They can do it because banks lend them money, which allows them to buy what they need. Therefore, money is more than just an aid to buying and selling — it’s the heart and the blood pumping around the economic organism, directed by its brain, the entrepreneur.
Companies rise then decline, and new leaders appear. Schumpeter called it “creative destruction.” In his view, capitalism is nothing but the constant change caused by restless entrepreneurs.
When an entrepreneur invents a new engine valve, they’re the only supplier of the valve: they’re a monopolist for it and so can earn high profits. The possibility of earning high profits encourages entrepreneurs to create all sorts of new products. Without monopolies it would be much harder for new technologies to even get invented. Monopolies propel the technological progress that transforms the economy and eventually leads to more and cheaper products.
“What a pathetic figure is the economic actor who is always searching anxiously for an equilibrium. He has no ambition and no entrepreneurial spirit. He is, in short, without force and life.” To Schumpeter the most important thing about capitalism was that entrepreneurs are constantly throwing rocks into the pond. The waves of creative destruction never die down.
The sequence is: if you enter my market then I’ll slash my prices; my hope is that this will put you off from entering the market in the first place. The problem with threats is that they aren’t always believable. You might think that I’ll never follow through on them because low prices would lose me too much money.
What begins as an attempt to get rid of the unfairness of capitalism ends in tyranny.
For Hayek, it wasn’t enough for Britain to fight the Nazis with tanks and planes. It had to fight them with ideas too. The idea that had to win was that of economic freedom — for the government to let people decide what to do themselves. Without economic freedom, political freedom was impossible. Without political freedom, people can’t think for themselves anymore. The government tells you what to do, what to think, how to live. Modern Western civilization itself was based on the freedom of the individual. If we forget that, then civilization might collapse.
What all politicians want, above all else, is to stay in office. To hold on to power they create “rents” and then give them to their supporters. Rents are revenues over and above what it’s possible to earn in a competitive market. For example, if the government puts a tax on foreign cars then domestic car producers, protected from overseas competition, make big profits. By giving privileges to special groups of people, politicians hope to gain political support, perhaps even money.
How did the giants get so huge? Karl Marx said that they’re the capitalists who exploit the workers and make money; Schumpeter, that they’re bold people who take risks and get rich when they get lucky. Conventional economics has a less colorful story. The question is what determines wages, most people’s source of income. Economics says that workers are paid what they contribute to production. Educated people have skills that make them more productive, so they earn more. In recent decades technological advances intensified the effect: people trained in computer programming and engineering were able to earn well. Unskilled workers got left behind.
Piketty argues that things aren’t as simple as this. He says that the extraordinary earnings of the tallest giants aren’t the result of extraordinary productivity. Top incomes are determined instead by companies’ habits and customs, and by what they’ve paid their top people in the past.
Economists talk of a trade-off between fairness and efficiency. Markets start off efficient but when governments meddle by redistributing income they upset efficiency. So redistribution leads to greater equality, but a slower growing economy. You can picture the problem as using a bucket to carry wealth from the rich to the poor: there’ll always be some spillage when you heave it along.
Atkinson said the dilemma is over stated. For one thing, markets don’t begin in a state of efficiency. Markets often start off pretty inefficient. The bucket is leaking before you pick it up. For example, markets aren’t efficient when people lack important information. On case is that in which employers can’t observe how well their staff are working — but higher wages might encourage people to work hard, improving efficiency. A generous minimum wage could reduce inequality and improve efficiency. There are other reasons why equality and efficiency might to together. Inequalities encourages people to work in the hope of getting rich. But the hope becomes unrealistic when inequality is extreme. In that case, inequality doesn’t make people work hard; instead they might despair of ever catching up.