Entrepreneurship and Hayekian Discovery

Brink Lindsey points me to this great article on how entrepreneurs think. It turns out that many entrepreneurs hate the concept of market research. Rather than trying to predict the overall size of the market in advance, their approach is to build a product that’s useful to a few customers, and then rapidly improve the product based on feedback from the initial customers. Brink’s take on this is spot-on:

Entrepreneurs grasp intuitively the central insight of the great economist F. A. Hayek: that capitalism is a process of discovery. Hayek saw that socialist central planning, then at the height of intellectual fashion, was doomed to founder on the unpredictability of the future. Capitalism, at the time derided for its chaotic duplicativeness, worked precisely because of its messiness: its decentralized process of trial-and-error experimentation is the only viable response to the ineradicable uncertainties of economic life.

Entrpreneurs are Hayekians at the micro level. They don’t want to sit back and plan, they want to dive in and discover and learn. They want to experiment: to see what works and what doesn’t, to build on the successes and leave the failures behind. Which is exactly what how the larger market order works at the macro level.

None of this is to say that planning is unnecessary. On the contrary, it’s vital — after you’ve discovered a good idea. To take that idea to scale and execute it efficiently — in other words, to pump out those Swedish meatballs — you need planning and lots of it. Which is why successful start-ups turn into big corporations run by professional managers.

Quite so. The distinction between entrepreneurs and managers and crucial, and it’s often overlooked. The skills needed to create a profitable 10-person company from scratch are very different from the skills needed to keep an existing 10,000-person company running smoothly. There are some people, like Bill Gates, who are good at both. But once the founder leaves, the people who take over for him tend to be cut from different cloth. They tend to be managers who earned MBAs and worked their way to the top of existing corporate hierarchies. They tend to be more process-oriented and risk-averse. I bet Brink’s description fits 22-year-old Bill Gates, but it probably doesn’t describe Tim Cook or Carly Fiorina.