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The Dark Side of Entrepreneurship (Part 1)
March 03, 2022
Illegal But Legitimate: What Robin Hood and Uber Have in Common
When we talk about entrepreneurs, we usually think of the likes of Elon Musk, Steve Jobs, and Jeff Bezos, whose innovative minds have created progress, wealth, and jobs. But there are also innovators who successfully operate outside the bounds of legality and existing conventions, exploiting new business opportunities with a great deal of creativity and energy. Around the world, more and more researchers explore in which ways people engage in so-called dark entrepreneurship, the lessons to be learned from them, and the conditions that allow to turn such borderline endeavors into something that benefits society; in other words: the light that comes with the dark.
For this first part, Nikolaus Franke, Academic Director of the Executive MBA Entrepreneurship & Innovation at the WU Executive Academy, has closely scrutinized illegal yet legitimate kinds of entrepreneurship.
For many decades, economists solely focused on business that was conducted within the bounds of existing laws, i.e., legally, and in line with society’s values, i.e., legitimately. The same was true for entrepreneurship and innovation. But there’s also a world beyond these confines. According to estimates, it generates up to 17% of industrialized nations’ GDP, and in some developed countries as much as 40%. But how do entrepreneurship and innovation feature in this context?
A first important distinction to make is the one between legality and legitimacy. In a perfect world, legislation and moral values would coincide perfectly. In the world as it is, however, that’s not always the case.
Let’s take, for instance, a situation in which a given law serves the interests of only a select few. An outlaw like Robin Hood, who fights for social justice, breaks the laws in force, but due to his intentions, major parts of society will regard his illegal actions as legitimate.
Illegal But Legitimate: Informal Entrepreneurship
A scientific case study explored in which ways society benefits from what’s called “informal entrepreneurship.” Witty farmers living in the impoverished Chinese Province of Anhui in the 1970s secretly split up the land they had been forced to farm collectively and cultivated it separately. This quasi-privatization was clearly illegal in the Communist system, which adhered to an ideology with no alternatives to the planned economy and common ownership.
The effect, however, was overwhelmingly positive. Already in the first year, the informal entrepreneurs produced crops amounting to the sum total of the previous five years. Of course, the ruling party did not fail to notice these outstanding results. They had a considerable impact on the major reform of the agrarian system in 1984, in which laws were amended to enable more private property – with beneficial effects for millions of people.
Also in Our Economic Systems, Informal Entrepreneurship Can Trigger Useful Reforms
Compared to Communist China, ideology is less of an issue in Western economies. What’s more, Western democratic values make it less likely that laws only serve a small elite. And still, not every single formal law or act makes sense for the society to which it applies. New York’s transport system regulations, which prompted cab licenses to be traded for more than one million US dollars, are a case in point. The horrendous costs created considerable barriers to market entry and low competition, which in turn resulted in a lack of customer-orientation and poor quality. Uber and Lyft snug out of these restraints by positioning themselves as technology enterprises. Many cities and countries reacted to the pressure created by this new type of service and reformed the regulations. Entrepreneurs in the field of the sharing economy, such as Airbnb or the file sharing platform Pirate Bay, had similar effects in their spheres. The higher the pace of a technological advance, the more likely it is for laws and stipulations to become outdated and unnecessary hurdles for innovations. This means that informal entrepreneurs can drive positive change.
Three Lessons to Learn from Informal Entrepreneurship
1. Radicalism and Non-Conformism
What most informal entrepreneurs have in common is that they are radical compared to their peers. They don’t give a hoot about existing rules and their narrow scope of possibilities. They question the status quo and then proceed to redefine it. They are non-conformist. Any entrepreneur will benefit from adopting such a free-spirited mindset. Innovations destroy the old to give rise to the new, and only those brave enough to be visionary and far-sighted and look beyond what’s right in front of them will eventually be great entrepreneurs.
2. Pragmatism
Pragmatism is another defining feature of informal entrepreneurs. They look for purpose instead of convention. It is this true goal and meaning of an endeavor that motivates their actions. And this is a quality no manager with the will to make a difference can do without. The larger an organization and the more centrally managed it is, the more red tape employees have to deal with. An extremely successful manager once put it this way: “If I played by all the rules 100% of all times, I would be doing nothing but filling in forms 24 hours a day.”
3. A Moral Compass
A third important lesson to learn here is that entrepreneurs must have a reliable moral compass. What’s legitimate? For whom is it legitimate and according to which standards? In which ways are costs and risks that are borne by society offset by benefits for the common good? These are clearly difficult questions, the answers to which might be influenced by the self-interest an entrepreneur harbors. This is why ethics plays such a huge role in training entrepreneurs. In the worst case, legitimacy is nothing but a sorry excuse enabling the two categories of dark entrepreneurship we will introduce in the next two installments of this series.
Read the 2nd part here - Legal but Illegitimate: Gambling, Prostitution, and Tobacco Use
Read the 3rd part here - Illegal and Immoral: What We Can Learn from Al Capone & Co.