Economics For Entrepreneurs: There Can Be An Economy Without Managers, But Not Without Entrepreneurs.
Recently, Professor Per Bylund explained to readers and listeners the different economic roles of entrepreneurs and managers.
From the perspective of the economic system – i.e. how the market works – the entrepreneur is the one who allocates scarce productive resources to their highest and best use. Many of these uses are not yet in existence – the entrepreneur imagines the future and then re-arranges existing resources to bring that future into being. Perhaps he or she turns silicon into microchips. Or internet connections into delivery services. Or sugar into cookies. Or coal into electricity. Or aluminum into truck beds. Or knowledge into professorial college lectures. Or hard work into a finished construction project.
The entrepreneur finds ways to put resources to better and more productive use than those for which they are utilized today. This creative energy is what drives human betterment, economic growth and our ever more comfortable standards of living. How do they do it? Each individual entrepreneur focuses on what they know and what they understand. They put the consumer first (or the customer if they’re running a B2B business) and focus their knowledge gathering on what the consumer wants.
When they start assembling resources to bring their new idea to market, they might be bidding them away from other activities. If the innovation they are developing is so new that no-one else recognizes the opportunity, the underlying resources might be relatively low priced – for example, purchasing a run-down house in a downtrodden neighborhood that others avoid, with the imaginary vision of being able to upgrade the house and rejuvenate the neighborhood. That’s why many real estate professionals say that the real profit is made with a smart acquisition rather than a brilliant marketing plan to support a sale. If the improvement is incremental, and the resources are already in use for consumer-approved products and services, it may be more expensive to bid the resources away. The entrepreneur’s economic calculation is more nuanced in this situation, and it may be unclear whether the consumer verdict will ultimately deliver a profit. The entrepreneurs bring the action of the pricing system into being with their bids, and their competition for resources is what ultimately ensures that society’s resources are put to their highest and best use. Prices for resources are generated by entrepreneurs.
There is no role for the manager in this fundamentally important economic activity. Until the entrepreneur has bid for and assembled the resources, there is nothing to manage. Once the resources are allocated to a “project”, then there begins to be a role for the manager to make sure processes are efficient and well-implemented, and the assembled resources are utilized in the most efficient manner, last as long as possible, and are well-directed towards the end of customer or consumer satisfaction. Even at this stage, if the entrepreneur senses that resource allocation is ripe for further fine tuning – more R&D, for example, with the money being transferred out of marketing – he or she will step in and take the reins back from the manager until the adjustment is executed. The manager is an expert in organizing production to implement the entrepreneur’s vision. The entrepreneur is the expert doing the imagining in the first place.
There can never be a market without entrepreneurship, but there can be a market without managers. It is perfectly conceivable that there could exist an economy where every stage of production takes place through market contacts without firms, where the entrepreneur is self-employed or an independent contractor, as are all workers and administrators. This is beginning to happen today. For example, independent producers in China can offer their goods and services on a platform like Alibaba to independent importers and resellers in the USA who execute their retailing, marketing and fulfillment on Amazon. Alibaba and Amazon and the other supply-chain enablements in the emerging global commercial network are not so much firms as software platforms providing digitally enabled services. In this emerging entrepreneurial ecosystem, there would be very little, if any, use for managers, since there is no value-enhancing cost-cutting or process efficiency to be sought, and no immense transaction costs to be managed away.
In his book The Globotics Upheaval, Richard Baldwin coins the term Globotics to communicate the idea of globalization and robotics – including processes robotically automated in software – as concurrent trends in today’s economy. More and more white collar jobs – managerial jobs – that are merely repetitive or unimaginative implementation and enforcement of rules can be done by software, or, as Mr Baldwin puts it, by “globots”. In actual fact, the robotic automation does not eliminate jobs but repetitive rules-based tasks that require neither creativity nor humanity. Released from mindless office tasks, we will all be freed to create value through our human values and human ingenuity. We can all become entrepreneurs.
In this non-managerial world, entrepreneurs would focus on new and previously unknown types of goods and services, and types of production. They will imagine what could be but isn’t, and compare the value of the current state to the not-yet-existing state, to determine whether there is profit for them in pursuing the new state. Managers focus on the current state and try to reduce its cost, smooth its processes and refine its supply chain. This can all be done by contracting between entrepreneurs – continuous dynamic bidding for each element and component. The entrepreneurial economy moves too fast to be “managed” or to require “managers”.
Listen to Professor Bylund and Center For Individualism Executive Director Hunter Hastings discuss The Role Of The Entrepreneur on the Economics For Entrepreneurs podcast.