Creative Destruction

Change is constant, so some profitable industries are always popping up and also some unprofitable industries
In a dynamic economy, resource are always moving towards an increase in the value of production
- Entrepreneurs listen to price signals and they move capital and labor from unprofitable industries to profitable ones
A general feature of competitive markets is the elimination principle
- Elimination principle: above-normal profits are eliminated by entry and below-normal profits are eliminated by exit
- Says that above-normal profits are temporary because great ideas are adopted by other people and then they become common
- To earn above-normal profits, an entrepreneur must innovate
Above-normal profits are constantly being eliminated by competition, and new sources of profit are constantly being created through innovation

For competitive process to work, prices must accurately signal costs and benefits
- Prices don’t always signal costs and benefits
- If they don’t accurately signal costs and benefits, invisible hand property 2 won’t work perfectly and there won’t be an ideal balance between industries
- We will get too few resources in some industries and too many resources in other
If markets aren’t competitive, invisible hand doesn’t work
Monopolists and oligopolists earn above-normal profits
- When an industry earns above-normal profits, we want resources to move to that industry
- Without the pressure of the competitive process, not enough resources will move and profits won’t be eliminated
- Output will be too low in a monopoly or oligopoly
- Good institutions align self-interest with social interest, but good institutions are sometimes hard to find or create