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Ludwig Von Mises

Entrepreneurs

Praxeology is notably distinct from other mainstream economic theories in that it emphasizes the role that entrepreneurs have in the economy. As Praxeology is the science of human action, it is only natural that the key actor in markets be identified, and this actor is the entrepreneur. What is an entrepreneur?

Entrepreneurs are people whose purpose is to maximize the use of their resources in order to reduce their uneasiness.

As such, all human action (i.e. acting to reduce uneasiness) is entrepreneurial in nature. However, in order to understand them better we need to understand the methods they base their decisions on. This is, we need to understand their (our) driving force in a more precise manner. We know that people act to reduce uneasiness, but we need a way to perform economic calculations in order to ascertain loss or increment of uneasiness. In order to do so, we need the concepts of profit and loss.

Profit and loss

The goal of each person is to minimize their uneasiness. Thus we define:

  • Profit is the condition when a person succeeds in minimizing their uneasiness.
  • Loss is the condition when a person fails to minimize their uneasiness.

As such, it is obvious that in general terms the goal of any action is to obtain a profit. Therefore the goal of any action is intrinsically selfish.

As with any other action, the goals of such actions are subjective and personal and thus the degree of accomplishment (or failure) of such goal is also subjective and personal. Therefore it is impossible to quantify precisely the degree to which uneasiness was increased or decreased. This is, it is impossible to quantify exactly and in an objective manner profits and loses. Furthermore, as humans, we apply the concepts of profit and loss to exchangeable as well as non-exchangeable goods and services. We value love, pride, a smile, a clear day and so on. All these non-exchangeable goods or services are part of our profits and loses. Precisely because these goals are subjective, all the properties of such goals are also subjective and personal. For example the concepts of fairness or unfairness or good and evil are not absolute or objective but relative and subjective. These concepts accompany our ideas of profits and losses and modify them.

However, just because we cannot quantify exactly the amount of profit and loss, this does not mean that we cannot estimate them through the use of economic calculations. We can do so by re-stating the definitions of profit and loss as:

Profit and loses are the difference between the satisfaction obtained minus the satisfaction that was used up or exchanged.

As such profit and loses are the drivers behind our actions since we always aim to maximize profits and minimize loses.

Behaviours as profits

Profit is easy to understand if it can be counted, such as money, or touched, such as a tangible property. A person has profited because this person has obtained wealth.

Profit is also easy to understand if its context is within the realm of our culture or ethics, morals or religion. For example, we can understand that a person volunteering their time to do charitable work is profiting because this person obtains a sense of satisfaction that he/she would not have had otherwise. The uneasiness of this person is caused by the knowledge that poor people are suffering.

But what happens when we are confronted with something we do not understand or that goes against everything we know and believe in? Take for example Japanese Samurai worriers. In ancient Japan should a samurai failed to fulfill his duty, he had to commit ritual suicide or Seppukku. In the west we cannot understand this event. For us, it is clear that killing oneself is a loss and not a profit because we have lost our life. However, for a Samurai living in ancient times, Seppukku was the only way to cleanse the family name and his honour from the stain produced by his failure. This was his uneasiness. His profit was the returned honour and this was more valuable than his life.

In both examples above, people are profiting even though they act to help other people.

It is for this very reason that profits and losses are ultimately personal and subjective, because they depend entirely from our point of view.

Profit, Loss and Economic Calculation

Although the general definitions provided above are correct, most people assign the concepts of profit and loss to economic measurements. In other words, people look at profit and loss from a wealth perspective as quantified through money.

Thus we end up with two economic definitions of profit and loss.

Profit is the outcome when we end up with more money than the amount we spent.

Loss is the outcome when we end up with less money than the amount we spent.

Profit, Loss and Societal Judgement

Now that we have re-defined profit and loss in terms of a quantifiable measure (money), we can look at them from a different perspective. Entrepreneurs will only make a profit in free markets if the goods or services they are selling satisfy people's needs. In this sense the amount of profit entrepreneurs receive will be an expression of satisfaction or dissatisfaction of all their client's subjective judgements about their own profits.

