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

Chapter Nine: P31W: Enter the Entrepreneur! 212 She followed that up as the #1 artist in the U.S. and the UK with The Gift. While Simon Cowell may give us the “yes” on her talent, there was someone that spotted her earlier in the audition process—someone who saw what everyone else could not. That is the alert arbitrageur. One of the most famous entrepreneurs in the U.S. is Bill Gates, one of the co-founders of Microsoft. Bill Gates is both widely admired and despised, with many of his critics suggesting he never really created anything, but rather leveraged others’ work and made a fortune off of it. The critic’s claim has some merit, as a review of Gate’s and Microsoft’s history shows (although clearly Microsoft did more than repackage others’ work). Nevertheless, the critics are missing the genius of Gates; he saw what others could not see. He was the alert arbitrageur that could recognize the differentials in how current software resources were being employed and how they could be employed. By purchasing those undervalued resources (fully valued in their current use, but undervalued in ways Gates thought they could be used), he was able to transform them into a product that more effectively met consumer demand. Sure, Windows was a copy of a Mac—and not very creative— but it nonetheless made Microsoft millions. As we’ll see later, Gates may not have been a creative destroyer, but he certainly was an alert arbitrageur. THE ENTREPRENEUR AS RISK BEARER In economics we will often talk of “consumer sovereignty” to describe the consumer’s ability to drive producer behavior. This often goes against the grain of conventional wisdom, since the populist view often has big business with significant market power over consumers. Consumer sovereignty, however, suggests that business must unceasingly serve consumers by providing them with highly valued goods and services. Should the business not serve their customers well, the consumers will take their money to a more worthy servant—to the extent that competition is available. This is the reality of the market system. Obviously there are some rural areas where there may be a single provider and consumers have less ability to shape producer behavior. Note that less is RISK VS. UNCERTAINTY The entrepreneur bears risk on behalf of consumers, but conceptually risk could be managed without entrepreneurial skill. The Dean of the Chicago School of Economics, Frank Knight, argued that the source of entrepreneurial profit was not risk, but rather uncertainty—events that could not be “insured” against. And his distinction between risk and uncertainty is very important. Nevertheless, we think that entrepreneurs bear risk for you as well as the uncertainty inherent in a world in time. The important economic contribution is the bearing of uncertainty, but risk must be borne as well—in the real world many activities simply can’t be insured away.