Murphy’s law of economic policy


Bureaucrats address problems, entrepreneurs seize untapped profit opportunities

This distinction between the perspective of an entrepreneur and bureaucracy is essential to problem solving. Bureaucracies look for problems to solve through policy interventions. Alert entrepreneurs grasp for untapped opportunities for profit before others jump ahead of them to seize the day.

Luke Froeb discovered this crisp difference in organisational perspective between entrepreneurs and bureaucrats when his MBA students kept falling asleep when he lectured on market failures and the standard public policy responses. His teaching evaluations were so bad that the Dean of his Business School threatened to fire him if his student evaluations did not improve. This focused his mind.

Froeb repackaged market failures as a business opportunity. His students sat up and paid close attention. Froeb saved his job and later wrote an excellent MBA textbook (Froeb and McCann 2008).

Froeb and McCann (2008) started the problem diagnosing with market failure is an untapped wealth-creating opportunity. Froeb told his students that the first to fill these gaps in the market or be the market maker for the missing market stands to profit. Alert entrepreneurs make money by identifying unconsummated wealth-creating transactions and devise ways to profitably consummate them.

The art of public policy is looking beyond the immediate effect of a policy to trace its consequences not merely for one group but for all. Looking past what is under your nose is not good business. Much of entrepreneurial alertness is seeing what others do not see under their very noses (Kirzner 1997).

The art of business is identifying assets in low-valued uses and devising ways to profitably move them into higher values uses (Froeb and McCann 2008). Wealth is created when entrepreneurs move assets to higher-valued uses. Cost control such as in a mega-project is a standard entrepreneurial challenge.

Froeb and McCann (2008) argued that mistakes – opportunities are missed – for one of two reasons:

  1. A lack of information; or
  2. Bad incentives.

Rational, self-interested actors err because either they do not have enough information to make better decisions, or they lack incentives to make the best use of information they already have.

Froeb and McCann (2008) argued that three questions arise about all business problems:

  1. Who is making the bad decision?
  2. Does the decision maker have enough information to make a good decision?
  3. Does the decision maker have the incentives to make a good decision?

For Froeb and McCann (2008), the answers to these questions immediately suggest ways to fix them:

  • Let someone else make the decision;
  • Give more information to the decision maker; or
  • Change the decision makers’ incentives.