Squeezing Opportunities: The Informal Market and Lemonade Stands

Adam Smith said, “The propensity to truck, barter, and exchange one thing for another is common to all men.” Smith believed that humans have a natural tendency to engage in the market. Engaging in the market does not just mean consumption. Various roles as sellers, producers, and middlemen are birthed from the same parent: market exchange. Informal Markets allow individuals to hone their natural propensity and use it as growth. Not just the growth of profits, though that is certainly a chief aspect, but the growth of entrepreneurial spirit, independence, and ideas. The informal market has proven to be a first step for many entrepreneurs throughout history, and it is deserving of more reverence than it often receives.

Informal markets have long served as a catalyst for economic growth and progress. While the notion may seem unfamiliar to those accustomed to transactions in the formal market sector, informal markets are likely something most of us have encountered or even participated in. The informal economy encompasses all economic activities that operate outside the purview of official authorities due to monetary, regulatory, and institutional reasons. Picture a child setting up a lemonade stand on the side of a road, paying a neighbor to water your plants while on vacation, or buying fresh fruit from a roadside vendor. These activities epitomize the essence of the informal market; the market where agents trade amongst themselves in the absence of formal oversight or regulation. Still, in the realm of developed countries, people seldom must rely on the informal market to meet their needs.

Consider this scenario: if you suddenly crave a refreshing glass of lemonade, you don't embark on a quest to locate the nearest lemonade stand; instead, you head to a convenience store or any other establishment that you know can meet your needs. Similarly, if your neighbor is unable to watch your dog while you're on vacation, you can rest assured knowing that professional veterinarians or dog daycares are available to provide care. The point is that, in almost all cases, segments of the formal market can readily meet our needs, which makes consumers rely on the formal market. In other words, we have moved away from depending on informal markets for essential services. However, it would be incomplete not to consider what informal markets can give rise to.

When you come across a child that has set up a lemonade stand, seldom does one think about their endeavor as the honing of the natural propensity Smith suggested, nor does one quickly arrive to think that a lemonade stand could be the seed for a future business empire. But, the informal market provides fertile ground for nurturing entrepreneurial tendencies. It allows individuals to experiment with their ideas, learn business skills, and develop a sense of independence and self-reliance. The empire that is now Berkshire Hathaway started with its founder, Warren Buffett, selling Coca-Cola and chewing gum door to door as a child. Similarly, Ingvar Kamprad, the founder of IKEA, would buy matches in bulk and sell them door to door as a child. What each entrepreneur learned during these experiences was, without a doubt, formative for their futures.

This is not to suggest that most children would go on to run Fortune 100 companies if they opened a lemonade stand. However, this is to suggest that all children would be sure to learn about the market from such a practice, and informal markets make it easy to do so. Low barriers to entry allow, perhaps encourage, such entrepreneurial activities to take place. To return to a previous example, look at the barrier to entry for a lemonade stand. They are: A stand, lemonade and a sign saying lemonade for sale. Conversely, if this took place in the formal economy, the barriers to entry would be significantly higher: setting up a lemonade stand would involve various regulatory requirements, permits, licenses, and potentially higher upfront costs. These barriers to entry into the formal economy could include business registration and cicensing, zoning restrictions, safety regulations, and tax obligations, to name just a few. Indeed, it should be seen that the informal market allows a natural steppingstone for developing entrepreneurs to rise to the playing field that is the formal market. These valuable lessons and skills one learns can be transferred to the formal market, where individuals can further refine their entrepreneurial abilities and take their ventures to a larger scale.

Without assuming too much, one can infer what Adam Smith would think of a lemonade stand: A manifestation of the natural propensity to engage in market exchange, a beacon of voluntary exchange, and a microcosm of the market economy and an opportunity for individuals to learn valuable lessons about supply and demand, competition, and the rewards of hard work. In the end, informal markets, like lemonade stands, are more than just simple transactions. They represent the innate human inclination to engage in market exchange and embody the entrepreneurial spirit that drives economic progress and innovation. By recognizing the value of informal markets and creating an enabling environment, we can harness their potential and empower individuals to thrive in both informal and formal economies, contributing to a vibrant and inclusive economic landscape.