Ed Lopez has a nice post on ZipCar which provides a great snapshot of the mechanisms of creative destruction.
My favorite part of the post was this quote from Baumol on the routinization of innovation:
"[T]he independent entrepreneur provid[es] many if not most of the more
revolutionary and heterodox contributions, while the routine innovation
activities of the oligopoly corporations take those contributions and
improve and extend them, often well beyond what their capabilities
could have been imagined to be. [Free Market Innovation Machine, p.57]"
This is a wonderful explanation of the relationship between small and large firms. Often, the small entrepreneurs work for the large firms, get a picture of where value could be created, and then solve the problem on their own. After developing the solution, they then sell the big idea to their former employer.
These solutions are the building blocks of economic growth - they are pie expansions. These entrepreneurs are the ones most likely to be dissuaded by regulations that are disproportionately harmful to small business.
Given their competitive mindset, this is precisely why large firms prefer these types of regulations - they are the equivalent of a lump-sum tax. Mandating that a new technology be adopted that costs $2 million to implement is very likely to discourage a producer with revenues of $5 million from taking their product to market, as it constitutes 40% of their business. The technology was probably designed by a large firm ($200M), who has lobbyists in place to make sure that the technology is adopted. In addition to the profits from the adopted design, they forced a tax on their competitor of 40% , while only paying 1% themselves.
We must do our best to avoid such corporatism. We ought to be mindful of microeconomics as the debate rages over how we will tackle our carbon problem.
