No Free Lunch: Economics for A Fallen World

9 | P31W: Enter the Entrepreneur!

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 not none; there are always substitutes and consumers can abstain from supporting bad producers. Consider “Black Friday” shopping, for example. The day after Thanksgiving is filled with competition for consumer dollars. Further, most of the good deals are also available online, making this service to consumers available to rural areas as well. Technology is further enabling the sovereign consumer and forcing producers to serve. So, as we discussed in the last chapter, potential competition is almost always there to restrain producer misbehavior.

In the exercise of consumer sovereignty, customers can be exceedingly fickle. Today they may want one product, with “Tickle Me Elmo” the must-have toy; tomorrow it may be the newest Wii. This Christmas it may be the iPad, but next year it could be something else. For businesses to serve their customers well, they have to have the products consumers want to buy available, but only those products consumers are likely to buy. I’m sure you’ve gone to the store before to buy something you really wanted only to be disappointed when they were out of your size or didn’t have the product in stock at all. If that store repeatedly doesn’t have what you want, you’ll stop going there altogether. The flip side is it costs the store money to carry infrequently desired goods, but if they pass too much of the cost to you, you’ll find another store to shop in. So businesses have to carefully balance having enough of what you want to gain your business, but not much you don’t want (averaged over all consumers) so costs aren’t too high.

The best businesses are, in effect, “middlemen” that bear risk for you, the consumer. A major risk that entrepreneurs bear is they must be prepared for the fickleness of consumers. They may order a stock of 100 million Tickle-Me-Elmo’s, and then for some reason no one wants them this Christmas season. They are stuck with the product and will have to heavily discount the item to get rid of it, likely suffering large losses. They are middlemen in that they take the raw resource inputs (land, labor, and capital) and transform them into something that you as a consumer want. Common conventional wisdom has retailers as middlemen, since they don’t “do anything” to produce the product. Of course we’ve already learned this is false; every stage of production and distribution adds value to us as consumers. So to the extent that there are middlemen, all aspects of production are middlemen since they are in the middle of the raw materials and contribute in some way to get the finished product in your hands.

These entrepreneurial middlemen are also risk bearing, because there is no certainty that what they expect you to want will actually come to pass. They carry all the risk for you; if your tastes change they will suffer the loss—not you. Further, they are middlemen that reduce your need to carry inventory for future needs; you can buy “just in time.” There is no need for you to keep your own hardware store on hand, although you may keep a small assortment of nuts, bolts, nails, and wood on hand at your house for small projects.

As consumer sovereigns, we are spoiled by the entrepreneur middleman who almost always has what we need immediately on hand and who bears all the risk. If he serves us well, he’ll earn a profit. If he does not serve us well, we will mercilessly find someone who will! The best entrepreneurs will know our future needs even better than we know them ourselves. We don’t know what we are going to want, so how can the entrepreneur know? The answer is that entrepreneurs don’t know our individual needs, but rather they are able to estimate what a representative or average consumer will want. As many customers bring their wants and desires to the entrepreneurs, the fickleness of one consumer may be balanced out by a change in desire of another. They never need to sell you a particular good or service; they just need to be able to sell it to somebody. And because of our understanding of the conceptual tool of marginal utility driving the demand curve, we know (and so do the entrepreneurs) that if they don’t exactly get the balance right, changes in price are likely to have the desired result (equate supply with demand). It would be incredibly expensive for us to preserve all of our options to meet possible future needs and desires if we had to buy everything we might want and stockpile for the possible contingency. Fortunately the social system of the market preserves our options at very low cost to us. The entrepreneur is willing to bear our risk and be the middleman—for a profit.

The P31W was willing and able to bear risk for others. She expended resources (both labor and materials) in advance to make linen garments available for others. Merchants were supplied with sashes at their moment of need—they didn’t have to expend resources to preserve their options. They depended instead on a risk-bearing entrepreneur who could “smile at the future.” For her, a woman who feared the Lord, she could trust that the future would be kind to a hard-working entrepreneur who served her family, the poor, and others in the market place.

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1 total remarks have been added

  1. Amy Radwanski | Mar 20, 2015 12:46 pm

    Ranking: 2
    This chapter features a few illustrations with unnecessary gender stereotypes. In this piece on the risk-bearer, the assumption that males keep hardware tools and that women keep makeup around is not necessary to illustrate the concept of a middleman and your point would be clearer and more relatable with a single illustration that applies to both genders. This is the second borderline sexist illustration I found in this chapter, referring to your previous notion that men are the ones who initiate relationships. Women do not just sit around and wait for someone to ask them out. They regularly go through that decision making process, weighing risks as men do. While your points and definitions are explained well throughout, the connections made in these illustrations were inaccurate and distracting.