Business Planning With Austrian Economics

Business leaders around the world grumble about regulation, often with good reason. But entrepreneurship is about finding opportunities. Regulation constrains the set of opportunities that an entrepreneur considers but does not eliminate all opportunities Regulation may also creates niches that can be very profitable.

Whereas mainstream economics assumes that certain products and markets are given, the Austrian school economics emphasizes change and uncertainty. (See my summary of this series for links to all the articles.) The entrepreneur is part of an evolving social environment, with change driven by technology, new business processes, evolving tastes and preferences as well as many other factors. Nobody has complete knowledge, so many people and businesses stick with old practices. Entrepreneurs see opportunities that others have not perceived. These opportunities may be new, driven by recent scientific discoveries or population moves. Opportunities may be old and previously overlooked.

In classic descriptions, the entrepreneur sees the opportunity to combine low-valued resources into a high-value product. (The product can be a service as well as a physical good.) This is why total wealth in the economy is not a constant but grows as new entrepreneurial opportunities are implemented.

The range of entrepreneurial possibilities is wide, but limited by various constraints. A possible opportunity that involves moving parts is constrained by friction. An opportunity that requires skilled labor is constrained by the availability of such workers in a particular time and place.

Regulations constitute other possible constraints. Some visions that the entrepreneur may have are illegal. Other visions may be limited, require permits or taxed. Laws and regulations are not insurmountable limits. Plenty of entrepreneurs engage in enterprises that are flat out prohibited. (We call them gangsters, drug dealers, pimps, etc. Not all entrepreneurial activity is admirable.)

An African economics student recently talked to me about the need for entrepreneurship in her home country. But, she said, in many third-world countries excessive regulation and corruption limite entrepreneurship. The discussion called to mind the search for profitable opportunities. A successful entrepreneur in a corrupt third-world country would probably not try to compete directly against a company run by the dictator’s brother. Instead, the entrepreneur searches for opportunities would not trigger too hostile a response.

Uber is a good story of entrepreneurial activity in a regulated sector. The company began as a town car service (think black Lincolns and Mercedes) using a phone app to compete against existing limo services. That segment was hardly regulated in most cities. It turns out that Uber became a major competitor to taxis, but not head on. That is, Uber never called up a taxi commission to verify its unregulated status. The issue was raised by taxi regulators only after business had taken off and consumers loved the service. By then it was too late for most regulators, as public sentiment backed the company.

India’s IT outsourcing industry is another example of avoiding frustrating regulations. In the 1980s, Indian IT was a tiny industry. Because it was small and new, it was largely unregulated. Building a new bicycle factory would have involved mountains of red tape, much of it developed to protect incumbent businesses from competition. IT companies only had to hire some programmers or call center staff, not comply with cumbersome regulations. The next thing India knew, it had a huge and growing industry.

Three strategies have emerged for entrepreneurs to deal with regulations. First, they look for areas that are less regulated. Both Uber and Indian IT reflect this. However, many others may do exactly the same, driving down profit potential.

The second strategy is used by established companies or seasoned executives who already have expertise in a particular industry. They look for sub-segments of the industry that are less regulated. Nutritional supplements are less regulated than drugs, for example. Adult pajamas are less regulated than children’s sleepwear.

The third strategy is to develop expertise in the regulations. Public utilities have large departments that handle the many regulation to which they are subjected. Real estate developers often have developed strong relationships with political leaders who can modify zoning rules. Automobile companies have deep knowledge of vehicle safety rules. Regulatory expertise helps companies succeed against less sophisticated competitors, who may understand business processes but lack skill in coping with legal requirements.

Working within laws and regulations is part of entrepreneurship. Whining is a less successful strategy of coping, whereas looking for points of low regulation will more often lead to business success.

Source: Forbes.com

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