Jim Harris on Entrepreneurship

Newspapers for entrepreneurs, centres for innovation, courses on entrepreneurship – everyone and his dog talks of the importance of entrepreneurs who risk their own money on new ventures to create jobs and growth.

We lack jobs and growth so do we lack entrepreneurs? No, it's just another chant in the litany of deprivation. Our 'sophisticated' economy supposedly also has millions of 'unemployables' and too few science graduates, accountants, patriotic doctors, skilled immigrants and so on. Such nonsense!

To live is to act, risking failure and loss in pursuit of happiness and prosperity. As Ludwig von Mises put it, in an uncertain world all purposeful human action is speculative and entrepreneurial. We're all entrepreneurs constantly sensing and seizing hitherto-unnoticed opportunities for satisfaction. What, then, is an entrepreneur in the narrower sense?

Frederic Bastiat gave a nice example of men associating in some agricultural endeavour. Some bring tools and horses. Others just arrive willing to work. Weather permitting, all prosper together. But the labourers would often rather exchange some of their seasonal risk for the greater certainty of a fixed wage. If they can agree this with the 'capitalists' who provided the tools and horses, the latter get the agreed remainder of the farm income and also the risk of loss, or hope of extra profit, if the venture does not perform quite as anticipated. The labourers only retain their share of the ultimate risk that the venture fails entirely.

In a second stage, sometimes the capitalists also opt for greater certainty and agree with one (or more) of their number to draw an agreed and fixed interest on the capital they provide. This entrepreneur assumes all the venture's risks of loss and hopes of unanticipated profit. Often, of course, it's his initiative that brings the participants together in the first place.

In Adam Smith's astonishing 1776 version of history, capitalist specialisation altered how we thought about ourselves as we became buyers and sellers, customers and suppliers, all striving to improve our output's quality and quantity to gratify our needs. Eventually the division of labour produced people who do nothing but think about improvements – engineers and scientists – and others whose trade is to observe everything – philosophers, teachers and professional managers. But it would be quite wrong to suppose that the rest of us thereby ceased also to act entrepreneurially. We all seize whatever gaps and opportunities for new profit we may observe. What else motivates any voluntary exchange? Each party perceives and goes after 'free' gain from it – not the whole of the economists' 'consumer surplus', but his share of it.

So the wage-drawing worker and the interest-drawing capitalist have swopped much of their risk for certainty, and the entrepreneur has swopped much of his certainty for risk. That's like any voluntary group insurance scheme where regular payments smooth away the sudden risk of a major expenditure, and the organisers worry about overall solvency. It's just one more case of human specialisation for mutual benefit. The entrepreneur does nothing we don't all do daily – he just does it for a living.

Ayn Rand stressed that though capitalism is manifestly mankind's most successful system of wealth-creation, capitalists are usually clueless as to how to explain or defend the system. Entrepreneurs tend to be no better. And most economists get it so wrong that they comfort capitalism's sworn foes more than capitalists do!

In mainstream neo-classical economics, the market is portrayed as an impersonal 'invisible hand' machine that (only) hums along nicely on complete information, perfect competition and equilibrium pricing. Eager critics readily discern 'market failure' demanding endless intervention by state agents. These God-like figures naturally access complete information with only the 'public interest' at heart and never risk 'government failure'.

This silly model is portrayed as being independent of individual motivations and actions. Critics and government unthinkingly assume that capitalists and entrepreneurs will keep on 'doing it' like clockwork automatons or milk-cows, impervious to disincentives. Households and farmers will keep employing workers whatever statutory minimum wage is imposed. Well, how wrong is that assumption? Can you run out of capitalists while accumulated capital 'seeks' an investment home? Or of entrepreneurs while profit opportunities 'beckon'? Cometh the hour and the need, cometh the man.

Ah but do they act like automatons, like implacable zombies? Or are particular conditions necessary before they will act? Well, at the extreme, if you keep jailing all active investors and entrepreneurs you might deter new entrants. So liberty is desirable. But do more subtle disincentives suppress private-sector job creation and defer prosperity for all?

Improving the neo-classical market-as-machine model, the Austrian school emphasises entrepreneurs' crucial role. Rather than just assuming the impossible – an instant, magical balancing-out of supply and demand at market-clearing levels – the Austrians invoke entrepreneurial discovery as the mechanism. Each of us helps the process along whenever we engage in exchange as producer or consumer. Foreign-exchange traders who deal currencies across the world do it as arbitrageurs. Poor craftsmen who convert and sell porcupine quills as decorative lampshades do it as street-traders. Errors keep being corrected. When over-optimism leaves product stockpiles unsold, suppliers soon lower prices. When over-pessimism leaves opportunities for profit untouched, entrepreneurs soon touch them. Unless they can't.

Liberty – freedom of entry – is about so much more than easy immigration and access to resources. Who can count the rules that can restrict it, the licences and permits, standards and quotas, fees and taxes, permissions and discretions, bribes and backhanders. Who but the most addicted would bother jumping hundreds of bureaucratic hurdles to win state tenders? Or start small businesses in entrepreneurially-hostile and union-favouring states? Why, one could almost imagine a gross over-accumulation of so many barriers to entry as to condemn a country to 40% structural unemployment and slow growth!

But governments, however overgrown, cannot escape human action and competition. Worldwide, profitable opportunities abound outside the over-regulated formal sector. Restricting formal competitive opportunity only pushes down on the waterbed of human energy. Then human desires necessarily 'demand' informal 'supply', some of which governments criminalise. Attempts to restrict 'victimless crime' boost its risks and rewards – and thus the resolve (and even the firepower) of its practitioners. Clearly, removing restrictions could attract many energetic entrepreneurs back into formal-sector situations with rather lower risks and rewards.

Most of us in the taxpaying 'working class' want to get on with our lives unbothered by authoritarian agendas. What Adam Smith told us about the butchers, brewers and bakers who provide our dinner applies equally to government. It is not from the benevolence of the working man and the entrepreneur that the state can expect its tax revenues, but from their regard to their own interest. Government should address itself not to their humanity but to their self-love, and never talk to them of public necessity but of their advantages.

If government wants South Africa to prosper, let it keep the peace and stay out of our wallets and our way.

Progressive deregulation might dispel the state's well-deserved reputation as prime suppressor of human initiative. Forget wasteful public efforts to attract, create, train or subsidise entrepreneurs. We only need that long walk to freedom.

=================================================================================== Author: (the late) Dr Jim Harris was a freelance researcher and writer. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and they are not necessarily shared by the members of the Free Market Foundation.

FMF Article of the Week\7 April 2003 - See more at: http://www.freemarketfoundation.com/issues/entrepreneurs-all-we-need-freedom-of-action#sthash.xt3qKHIB.dpuf