By Raushan Gross on the Mises Wire

In his landmark book, Intellectuals and Society, Thomas Sowell wrote, “Only abstract people in an abstract world are the same.” Sowell contended that there are differences between people’s knowledge and abilities. The same differences exist between an abstract entrepreneur and the Austrian concept of an entrepreneur. Austrians see the market as a process of flesh-and-blood individuals who seek to make a profit and avoid loss. Contrarily, the abstract entrepreneur is viewed in a romanticized way and is a purely imagined type of entrepreneur who bears no consequences of profit and loss. 

Peter Klein has noted that the entrepreneur in the Austrian view receives profits because the he or she has greater knowledge and makes better judgments about market conditions. The entrepreneur applies specific knowledge in the market economy toward profit-seeking opportunities. Only abstract people have the same knowledge, at the same time, and at the same place. But we live in a world of real people seeking to earn profits and minimize losses. We’re not in an abstract world with abstract people with abstract knowledge employed in abstract markets without facing the concatenating forces resulting in profit and loss.

There is a tendency to romanticize the entrepreneurial process and entrepreneurship. All too often, entrepreneurs assume that since they have capital and a means of production, that once a product comes to market consumers will rush in and profits will be made. As Sowell said, these aare abstract outcomes based on abstract premises. This is especially the case when market phenomena are conceived with an abstract notion about consumers. Such vague assumptions produce poor outcomes. The reality is that entrepreneurs are hemmed in by market constraints: time and consumer preferences. These constraints do not exist in the abstract. Time is of the essence, so within this constraint, entrepreneurs seek to earn votes from consumers in the form of revenue, and be rewarded with profit. In the abstract, entrepreneurs who are driven by romantic desires of what they abstractly think consumers want, think they possess an omniscient view of what the future holds.

In Profit and Loss, Mises stated, “The market is always crammed with visionaries who want to float such impracticable and unworkable schemes.” The entrepreneur does not intend to go into a losing situation, but we know where entrepreneurial efforts often lead. They lead to not-so-romantic outcomes.

There is nothing abstract or romantic when consumers cast their votes – via money spent – in the marketplace for that firm that meets their expectations. But how does the entrepreneur know the personal, subjective values and desires of consumers? The answer is, we don’t know because the future is so uncertain. 

But the most important fact for entrepreneurs to remember is that consumers are the ones who dictate market conditions. Entrepreneurs must remember – as Mises noted —that they are not rewarded for serving their own desires. They are rewarded only for serving consumers. Profits go to the best provider — the one who can fill the gap between what is and what can be done better. Thinking of entrepreneurial activity in terms of the abstract ignores the importance of the wants of consumers, and each consumer is a specific person with specific needs. 

But entrepreneurs often have the knowledge of how to meet these needs because each entrepreneur is unique. Thus, knowledge is decentralized, all knowledge is not equal, and only by understanding specific realities in the marketplace can one profit on existing opportunities. In the not-so-abstract reality, the entrepreneur who moves first has the potential to receive the reward of greater profit. But acting fast is not enough. One must know what to do to best serve consumers. This is a result of using better insights and solid judgments.

A further reality is that even for those who act both quickly and soundly, there are fast followers (i.e. potential competitors) who can potentially also serve customers with similar goods. Losses will follow for at least some of these entrepreneurs. 

The Austrian approach to entrepreneurship holds that profits are not promised, and losses are common. Indeed, losses are a very unromantic reality for many entrepreneurs. And there is nothing abstract about them.