Have you ever been to one of those training days and snuck out early to get first dibs on the lunch buffet?
That’s basically what entrepreneurs do – they try to get to the gold mine before everyone else. But eventually, everyone else does turn up, and ruins the fun. If enough people turn up, sometimes the organisers have to have the food distributed by paid staff rather than just let people help themselves. Scarcity and desire strikes again.
The point is that entrepreneurs can make good money in the golden sunrise of their enterprise, but once competitors start appearing, his profit margins shrink to the bare minimum until they might eventually force him out of business.
Entrepreneur is an old French word meaning someone who undertakes things.
But you could literally translate it as the “between taker” – or the person who is “on the take” between two others.
I like that second definition. It highlights one of the myths of business – that of the entrepreneur as the powerhouse of the economy getting reward for taking risks.
Why is this a myth?
In reality, entrepreneurs can only really make their dreamt-of mega-bucks in the brief golden period when their innovative business is still a monopoly. Once competition from other entrepreneurs kicks in, the curse of “marginal” profit kicks in. (For good explanations of marginality have a look at David Smith’s Free Lunch, or Tim Harford’s Undercover Economist.) But in brief, what it means is that once competition enters the market, entrepreneurs can only make the bare minimum profit before having to close down. The profit now goes to the two things than the entrepreneur is “in between” – namely the consumer (benefitting from low prices) and the owners of essential resources.
In Harford’s book he talks about the coffee stand at Waterloo train station. The reason why the stand does such good business is because of the uniqueness of the position – just where thousands of commuters get off the train on the way to exit. The primary resource is the position – the person who owns that bit of land has something of great value. Once competition comes into the coffee stand market, the platform owner can absorb any profit that would have gone to the coffee stand entrepreneur as a result of the bidding war for this prime position. (The other resource providers such as the coffee suppliers and the baristas are irrelevant because they have so many of their own competitors. The Waterloo train station owners do not really have many competitors.)
Many economists are happy to stop investigating the story at the point where they reveal the miracle of the free market brings prices down to benefit the consumer.
But for me, the other end of the situation is just as interesting. The property owner through no effort of their own absorbs the rewards previously accruing to entrepreneur – the hero of free market economics.
This is all analysed in early economic literature – notably in David Ricardo who sought to show that “the interests of the landlords were opposed to the interests of the rest of society.” (From Backhouse’s The Penguin History of Economics.)
There is another twist though.
Up until (relatively) recently, agricultural land was seen as the primary resource. Agriculture being the main form of wealth creation – adding value to the raw materials through the magic of nature. But in recent centuries this has started to shift. Marx suggested that primary resources are the means of production. Factories and machinery could only be afforded by the extremely wealthy – or at least well financed.
Nowadays, I would suggest that the key resource which allows the creation of wealth is the “means of promotion”. (Yes I was pretty pleased with myself when I thought of that.)
Because if you now have access to the media you can sell any old rubbish! (Have you seen the latest batch of celebrity Christmas books?)
A friend of mine, who has run his own business for 15 years and was once a huge fan of The Apprentice has lost his interest in the programme. He highlights the ease with which contestants can get meetings with purchasing managers in big companies. As he points out, you might have to spend years trying to cultivate a relationship with a purchasing manager to get such an interview. Unless of course you have the magic words, “I’m a contestant on BBC’s The Apprentice”.
“Means of promotion” covers a wide net – from the luxuriant self-promotional capacity of Rupert Murdoch to the business owner with a friend who can up his google presence as a favour.
But also, I notice that as big firms take over our shopping habits – reducing the number of suppliers and increasingly provide all our wants in one place – just by being on the shelves in these “megastores” is a significant form of promotion in itself.
An agreement from a megastore to stock your product means that a vast percentage of the population have easy access to the product and can become aware of the product – and of course the large number of stores that can stock the item will mean that your economies of scale are extraordinary.
The economies of scale enjoyed by big companies, along with vast financial and cultural capital, are the reasons why the “golden period of a new business’s monopoly” that I mentioned at the beginning is becoming ever shorter. Businesses that are easily replicated can be copied very quickly by the big companies.
Equally the businesses that are difficult for competitors to replicate such as communications technology have very high start up costs.
Inevitably we are seeing an expansion of the absorption of profit by the controllers of the primary resources – land, capital and now media and marketing.
Poor old entrepreneurs. Life is tough in the middle!