The Economics of Entrepreneurship
"If you’ve got a business—you didn’t build that. Somebody else made that happen." Barrack Obama, 2012
"Don’t let anybody tell you that it’s corporations and businesses that create jobs." Hillary Clinton, 2014
Business owners are too often vilified these days. They are accused of such things as: exploiting workers, making huge profits, ruining the environment and being greedy. While I have pointed out in previous blogs how it’s not possible to survive in a free market if you try to do any of these things; the “anti-business owner” is alive and well. Even so, have you ever considered that the profit motive may actually be consistent with virtue? I contend it is. I argue that the entrepreneur is actually one of the most virtuous members of society. As J.B. Say wrote in 1803:
“An entrepreneur is an economic agent who unites all means of production—land of one, the labour of another and the capital of yet another—and thus produces a product. By selling the product in the market, he pays rent of land, wages to labour, interest on capital and what remains is his profit. He shifts economic resources out of an area of lower and into an area of higher productivity and greater yield.”
An entrepreneur seeks out opportunities to correct “mistakes” in resource allocation. By improving the allocation of resources, entrepreneurs reduce waste and direct resources to where they are valued most. When such mistakes are corrected, the parties to the exchange are better off (remember, in free markets, voluntary exchanges only occur when each party to the exchange is better off; otherwise, the exchange would not occur in the first place). If virtues are characteristics valued as promoting collective and individual greatness, then entrepreneurship is virtuous. Entrepreneurs seek to meet the needs of consumers (sometimes needs consumers do not even realize they have yet) in new and more efficient ways. They only stand to profit if they are successful in meeting the needs of consumers (by satisfying their wants).
Entrepreneurs Correct Misallocated Resource
Yet entrepreneurs do not just spot misallocations of resources and correct them for a profit. They also envision new allocations of resources that would be more efficient than any combinations applied thus far. They are visionaries in this sense. Remember the movie “Field of Dreams?” The lead character built a baseball diamond in his cornfield (risking his family and farm in the process), because he believed people would come watch a game. Entrepreneurs take similar risks: they stick their necks out to “build it,” even though there is no guarantee “they will come.”
This “vision” is part of what makes entrepreneurs important to our standard of living. It takes time (often years) to develop new products and better ways of doing things. If entrepreneurs were not rewarded when their ventures succeed, they could never afford to take risks in the first place. Apple® is now one of the most successful companies ever (and good for them). However, did you even think you needed an iPod, iPad or iPhone before Steve Jobs began to design and develop those (years before they were available for purchase)? Likewise, many of the products and services you “need” today, you could never have imagined before they were invented.
I would argue that entrepreneurs are one of the few participants in an economy that actually put themselves at risk, before they know they will be compensated for such. When most people take a job or perform work, they know what they will be paid. Entrepreneurs perform their work with no guarantee they will EVER be paid.
Certainly, this is not the same as altruism. Altruists seek to help others as their only goal and objective. However, if such altruism is not sustainable (i.e. the returns to such altruism does not provide the resources for further and continued altruism), its impact is limited. On the other hand, the ventures of the entrepreneur are actually self-sustaining—when successful.
By identifying more efficient combinations of resources, satisfying more of the wants and needs of consumers, all the while, fairly compensating the capital, land and labor resources used in the productions of goods and services; the endeavors of the entrepreneur are self-sustaining by definition (in this way, I suggest the virtues of such are superior to even the altruist). Perhaps the “evil profit seeking” actually does more good for society than more “philanthropic” motives.
Earlier, I established that what really creates wealth is new “knowledge,” (learning and discovering more efficient and effective ways to produce goods and services). Remember, if wealth is the accumulation of resources (products, services and capital or financial claims on them), then the more that can be produced per the current factors of production, the more wealthy the society will be (the higher their standard of living).
More specifically, new “knowledge” (innovation) is what creates new wealth that could not exist before. Wealth can be created using knowledge (particularly new knowledge—innovation) to produce more goods and services, per a certain amount of factors of production. It does not simply change hands; it is NOT a zero sum game!