When I was in grad school at George Mason in the mid 90s, a common topic of conversation was comparing and contrasting Schumpeter’s and Kirzner’s views of entrepreneurship. At least a few dissertations fizzled out on the topic. Deep down, in the building blocks of the two theories, there is fundamental agreement. But in some surface ways, the two entrepreneurs “look” different. Schumpeter’s is a consummate innovator—hence the term “creative destruction.” Kirzner’s entrepreneur is also an opportunist but more so in a pure arbitrage sense—he buys low and sells high.

I’ve been hearing more and more about Wal-Mart lately (BTW, I’m no Wal-Mart fan or shill). Russ Sobel and student Andrea Dean presented a nice paper on a session I organized at the SEA meetings last month. They show that as more Wal-Mart stores open in a given state, aggregate small business activity in that state is unaffected or even enhanced. That’s not so much destruction.

Also, an October 2001 study on the “new economy” by the McKinsey Global Institute talks a lot about the details of WM’s distribution network and how that creates economies of scale. The McKinsey study breaks down aggregate productivity growth for the U.S. economy into sector-by-sector contributions. Some large percent of the macro productivity growth is due to the retail sector (and five other sectors). Within retail, the study finds that WM innovated common distribution and marketing processes using simple technologies like warehouse logistics/purchasing, electronic data interchange, and wireless bar code scanning. This forced the entire industry to become more efficient, and these innovations are now standard for any retail operation of significant scale. The study also discusses how these innovations migrated vertically to wholesalers as well, especially in pharmaceuticals. All of this improved productive efficiency in the retail sector, which has had macroeconomic effects. That’s creative destruction.

Here’s my hunch. Wal-Mart’s innovations increased the minimum efficient scale for businesses that market and distribute finished retail items. So mom-n-pop can’t compete in hardware, electronics, clothing, groceries, etc. But a WM opening creates the opportunity for firms with small MES to open--little shops like ice cream parlors, indoor climbing gyms, law firms, barber shops, and others that Sobel and Dean mention briefly. This opportunity creation could occur partly through effects of WM on downtown small scale commercial real estate. Without WM, little shops would have to compete with hardware, grocery, electronic, clothing, and other stores for downtown space. With a big box out on the bypass, there’s much more opportunity for little shops to open on Main Street. That’s truly the market process in action, allowing resources to move toward their highest valued uses.

Wal-Mart is also famous (or infamous) for buying low and selling high(er), which also leads to allocative efficiency, which brings me full circle to my opening point. Wal-Mart may be the consummate Schumpeterian-Kirznerian entrepreneur. Theories reconciled.