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Wednesday
Dec052012

Merchants and Entrepreneurs

On Monday I put forth the notion that most of our cities are missing a merchant class, a group of business owners that were vital to the health of our places (and I believe still are). I didn't realize that there would be confusion with the distinction I drew between merchants and entrepreneurs. It is an important enough point that I want to take today to add some clarification.

On Monday, I indicated:

Entrepreneurial people...exist in places like the neighborhoods devastated by Hurricane Sandy. Or the Gaza Strip. I admire the hard work and ingenuity, but they do not constitute a merchant class.

Entrepreneurs -- and I am one of them -- are, at their core, opportunists. I point out that I am one because I am not using the word "opportunist" here in a derogatory way. There are opportunists like the guy who will sell you a bucket of water when you house is on fire and there are opportunists like the person who will acquire cast off clothes in bulk to give to the poor hoping the next church collection will cover the costs. I don't ascribe positive or negative morality to the term entrepreneur. It is more a state of mind.

My point in bringing up a place like the Gaza Strip was to indicate that entrepreneurs are everywhere. They cannot be wiped out and will exist in every society. They can be stifled, but not eliminated. This was why the Soviet Union could not keep out Levi jeans and prisons can not eliminate drug use. Like water finds every available crack, entrepreneurs will ultimately exploit every opportunity. A successful society directs entrepreneurial activity for good, rewarding those few that succeed and not punishing too severely the countless number that fail. Our (until recently) very lax bankruptcy laws were designed to do just that.

The other reason I used Gaza as an example is that entrepreneurs thrive on volatility. The more tumult there is, the more incentive there is for risk takers. Fortunes are not made in calm markets but in times of great change. 

So if entrepreneurs exploit new opportunity and thrive in times of volatility, merchants exploit their position in the current arrangement and thrive in times of stability. 

We can go back to the merchants of antiquity to see the difference in stark detail. The explorer in the ship who traveled to distant lands in search of valuable goods was an entrepreneur. The guy that had a shop on the docks to receive the entrepreneur's haul was a merchant. He paid the entrepreneur then turned around and sold the goods through his distribution channel, pocketing a margin for the transaction. Maybe one out of five entrepreneurs would return to port successful, but those that did would be handsomely compensated. In contrast, the merchant always made money.

When I think American merchant of the 1960's, my thought goes to the shoe salesman. In 1960, every American town had a shoe store in the downtown. There was a limited selection of shoes and boots with a capacity to acquire specialty items through a wider distribution network. The shoe salesman knew shoes, would fit them to the customer's needs and would likely also fix them when they wore down.

This was a stable business. Everyone in town needed shoes and the shoes would need replacement at a regular interval. There wasn't a lot of selection in shoes -- and not competing brands like Nike, Reebok and Adidas -- so there was no need for more than one shoe store per neighborhood. It was a stable business, likely handed down from generation to generation. Nothing more, nothing less.

Where is this shoe salesman today? He is not owning his own shoes store for starters. In most towns today thre are no shoes for sale. You need to drive to a regional center where there is a Walmart, shopping mall or strip center to find shoes. As a consumer, there is a much wider selection (although never enough, so claims my wife), but there are fewer people throughout the region selling them. If the shoe salesman has a job in the trade, at best it is a franchise owner, but since he is not a risk taker, he most likely is one of the store managers. He is part of the corporate structure and, while he likely works hard and receives fair wages and benefits, his wealth and future prosperity is not tied to the business.

Now we're getting to what I see as the difference this has had on our cities. It is not the obvious -- the dislocation of jobs, the consolidation of opportunity, the leaking of wealth out of the community -- but something more subtle.

Entrepreneurs are risk takers. They thrive in times of volatility. 

Merchants are not risk takers. They prosper in times of stability. 

Take the merchants out of America's cities and what do you have left? You have the vast majority of people who do not have business-oriented minds and then you have entrepreneurs. Risk takers.

Imagine yourself in the modern city council meeting. The staff -- which has their own perverse incentives -- brings forth the economic development plan, a vision assembled by intense community engagement. It calls for millions of dollars of investment in new infrastructure for an industrial park on the edge of town, millions more for Main Street "beautification" and tax subsidies and incentives to get business growth going. Everyone nods. This is what successful cities do; they "invest" to make things happen.

Actually, to be more precise, this is what entrepreneurial cities do, they invest speculate/gamble in the hopes of making things happen. For the entrepreneurial mind (the only kind left in the city with ideas and initiative), these are logical moves. Have you ever met an entrepreneur who was not confident they were making logical moves?

