Question

The elimination principle discussed in this chapter tells us what we can expect in the long run from perfectly competitive markets: zero (normal) profits across the industries. If this were the case, and this fate was unavoidable, going into business would seem to be a fairly dismal choice, given that the end result of normal profits is known right out of the gate. Despite this, we constantly see entrepreneurs working hard to earn profits. Is this a waste of time, given what we know about the elimination principle? Is the fate of zero profit unavoidable? What would Joseph Schumpeter say about all of this?

Answer 1

The elimination principle tells us what happens in the long run, after the market adjusts. It is precisely the pressure of the elimination principle that forces firms to be innovative and creative because complacency will lead, over time, to the erosion of profits. Entrepreneurs are inspired by this pressure, some even thrive under it. Plenty of profits are available to firms that are innovative and creative. so the fate of zero profit are avoidable . This is consistent with the idea of creative destruction popularized by Joseph Schumpeter. He believed that the elimination of profits inspired the continual innovation, which is an important source of economic growth. Finally, do not forget that normal profits are just that- normal- which means they are just the right incentives for normal products in normal time.