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

Chapter Ten: It’s all About the Institutions! 233 Not only will entrepreneurs discover knowledge about consumer demand from their own market, they will also gain knowledge about consumer demand from other markets that use similar resource inputs (land, labor, capital, and entrepreneurship). Looking at the cost side of the equation, you may initially have an ex ante (before the fact) expectation that at a certain production level your total costs might be, say, $2,000 per week. That expectation is what made you decide to bid those resources away from alternative uses in the market. But if you serendipitously find that raw materials prices have dropped, your costs are ex post (after the fact) lower and you can expand production to maximize your profits. In this case your initial knowledge was incorrect, but the opportunity for additional profit drives you to incorporate your new knowledge (of lower input costs) into action. You will revise your production plans as the market has communicated to you that it values the output of your production process (your AirPods clones) more than it values alternative uses of the resources used to make it (such as what the land, labor, capital, and entrepreneurship you used could have produced). By learning in the discovery procedure, and acting on that knowledge to better serve consumers, entrepreneurs are able to earn a higher profit. What you need to remember is this: you are just one of many market participants. As you expand production, other businesses are forced to rearrange their plans as you draw resources away from their businesses. There are complementary businesses that will rearrange their plans as you act on your new knowledge. You may need to expand your facility to take full advantage of the demand, or you may bid away construction workers that might have worked on a new house. The intersections of plans that must dovetail are endless—and the price system guides them all. Figure 10.1 may help us think about the world from an entrepreneur’s perspective. As mentioned at the beginning of this chapter, the only moment of action is always the continual moment of “now.” We act, live, remember, and look forward in the present— in the right now. But our time in the present is not only a period of action; it is also a continual process of appraisal of past actions and future possibilities. The goal of this appraisal by acting man is always to guide both current and future actions. Even though we live in a world of uncertainty, we continually gain knowledge as time progresses. We reflect on how closely our past plans matched our expectations and we try to identify the source of any error in previous plans. Was it our technical knowledge (data) or perhaps we didn’t properly understand the linkage between the means we chose and the end goals we pursued? We look back and try to determine what worked and what didn’t. We then try to understand what we could have done differently to achieve a better outcome. Of course we don’t just live in the past, we’re constantly looking forward as well. We take the new knowledge that we gain and revise our baseline stock of knowledge. Perhaps this may require revision of existing plans, or it may help identify new opportunities or new risks such that we create new plans. Reflection of the past also assesses our prior ability to actually implement our plans (did our prior actions lead to the expected results?). This reflection helps to shape our understanding of our potential ability to direct our