CREATIVE DISRUPTION

With the 2016 Presidential Election almost upon us, it has become apparent that this election is taking place at a very important time in our nation’s history. Let me be clear. I am not saying that this election is the most important one we have experienced as a country, nor am I claiming that every single person should look to the voting booth as a means to a stable and prosperous society. On the contrary, it is quite often people find that using political means to achieve any ethical or economic ends is not the most fruitful path. Neither do they find that simply withdrawing consent to be governed a viable option, for the very reason that democracy is a political structure that vies for power and influence. And without a voice, or a vote to commit, one can have neither.

The entire system is a false dichotomy, and that’s not even mentioning this fake narrative that Republicans and Democrats actually have any real differences. The false choice is actually between voting and not voting. Neither choice by itself is a realistic option for change. To make any real difference in the world, an individual must look to what isn’t being said or done at the moment, and carve a path for themselves, while at the same time making this path bear fruit for those who wish to travel a similar one themselves. This brings us to our current predicament.

It is obvious that the people most affected by our political and economic problems are young people, primarily 30 and younger like myself. Millennials are the beneficiaries of the innovations, technology, production, and education provided by previous generations. But for the last several years, particularly since the Great Recession, our future has been thrust into a state of foggy, perpetual uncertainty. To understand why things may seem to be changing for the worse, we must understand how they could ever change for the better.

Bear with me on this. Like any obstacle you have to climb, it can be a challenge. You could think of our social and economic strife as a giant redwood tree, each branch being a smaller issue but as you get higher the branches thicken and block your path. These are the major problems we face as a society. If we are ever going to have a great future, we have to reach the top of that tree. It may be a long, tumultuous climb, but when you get there, your efforts will bear fruit. On your way to helping yourself to that fruit, you’ll be able to provide some for those near the lower branches that are less fortunate than you. This will help solve many of our issues that politics cannot. It starts on an individual level. But first, it is of the utmost importance that you and I fully grasp the simple distinction between politics and economics.

EQUALITY & EQUILIBRIUM

For all of our prosperity, we do not live in paradise. There is suffering, poverty, and a shortage of many of our wants and desires. This is the nature of economics. If it wasn’t, we would have an abundance of everything and would be in a perpetual state of equilibrium where there would be no economic hardships for anyone. While there are several definitions of economic equilibrium, the definition most useful to millennials in our current economy is where the subjective plans of each of us coordinates perfectly with the plans of every other person so that each person can acquire the things that they find most desirable, while at the same time they can provide something that is most useful to one or more individuals. In other words, it is a situation where everybody who wants something is able and willing to acquire it (for a given price). Therefore, there is no economic poverty and no unsatisfied wants in this state of equilibrium.

It is a state of constant bliss, where our subjective preferences are satisfied. Everyone you know has the latest iPhone and internet access. You and your friends all have the money to take a trip to the beach for the weekend. Your parents have the necessary amount of money saved in order to retire comfortably, while you also have enough income to pay off your student loans.

Unfortunately, this state of equilibrium is an impossible concept. It is a unicorn. There are two reasons for this. First, our system of market exchange is a process, not a “state” of being. Every day, people exchange different goods and services for different amounts of money, and work different jobs for different amounts of income. And this is constantly changing. Consumers change their demands, and producers and retailers change the supply of their products based on their perception of these changing demands. Workers change jobs and acquire higher level positions to secure more benefits and income, and people exchange ideas and thoughts to further their own knowledge for their careers. If our economy was ever in equilibrium, everybody would possess everything they need and want, and therefore there would be no room for change or action.

KNOWLEDGE IS POWER

More importantly, our knowledge is constantly changing. By knowledge, I do not mean scientific or analytical knowledge, nor do I mean any kind of technical knowledge. I mean to say that there is a more practical knowledge of the available resources in society. F.A. Hayek calls this “knowledge of the particular circumstances of time and place.” That statement reflects the difference between these two types. The more scientific or technical type is often used by bureaucrats and political planners who often make decisions of how to organize society using methods that only they and other elites possess. The second type is a more widely disbursed and decentralized form of knowledge. In other words, it is a type of knowledge that many people have with regard to their specific location(county, town, neighborhood, etc.) and time frame. They have a tendency to know and anticipate what their local economy demands and supplies better than someone in another location, such as another state or country. This equips these locals, including you, with the “correct” type of knowledge to know what the market demands at any given time. In addition, as time passes the type and scope of knowledge changes with it due to the ever changing availability of resources, demands, and incomes of other locals.

