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less of a threat, even during periods of low unemployment. Sellers continuously have to find new ways to slash costs and lower their prices in order to stay competitive. It also sheds light on why, after slumping in the 1970s, productivity (output per unit of labor input) has been rising. Companies have been under increasing pressure to do more with less. *
    Fiercer competition has spread to nonprofit institutions as well. Even the stuffiest, most hidebound universities, hospitals, museums, and charities must now innovate, because they’re subject to the same underlying dynamic that’s affecting the rest of the economy. Attendees, patrons, and donors have an increasingly wider choice from which to pick, better information about how each institution is performing, and greater capacity to switch to one that satisfies them more. So nonprofits have to be better, faster, and cheaper, too.
    THE LOGIC OF INNOVATION
    To understand this dynamic, it helps to go back to the musings of Joseph Alois Schumpeter. Schumpeter was a professor of economics at, successively, Graz (Austria), Bonn, and finally, Harvard, and also served as finance minister of Austria after World War I. Wherever he went Schumpeter cut a dramatic figure—aristocratic, romantic, and not unduly burdened by modesty. (Later in his life he said he had always had three wishes—to be a great lover, a great horseman, and a great economist—and that two had been granted. 3 ) In
The Theory of Economic Development,
originally published in 1912, Schumpeter conceived of a world in which the entrepreneur played a central role.
    Most economists still focus on how supply and demand come into balance, and how scarce resources are allocated most efficiently. Imbalances in supply and demand are considered to be inconvenient exceptions to the economists’ model of perfect competition, caused by some external force like a flood, plague, or politics. But Schumpeter assumed that a healthy economy is never in tidy equilibrium; it’s continuously wracked by invention and change. Innovation will occur most readily, he reasoned, when entrepreneurs are rewarded for their brave efforts by gaining a temporary monopoly on something for which consumers are willing to pay extra—but only temporary. Unless entrepreneurs feel threatened by new competition, they will have no incentive to continue to innovate. Economies, therefore, cannot progress without the “gales of creative destruction” wrought by such entrepreneurial
Sturm und Drang.
    As the twentieth century wore on and large-scale production came to dominate modern economies, Schumpeter became gloomy about the prospects for entrepreneurship. Everywhere he looked he saw businesses more interested in stability than in change. He failed to see, or to value, the benefits of mass production and mass marketing. Instead, Schumpeter dwelled on the lackluster managers and risk-avoiding paper-shufflers who were running large-scale enterprises. He gloomily predicted that capitalism would disappear into a static morass of bureaucratic socialism. 4
    But at the start of the twenty-first century, Schumpeter’s dire prediction is being proven wrong. We’re moving quickly into a neo-Schumpeterian world.
    Try this mental experiment. Suppose you offer to sell X for the price of $Y. Assume you’ve already figured out how to make X better, faster, or cheaper than anyone else. Maybe no one else even imagined there was a market for X, and you’re the first to sell it. Buyers begin flocking to you because you are offering them a terrific deal, and you start to make a lot of money. Schumpeter would be proud.
    But now not only do additional buyers find out about the deal you’re offering, but other sellers learn of it as well. Your prospective rivals may not know exactly how much you’re pocketing, but they can probably deduce it because they can discover how much you’re paying for all the ingredients that go into X, including labor. Information is