Entrepreneurship in the Time of COVID-19

By Per Bylund

Per Bylund, author of The Seen, the Unseen, and the Unrealized: How Regulations Affect Our Everyday Lives has commented extensively here at mises.org, and in a variety of entrepreneurship-focused publications, about the economics of entrepreneurship. Editor Ryan McMaken recently asked Professor Bylund to comment on what challenges entrepreneurs face right now in a rapidly changing legal and economic landscape.

Ryan McMaken: It seems entrepreneurs are in an especially tight spot right now. It is especially difficult to predict if one’s business will even be allowed to be open six months from now. What sort of problem does this much regime uncertainty create for entrepreneurs?

Per Bylund: There are many problems with this, but most fundamental is that it undermines the very essence of entrepreneurship. What entrepreneurs do is simply to organize production using their own judgment of what will benefit consumers in the future. Or, to put it differently, they imagine what could be and set out to make it so. But this is only possible if they can trust that they are able and allowed to follow through on their plans. When they cannot, e.g., if they suspect that they will not be allowed to run their business, then there is no reason why they would make those investments. This is much worse for those entrepreneurs who are not thinking of starting a business, but who already have done so. They have already tied up a lot of capital, not to mention time and effort, in their businesses. What they’re facing now is whether to pull the plug on their life’s work, liquidate the assets, and fire employees, who in small businesses have often become almost family members. And they have to make that decision not based on whether they can facilitate value for consumers, but on what they think politicians might or might not do. It’s an impossible situation.

RM: You have often emphasized identifying the unseen consequences of government policies. What would you say are the top unseen consequences of the policy responses to the pandemic?

PB: I fear we will soon discover that the lockdowns have caused a lot of death, disease, and suffering for many millions of people—in addition to what the pandemic itself caused. But sticking to the economy, we’ve already seen signs that supply chains have been severely impacted, if not destroyed. We might be facing a situation where the economy simply cannot produce essential goods because there is no capacity. The link from producer to consumer is broken, leaving production incomplete. For example, without meat processing plants no meat will reach grocery stores. But farmers will still need to slaughter their animals. So we have supply upstream and demand downstream, but nothing to connect them. Add to this that government is sending people cash to buy stuff that doesn’t reach stores, and we’ll have a huge problem on our hands. And that’s in the present or near future. There are also all those entrepreneurial investments that need to be made now in order to provide new and improved goods in the future. This means our future will lack a lot of the goods and services we otherwise would have, what I call the “unrealized.”

RM: Let’s say there had never been any sort of “lockdown” at all. Would entrepreneurs still have had to face some serious challenges as a result of the disease?

PB: Of course! People would have changed their behavior even if they weren’t forced to shelter at home. We see this in Sweden, where there was no outright lockdown. With the fear of disease, people don’t behave like they used to. For example, they spend less money on social activities, eating out, etc., and more on conveniences at home, on groceries, and so on. So they shift their demand, and entrepreneurs need to adjust to it to not lose money or go under. This is really regular entrepreneurship, though, but with much larger and faster shifts in consumer demand than usual. Some entrepreneurs would be wiped out, others would gain. Many of them would face severe cash flow problems. But they would also need to adjust how they do business to meet consumers’ new priorities. To get customers to enter your store, for instance, you might need to take additional measures to limit the risk of getting infected. It might include the use of masks, disallowing customers with symptoms, limiting the number of customers in the store, offering curbside delivery, etc. And, of course, they need to communicate what they’re doing to regain customers’ trust.

RM: If all the restrictions that have been put in place were eliminated today, what challenges would entrepreneurs still face in coming out of a period of lockdown?

PB: There are many such problems. Markets may have disappeared as consumers changed their behavior and formed new habits; they might not completely go back to their old way of life. But many businesses have also been forced to fire their employees and end contracts with suppliers. To restart their operations they need to rehire and get all the supply chains and production processes working again. Part of the problem here is that the federal government has paid unemployment benefits that were higher than the wages people earned, so they may not want to go back to work. Others have found other jobs or changed their minds. For the entrepreneur, this means they will need to find and train new employees. And they might have to find new suppliers. The ones they previously cooperated with might have gone out of business, or the trusted relationships might be forever lost after reneging on contracts, stopping payments, and whatever else the lockdown forced them to do. So, in many ways, they might have to start anew. To make matters worse, many states are reopening in stages. For example, in Oklahoma restaurants are now open but have to implement rigorous and very costly disinfection protocols, and they must maintain a six- to eight-foot distance between guests. In Texas, they were only allowed to start at a max 25 percent capacity. Restarting operations at a mandated scale far below what the business was optimized for can put greater financial strain on the business than staying closed. Entrepreneurs need to be diligent and be on top of their cash flow situation. I fear many businesses may go under because of how they’re [being] allowed to resume operations.

RM: What are some of the most important policy measures that could be introduced right now to help business recover from the current shocks?

PB: I’m sure there are many specific reforms that would benefit businesses in different locations and industries. But generally what political decision-makers can and should do is exactly the opposite of what they are likely to do. Rather than try to control the situation and add burdens, they should remove them. Some of the measures intended to slow the spread of the virus might be wise but are unlikely to be effective or even advantageous for all businesses. Most businesses and situations are unique. To then strictly enforce the new and often vague rules can pull the rug from under businesses’ feet and cause conflict. It sounds counterintuitive, but lax enforcement is probably the way to go. Entrepreneurs are in the business of using their own judgment, and it is hard to think of a situation when judgment is more appropriate than in a crisis. After all, businesses don’t make money from treating their employees poorly or harming their customers. My best advice is to get out of the way and to focus on communicating with business owners—provide the information that they need to make proper decisions.

Source: Mises.org

Per Bylund is assistant professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Website: PerBylund.com.

Image: Pixabay