Mike Connell wrote the following:
In the neo-classical economics of macro and micro economics, the market immediately and costless moves to the new equilibrium of supply and demand. There is no room for risk, cost, delay, and mistakes — it is a world of perfect information and frictionless movement. This is not the real world; this is a model. In the real world, there are costs to moving goods around and staring new firms and acquiring information. These costs prevent all the possible voluntary exchanges that could occur from actually occuring — some amount of potential wealth remains uncreated — in business terms you might say that “money is left on the table.” This gap between what is possible and what actually happens creates an opportunity for business.
An entrepreneur can step into this gap and offer a service for a price. The entrepreneur has some special talent or ability (or economy of scale) that allows the entrenpreneur to efficiently produce the good or deliver the service. If the price is low enough and the value created is large enough, there will be a viable market for the entrepreneur. One of the frictions that entrepreneurs can often provide efficiently is the services of a middleman. Recently my Midwest Entrepreneur’s class has had two such middlemen speak about their business.
John Twomey is a grain dealer/handler in Western Illinois. The farmer could (and some do) deliver their grain to the ultimate user or the barges at river — that is a costly thing to do and an activity at which the farmer has no particuliar comparative advantage. Given this real world cost, there is an opportunity for an entrepreneur/middleman. Someone (John Twomey) can offer the service of collecting the grain and moving it closer to its ultimate use more efficinently than the farmer can because of economies of scale and specialized knowledge. In the real world, John Twomey is a part of the process that causes the market to jump to the new equilibrium price and quantity.
Rod Smith is a Monmouth entrepreneur that buys auto parts and sells them on eBay. NASCAR teams routinely replace all of the parts on their race cars with new parts even when the old parts are still working — often after only one race. These slightly used parts are highly valuable. The NASCAR teams could (and to a limited extent do) resell these parts in the secondary market. Selling used car parts in the secondary market is a costly process that requires specialized knowledge. Rod Smith travels to North Carolina and buys such parts wholesale in bulk. Then he sorts, cleans, advertises, sells and ships these parts to buyers in the US and all over the world. He can provide this service more efficiently than the NASCAR teams. He helps the market move goods from lower valued uses to higher valued uses and creates wealth for society and a profit for himself in the process.
These men are both good examples of entrepreneurial middlemen that exist in the real world but not in the supply and demand models of microeconomics. Remember that an entrepreneur is an individual that sees an opportunity and takes personal risk to supply a good or service to society. Entrepreneurs and middlemen are the grease that help reduce the friction of the market and move society to a better place.
Below are my summary notes from Rod Smith presentation on Tuesday afternoon while a blizzard raged outside: Rod used his extensive contacts in racing, positive cash flow, increased appetite for risk , buying more in bulk and more expensive parts to fuel growth from just over $100,000 in sales to $240,000 in annual sales. The NASCAR racing teams know Rod will buy practically everything they have to sell. They keep a big bin for him at the major racing team assembly facilities. Plans to go to $500,000 annually in 2011 or 2012. Wife does all of the shipping and had to quit her day job to support his business. Attended Monmouth College in the early 70’s. Raced his own car three or four times a week and met many people in the racing fraternity over the past 30 years.
Bought 20 Richard Petty racing, Dale Earnhardt Racing, Hendrix Sport, and Childress Racing engine blocks (He is on the super “high trust partnership” with that account) and plans to make profit selling the items at a 100-300% mark-up. Usually buys from about 70 NASCAR teams and even broker new stuff to teams in less. Never hired an attorney or used an accountant. Buys by the pile because he knows what he sees. Made $81,000 in two months during December and January, 2011. He keeps the parts for two years top (of the line Chevrolet racing engines) when product development restrictions kept Rod from selling it immediately. Five local competitors vie for the same items, but he cooperates with most of them. What scares him most? Fuel costs. It could ruin his business.
Smith said “It is fun to see big gains that usually happen when things sell on Sunday”. Why? Evidently the real eBay buyers come out to buy on Sunday.
