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Quotation of the Day…

… is from page 9 of William Baumol’s 2010 volume, The Microtheory of Innovative Entrepreneurship (link added):

If we are interested in explaining what Trygve Haavelmo once described as the “really big dissimilarities in economic life,” we must be prepared to concern ourselves with entrepreneurship.

Indeed.  But it isn’t just big, technology-based, visible innovations – such as the railroad, centralized meat slaughtering, and sharing-economy apps – that can be adequately explained only if due attention is paid to the entrepreneurship that is necessary to innovate in ways that improve consumers’ well-being.  To adequately explain markets, we must recognize that entrepreneurship of a far less visible and less momentous kind is constantly taking place – entrepreneurship that, while each instance of it is too small to notice when we gaze at “the economy,” occurs so frequently and in such great numbers that its disappearance would bring about a significant, perhaps even calamitous, collapse in the living standards of people in the modern world.

This less-visible variety of entrepreneurship includes the sort that is emphasized in the work of Israel Kirzner.  But such entrepreneurship also plays a key, driving role in the works of Armen Alchian, Ronald Coase, Harold Demsetz, Julian Simon, and many other first-rate economists who aren’t thought of as focusing on entrepreneurship.  Such entrepreneurs help move markets from conditions of ‘very imperfect’ to ‘less imperfect.’  Entrepreneurs seize not just big profit opportunities, but also (mostly) small ones – a town that benefits from a new Thai restaurant; a section of the city in which nail-salon prices are a bit ‘too’ high and so an entrepreneur opens a new nail salon there; the owner of a lawn-care company discovering ways to profitably shave some minutes off of the time that his workers spend mowing clients’ lawns; a supermarket executive taking the risk of replacing one brand of coffee that has long been displayed prominently in the coffee aisle with another brand.

Entrepreneurial decisions such as these are made not only daily, but minute by minute.

It is the reality of such entrepreneurship that makes assertions that the market for low-skilled labor is infected with monopsony power highly dubious.  Such assertions reflect a failure to understand the reality of markets and of entrepreneurship.  Entrepreneurship is all about discovering “frictions” in markets and finding ways to exploit those frictions profitably.  Suppose it is true that some low-skilled workers today are underpaid (that is, paid less than the value of their marginal productivity and that these workers are prevented by fear, uncertainty, or ignorance from quitting their current jobs in order to search for other, better-pay jobs.  Such a reality is a profit-opportunity for entrepreneurs.  A locale infected today with such monopsony power is a golden opportunity for a new entrepreneur to create a new firm – a new restaurant, a new lawn-care company, a new car-wash – to enter that market and get workers at bargain wages.  This process then puts upward pressure on wage rates.  Also, if it is true that such “frictions” are real, then surely entrepreneurs can advertise to the underpaid workers that better wages are available elsewhere.

The notion that monopsony power in the market for low-skilled workers in modern America is a genuine problem reflects nothing about reality and everything about a failure of the proponents of this notion to understand the way real-world markets operate.  Put differently, those who insist that such monopsony power is real claim to have identified profit opportunities but refuse themselves ever to try to seize such opportunities and their frequent assertions of such monopsony power mysteriously fail to convince more-capable people to take steps to seize these alleged opportunities – mysterious, that is, only if such assertions of monopsony power are believable.  Which, of course, they aren’t.