Entrepreneurship: language, knowledge, and networks

A task of human action and organization is to reduce uncertainty to risk, an event whose outcome that can be predicted probabilistically, and to adapt in the face of uncertainty that is irreducible (Knight 1921). All action entails uncertainty. One does not know what will happen tomorrow. If we lived in a world where developments were perfectly predictable, coordination would be a simple task. Not only can we not be certain whether or not we will meet the fate of the dinosaurs in five years’ time, we cannot even be certain of the actions that other people will take. We cannot look into their minds. We can only develop relationships and communities that help reduce this uncertainty. The task of the entrepreneur is especially complex for this reason. He must successfully navigate an environment where consumer preferences are changing and where cooperation is not guaranteed.

Successful entrepreneurship is a task of sensing. This requires two key components: a model that coherently identifies and predicts the environment and accurate information that is to be processed by the model. We gave some examples of this in the previous post. Models used by successful entrepreneurs are likely difficult to explicitly identify. Some combination of intuition and explicit beliefs feed into entrepreneurial decision-making. While we cannot identify a particular model that makes an entrepreneur successful, we can consider some components that lead to coordination which the entrepreneur must learn to navigate if he is to be successful.

We have seen that prices lead to coordination, but this is only the case if non-price information can be integrated into prices. There is a variety of information to be integrated. Changes in physical conditions are primary. The emergence of a new form of capital provides opportunities for use. Changes in climate must be predicted if farmers are to make decisions that cohere to the environment and, thereby, maintain substantial yields. A more difficult task is navigating the social environment of other actors who themselves are guided by models and information that the entrepreneur knows only in part.

Humans are social animals. It should not be surprising that we must spend a tremendous amount of energy to reduce uncertainty within this domain. If an entrepreneur is to engage in a venture, he must feel confident in his trust of his business partners. Building trust between partners is a matter of ingraining patterns of action sufficiently that all action evidences a level of mutual concern sufficient for the end toward which cooperation is aimed. The greater the volume of interaction and the number of ways in which one interacts with another, the greater the need for mutual trust. Action that can be interpreted as a violation of trust makes future cooperation less attractive for the observing partner. Maintaining trust is a complex task that requires continual evidence of commitment to the well-being of the other and a lack of evidence to the contrary.

The primary way in which human agents maintain commitment is through the practice of a complex array of overlapping games whose meanings reinforce one another. These are institutions, but this term is not fully descriptive in that there are a multitude of these and that every social milieu includes its own unique mix of overlapping patterns: these are language games, which I will refer to as social games when appropriate or, simply, games (Wittgenstein 1953). The game of largest extent is the game of market exchange (Bloor 1995; Koppl 2002). In the basic form of the game of market exchange, agents own property and themselves and are able to exchange that property and services rendered by it for other goods. If existing barriers to competition are relatively small or non-existent, prices of like goods will tend to converge to the same value when controlled for transaction costs, which include costs derived from distance, search, administration, and the like.

As has become especially obvious to those who purchase goods online, the game of exchange spans groups and larger collectives. Persons from an Amish community in Pennsylvania are able to purchase materials from India, even though the internal functioning of the group is not oriented toward market exchange. Groups that may seem impervious to markets inevitably participate in them. Inclusion in the market is welfare improving even for these groups. When the risk of fraud is low, the game of exchange leads other players in it to promote the well-being of other players in the game. The larger the extent of the market, the more benefits consumers receive. Cost reducing division of labor and improvements in product quality are promoted by the increase in the number of players, and therefore, competition and the reduction of the cost of specialization.

There are many other games that occur within and between groups who play the game of exchange. The meanings embedded in sets of overlapping games reinforce the place of each actor and normative beliefs held in the group and play a significant role in interpretation of action. Whether the group hierarchy is rigid or fluid, of great power distance or small, relatively oppressive or less so, meanings implied by games reinforce that hierarchy as it exists. These games themselves tend to be adaptive to needs in the group and drives of its members. If some group participating in a game larger than its membership find that they are oppressed by another group, discontent expressed through action may lead to a reduction of the weight placed on it by the more powerful group. In politics, the latter group is thought of as the ruling class (Mosca 1939). Such implicit agreements arise in the course of gift exchange and other symbolic interactions in many early societies (Bordieu 1980). While they may alleviate the burden of the underclass, they also reinforce the existing hierarchy. Not all games are embedded in systems of oppression. In fact, it is difficult to identify a system as purely oppressive or something else, especially if there is no obvious path to improvement for all. Sometimes, societies will be stuck in suboptimal equilibrium, much as most of human society was stuck before the industrial revolution and dramatic political change that surrounded it.

