How the Entrepreneur Creates and is Created

Featured image is Sir Francis Baring, by Sir Thomas Lawrence.

Entrepreneurs are not as free or powerful as we like to imagine, nor can they be entirely subsumed into the larger forces of history.

In Knowledge and Coordination, Dan Klein points to “The Verger,” a short story by W. Somerset Maugham, as a great telling of entrepreneurship in practice. The titular character goes in search of a cigarette and realizes that there is nowhere he can buy one in the vicinity.

“That’s strange,” said Albert Edward.

To make sure he walked right up the street again. No, there was no doubt about it. He stopped and looked reflectively up and down.

“I can’t be the only man as walks along this street and wants a fag,” he said. “I shouldn’t wonder but what a fellow might do very well with a little shop here. Tobacco and sweets, you know.”

He gave a sudden start.

“That’s an idea,” he said. “Strange ‘ow things come to you when you least expect it.”

Klein uses this as an example of entrepreneurship on the model of his mentor, Israel Kirzner. Kirzner is an economist in the Austrian school, who emphasizes the role of alertness and frameworks in entrepreneurship. The Austrian school more broadly defends entrepreneurship as a creative act.

For neoclassical economics, however, this sort of arbitrage is more a feature of the situation than the individual. The shop that the protagonist sets up is like one of the corner stores that is very common in New York City. A lower density neighborhood may have relatively few of them, but then see an influx of people and suddenly gain a few more. The situation creates the arbitrage opportunity, not the entrepreneur.

We can all agree that an iPhone would have been quite handy in the 19th century, but it takes a lot more than a Steve Jobs or even an Apple to make such a thing possible. The whole infrastructure behind the Internet, as well as the means to connect to it wirelessly, to say nothing of the manufacturing ecosystem, modern computing, and touchscreen technology, went into a situation that made the iPhone possible.

But even if the situation created the possibility of a touchscreen Internet-connected phone, was the iPhone likely? Can anyone deny the way it influenced its competitors? What would the look and feel of smartphones have been like if there had been no iPhone, or if Apple had botched its attempt to make and market one?

And what about marketing? Some economists argue that it is nothing more than a wasteful arms race. Others argue that it’s simply the cost of getting information about a product out there. Vanishingly few—Deirdre McCloskey and Tom Palmer are two that I’m aware of—argue that it is about persuasion. Entrepreneurship is not just about seeing a possibility, but creating one. By telling consumers a story about where a product fits into their lives, entrepreneurs invite those consumers to participate in making that possibility a reality. This fails more often than it succeeds.

A story is how possibilities are understood or conceived of in the first place. “There are enough people around here, like me, who want a smoke or some sweets, to make a shop profitable.” “The center of our digital lives is shifting from the computer to the cloud, opening up possibilities that weren’t available to the iPod.” “If I buy up grain during the season when it is plentiful, I can sell it at a higher price when it is scarce.”

Our standpoint determines what possibilities we’re capable of seeing. Our historic situation plays an enormous part in this, of course. But also the books we have read, the people we have met, the situations we’ve been in, and what we’ve done. In other words, there’s History, and then there’s our personal history. Both matter.

Big-H History seemed to be going the personal computer’s way even without the two Steves or Bill Gates. One wonders how different the look and feel of them might have been, or whether the enterprise market would have developed the way it did, without those specific men and the particular possibilities they envisioned.

Consider the POW camp where the residents receive a parcel each week. Suppose one prisoner imagines that it is possible the parcels might stop coming for a few weeks. He doesn’t even think it is more or less likely; he simply imagines the possibility. Disturbed by this, he starts stowing half of his parcel for a few weeks in a row.

Then a month and a half go by without a parcel delivery. Suddenly he’s got a hot commodity. He’s able to sell it off little by little for more than people would have given for a while parcel when deliveries were coming regularly.

The deliveries start again. Now that people have learned a hard lesson, they start setting aside some of their own parcels to hedge against another lean time.

Did the imagination and entrepreneurship of the first guy matter? Say it saved one or two lives. In the march of History, people would have learned their lessons after the first lean time, right? And if the lean time had never ended, that one man’s efforts couldn’t have helped them indefinitely. So did it matter?

Individually, perhaps not. But Big-H History is really just a shorthand for the accumulation of creative acts, small and large. We ask whether the ones that appear to have individually outsized effects are what move history. And the answer depends on the situation, but most of the time it probably is not. Manufacturing and textile entrepreneurs draw people to cities from farms, or did the movement of people from farms to cities create the labor necessary to revolutionize manufacturing and textiles? Wouldn’t most people say there’s a two-way relationship there?

Entrepreneurship creates possibilities and is created by possibilities. It changes history and is changed by history. It’s a creative act and a perfectly natural response to the situation. It’s constrained freedom and thrown-projection.

This is my admittedly vague sense of how the way the entrepreneur influences but is also has influences works in practice.

And it is not only so in commerce, but politics, science and scholarship, and philosophy.

But also for family, friends, peers, and community.

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