WEBVTT NOTE 8.05. The Adoption of a New Technique; The Entrepreneur and Innovation 1 00:00:00.000 --> 00:00:05.000 5. The Adoption of a New Technique 2 00:00:05.000 --> 00:00:17.000 At any given time, then, there will be a shelf of available and more productive techniques that remain unused by many firms continuing with older methods. 3 00:00:17.000 --> 00:00:25.000 What determines the extent to which these firms adopt new and more productive techniques? 4 00:00:25.000 --> 00:00:38.000 The reason that firms do not scrap their old methods immediately and begin afresh is that they and their ancestors have invested in a certain structure of capital goods. 5 00:00:38.000 --> 00:00:49.000 As times and tastes, resources and techniques change, much of this capital investment becomes an ex-post entrepreneurial error. 6 00:00:49.000 --> 00:01:00.000 If, in other words, investors had been able to foresee the changed pattern of values and methods, they would have invested in a far different manner. 7 00:01:00.000 --> 00:01:12.000 Now, however, the investment has been made, and the resulting capital structure is a given residue from the past that supplies the resources they have to work with. 8 00:01:12.000 --> 00:01:26.000 Since costs in the present are only present and future opportunities foregone, and bygones are bygones, existing equipment must be used in the most profitable way. 9 00:01:26.000 --> 00:01:38.000 Thus there undoubtedly would have been far less investment in railroads in late 19th century America if investors had foreseen the rise of truck and plane competition, 10 00:01:38.000 --> 00:01:44.800 and if there had been fewer land grants and other governmental subsidies to railroads. 11 00:01:44.800 --> 00:01:51.040 Now that the existing railroad equipment remains, however, decisions concerning how much of 12 00:01:51.040 --> 00:01:59.060 it is to be used must be based on current and expected future costs, not on past expenses 13 00:01:59.060 --> 00:02:01.360 or losses. 14 00:02:01.360 --> 00:02:07.960 An old machine will be scrapped for a new and better substitute if the superiority of 15 00:02:07.960 --> 00:02:14.180 the new machine or method is great enough to compensate for the additional expenditure 16 00:02:14.180 --> 00:02:17.580 necessary to purchase the machine. 17 00:02:17.580 --> 00:02:25.320 The same applies to the shifting of a plant from an old location to a superior new location, 18 00:02:25.320 --> 00:02:29.800 superior because of greater access to factors or consumers. 19 00:02:29.800 --> 00:02:36.240 At any rate, the adoption of new techniques or locations is limited by the usefulness 20 00:02:36.240 --> 00:02:41.800 of the already given and specific capital goods structure. 21 00:02:41.800 --> 00:02:48.080 This means that those processes and methods will be adopted at any time which will best 22 00:02:48.080 --> 00:02:51.440 satisfy the desires of the consumers. 23 00:02:51.440 --> 00:02:57.280 The fact that investment in a new technique or location is unprofitable means that the 24 00:02:57.280 --> 00:03:04.600 The use of capital in the new process at the cost of scrapping the old equipment is a waste 25 00:03:04.600 --> 00:03:08.680 from the point of view of satisfying consumer wants. 26 00:03:08.680 --> 00:03:16.060 How fast equipment or location is scrapped as obsolescent then is not decided arbitrarily 27 00:03:16.060 --> 00:03:17.600 by businessmen. 28 00:03:17.600 --> 00:03:24.960 It is determined by the values and desires of consumers who decide on the price and profitability 29 00:03:24.960 --> 00:03:32.200 of the Various Goods, and on the values of the necessary non-specific factors used to 30 00:03:32.200 --> 00:03:35.120 produce these goods. 31 00:03:35.120 --> 00:03:41.940 As Mises writes, the fact that not every technological improvement is instantly applied in the whole 32 00:03:41.940 --> 00:03:48.880 field is not more conspicuous than the fact that not everyone throws away his old car 33 00:03:48.880 --> 00:03:56.080 or his old clothes as soon as a better car is on the market or new patterns become fashionable. 