While those with political power can arrange resources to provide public goods on a much more national scale with their access to technical knowledge, these elites do not possess this decentralized knowledge, nor can they conceptualize the idea that this knowledge must constantly change and adjust to serve the needs and wants of specific neighborhoods, towns, and counties. On the other hand, those who possess this widely disbursed understanding of time and place are at a distinct advantage when taking into consideration the idea that they can acquire and sell these resources in a timely, efficient, and cost effective way.

However, this knowledge is virtually never correct or perfect. Desires and wants are completely subjective, and as each second of time passes, they change, sometimes radically. In as little as a month, a new fad may come and fizzle out like Pokemon Go, or a new product may become scarce due to a constantly growing demand outpacing the available supply of it. In a sense, we could call this radical uncertainty. It is the nature of our economy. We have especially seen this since the Great Recession. Millennials in particular have been affected by this.

WE ARE THE MARKET

In 2016 there has been a rise in more interactive forms of exchange. With payment systems like Venmo, transportation services like Lyft and Uber, free investing apps like Robinhood, and new cryptocurrencies like Bitcoin, the U.S. economy and job market has shifted significantly, emphasizing more peer-to-peer interactions.

It is not surprising that the majority of the activity in this new “sharing economy” is comprised mostly of millennials who are younger than 35. While the unemployment rate may be low, over 40 percent of the unemployed are millennials. That is over 4.6 million young people who are out of work. Many of us have student loan debt, which hampers our ability to buy a house, a car, and other expenses we would otherwise be capable of affording. Combining this debt burden with the rise in the cost of living for important purchases has caused many young people to look for political answers.

My purpose here is to convince you, as someone with youth and passion on their side, that you can be the source of actual, real change on a local level. It is not my purpose here to make a moral or ethical case for best way to correct our social problems such as racism and sexism. That is the role of activism. It is to show how, with the right kind of “alertness” to our ever-changing economy, you can change your own troubling circumstances like student loan debt by providing very important needs of others around you. Not through political or activist means; but by the market.

As I stated before, knowledge and information are not perfect and are actually quite limited. We know this. It’s what creates uncertainty. And because of this, our economy is saturated with opportunities. Opportunities that can be created through awareness and alertness. Quite often they are overlooked by the average person. This obvious point was missed by an economist many decades ago named Lionel Robbins. He was a sensational theorist who correctly diagnosed the causes of and solution to the Great Depression. One of his lesser contributions was stated in the idea that market actors, like you and I, are simply “economizers”. What this means is that we pursue what we think is our desire at a given moment, whether it be a day at the spa or a lunch at a nice restaurant, with readily available information that we know with certainty is correct. In other words, that the goals and the means to achieve these goals for us are knowable and given.

He was wrong. Again, this is chasing a unicorn. It doesn’t exist. We often don’t know the correct way to achieve our goals, or at least don’t necessarily know the least costly way. In order to achieve our goals, it is necessary to know what our choices are. These are called opportunity costs. It’s not a monetary cost, per se, but a subjective cost that we internally weigh against other choices or paths we could choose instead. It just so happens that costs are usually calculated in terms of dollars.

PRICES ARE KNOWLEDGE

The most important aspect of this idea is the concept of a price. A price is simply a way of determining how much of something is to be exchanged for something else. It’s a ratio, nothing more. It’s almost always calculated in terms of money, just as costs are. Economic theory isn’t important here, but what is important is the idea that prices contain information. Or to be exact, they contain imperfect information. An economist from St. Lawrence University correctly calls them “knowledge surrogates”, due to this lack of perfection. They convey information that tells you how much money it will take to acquire something you want.

