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Entrepreneurship FailureThis article is a little bit of an inside story and thus we apologize for it in advance. As you may have heard (or perhaps not), Austrian Economics (see Austrian Economics Compilation) is big about entrepreneurship. This could not be otherwise since Austrian Economics is all about Human Action. Basically, to speak about economics is to speak about how humans act because there cannot be economic activity without people acting in an economic manner. This seems so obvious as to be insulting for many people. But if it is so, why are we wasting your time? Well, because it would seem that "some" economists (i.e. the entire mainstream economic profession) disregards entrepreneurship altogether and treats the whole of economy as some sort of physical system, like gases or mechanical devices. Mainstream economic theories have tried to destroy Austrian Economics for many decades to no avail. Actually, the opposite has been happening. Quietly and under the table mainstream economists have been adopting "selected" Austrian Economic ideas and principles. However, on the surface, they positively hate Austrian Theories.

One of the many points of contention (to express it in polite words) has been the "entrepreneurship" issue. Austrians are very explicit and simple; without entrepreneurs there could be no economy. Without people willing to risk capital on uncertain endeavours hoping for profits, markets would never have developed. If a seller is not willing to risk the possibility that some of the stock may never be sold, the seller would never produce a product in the first place. Without people risking having a loss, markets (and civilization) would have never existed.

The "other" side ignores the whole issue and simply states that markets are something that "just happens". Of course, they conveniently forget to mention any mechanism. No matter. For them markets are a "natural" phenomenon and therefore they respond to "natural" laws. It is only a matter of finding the "right" law. And of course, we know how successful they have been, in particular the 2008 implosion and the future mega-debacles yet to come.

J'ACCUSE

Mainstream economists saw in the emphasis on entrepreneurship the perfect "silver bullet" to finally kill Austrian Economics. Over the last decade or so many sufficiently sound statistics have been developed which could be used for this purpose. Over the last few years many such efforts have been developed showing that, without any major doubt, on average entrepreneurship does not improve the life of entrepreneurs. Thus, there is no reason to favour or "stimulate" entrepreneurship. There! Proven! All this BS about entrepreneurship has been proven wrong and now we can safely return to our tested-and-tried mainstream economic principles of printing while drunk or drinking while printing, whatever works best for our image.

OR NOT

Let's begin by saying that when Austrian Economics speaks about entrepreneurship it doesn't refer to a "class" in the same manner as communists refer to the "working class". Entrepreneurship is a continuous and not a dis-continuous skill. What this means is that if we could somehow measure this skill, we would find that it is impossible to define a "quantum unit" of entrepreneurship (i.e. an indivisible unit). Entrepreneurship would freely vary from people to people in as many fractions as possible. As such trying to define who is or isn't an entrepreneur is purely arbitrary. It's exactly as trying to describe who is or isn't rich! It is preposterous! Trying to analyze the "entrepreneurial class" as such is not only a gigantic waste of time, but a classic example of a flawed "straw man" argumentative tactic.

When Austrian Economics talks about entrepreneurship it makes reference to the entrepreneurial attitude that we all have when engaging in economic activities.

Furthermore, what Austrian Economics says is that we are all entrepreneurs and as such we all progress our economic wellbeing when we act as such. However, it is abundantly clear that there are a few of us (just a few) that are much better at business than everybody else. It could not be otherwise since the entrepreneurial skill responds to a Gaussian distribution just like any other skill.

Entrepreneurship Distribution

What this means is that most people are somewhere in the middle, not too good and not too bad at being entrepreneur. Furthermore, this also means that if we calculate the average of people that benefited from being entrepreneurs we get zero simply because there is the same amount of people on both sides of the distribution!

As a matter of fact, depending on where and how you measure "entrepreneurship" you may obtain a skewed distribution which is not symmetrical. Thus if we re-calculate the "average" number or percentage of people that are better off because they are entrepreneurs, this average is far, far smaller than half the people who participated in the experiment! What all this statistical mumbo-jumbo is saying is simple: only few people will become very wealthy. This is exactly what reality tells us. Only a tiny percentage of the population will be rich. And according to mainstream economics and socialistic points of view, this is very, very bad. Entrepreneurship does not work. However, what mainstream economics is doing is missing the point…on purpose.

What Austrian Economics is saying is that we are all entrepreneurs and it is this entrepreneurial activity that makes us all wealthier. The error is in trying to measure "entrepreneurship" and to arbitrarily define it one way or another.

THE CORRECT ANALYSIS

The correct way to analyze this phenomenon is to compare what happens in places where people are allowed to be entrepreneurial versus places where people are not allowed to be so. This is quite easy to measure. All we have to do is to compare GDPs of communist versus capitalist countries. Even though the GDP is a seriously flawed measure (see GDP Keynessians Vodoo Economics), it still provides us with a clear result: communism loses and capitalism wins.

This is so not because there are more entrepreneurs under capitalism (that would imply some sort of genetic anomaly that discriminates between political systems) but because of the action of political systems to depress or allow entrepreneurial activities. The difference is the sum of all personal entrepreneurship activities on the economy as a whole. Essentially entrepreneurship creates a much bigger pie from which we all benefit. That's the real strength of entrepreneurship; to make us all wealthier (for a more detailed explanation see Piketty Fences).

A side effect of this natural phenomenon is that yes, some people will become very, very rich. This is not a statistical anomaly but it is well within the norms of statistical distributions. Entrepreneurship produces massive wealth for all to share but it does not guarantee that you will become rich. As a matter of fact, if the statistical distributions of "entrepreneurial activity" hold, it is almost guaranteed that you won't. However, you will be far, far better off than if entrepreneurship wouldn't exist.

The secret is to understand that in order for all of us to become better off is to allow entrepreneurship to follow its natural course and as a side-effect produce very wealthy people. We can see this effect in the picture below:

Entrepreneurship Wealth Effect

In it we can see how entrepreneurship increases wealth for all people but it does not change the shape of the distribution. We still have "rich" people. It is impossible not to have "rich" people and expect the same wealth levels for all people.

CONCLUSION

Human Action (entrepreneurship) is what drives the creation of wealth and thus civilization itself. We cannot limit or manipulate the former and expect not to have consequences on the latter. Every single boom and bust throughout modern economic history (about 200+ years) so demonstrates. Entrepreneurship is not the disease but the salvation precisely because it is a natural human process.

Unless you are a socialist, that is. Then, all natural economic processes must be managed "for the good of society" and in so doing we will finally be able to live in the "worker's paradise". Just one question though, if this is the case, why didn't you move to the USSR?

Note: please see the Glossary if you are unfamiliar with certain words.

1 Comments | Add yours
  • Very enlightening article. As one who dwells on Mises and Human Action, the idea of how the distribution of entrepreneurs effects prosperity, clarifies my understanding of Mises, and why he dwell so much on entrepreneurship. Thanks!

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