34 00:03:56.080 --> 00:04:02.560 Specifically, the old equipment will continue in use as long as its operating costs are 35 00:04:02.560 --> 00:04:07.480 lower than the total costs of installing the new equipment. 36 00:04:07.480 --> 00:04:14.840 If in addition, total costs, including replacement costs for wear and tear on capital goods, 37 00:04:14.840 --> 00:04:20.740 are greater for the old equipment, then the firm will gradually abandon old equipment 38 00:04:20.740 --> 00:04:25.760 as it wears out and will invest in the new technique. 39 00:04:25.760 --> 00:04:31.880 As is often true, critics of the free market have attacked it from two contradictory points 40 00:04:31.880 --> 00:04:32.880 of view. 41 00:04:32.880 --> 00:04:39.640 One, that it unduly slows down the rate of technological improvement from what it could 42 00:04:39.640 --> 00:04:48.000 and Should Be, and 2, that it unduly accelerates the rate of technological improvement, thereby 43 00:04:48.000 --> 00:04:51.640 unsettling the peaceful course of society. 44 00:04:51.640 --> 00:04:57.680 We have seen that a free market will, as far as the knowledge and foresight of entrepreneurs 45 00:04:57.680 --> 00:05:05.540 permit, produce so that factors are best allocated to satisfy the wishes of consumers. 46 00:05:05.540 --> 00:05:12.140 in productivity through new techniques and locations will be balanced against the opportunity 47 00:05:12.140 --> 00:05:19.620 costs foregone in value product from using the existing old plant. 48 00:05:19.620 --> 00:05:25.380 Technocrats condemn the market for rewarding investments according to their marginal value 49 00:05:25.380 --> 00:05:30.940 productivity instead of their marginal physical productivity. 50 00:05:30.940 --> 00:05:37.220 But we see here an excellent example of a technique more physically productive but less 51 00:05:37.220 --> 00:05:44.220 value-productive and for a very good reason, that the given specific capital goods already 52 00:05:44.220 --> 00:05:51.940 produced lend an advantage to the old technique, so that out-of-pocket operating costs of the 53 00:05:51.940 --> 00:06:00.220 old technique are lower until the equipment wears out than total costs for the new project. 54 00:06:00.220 --> 00:06:07.500 are benefitted by continuing the old techniques while they remain profitable, for then factors 55 00:06:07.500 --> 00:06:12.500 are spared for more valuable production elsewhere. 56 00:06:12.500 --> 00:06:19.140 And ability in entrepreneurial foresight will be assured as much as possible by the market's 57 00:06:19.140 --> 00:06:29.060 process of selection in rewarding good forecasters and penalizing poor ones proportionately. 58 00:06:29.060 --> 00:06:32.860 The Entrepreneur and Innovation 59 00:06:32.860 --> 00:06:39.500 Under the stimulus of the late Professor Schumpeter, it has been thought that the essence of entrepreneurship 60 00:06:39.500 --> 00:06:47.420 is innovation, the disturbance of peaceful, unchanging business routine by bold innovators 61 00:06:47.420 --> 00:06:51.700 who institute new methods and develop new products. 62 00:06:51.700 --> 00:06:58.140 There is, of course, no denying the importance of the discovery and institution of more productive 63 00:07:28.140 --> 00:07:44.500 Entrepreneurial activities are derived from the presence of uncertainty. 64 00:07:44.500 --> 00:07:51.020 The entrepreneur is an adjuster of the discrepancies of the market toward greater satisfaction 65 00:07:51.020 --> 00:07:53.800 of the desires of the consumers. 66 00:07:53.800 --> 00:08:00.440 When he innovates, he is also an adjuster, since he is adjusting the discrepancies of 67 00:08:00.440 --> 00:08:06.760 the market as they present themselves in the potential of a new method or product. 68 00:08:06.760 --> 00:08:14.560 In other words, if the ruling rate of natural interest return is 5% and a businessman estimates 69 00:08:14.560 --> 00:08:22.200 that he could earn 10% by instituting a new process or product, then he has, as in other 70 00:08:52.200 --> 00:08:59.120 Discrepancy is eliminated and there is no pure profit or loss in this area.