Entrepreneurs and markets


While most entrepreneurs depend on functioning and competitive markets to survive, there are those entrepreneurs that actually thrive in imperfect markets. These are the entrepreneurs that creates a business around something like an information failure, high costs of finding suppliers or customers (brokering), or overcoming economies of scale (for instance by leasing expensive equipment on a pay-per-use basis).  Their services or products are valuable to the societies that they create their businesses in, as they overcome barriers to entry and barriers to upgrading. However, there are long term consequences to an economy that is riddled with market failures especially when these failures become very profitable for some. But more about that later.

Anecdotal evidence would suggest that entrepreneurs that exploit market failures to create new markets often earn disproportionate returns. They take huge risks as governments could address the market imperfection if it had the will, the competence and the resources to do so. Once these entrepreneurs are established they often have near monopoly market dominance. Unequal income for me is not such a big problem (it basically tells me there are many systemic failures), rather unequal opportunities is a much bigger issue as it is more widespread. For instance, can the cycle of inter-generational poverty be broken in a society? Can a child from a poor rural location one day choose to become a lawyer, engineer, or teacher; or are they trapped with few options? Is the society creating opportunities only for a few entrepreneurs that have connections and that can protect their interests, or are we creating markets where many entrepreneurs can compete in?

In a European country, with layers and layers of competition and market policies, most entrepreneurs compete on a more-or-less even playing field with markets that are carefully designed, or regulated as they emerge. In Africa, many entrepreneurs are competing in markets where government actually introduce imperfections, largely because markets and competition is not trusted (it is called the Law of Unintended Consequences). The situation is also made worse in that our market regulating and shaping institutions are often not resourced sufficiently and over-run with both creating market systems and coping with ongoing change.

How to overcome this situation?

Industrial policy in developing countries cannot be driven only from the perspective of trade and industry, as many other departments (or policy areas) are introducing market failures into the system in for instance health, education, science and agriculture. These conflicting policies then creates market imperfections that if exploited by a few entrepreneurs will lead to huge profits and a firm market footing. Society may benefit in the short term from a particular solution being available, but in the long term society may be stuck with a market that very quickly develops its own interests that may not necessarily be in the interests of the wider society.

Furthermore, market institutions must recognize and identify the patterns that plays out repeatedly in a society, and try to address these. We should not celebrate when one entrepreneur jumps on an opportunity (although this is still better that nothing). We should celebrate when many entrepreneurs are crowded into a market. I don’t know whether it is naive to ask policy makers to also think about the unintended consequences of their decisions. This is the reason why we’ve had to delve into complexity theories to try and curb the damage being done by well-intended policies.

If we do not succeed in building the right market systems that are based on fair competition we will forever be creating opportunities just for a few entrepreneurs. In the meantime, we depend on a few entrepreneurs that combine intelligence about an opportunity with the right resources and the right competences.

One Response to “Entrepreneurs and markets”

  1. Liza Van Der Merwe Says:

    A slow onset disaster is smouldering in our backyards in the urban slums where entrepreneurs are a law unto themselves creating markets that are flourishing due to the failure of layers of government and failed intention. A situation most unsustainable from an economic development and upliftment perspective.

    Poverty is a very resilient system. Those living in the urban slums or shanty towns come to our neighbourhoods to earn a living, yet most people from the suburbs would not dare to go where they come from. When you grow up in the ‘freedom’ of an urban slum where boundaries are defined by the people with power through intimidation, how do you learn of the option to become a doctor or a lawyer?

    Through an eye witness report I learned of one of the Diepsloot Lord’s who owns many of the spaza shops in the area. As the rich and powerful have influence and connections he decide which streets will be cut off from their power supply. Only after the community have raised the required fees will they be reconnected again. Does anyone in that street pay the municipality for this service delivery? Illegal connections, but Mafia controlled. The harsh reality of profiting from failure.

    It is safe to talk of rural development, even romantic. The informal economy of the shanty town is a mess shrouded in impenetrable layers few wants to peer into. One need more than mere complexity relevant approaches…!

    Like


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