In other words, if all clients believe they received a good deal and the good or service they purchased satisfies their needs, entrepreneurs will have a profit in the broad sense. However, from the entrepreneurs' point of view their profits will be expressed as money.

What this means is that profits (in terms of money) are simply the expression of the degree of success of an entrepreneur to contribute to the satisfaction of societal needs. The more money an entrepreneur makes in a free market, the more successful this person was at providing what society needs. These profits are the agglomeration of all the opinions of all clients as to how well have they been served. This is so because clients did not express their opinions through beliefs or support statements or votes, but through purchases (i.e. action). By acting (an irreversible process) clients are unequivocally expressing their opinion in a manner that truly matters. This manner is not fuzzy or open to interpretation or subject to further analysis; it is final and definitive.

Each individual purchase cannot provide information as to the degree of satisfaction of a specific client because this degree is personal and subjective. However, the number of purchases which translates in total profits does. It is obvious that if many people decide to purchase a product, this product is indeed useful to them. This is so because we must never forget that a purchase is a win-win process. Customers are willing to pay money for a good or service because they value said good or service more than their money. They see value in said good or service and through their act of purchasing it, they express this view.

The Origin of Profits in Markets

Profits do not arise out of thin air or just because a given production system exists. In other words, just because Xin is producing gadget BBA this does not mean that this gadget will make a profit, even if it satisfies consumer needs. Yes, in order to make profits one needs to satisfy consumers' needs, but this is not enough. The amount of profit we will make depends of our effectiveness at satisfying those needs. If we are ineffective, we won't make a profit even if we satisfy consumer needs.

Where does this come from? From uncertainty.

We know that people strive to achieve goals. Entrepreneurs' goals are to delay their consumption with the expectation of achieving higher consumption later. However, how entrepreneurs act to try to achieve this goal varies from person to person and there is no guaranty of success. Some entrepreneurs will be successful at this goal and some will not. Those who are not will not receive profits which means that the capital they used to try to achieve their goal has been wasted.

For educational purposes, we can classify entrepreneur's ineffectiveness in two categories:

  • Wrong product or service.
  • Price too high

If an entrepreneur produces a good or service nobody wants, it is obvious that this person won't have too many sales. Low sales means no profits.

If an entrepreneur produces a good or service at manufacturing costs that are very high, this person will be forced to ask high prices, which consumers will reject. This means low sales and thus no profits. This will happen even if the good or service does satisfy consumers' needs at a physical level, but it fails to do so at an overall level. In other words, let's say that a company manufactures a dog walking robot. Many dog owners will be happy to have a robot do the dog walking for them. In this sense the robot is satisfying consumers' needs. However, if the price is too high, this won't satisfy overall consumers' needs. When a potential consumer looks at both characteristics, usability and price, this person will determine that the price does not justify the removal of the uneasiness produced by having to walk the dog personally. Therefore they won't buy the robot.

In either case above, the capital that entrepreneurs have spent manufacturing their goods or services has been wasted. This creates the opportunity for another entrepreneur to either provide a better product or produce at a lower price by investing new capital more effectively. This is so because the need for said goods or services exist and it is not being satisfied. The prize for correcting the errors of previous entrepreneurs is profit. By creating better products or lowering their prices the needs of consumers are thus better satisfied.

In this sense prices are simply key indicators highlighting ineffectiveness and waste while pointing to the places where these issues are being resolved. Lower prices simply means higher Catallactic competition. But Catallactic competition means a great deal of people trying to create more attractive products with higher satisfaction at a lower cost. Thus, by purchasing such products customers foster and support a behaviour that benefits the entrepreneur and themselves. Entrepreneurs are the people who act to correct ineffectiveness and waste through the investment of their own capital.

The very fact that high profit margins exist advertise to other entrepreneurs about this existing opportunity hence triggering the chain reaction of Catallactic competition which will ultimately eliminate all profits.

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

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