8.05. The Adoption of a New Technique; The Entrepreneur and Innovation

0:005. The Adoption of a New Technique 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. What determines the extent to which these firms adopt new and more productive techniques? 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. As times and tastes, resources and techniques change, much of this capital investment becomes an ex-post entrepreneurial error.

0:49If, 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. 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. 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. 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, and if there had been fewer land grants and other governmental subsidies to railroads.

1:44Now that the existing railroad equipment remains, however, decisions concerning how much of it is to be used must be based on current and expected future costs, not on past expenses or losses. An old machine will be scrapped for a new and better substitute if the superiority of the new machine or method is great enough to compensate for the additional expenditure necessary to purchase the machine. The same applies to the shifting of a plant from an old location to a superior new location, superior because of greater access to factors or consumers.

2:29At any rate, the adoption of new techniques or locations is limited by the usefulness of the already given and specific capital goods structure. This means that those processes and methods will be adopted at any time which will best satisfy the desires of the consumers. The fact that investment in a new technique or location is unprofitable means that the The use of capital in the new process at the cost of scrapping the old equipment is a waste from the point of view of satisfying consumer wants. How fast equipment or location is scrapped as obsolescent then is not decided arbitrarily by businessmen.

3:17It is determined by the values and desires of consumers who decide on the price and profitability of the Various Goods, and on the values of the necessary non-specific factors used to produce these goods. As Mises writes, the fact that not every technological improvement is instantly applied in the whole field is not more conspicuous than the fact that not everyone throws away his old car or his old clothes as soon as a better car is on the market or new patterns become fashionable. Specifically, the old equipment will continue in use as long as its operating costs are lower than the total costs of installing the new equipment.

4:07If in addition, total costs, including replacement costs for wear and tear on capital goods, are greater for the old equipment, then the firm will gradually abandon old equipment as it wears out and will invest in the new technique. As is often true, critics of the free market have attacked it from two contradictory points of view. One, that it unduly slows down the rate of technological improvement from what it could and Should Be, and 2, that it unduly accelerates the rate of technological improvement, thereby unsettling the peaceful course of society. We have seen that a free market will, as far as the knowledge and foresight of entrepreneurs permit, produce so that factors are best allocated to satisfy the wishes of consumers.

5:05in productivity through new techniques and locations will be balanced against the opportunity costs foregone in value product from using the existing old plant. Technocrats condemn the market for rewarding investments according to their marginal value productivity instead of their marginal physical productivity. But we see here an excellent example of a technique more physically productive but less value-productive and for a very good reason, that the given specific capital goods already produced lend an advantage to the old technique, so that out-of-pocket operating costs of the old technique are lower until the equipment wears out than total costs for the new project.

6:00are benefitted by continuing the old techniques while they remain profitable, for then factors are spared for more valuable production elsewhere. And ability in entrepreneurial foresight will be assured as much as possible by the market's process of selection in rewarding good forecasters and penalizing poor ones proportionately. The Entrepreneur and Innovation Under the stimulus of the late Professor Schumpeter, it has been thought that the essence of entrepreneurship is innovation, the disturbance of peaceful, unchanging business routine by bold innovators who institute new methods and develop new products.

6:51There is, of course, no denying the importance of the discovery and institution of more productive

7:28Entrepreneurial activities are derived from the presence of uncertainty. The entrepreneur is an adjuster of the discrepancies of the market toward greater satisfaction of the desires of the consumers. When he innovates, he is also an adjuster, since he is adjusting the discrepancies of the market as they present themselves in the potential of a new method or product. In other words, if the ruling rate of natural interest return is 5% and a businessman estimates that he could earn 10% by instituting a new process or product, then he has, as in other

8:52Discrepancy is eliminated and there is no pure profit or loss in this area.