Free Markets Don’t Provide Enough Entrepreneurship

Dear Reader,
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Please consider the following argument in abbreviated form (original here).
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“Information is a public good because its consumption is nonrivalrous and it is very hard to exclude nonpayers from acquiring it once it has been generated. Thus in equilibrium the market will tend to provide too little information. When an initial entrepreneur discovers a new profitable product (the smart phone or the personal computer for example) he generates information on the profitability of this new product. If there is free entry, other potential entrepreneurs will use this information and will enter the market as producers of this new product. Because the information generated by the initial entrepreneur on the profitability of the new product is non rivalrous and it is very difficult to exclude others, the information generated by entrepreneurship will be under provided. In other words, in a free market, in equilibrium, entrepreneurship will be underprovided. Hence government must subsidize entrepreneurs.”
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What can be said in terms of Public Choice? What can be said in terms of pure theory? Please be social and answer in the comments!

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  • Juan Fernando Carpio

    “Thus in equilibrium the market will tend to provide too little information.” Non sequitur. Please never do this.

    • Santiago Gangotena

      This is more of what I was looking for! Can new information be provided in equilibrium… No.

  • Juan Fernando Carpio

    This is neoclassical claptrap (no offense intended, of course). Brands provide differentiation. Period.

    • Santiago Gangotena


  • Ryan Safner

    I think even a neoclassical framework without regard to public choice and market process analyses (though obviously incomplete without them) would address this if we are willing to jettison a few implicit and unwarranted assumptions about public goods:

    Samuelsonian public goods seem to assume two things (in addition to non-rivalry & non-excludability):
    1. That once an idea is discovered, it is instantly and costlessly broadcasted anonymously to everyone in the system/society
    2. Once aware of the idea, all people value it highly enough to consume it, again costlessly

    On 1) Ideas are not anonymous, they travel through specific channels across networks. I think it’s quite rare that they are literally “broadcast” like a TV show on NBC open to all who have a (legal or illegal) receiver. Now it could be that within these networks are rival entrepreneurs, especially if they all use similar inputs that are privy to the discoveries of the entrepreneurs. But this is why firms use contracting (non-compete clauses, non-disclosure agreements, etc) and other attempts to keep their discoveries from spilling out (trade secrets, etc), to say nothing of patenting or copyrighting them.

    Additionally, there is often a large cost involved with spreading ideas. The failures of us economists to inform and teach the public about economics, despite our massive investments in teaching capital makes this plainly obvious.

    On 2) Even if an idea spills into the open, it is not costless to use. Things have to be reverse-engineered and/or fitted into an existing capital structure at a rival firm, who may even have to start building that new specific capital structure. All of that is going to take time, which gives the first discoverer (assuming s/he actually DID something with their discovery and utilized it in a production process to make a novel product) a first-mover advantage. And as Juan Fernando Carpio said, it benefits the first mover’s brand. Few people will buy from some upstart who happened to steal Ford’s new pickup truck plans, they would rather buy from Ford.

    • Santiago Gangotena

      I’ll play devil’s advocate. Yes all fine and good however the information spillover is not the product itself but the knowledge that about the profitability of producing in some industry that has not been in service before, so the arguments don’t apply, its not only about creative goods (it can be). And its not about the cost of producing a good, those are private costs and benefits. The benefit is the knowledge generated by the idea. Consider the examples given by Rodrik and Hausman, or what agricultural product should you produce? If you are successful in producing yams, while everyone is producing potatoes, you signal the rest of the market that producing yams is profitable. This information is readily available to people producing potatoes. Thus in equilibrium there will be an insufficient amount of experimentation because of the information spillover. Think of world markets, and no brand differentiation for agricultural products and the argument still flies.

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