This is where the merchants are badly needed. Take that same council meeting back to 1960. The staff comes forward with the grand plan for expansion. The merchants are in attendance at the meeting -- heck, it probably takes place in one of their shops, especially since the council is largely made up of merchants -- and they look at each other and shake their heads. One stands up and says, "Just whose money are you planning to gamble with here?" There is a general consensus reached fairly quickly: we welcome entrepreneurs and risk takers, but not where their backstop is the collective dime. Our businesses are doing just fine. While more growth would be nice, it is not worth the risk.

You don't get this kind of reaction from the manager of the franchise shoe store. That person likely has better things to do than show up at city meetings -- things that compensate for their low job satisfaction -- and will cede the decision-making to those that show up. The entrepreneurs. They are trying to make things happen, after all.

I'm not trying to glorify the lost merchants. I would likely strongly dislike most of these people on an individual basis, especially in my own town. They would tend to be penny pinching, zealous protectors of their own self interest. I'm an innovator -- I want to shake things up -- and so this type of person drives me crazy. But if we step back and look at them, the merchant class is the needed check and balance to the frequently irrational delusions of the entrepreneur.

The reasons our cities are financially failing are complex, numerous and varied. I'm not sure if we can put the absence of a merchant class as a cause or an effect. Either way, their absence is missed. Nurturing them back into existence should be a strategy for those seeking to build a Strong Town. Their emergence will be a sign of success.

 

If you would like more from Chuck Marohn, check out his new book, Thoughts on Building Strong Towns (Volume 1)

 You can also chat with Chuck and many others about implementing a Strong Towns approach in your community by joining the Strong Towns Network. The Strong Towns Network is a social platform for those working to make their community a strong town.

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Reader Comments (8)

Thanks for these thought-provoking posts, Chuck. I'm not sure I agree with every point, and I'd worry about nostalgia creeping in, but there's definitely something to the classification and the absence. Good pub debate fodder.

Are other words for your merchant: middle-man? A broker? Wholesaler? If so, this is exactly who the Internet shakes up: your amazon prime podcasts covered this. Amazon is the wholesaler and now has a direct relationship with the customer. You concluded on those podcasts that the local store could still offer overpriced goods in return for immediacy, which is possible, but doesn't feel like the boring

Entrepreneurs mock brokers as sellers of "picks and shovels in the gold rush": not risky panhandling, but equipment suppliers to the many fools (and some flukes). I also note that investment banking (at least in London) used to be called Merchant banking, back in its more clubby and risk-averse days.

Services - bespoke suits, shoe repair, haircutting, pubs and restaurants - might be more durable, but I think you have them classes as fly or burn entrepreneurs.

Still musing, look forward to the debate on these pages.

December 5, 2012 | Unregistered Commenterneil21

Neil,

Yeah, I'm still trying to think this one through so I appreciate the feedback. And circling back to the Amazon Prime podcast is solid. I don't know where this goes, ultimately.

I try not to be overly nostalgic, but I'll confess to it creeping in. Maybe it is the time of year. I know that many of these places were essentially mob towns run by a group of (sometimes thuggish) merchants. They made the immigrants live on the edge of town or the other side of the railroad tracks. Not necessarily a nice place.

But the pendulum has swung too far in the other direction. I don't want to go back, but I want to learn from what worked and figure out how we can adapt it to today.

Thanks,

-Chuck

December 5, 2012 | Registered CommenterCharles Marohn

Hey Chuck. I'm just replying to your reply to Neil. You don't have to worry about the pendulum or "thuggish" merchants making immigrants live on the outskirts of town. For example, many times immigrants are precisely the merchant class you are describing. Your shoe example highlights a specific immigrant at one point in history.

Currently there are groups of new Minnesotans that fit into your merchant profile. Many folks are arriving from places such as: India, Bhutan, Nepal, etc. and are finding a niche within the hospitality industry. There are many becoming merchants, per your definition, not hourly service sector employees.

I totally see what you are saying. You shouldn't feel guilty about perceptions of the pendulum. Often times "thuggish" is simply a symptom of defending a niche. Immigration is sometimes a story of mercantilism, sometimes a story of labor solidarity.

I think an important message you are creating here is that, "Merchants comprehend and appreciate cooperation, not only competition. And, symbiosis is important. Merchants require the community. The community requires merchants. Merchants cannot succeed by viewing the community as a commodity, product, or source of consumption. Merchants are an active part of a community which enhance the community's health."

Thanks...

December 5, 2012 | Unregistered Commenter"T"

Well said. Strong Towns will inevitably be drawn into the 2013 tax reform debate. I look forward to those posts. I like the back-to-back business posts so I want to add to the feedback: I've spoken to roughly 25K merchants and entrepreneurs over the past three years and I know their failures, concerns, complaints, compliments and successes intimately. All stripes from the smallest sole proprietor to the big CFO, from Saint Paul to the Iron Range, and likely every other state in the nation.

