No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Nine: P31W: Enter the Entrepreneur! 205 resource prices and output—The entrepreneur is the alert arbitrageur . § § Taking risk by predicting uncertain future demand and positioning to meet it— The entrepreneur is a risk bearer on behalf of consumers. § § Creating new products and processes through innovation, often called creative destruction, where old processes and products are destroyed by competition and replaced by superior methods and goods. It is worthwhile right up front to point out something that is not on the list of the entrepreneurial functions: providing capital to perform the other functions—problem solver, appraiser, alert arbitrageur, risk bearer, or creative destruction. The entrepreneur may or may not provide capital in the performance of these duties. Many real world entrepreneurs do commit significant amounts of their personal capital in support of these functions, but they don’t have to supply the necessary capital. Venture capitalists will often commit capital in support of good ideas from entrepreneurs, if they are given a large portion of any profits that are made (usually through an equity ownership stake). THE ENTREPRENEUR AS PROBLEM SOLVER The broadest entrepreneurial function is that of a problem solver. We live in a fallen world, and many of us see problems every day. The problem-solving entrepreneur must “see” problems, and her assessment of the problem must be accurate. She must be able to discern the wheat from the chaff, and what is important and critical to the problem and what is simply a distraction. Many of you have had those nasty word problems in math or science class. The teacher gives you all sorts of information and facts, and your challenge is to (1) sort out the problem to find out what is truly the unknown that you must solve for, (2) figure out what equation you could use that might help solve the problem, and (3) identify what the “knowns” are that you might be able to plug into the equation to arrive at a solution. These problems get more difficult when there is more than one equation that might work, and also if there are many extraneous facts; you have to think through whether that fact is needed to solve the problem or if it is just a distraction. If I’m not using that fact, do I really understand the problem? While we may struggle with these questions, the entrepreneur is an expert at sorting out messy problems, and she doesn’t even have it written down in front of her! One might think that identification of the problem is easy, but the ground is littered with entrepreneurial failures that misidentified the problem—or at the least, they misidentified whether the problem could be solved profitably. In 1985, for example, Coca-Cola tried to force its consumers to go to a new recipe for its flagship soft drink by offering only the new product and discontinuing the old formula. Angry consumers refused to buy the new product, and Coke hastily reintroduced Coke Classic to avoid a total disaster. Eventually, the new Coke disappeared, and Coca-Cola Classic reverted to simply Coca-Cola. Similarly, the dot.com bust in the early 2000s saw many “great” ideas Venture capitalists: financiers who specialize in funding risky, early stage business enterprises. These early stage ventures are high risk, but offer high reward. Arbitrageur: one who buys in a cheap (inexpensive) market in order to sell in a dear (expensive) market. The arbitrageur is able to profit by exploiting price differences between markets.