Thursday, August 19, 2010

Kirzner's Arbitrage Entrepreneurship

When I first moved to the DC area the food scene was just beginning to pick up. If you went to a local farmers market you were more likely to see fruit from CA than anything local. Too many of those experiences (it wasn't even organic) soured me on local farmers markets for quite a while - but thankfully things are better now.

One area that's seen particularly rapid growth is food trucks, despite red-tape and other hurdles. A new competitor, Red Hook Lobster (@lobstertruckdc) hit the streets this month and rolled into my neighborhood today. A coworker of mine went to see what the fuss was about. He waited in line for 40 minutes, came back to the office, ran some errands, and the woman who was behind him in line was still waiting (reference photo below). The funny thing is that McCormick & Schmick's is right around the corner and they sell lobster, albeit not lobster rolls. While a bit more expensive, there wasn't an hour and a half wait. Doesn't economics teach us that life is all about tradeoffs?

But of course there is no novelty and no fun in going to something old and familiar. The lobster truck is successful in part because it is new, but also because it is innovative. Here's a bit of background about the lobster company:

The Red Hook Lobster Pound was founded by Ralph Gorham and Susan Povich. While sitting at their dining table in Red Hook, Brooklyn, devouring fresh lobsters that they had just brought back from a friend in Portland, Ralph proposed to his wife Susan that they open a lobster pound in the empty storefront in the building that they owned, and were unable to develop due to the contracting credit markets.

Given that Susan’s family is from Maine, the idea was not that far-fetched. Ralph and Susan opened the Red Hook Lobster Pound six months later and it became the food success of the year, with people coming from hundreds of miles to sample the freshest lobster in NYC. Ralph drives to Maine each week, to pick out the freshest catch he can find. Susan oversees the lobster roll extravaganza, in 2009, the Red Hook Lobster Pound sold over 15,000 lobster rolls and 15,000 pounds of lobster. RHLP also puts on lobster boils all spring, summer and fall at various friends venues, including bars and restaurants. 2010 looks even better!

And of course, you know the story from there. This is a great example of Kirzner's version of entrepreneurship (background). In contrast to Schumpeter, Kirzner argued that entrepreneurs drive the economy towards equilibrium through arbitrage. In this case, our intrepid entrepreneurs, who were not able to start a different business because of credit constraints, recognized that they had access to a good (Maine lobster) that people couldn't get in NYC.

So they settled all of the tough logistical challenges and soon lucky New Yorkers were eating fresh Maine lobster. In much the same way, our entrepreneurs recognized that DC was also lacking, that is wasn't really that far away, and that it might be feasible, not to mention relatively low cost, to start a food truck here. That's to our benefit of course, and I'm thankful they didn't launch in Manhattan, Philly, or Baltimore first.

In my mind, one of the reasons economists continue to focus so much attention on perfectly competitive markets, however unrealistic they may be, is because the model presents a clear picture of the benefits from consumer surplus that emerge in equilibrium. While the real world is complex and dynamic, entrepreneurs like Ralph and Susan improve our options for consumption, increase competition, thereby limiting monopoly pricing, and generally bring the world closer to some hypothetical perfect equilibrium.

These days it's hard not to skim the blogosphere without hearing about interest rates, the Federal Reserve, quantitative easing, or aggregate demand, but it's important to recognize that while all of this is important, macroeconomists frequently (always?) miss the link between entrepreneurs and growth. Likewise, while our politicians frequently talk about entrepreneurs, few have any real conception of their importance, as Carl Schramm ably noted back in January in his State of Entrepreneurship Address (pdf):

But even when policymakers do speak of entrepreneurship, it is most often in abstract terms—how much entrepreneurs contribute to this or that indicator, as if they were more a statistic than a living, human phenomenon. And even that perspective can’t be taken for granted.

The dominant schools of economic thought in the 20th century downplayed or ignored the role of entrepreneurs, preferring instead to see all economic activity as the creature of three fundamental forces: big business, big labor, and big government. Forgotten in this equation was the fundamental fact that every big company had to start small. There are no Athenas in business, no companies that spring fully formed from the mind of their founder. They all begin with one person and an idea.

That person is an entrepreneur … and the idea is what sets him or her apart from the crowd, what compels him to leave a job, strike out on her own, and take a big risk. When that risk pans out, the result is a fast-growing company, hundreds and possibly thousands of new jobs, new wealth invested in every sector of the economy and spent in every corner of society, and—most fundamentally—a new product, service, or business model. Nearly everything we take for granted in our daily lives today began its own life in this way, as the creation of an entrepreneur. Think about automobiles, air conditioning and, more recently, software and search engines.

The bottom line is that we should all be grateful for the efforts of entrepreneurs like Ralph and Susan. While I'm not going to wait in line for an hour and a half right now, I'm sure that in time demand will settle down (0r they'll get a few more trucks) and I'll be able to enjoy a tasty Maine lobster roll. When I do I'll think about what a wonderful service they're providing, but also about the impacts their decisions will have on our world. At the same time, I'm sure their competitors will also be thinking of ways to poach their clientele. All of this competition, while difficult for producers, makes our world a much better place.

1 comment:

  1. Who are you? Thanks for the very interesting analysis!
    susan of the Red hook Lobster Pound