As a private citizen, I've written a twenty-page, simple tax guide targeted towards state residents under thirty with regard to the big three revenue sources: property, sales and income tax. I provide a fundamental overview a review of legal, technological and administrative challenges; and my own little thought of a solution. I'm just sitting on it, letting it soak in, while I can't really do anything with it. But basically, where I think you want to get and what my plan talks about is:

(1) We need to get people to become more familiar with the sales (and use) tax for retail sales in the state and the few minor steps required to be legally established as a business in the eyes of government. If that requires simplification or technology investment, so be it.
(2) Once people understand the basic requirements of establishing and operating a business, they need to learn how to diversify their income. Young people, under 30, especially in 2013 have no business sitting around waiting for someone to give them a job. (If merchants are ancient, jobs are old-fashioned.) They do need to take on more calculated risk (not in the more common dangerous and unhealthy ways). BUT... Communities, strong towns in particular, need to find a way to mitigate the risks. The best way for young people to mitigate risk is to share it with others. There are other diverse income sources people need to consider in addition to wages: individual business income, flow-through business income, rental properties, agricultural production, capital gains, interest and dividends, And no, "Powerball" doesn't count if anyone was wondering.
(3) Once people are able to diversify their income sources to be best positioned to have more disposable income, they are able to increase their property holdings or augment their values through improvements to realty and other types of value-adding activities. This increases tax base and revenues capacities.

The demographic change in Minnesota DEMANDS, immediately that step (2) happens within the next five years. Long-term, for Strong towns, you need to find a way to get to step (3). Step (1) is the hardest but that's all I've done for the last three years. That said, I've never completed the regimen fully myself but I am now making preparations for finalizing a transition. Entrepreneur to entrepreneur, how would you suggest a young person like myself mitigate or appreciate the risk of taking "the leap"?

~Bob Helland

December 6, 2012 | Unregistered CommenterBob Helland

This is a very thought provoking discussion. One thing that comes to mind about the stability aspect of merchants is that they like, well stability and are very resistant to change or any kind. Sort of like the old curmudgeon yelling "hey kid, get offa my lawn!" primarily because they are *not* risk takers. They are very much resistant to any change, especially a strong towns kind of message if it is at all disruptive. In my local experience here in our historic downtown of Annapolis MD, the topic of much controversy is revitalizing our "City Dock" area to make it better for people instead of cars (see http://www.capitalgazette.com/news/annapolis/parking-dominates-city-dock-debate/article_52fb3749-59b0-5f7b-9d52-1f9237b9913d.html). There are definitely contradictions in this Merchants and Entrepreneurs train of thought.

By the way this would make a good (negative) SID TV episode - how the best view of the city is given to cars...

December 6, 2012 | Unregistered CommenterAlex Pline

Thanks for the clarification Charles. I think the merchant personality is out there, just not necessarily a merchant. I wonder if they are the the naysayers that never miss a Council meeting. We call them CAVE people (Citizens Against Virtually Everything). And they do drive you crazy. Some of them get so ugly about it which I see as a cultural shift. It's hard to debate anymore without name calling or non-intellectual low blows.

December 6, 2012 | Unregistered CommenterJeff Morrow

As someone who has perhaps made (or is still making) the transition from an "entrepreneur" to a "merchant" I think I understand where you are going with this definition.

A "merchant" has a stable base of capital and a disposition to stick around for the long haul. That capital can simply be money, but it can also be social and political capital - trust they have worked hard to earn would be a good example.

Before I sunk my family's resources into a local business, I noticed that people would go a bit glassy eyed when I spoke about local politics. Now that I am visibly "invested in the community" (I feel more ambivalent about it now than I did when I moved here), my voice seems to carry a lot more weigh in conversations about local politics.

That is my perception at least.

As a merchant, I need to maintain a good relationship with people in the area and I spend more time than perhaps I ought to doing non-business community related work My neighbor who owns a cafe next door is similar, as are several other local shops that came online around the time mine did. Most of the other shop keepers in this area don't even live nearby, and if they do they are here for the money and don't even bother sweeping in front of their shops.

Like I said, I see where you are going with these thoughts. Maybe "entrepreneur" isn't the right term. I view the bright idea sorts more as economic fishermen - moving where the catch is and needing to be nimble and creative to make their livings, but never really setting down a big presence back home (because home isn't as important as the chasing the next big catch).

I take the block my shop is on very seriously, and I am very vocal in simply wanting the best for it at all times in the most parochial sense.

December 7, 2012 | Unregistered CommenterJosef Bray-Ali

Chuck, this post gives me fodder to share with folks in my local Chamber of Commerce. I'm interested to see how much your post resonates with them. I wonder how they view themselves in this economy, and how they view their relationship to their community/town. I suspect the opinions will be different in a suburban community like mine versus a small town like yours.

December 14, 2012 | Unregistered CommenterLawrence
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