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

Chapter Nine: P31W: Enter the Entrepreneur! 210 One can think about the effects of entrepreneurship via its effects on a nation’s production possibilities frontier (PPF). 1 T he alert arbitrageur is able to see opportunities to rearrange productive resource inputs in a more efficient manner. In Figure 9.1 , this might take the US’s PPF from point A to point B. With the discovery of the profitable opportunity, we find that the prior dashed line PPF was actually an interior point, and it is possible to gain more total output with the same amount of resources. Notice that point A was previously on a PPF (the dashed line) that was possible—absent the entrepreneur’s alertness. This was a PPF that was thought to be an efficient use of resources, only the entrepreneurial alertness was able to “see” the potential increase to point B. Thinking about the PPF may also help show the importance of entrepreneurship to economic growth. We typically think of economic growth as occurring when a nation saves more today to allow more consumption in the future. Investment is a way to push out the PPF over time. As we invest in more productive human (education) or physical (machinery) capital, we can produce more overall. Entrepreneurship is similarly seen as a way to increase future consumption; but to the extent that entrepreneurs are successful, it does not come at a cost of sacrificing current consumption! As seen earlier, existing resources simply needed reallocation—no new savings is necessarily required for entrepreneurship to succeed. The entrepreneur serves a valuable social purpose indeed! To demonstrate this a little more formally, recall that in chapter 7 we introduced a simple production function with output (Q) as a function of labor (L) and capital (K), which assumed that there were fixed natural resources and entrepreneurship. Our model looked like this: A slightly more robust production function could include natural resources (N) as well as human capital (H) within the production function. This function could be represented as: This function suggests output is related to the amount of labor, capital, human capital, and natural resources that are available in the production process. Human capital is simply the education and training that each individual worker possesses, and natural resources are the physical outputs of land (the land itself, trees, mineral rights, etc.). But Steel Corn B A Figure 9.1, Entrepreneurial Alertness Expands PPF. Going back to our Production Possibilities Curve from Chapter 2, we can imagine the U.S. is on a PPF interior point such as A above. Prior to an entrepreneur’s alert discovery of a profit opportunity, the market participants believe they are producing as efficiently as possible, and that the dashed line through A is the PPF. But the entrepreneur shows a recombination of assets could actually produce at B, on a much higher PPF. No new savings or investment is needed here to expand the PPF, just entrepreneurial alertness to use the existing assets more efficiently. Q = f (L,K) Q = A f ( L, K, H, N ) The essence of alertness is “seeing the unseen and unknown.”