Where are the Real Entrepreneurs?

Opinion

  on January 31 2012 11:40 AM

Everyone likes the word entrepreneur. Its precise definition is elusive, but even if we as Americans don't really know what entrepreneurship means, we know that we like it, and we want more of it. After all, the word evokes all the popular clichés that are so prominent in our culture, especially around election time: the American Spirit, the struggle to overcome, innovate, inspire positive social change, and so on. Indeed, entrepreneurship has become a catch-all in these times of economic turmoil, representing something of a black box that will make everything better, so long as we encourage it.

It should come as no surprise then that the word appears often in American politics, and on all sides of the ideological spectrum. In his recent State of the Union address, for example, President Barack Obama spoke highly of entrepreneurs and risk-takers, and emphasized the importance of promoting new business ventures. In fact, I hypothesize that no politician has ever gone on record as being against entrepreneurship. And yet, despite receiving more lip service than most economic terms, there is little that the United States' political system discourages more than genuine entrepreneurial effort. To answer the question posed in the headline, entrepreneurs are systematically prevented from entering the market. In order to understand this claim, let me say a few words about what entrepreneurship is exactly, and how the current economic regime works against it.

Entrepreneurs perform a specific and absolutely vital economic function. They use their own judgment and risk their own capital in order to produce goods and services for society. Entrepreneurs can, therefore, come in all shapes and sizes, from small business owners to established industrialists. The common problem all entrepreneurs face though is the uncertainty of the market: bad decisions mean producing things people don't find useful, and result in losses and bankruptcy. Good decisions, however, result in the production of things people do find valuable, and the reward for good entrepreneurial judgment is profit. Profits, therefore, perform an important social function, because they encourage entrepreneurs who are good at satisfying wants, and, likewise, losses punish individuals who waste resources.

Consistent with virtually every other term used as political currency, politicians praise the concept of entrepreneurship, while at the same time doing anything and everything in practice to oppose it, hindering entrepreneurs at every turn. The enormous and constantly growing complex of economic regulation works directly against the profit and loss system, discouraging entrepreneurship and innovation. Prominent examples would be rewarding bad decisions through bailouts, or punishing good decisions by subsidizing firms that choose not to innovate or change.

Much of this is intuitive, however, and many are starting to wise up about the basic problems. Politicians usually require reasonably concrete ideas about what they want to do to encourage the entrepreneurial spirit, and how they can avoid the pitfalls of economic intervention. Unfortunately, when discussing reforms to solve the problems of regulation, many commentators focus on taxes as the major impediment to economic progress, arguing that, for example, taxing away profit erodes the incentive to be entrepreneurial. (After all, why risk resources when there is little or no reward?) This is certainly true as far as it goes, but taxes are one piece in a large puzzle. They are a useful political talking point, because their effects are immediately obvious to the wallets of the voting public. But taxes are only one barrier to entrepreneurial effort and often serve as a distraction from the effects of other economic policies that work directly against entrepreneurs in subtler ways.

Part of the problem with seeing this bigger picture is that even supporters of the market economy often think of taxes and regulations only as something that government does to business, and they miss the deeper problem of the things government does for business. The result of this sort of thinking is that people adopt the mistaken idea (propounded by writers such as Ayn Rand) that businessmen are a persecuted minority, when in fact certain groups of businessmen are the very people agitating against new entrepreneurial endeavors. They do this through encouraging government regulations -- taxes, subsidies, tariffs, quotas, licenses, minimum wage laws, and health and environmental restrictions, to name only a few -- which provide artificial advantages to some firms at the expense of others.

These regulations are seemingly designed to promote the good of society, yet are usually manufactured by larger businesses that want to price their smaller competitors out of the market. It is easier to lobby than to compete, and lobbying and political influence shift regulation in the direction of whoever happens to have the ear -- or the pocket -- of the regulators. All regulatory interference creates barriers to entrepreneurship in industry, and the result is that it is difficult, impossible, and often illegal for eager entrepreneurs to challenge the established firms.

Sadly, the most common conclusion about the perils of regulation is that the solution must be to simply clean up the political process, and to get money out of politics. The problem with this claim (in addition to its astounding naïveté) is that it assumes that the problem with economic regulation lies with the people who make it. But regulations do not discourage entrepreneurship because of the way they are designed, or because of the schemes or ideologies of the people behind them. Regulations hurt entrepreneurs precisely because they are regulations. Regulation of all types interferes with the ability of entrepreneurs to produce for society at large; it perverts the profit and loss system and rewards producers who perform poorly. The ill-gotten gains of the businessmen who conspire to regulate their competition out of the market merely add insult to economic injury.

Policy advocates face a choice: they can either encourage entrepreneurs or regulators. They cannot do both. If current and future administrations do not systematically oppose interference with the profit-and-loss mechanism, they threaten the vital function entrepreneurs and markets can perform, and promote instead the disastrous consequences of the marriage between government and business.

Matt McCaffrey holds a master's degree in economics from Auburn University and is currently a PhD candidate in economics at the University of Angers. He is also the editor of Libertarian Papers.

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