Entrepreneurship In A World Of Unpredictable Success
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When we use the term “market concentration,” we refer to the structural characteristics of a certain sector. But simply adding the market shares of the biggest companies may not conceal the true causes of success at one point in time. Available concentration indexes also ignore vital dimensions of economic activity: some enterprises are more concentrated than others because of technical properties of their production technologies or unique aspects of the markets they serve (e.g. production-cost savings, network effects, government-conferred privileges and barriers to entry, brand loyalty, consumers’ preferences, etc).
It is rather obvious that some entrepreneurial activities outperform others owing to reasons not necessarily related to concentration. Deeper observation suggests we need to look at why it is seldom known in advance what will succeed. For example, linking economic models with those of biological evolution, Paul Ormerod’s Why Most Things Fail identifies the subtle patterns that comprise the apparent disorder of failure and analyzes why failure arises. But in today’s complexity and ways to adapt to its constant change, we need to appreciate the uneven success of products that are closely related to the uneven success of enterprises.
From a broader policy perspective, Edmund Burke (1729–1797), an Irish-born British philosopher, warned that society is of an order of complexity such that no one mind, no matter how refined, could fully comprehend all its interlocking parts. He believed it is not prudent for governments to provide for our necessities because “the laws of commerce are the laws of nature.”
The complex process of success will continue to be unpredictable and influenced by unique factors. F.A. Hayek presciently noted more than 70 years ago how the complexity of knowledge required economic freedom and made central planning impossible: “The interaction of individuals, possessing different knowledge and different views, is what constitutes the life of thought… To ‘plan’ or ‘organize’ the growth of mind, or for that matter, progress in general, is a contradiction in terms.”
For most of the Middle East’s history, economic progress was stagnant or low with central planning being the norm and economic growth spreading unevenly producing a diverse record of development. Such varying growth paths have prompted a diversity of explanations about what causes prosperity, whether at the individual, firm, or country-wide levels.
Firm size, for instance, is well-known to follow Zipf’s law (also known as a ‘power law’). Actually, many social, economic, biological, physical and naturally occurring phenomena (including city size, income distribution, macroeconomic shocks, the spread of epidemics, the popularity of websites [by the number of visits or links to a site], forest fires and earthquake magnitudes) behave according to a power law distribution which implies that small occurrences are extremely common, whereas large instances are extremely rare. Moreover, economic success (and failure) of individuals sometimes follows such skewed tendencies. Moving to international data, economic development is also spectacularly uneven across countries, as well as across time. Thus, there is a tremendous difficulty in knowing what will succeed.
A formal definition may be useful: a “power law” is a relation of the type Y = aXβ (where [Y] and [X] are variables of interest, [β] is a power law exponent, and [a] is a constant). For example, if X is multiplied by a factor of 10, then Y is multiplied by 10β (imagine here how Y is scaled up as X to the power β).
Such findings force us to rethink the underpinnings of entrepreneurship research in order to explain deviations from our traditional ‘benchmarks’ and ‘normal curves’ and come up with sensible stories of entrepreneurial success. In this way, power laws can be an explanatory tool for drawing lessons from the “economics of success.” For example, power law models can explain why very small differences in talent give rise to very large differences in pay in areas like arts, sports, and many other businesses.
Across all entrepreneurship research, we need to identify extreme, but uncommon, events underlying statistical data to be able to generalize outcomes in the ecosystem. Not only that, we need to utilize power laws to look further into behavioral aspects which make entrepreneurs appear to do what is uncommon.
The future of power laws as a subject of entrepreneurship research looks very promising and seems to appear almost invariably. They can guide us to the essence of success as a phenomenon and suggest a deeper understanding of the causes of progress. They are so common that Peter Thiel, the tech investor and entrepreneur, once declared “we don’t live in a normal world; we live under a power law.” In his transformational book, Zero to One, the founder of PayPal elegantly reminded us to think in power law terms: “Life is not a portfolio: not for a startup founder, and not for any individual. An entrepreneur cannot “diversify” herself… in a kind of homogenized, generic knowledge.”
Although decision makers in the Middle East (and many other parts of the world) should enhance economic freedom to give markets greater feedback mechanisms, it seems we still usually suffer from the delusion that we already know the answers and that we have full knowledge of the complexities of success and progress. For learning what is succeeding and what is not, power law distributions are a starting point for improving our understanding of many entrepreneurial enigmas that demand further exploration and reexamination.