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

Chapter Nine: P31W: Enter the Entrepreneur! 209 THE ENTREPRENEUR AS ALERT ARBITRAGEUR As a reminder, arbitrage is simply the act of buying a good in a cheap market and selling the same good in a dear (expensive) market. The markets may be separated by distance or time, and the good could be resource inputs that can be used more productively in alternative settings. Under the broad rubric of problem solver, yet broader than that of the entrepreneurial function of appraisal, is the alert arbitrageur . As the economist Israel Kirzner wrote, the most critical aspect of entrepreneurship is alertness: someone who is more attentive to opportunities. The nature of these heretofore unnoticed opportunities lies in the market underpricing resource inputs (e.g., labor), compared to the value of what that resource could earn if used in a different way (maybe producing a different product). The entrepreneurial function of appraisal, as discussed earlier, is embedded in the alert arbitrageur as the entrepreneur becomes alert to a potential opportunity. Appraisal will be a key function to confirm that the potential price discrepancy is real (in the mind of the entrepreneur) and therefore should be acted on. Let’s use an obviously unrealistic example to illustrate the point. The alert arbitrageur might notice that Joe’s Bag of Donuts is hiring Ph.D. physicists to serve coffee, and is only paying them $7.50/hr. The alert arbitrageur would realize the physicists are undervalued in their current usage. He will hire them away from Joe’s Bag of Donuts to use them more productively according to their talents. While this is an extreme case, the idea happens all the time. An entrepreneur may have a great idea for a new product, and he will hire resources away from other uses for his venture. He may not be thinking about arbitrage (and he is almost certainly not thinking that way), but that is what he is doing. He sees a price differential between the value of their current output—as represented by the price of the inputs in their current use—and what he hopes to be able to produce, in terms of what it would cost him to hire the resource inputs away from their current use. Similarly, the P31Wmade linen clothes and sold them; she bought the field and planted the vineyard. Anyone else could have done this, but they didn’t. She was alert to the opportunity, and her gain was good. This entrepreneurial alertness may come in many forms: § § alert to better resource use (land, labor, and capital) § § alert to better or more efficient production processes § § alert to changing customer preferences The key is an alertness to profit opportunities by changing production (either through resource inputs or product outputs) to satisfy future consumer demands. Alertness on the part of the entrepreneur is contrasted with ignorance on the part of others in the market. Just as the entrepreneur “sees” the unexploited profit opportunity, the rest do not. Further, they don’t realize they are even missing the opportunity; for them, there is no opportunity to be pursued. They don’t know what they don’t know . Thus the essence of alertness is “seeing the unseen and unknown.” Alert arbitrageur: someone who is especially attentive to opportunities to profit from price differentials between markets.