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

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9. Development orientation

I administered my Economic Orientation Questionnaire at a seminar of Local Government Business Facilitators (SA 2004)- here are the results:

The purpose of the questionnaire was to identify underlying attitudes towards economics and economic development.

If one wishes to accelerate wealth creation in communities one should look at the underlying drivers of wealth creation – for example: Not one respondent indicated that property rights could be considered as a factor in wealth creation. This may impact on the actions taken to accelerate the economic development in a region.

RESULTS

One third of the respondents mention BEE as the reason why some blacks are wealthier than some whites. It is sad to note that only four give some recognition to hard work and entrepreneurship as the reasons for black economic success. One would have hoped that persons responsible for development initiatives would be more inclined to acknowledge entrepreneurship as a platform for wealth creation.

When exploring the reasons for wealth within a population group more individuals were able to see that it is dependent on other reasons (more individually rooted, rather than the broader environmental situation) that help some to become wealthy

Only four persons feel that rich persons do not have to be privileged in some way to achieve success – the is quite the opposite to current research

A number of very positive attitudes were expressed by the group:

Wealthy people are predominantly seen in a positive light - 72% - so wealth and wealth creation is seen as good.

The following is VERY positive and bodes well for the future: About two thirds of the respondents (20) do NOT feel that it will be a better society if money was taken from the rich and given to the poor. As one respondent put it in a side note: “You cannot empower a small man by bringing down a big man". In keeping with this - two thirds of the participants do not favour nationalisation - what is of real concern is the third that do!

A staggering 27 of the respondents feel that workers are being exploited by factory owners. This indicates a very negative perception of the main instruments of wealth creation - factories. One will have to change this perception if one would want to encourage industrialisation.

Also good is the group score of 79% on their knowledge of how prices behave - 100% would have been nice seeing we are talking about Economic Development Officers!

Perhaps on the negative side is the high reliance on Government to solve economic problems. For example only 36% understand that protectionism does not help the economy in the long run - they indicated that tariffs on imported goods should be removed. One wonders to what degree they realise that they are the champions of the poor, since this will mean cheaper goods for the poor an helping our competitive advantage when it comes to exporting.

If one compares this low 36% with the 79% of those that said “Yes” to “Remove barriers to free trade”- which is essentially the same question – leads one to conclude the following: Disparities in scores of questions that explore essentially the same issues from different vantage points – indicate that more solid grounding in economic theory may be required.

Another example of this “split” thinking is that 23 participants - 70% - felt that taxes on business should be reduced. This is a substantial number of people that realise that businesses are the engines of wealth creation and taxes on business reduce job and wealth creation. 81% however said that small businesses should be subsidized! – they do not quite understand the relationship between taxes and subsidies.

A particular highlight is the fact that virtually all of the respondents - (30) said "remove laws that make it difficult to start a business" If this could be achieved in the Northern Province we will have a chance to exceed the 6% growth target set by the Deputy President.

SUMMARY

The responses tend to be very mixed - one can say confused, but the message is clear - there is hope for the free market in South Africa as proclaimed by its Government officials!

The group could benefit from some more exposure to modern economic and entrepreneurship development thinking.


If you wish to measure these and other concepts and perceptions that people hold - contact:

Charl Heydenrych
082 637 3710


Leaders in entrepreneurship development
proplib@tiscali.co.za