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David R. Henderson, Ph.D. Economics
Honor entrepreneurs Red Herring Magazine, July 1, 1999 Entrepreneurship is the lifeblood of a free market economy. Entrepreneurs are the people who bet their own time and, typically, much of their net worth to implement ideas that create new things and new wealth. Where others see only a problem, entrepreneurs see an opportunity. When they are successful, they transform industries and entire economies. "Honor labor" is a well-known bumper sticker slogan, and, of course, a person who does a good day of honest work deserves to be honored. But entrepreneurs also should be recognized. Wherever you are as you read this, look around. Name the first item that you see, whether a luxury or a necessity, and chances are that it exists because of the actions of an entrepreneur. I propose an "Honor entrepreneurs" bumper sticker. HOLY GALE In 20th-century economic thought, there are two patron saints of entrepreneurship. The first is Joseph Schumpeter, author of the 1942 classic Capitalism, Socialism, and Democracy. Unlike most economists of his day, who saw competition only in an industry where hundreds of small firms sell the same item and compete solely on price, Schumpeter knew that the real competition lies elsewhere. He painted the big picture beautifully: But in capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization...competition which commands a decisive cost or quality advantage and which strikes not at the margins of profits and the outputs of existing firms but at their foundations and their very lives. This competition, he wrote in one of the most memorable phrases in economics, was a "perennial gale of creative destruction." And that gale's creators were the entrepreneurs who acted "with confidence beyond the range of familiar beacons." Their function is, in Schumpeter's words, "to reform or revolutionize the pattern of production." Schumpeter was prescient about many things, including the fact that the quickly increasing population would not cause Malthusian economic misery (see my article "The information economy"), but he was unduly pessimistic about the role of entrepreneurs. Economic progress, he wrote, would soon become "depersonalized and automatized," and entrepreneurship would lose its importance "at an accelerating rate in the future." When Schumpeter died in 1950, his predictions did seem reasonable. But if he were alive to see Silicon Valley today, he would be stunned. Everywhere you turn you run into entrepreneurs who are starting businesses in homes, garages, and small offices. The success of entrepreneurship in Silicon Valley and in many other parts of the United States routinely contradicts Schumpeter's pessimism. The other patron saint of entrepreneurship is the late Friedrich August von Hayek, cowinner with Gunnar Myrdal of the 1974 Nobel Prize in economics. Hayek put the intellectual nail in socialism's coffin. His insight, laid out in a series of articles in the '40s, was that central planning by government couldn't work. The amount of information required to plan the economy of a population larger than just 10,000 people, let alone several hundred million, could not be comprehended by a few state planners. Instead, the information needed to price an asset appropriately, or to invest in a company, or to build a new product was collectively possessed by ordinary people and only in a free economy could be used for trading, or investing, or producing. Although Hayek didn't write much about entrepreneurs, his spirited explanation of how people act on information to make economic decisions was necessarily a defense of the entrepreneur. Even the poor in the United States do well as a result of markets that are fairly free (see my article "The Rich -- and Poor -- are Getting Richer"). The quality of the clothing and the food they can get, for example, has improved dramatically, and the price of both has dropped. Yet there are three main areas in which the poor are not well served: education, transportation, and protection from crime. Isn't it interesting that all three have an important characteristic in common? All are provided almost entirely by, or highly regulated by, the government. GUV AND TAKE Government control leaves little room for the entrepreneur. A public-school teacher who gets kids excited about reading is no more rewarded than one who puts them to sleep. Entrepreneurs in Harlem have tried to provide unlicensed taxicab services to that area's residents, whom few of the commercial companies will serve. But New York's government has threatened the entrepreneurs with fines and jail time if they persist in providing this valuable alternative to public transit. A police officer who figures out how to reduce crime will not get rewarded; one police chief of New York City was even fired despite having reduced the city's crime rate. Here's a prediction that I'm sure of: the greatest improvements we see in education, transportation, and protection from crime will come from free markets and entrepreneurs, not from government.
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