Does a novice entrepreneur need to understand the quantum mechanics of a product he is selling?

 

I have been pondering on an idea of late, and have decided to put it on paper. It coalesces around the idea of absolute knowledge from the side of the entrepreneur in every day business activities.

Before we start, lets make a few assumptions that we will delve into and therefore try to answer the question in the heading. Lets assume that person “A” decides to open a bakery (I wanted to give an example of a sofa manufacturer, but since I ate a nice bun this morning, lets stick with whole grain products shall we). Before he even considers opening a bakery, he must ask himself one crucial question: According to my time preference, am I able to generate a return higher than or at least equal to the opportunity cost of a similar investment? If the answer is “Yes”, he will ask subsequent questions and make further assumptions.

We will assume that person “A” will need idle retail space for his bakery. He will need to hire staff for production, sales, accounting, maintenance. He will need to find suppliers, a customer base etc.

Lets assume also, that he can hire skilled bakers, people that have been employees in other firms or idle workers with knowledge in the craft of baking bread.

Lets further assume that he has a vision of a product but doesn’t have any background in design or mechanics of designing a product (the input tools, shapes, special ingredients). He can than hire someone that does know.

And to keep this mental exercise short, we shall also assume that he understands that he may fail and lose everything, and that he may also succeed and reap the benefits of his endeavor.

Does the novice entrepreneur need to understand how bread rises in the oven? Does he need to know how long does it takes for the bread to be baked? Does he need to know the chemical processes taking place in the oven? Does he need to know how the alarm system at the front door using motion sensor technology detects burglars during the night? Well, frankly, not necessarily.

You see, the market has an ingenious built-in system of solving problems that require fine tuning and specialization. Entrepreneurs, that are seeking for the next best thing to satisfy desires and consumer wants, “paste” together various resources and makes assumptions on those actions. He is either rewarded or punished for his actions. Punishment might seem rather harsh in the form of bankruptcy, but it the “invisible mechanism” that gives out signals if person “A” is doing something right or wrong. If person “A” manages to put together correctly the pieces of the puzzle, he will get the correct picture – a profit, which is nothing more than a time component of receiving additional future goods, that would not have been created if not for the entrepreneurs efforts.

Without person “A” and without this “signal” (profit), nobody would really know for sure if certain human actions of resource usage were productive or not. Person “A” is rewarded for taking risk, providing employment and indirectly, accomplishing the goals of his employees in the process in the form of salaries and their own time preferences.

So, unlike in todays world, where person “A” is thought of as being an exploiter, and a social pariah, he is the social champion, the provider of goods and bearer of good news.