What the Regime Uncertainty of the Pandemic Means for Entrepreneurs

May
21, 2020

4 min read

Opinions expressed by Entrepreneur contributors are their own.

Major upheavals, such as an unexpected pandemic, cause shakeouts in markets. While virtually all businesses suffer, startups and small businesses are typically the ones to go under first. Because entrepreneurs have tight margins and small or no buffers, they suffer immediately and immensely when their cash flow is disrupted.

Entrepreneurship saves business

It’s true, yet what makes businesses survive dramatic change is their entrepreneurial acumen. Big corporations may have the means to hold out longer but will be hopelessly out of sync with the market unless they adapt to the new situation. We have seen many examples of such entrepreneurialism lately, both in big business and opportunity-seeking entrepreneurial startups, from well-established alcohol producers shifting to producing hand sanitizers to offering drive-through coronavirus testing.

Related: 4 Ideas for Actually Pivoting Your Business Right Now

The best advice for entrepreneurs is to focus on what they do best — entrepreneurship — or figure out how to best create value for consumers. Simply put, entrepreneurs are bearers of uncertainty because they are creators of tomorrow. When consumers change their behavior, good entrepreneurs quickly adapt, adjust, and try to meet them where they will be.

Entrepreneurs can shoulder this fantastic responsibility because of reliable and supportive institutions, or what Nobel laureate Douglass North referred to as the “rules of the game.” With the COVID-19 pandemic, however, things are different. It is an upheaval in the economy, which is a bad situation in itself, but what is worse is the regime uncertainty added on top.

Regime uncertainty

When policymakers responded to the pandemic, they issued emergency declarations that changed the rules practically overnight. From ordering “non-essential” businesses to close to regulating the operations of “essential,” these decrees fundamentally changed the playing field. The legal interpretation is far from obvious for many businesses, thereby leaving entrepreneurs in the dark — and with huge costs trying to figure out what this means.

While the $2 trillion stimulus package is intended to offer relief, including support for businesses, it also increases uncertainty. For example, loans come with strings attached and generous unemployment benefits make staffing unpredictable.

Related: Entrepreneurs Are Prepared for Crisis Whether They Know It or Not

This uncertainty is of a different kind than what entrepreneurs typically bear. Economist Robert Higgs calls this regime uncertainty since it arises from changing and unpredictable rules. When entrepreneurs cannot trust fundamental rules such as the enforcement of contracts and protection of property rights, they cannot run a business. Higgs argues that regime uncertainty was the main reason the Great Depression lasted so long — entrepreneurs were unwilling to take the plunge because of the general anti-business sentiment expressed by New Dealers.

Dealing with the current situation

Entrepreneurs are experts in uncertainty-bearing. After all, they face uncertainty on a daily basis and even cause it by innovating new products, services, and business models — and thereby disrupt markets. Entrepreneurs go with their gut feeling about what the future should look like, and they set out to create it. But they assume the rules will be relatively stable.

What makes regime uncertainty different is that it is an institutional (rules) rather than economic (action) unpredictability. This makes it harder to be an entrepreneur, and the risk of failure increases dramatically. But what they face is ultimately the same problem — to figure out what the future will be like, if not create it.

With changing rules of the game, it is a mistake to focus only on solving problems within the business. It is prudent to act to safeguard one’s business, but entrepreneurs should consider what might come of this whole situation — and what their role in it might be.

Related: How One Franchise Company President Makes Better, Faster Decisions During Uncertain Times

Seeking advice from legal counsel is a good way of interpreting the new rules already in place. But it will not help with figuring out what effects they will have on the economy or how the rules themselves might change. When things are up in the air, there are no formulas, models, or blueprints that can help.

This is no news for entrepreneurs. They are used to trusting their gut and placing a bet on the future. This is still the case, but with more variables than is usually the case. The question is how best to deal with it. What does your gut say?