How Entrepreneurs Learn from the Marketplace
Ludwig von Mises wrote that “we are historians of the future.”1 But, the heterogeneity in knowledge makes it virtually impossible to know everything there about historic market trends, or even about local economies.This is why F.A. Hayek emphasized there is no such thing as perfect knowledge among individuals at any given time. Everything is constantly changing, as Thomas Sowell noted, “the very land that people stand on is not the same in different places.”2
On the other hand, it is possible for entrepreneurs to gain a working knowledge of what is needed to serve consumers at a particular point in time under specific market conditions. But even in this limited case, perfect knowledge and perfect forecast is inconceivable in the real world.
Since entrepreneurs are not omniscient, they cannot single-handedly change the course of nature to suit their own ends. They must constantly adapt to conditions created by others. And one way they adapt is through the process of market competition.
But competition is certainly not welcomed by every entrepreneur. Competition is viewed as an obstacle by incumbent entrepreneurs. Entrepreneurs who have just entered the marketplace, however, embrace competition. From the consumer’s point of view, of course, this is all to the good. New entrepreneurs sell products and offer services that the incumbent firms missed.
Moreover, so long as people are free to buy and sell in a marketplace, there will always be new competitors attempting to emulate a successful firm or to pursue a current firm’s missed profit opportunity. And along the way, entrepreneurs will learn a lot about the marketplace. Some will use this knowledge to attract new consumers. Some will learn new information through the process of going out of business. And firms will learn from the failures of other firms.
In a world of demanding and ever-changing consumers, there is always a way to do things better, with greater quality, and at a lower price. Entrepreneurs must learn how to do this, or they will lose out to those who can.
For this reason, those who were once on top will not always be there. Incumbent firms, who once had an advantage, may not share in the enthusiasm of innovative practices being employed in their own backyard. Because of this constantly evolving situation, “Firms that hold competitive advantages “ Fernando Monteiro D’Andrea writes, “will have to defend their position by innovating continuously.”
There are four ways entrepreneurs can do this, and they help illustrate why competition is so important to the learning process:
1. Strive to Learn More: Entrepreneurs subject to less fierce competition do not gather as much information or learn as quickly. But, by experiencing market changes, and acquiring feedback from participants and competitors, entrepreneurs become more knowledgeable of consumer needs and market demands.
2. Interact More With People in the Market: Greater learning is fostered by more interaction. Competition requires more voluntary communication between entrepreneurs and consumers. This is non-coercive, unhampered interaction between people in the form of buying and selling, or the refusal to buy and sell. As decision makers interact in the marketplace, they discover opportunities for what is and what can be.
3. Be Ready to Act: This is a given to any entrepreneur. Kirzner contended that competitive pressure is part of the character of the market; we can never be disentangled from it. If a profitable service or product is found or created, others can and will imitate the success and share in the profits. It is important to move quickly and to take advantage of current fashions and consumer demands. Those entrepreneurs will copy the innovators will drain away market share, but the most innovative have the chance to benefit the most.
4. Find What No One Else is Doing: Once entrepreneurs have a sense of what consumers wants, the next challenge is to provide new goods and services that meet consumer needs even better than the existing goods and services. Once these new goods and services reach the marketplace, the learning process begins all over again. The entrepreneur continually seeks a niche in which to find new profit opportunities. But these opportunities can never be known ahead of time.
Entrepreneurs do not know ex-ante all there is to know about a particular market and the likelihood of a service or product’s profit potential; as well, entrepreneurs cannot know ex post if their service or product will receive consumers’ votes. Regarding the entrepreneurial paradox of acquisition via competition, the adage rings true today: You can't hit a home run if you don't go up to bat.