that a national or industrial economy may also be viewed as combinations. By looking at things in this way we get combinations within combinations, suggesting new ways of interpreting Schumpeter’s idea that entrepreneurship and combinations are closely related.
This way of looking at things indicates why there are almost always unrealised innovations in the economy. A realistic view of what we may call the entrepreneurial matrix suggests a nesting of hundreds and thousands of subcomponents. Because of the combinatorial explosion, the space of possible innovations to be realised would very quickly grow to include more elements than the number of stars in the universe. The space of possibilities is truly enormous; and there is always hope for the entrepreneur. But since there is also the fact that new ideas are, on average, bad ones, most entrepreneurs will end up disappointed.
Essay
Using the imagery of “combinations within combinations” as an organizing framework, craft a concise 3-4 page (double-spaced) essay that explains how the following ideas can fit together into a self-consistent, mutually-reinforcing system:
Steven Johnson’s idea that: “openness and connectivity may, in the end, be more valuable to innovation than purely competitive mechanisms.”
Steven Johnson’s description of the idea of “the adjacent possible” and what it implies about innovation. (Why is it “as much about limits as it is about openings”?)
Schumpeter’s idea of “creative destruction,” as explained by Cox and Alm.
Mises’ arguments about the social function of profit and loss.
Boudreaux’s arguments about the informational role of prices.
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