The crucial point is here is that these prices are almost always wrong. This is because this is not Nirvana. Retailers and store owners don’t know the exact price that should be charged to gain them the biggest profits, and this implies that the price they charged for any product is either to high or too low. If the price is too high, less of it will be demanded, and there will be too many of these products left on the shelves. This means there will be unsatisfied customers who didn’t get what they wanted at a low enough price, and must settle for the next best thing. If the price is too low, there will be an overabundance of demand for it, and therefore there won’t be enough of the product to satisfy every customer. This means that some of them will go unsatisfied as well.

YOU ARE THE MARKET

This is where you come in. You may not be aware of it, but you’re an entrepreneur. Even now as you are reading this, you’re profiting. You may be thinking this is wrong, but remember what I stated earlier. Prices and costs are inherently subjective. You value your wants based on the alternative choices you have at a given time. Even though they can be calculated in terms of money, they are based on our personal desires and wants. In a state of equilibrium, prices of these things would equal costs, and there would be no need for action. So the fact that you have decided to read this instead of watching TV or playing Candy Crush on your smartphone shows that you have considered all of the alternatives you could have chosen, and have decided that this is the most profitable choice, based on these opportunity costs.

In this regard, everyone is an entrepreneur. Yet there is more. While bankers and rich capitalists seem to have more than enough means to acquire their wealth, you are in a similar situation, but for a different reason. While someone in the top 1% of income earners has more wealth than you, he requires capital to acquire it and maintain it. This capital does not simply mean money. Usually the wealthy obtain “income streams” from capital such as real estate, factories, patents, stocks, bonds, derivatives, and other financial instruments. These income streams are perpetually propped up by our monetary system, which typically benefits the wealthy through the manipulation of money and interest rates. While it’s extremely unfair to younger people to have to watch their incomes and job opportunities stagnate or fall, it’s a harsh reality.

There is good news, however. You don’t need real capital to make money or to start a small business. The only thing that is requires of you is alertness to opportunities. You could call this discovery; discovery of a good or service that is undervalued in one part of the market and overvalued in another. This good or service could be anything. It could be tangible like a toy for special needs children, or a service like providing cheap tutoring online. A important aspect of this alertness is the fact that these products are able to be acquired at a cheaper price in one area and sold at a higher price in another. This is known as arbitrage.

This may seem like it’s too good to be true, but it’s not. There are nuances of course, but if the difference between these two prices is large enough to enable you to offer an interest payment attractive enough to compensate a friend, family member, credit union, or investor into lending them the money to purchase the cheaper good in order to sell it for a profit, then you are not required to “own” the means or capital in order to create value in the economy. So you and I as college students or workers don’t need to necessarily scrape up every dollar we can to take advantage of the general ignorance of these possible opportunities. Although, many of us probably have sufficient savings to pursue at least a few of these price discrepancies. There are many other scenarios where this purely entrepreneurial function can work for us too.

PURE ENTREPRENEURSHIP

What separates this concept from the money and wealth that capitalists and investors make is what has been called pure profit. As an investor or businessman, there is inherent risk to each productive endeavor taken. Should they fail, they will effectively lose their capital, i.e. their income streams. We can infer from this that there are costs incurred in order to make their products they want to sell for a profit. Any revenue they receive from customers that is in excess of these costs, such as labor or tools, they then retain that money as profit.

Yet this is not the same as pure profit. This is a concept stated by economist Israel Kirzner which is based on the idea that an alertness to these previously unrealized opportunities enables a person to take advantage of a virtually riskless endeavor to buy resources at a lower price and sell them where they are more valuable to society. The main difference of these two types of profit is that pure profit can be obtained with no capital and a minuscule amount of risk or none at all! While you can never completely eliminate uncertainty, you can minimize it to a negligible amount, or ignore it completely. Robert Wenzel from EconomicPolicyJournal.com puts it best:

 

If a man spots a ten dollar bill on the sidewalk on a calm windless day, is he in our world in any real sense uncertain that if he stoops down to pick it up there is a risk that he won’t get it?