Social games tend to be confined to networks of individuals who are part of the in-group. Consider students from secondary school. They all play the same game concerning the schools schedule. They obey the bells and their meanings. Failure to obey may create problems for the students as rules require the students to show up at certain places at certain times. Inside of this larger game, many other games are played. Students form groups whose meanings tend to be contained in the group. One group may occupy a table at lunch and tend to follow a rule that all remain seated there during lunch. A member who fails to adhere to this rule may receive strange looks. Other groups may prefer to stand and do not demand continual presence. Those in the group may feel secure with some minimum threshold of participation from others that is not quite as burdensome. Groups may feud between one another within a school and yet, members from these groups may all come together in larger events like sports games and musical competitions where they face other schools. Most students successfully navigate these interwoven games. Schools with students who are adept at this and therefore able to cooperate at larger scales are more likely to excel in these bigger competitions. We would also expect that schools where groups tend to hold less animosity between one another will also excel as the population forms a more coherent whole.

Coordination through games does not happen automatically. Humans are often predisposed by their passions to animosity toward those who are not within their own group. Entrepreneurs help bring together groups such that plans of members more coherently overlap. Successful social entrepreneurs are able to work between groups, filling structure holes (Burt 2000). The holes represent network structure where two agent or groups of agents are otherwise distinct from one another. There is no member in one group who shares membership with the other. Due in part to their congeniality toward both groups and their ability to speak the language of both groups, social entrepreneurs who fill structural holes are able to realize profit opportunities that are otherwise unavailable. Not only must such a person speak the language of both groups, but he must do so in a manner that, in the least, implies no ill will or deception toward his partners. A failure to do so will likely limit the success of the entrepreneur as well developed groups are especially sensitive to potential for fraud. In the ideal case, his actions reinforce the meanings of both groups to the extent that it is possible, though this becomes an increasingly difficult as the magnitude of animosity increases between groups. This may be why early merchants were held in disdain.

Entrepreneurs who are successful at navigating these games are able to foster a world that they would prefer to live in. The better their ability to navigate the social milieu, the more they can reduce costs of organization and find access to resources that are otherwise unavailable. Following Foss and Klein (2012), entrepreneurship exists as agency that controls some set of resources, using the available bundle to exploit profit opportunities and create new ones in the process. Navigation of social context potentiates profit opportunities. Thus we may look to firm operation to better understand the role of language and communication in entrepreneurship.

Efficiency increases lie in wait within firms whose divisions lack knowledge of one another. Language common to the firm must facilitate the transmission of information within it. Channels must exist between the parts of the firm in order to minimize information costs. Kenneth Arrow (1974) observes,

An organization can acquire more information than any one individual, for it can have each member performing different experiments. Thus, the limitations on an individual’s capacity are overcome. But as always there is a price to be paid . . . The information has to be coordinated if it is to be of any use to the organization. (52, 53)

He continues in regard to coordination of diverse knowledge within a firm,

. . . we have seen that the organization’s gains from increasing scale are derived by having its members make different experiments, that is, by specialization. As we have seen in the last chapter’s discussion of the economics of information for the individual, this means the members will be accumulating differing types of skills in information processing, learning (acquiring [human] capital), in the areas in which they are specializing and unlearning elsewhere. As a result, communication among them becomes more difficult (as academic specialists are learning), and the codes used in their intercommunications have to become more complex. (55)

The development of unique language within a group promotes specialization while increasing the cost of integration of this dispersed knowledge. Nonaka (1994) observes that creations of redundancies within a firm can facilitate the sharing of knowledge between divisions.

Rotation helps members of an organization understand the business from a multiplicity of perspectives. This makes organizational knowledge more fluid and easier to put into practice. Wide access to company information also helps build redundancy. When information differential exist, members of an organization can no longer interact on equal terms, which hinders the search for different interpretation of knowledge (29). [emphasis mine]

Perhaps ironically, the increased flow of knowledge and potential for creativity, while being welfare promoting, also increases uncertainty as new possibilities for the course and ends of production arise at a faster rate.

Creative chaos is generated naturally when the organization faces a real ‘crisis’ such as rapid decline of performance due to changes in technologies or market needs, or the realization of a significant competitive advantage on the part of a rival firm. It can also be generated intentionally when leaders of an organization try to evoke a ‘sense of crisis’ among organizational members by proposing challenging goals (28).

So long as redundancies in knowledge exist, members understand how their work affects one another creating plans that tend to dovetail. This requires a “deep, mutual trust between members of the organization” so that “the organization can control its knowledge creation (28-29).”

From our discussion, we can observe some traditional aspects of the entrepreneur. In a context with given knowledge, it is the job of the entrepreneur to reduce inefficiencies. This promotes the equilibrium result of traditional supply and demand analysis (Kirzner 1963). Not wholly unrelated, the entrepreneur brings new innovations to market. These represent an expansion of knowledge that we often refer to as technology in economics. Joseph Schumpeter (1942) referred to such innovation as “creative destruction”, noting its short-run disequilibrating effects. As Kirzner (1999) points out, what this entrepreneur has actually done is bring about a new equilibrium that is reached in the process of market competition for profits generated by the innovation. Finally we observe political entrepreneurship. While this sort of entrepreneurship can tend to be unproductive or destructive, especially in regard to state politics (Baumol 1990), within a firm a transformation of political orientation may be required to increase efficiencies. Changes may naturally arise when a firm is in crisis, though successful handling is never guaranteed. This certainly would be the case for implementation of the sorts of knowledge sharing management policies that Nonaka observes and suggests (1994, 28).