This paper provides an alternate view of how new firms contribute to the evolution of the economy. Entrepreneurs, buoyed by over-optimistic expectations of financial rewards and over confidence of success, start new firms at a rate far higher than any economy can sustain. Inevitably, failure rates are high, as new firms must be capable of driving a more established rival out of business in order to establish a position for themselves. New firms, if they are to overcome the inherent disadvantages of newness, are better equipped to survive if they innovate rather than imitating existing firms. The sheer volume of new firms is such that business founders’ enthusiastic attempts at finding new ways to fill consumer needs provide a wide variety of formulas for success, whose success can only be determined by doing battle with existing firms in the market place. This process of survival of the fittest results in a process of continual economic change where new firms play a far larger role than has generally been recognized.
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