Yes, a meteor may fall from the sky that very moment and as he turns his head down, it could knock him dead. A truck could jump the curb and knock him dead. A swarm of bees could find him and sting him as he stoops. All these are indeed possibilities…

the man most assuredly is not going to enter into his calculations that a meteor, truck or a swarm of bees will hit him just as he stoops for the ten dollar bill. In actuality, this was a riskless transaction, taken in the context that we must act within the realm of many minute uncertainties and much impreciseness.

 

This may seem like a exaggeration, but it’s absolutely true. With hardly any starting capital and with virtually negligible risk, you can provide real value and thus change to both your and others’ well being. All that is required is two things. The first is discovering where a product, service, or good is under priced, and where in your economy it is overpriced. This will open up a previous unknown chance to create value. Second, you need to discover where buyers have been paying too much and sellers receiving too little and to narrow that margin by purchasing the good for a little more and selling it for a little less. This would benefit buyers with a lower price, sellers with a higher price, and you with a pure profit. Closing this gap will bring the economy closer to equilibrium, and thus make people, including you, better off. It all comes down to alertness. Data and prices alone cannot do the job, it takes a certain amount of subjectivity and perception. Perhaps it can even be on a subconscious or accidental level. Fear is surprisingly also a fairly common motivation for entrepreneurs. It gives them a reason to be more detail-oriented and cautious of their environment.

REAL WORLD EXAMPLES

One brilliant example of this pure entrepreneur could be seen in Britain recently. A teenager named Beau Jessup discovered in a visit to China that Chinese parents were naming their newborn children embarrassing names such as Rolex and Cinderella. Her parents’ friends there also asked her for name ideas for their children. She decided to create a website called Specialname to assist these parents in naming their children with more culturally appropriate names that fits the family’s tradition and values. Beau’s alertness to this opportunity has lead to over 200,000 babies getting names from her only 6 months after the website began. She has made $86,000 dollars since then. It’s interesting what she stated about the whole endeavor:

 

“I wanted to do it just to see if an idea could turn into more than just simply an idea. And I never expected it to become more than just a small project. It is obviously a nice surprise, but it is definitely a surprise.”

 

So you can see that it doesn’t take a purposeful attempt to find these possibilities and opportunities. As I said, it could be just curiosity or purely coincidence, as was the case with Beau. She took on virtually no risk and owned no capital. All she needed to do was to create a website, and these days that can be done with little or no cost. In addition she will be using the pure profit from the website to pay for her education. And on top of that, her costs were most likely negligible, as prices for internet access can vary between $1 an $5 per day, but some entities such as NetZero and Earthlink charge less than $0.45 for dial up. Access to the internet is extremely cheap for most people in developed countries, especially in the U.S. Here are several examples of this inspiring pure entrepreneurship:

 

http://schumpeterscentury.blogspot.com/2010/08/kirzners-arbitrage-entrepreneurship.html

http://www.economicpolicyjournal.com/2013/01/kirznerian-entrepreneurship-at-edge.html

http://www.nzherald.co.nz/world/news/article.cfm?c_id=2&objectid=11705726

 

CONCLUSION

These people show not only alertness to the needs of others, but also the desire necessary to change the world around them. They in turn have benefited as well. That is the way of markets. To create value means to receive value, not the other way around. So instead of spending all of our time arguing for more ambiguous social programs, advocating for abstract “rights”, and verbally attacking others that have a different vision of a moral and prosperous society than us, let’s try something different other than going along with the herd.

I believe in democracy. Not democracy in and of itself, but the democracy of the market. The idea is that we all have a say in what others create. Not by our votes, but with our wallets. Most people don’t see this, but it’s reality. If you can create this wealth on a local level, then you can reduce uncertainty for others. You can provide more value and better choices than what’s out there. Like you, I know that finding a comfortable job with benefits and a pension is becoming more difficult to find, especially for the young. That is because our economy is changing. How this change occurs depends on you. This isn’t some dry, idiosyncratic concept meant only for intellectuals. This is a real world explanation for what you are capable of as an individual. You can be an agent for real change, a pure entrepreneur. All you have to do is be alert to opportunity.

 

NOTE: Here is an example of someone who used morality as more of a motivation for entrepreneurial discovery than profit, and yet he used the means of the market to do it:

The “Miracle” of Kirznerian Entrepreneurship

 

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