THE ROLE OF THE ENTREPRENEUR IN A CAPITALIST ECONOMY

There are few debates more prominent today than the one raging over the “job creators” in the USA.  Who are the real job creators and what is their role in a capitalist economy?

In recent pieces on Business Insider and Bloomberg, Henry Blodget and Nick Hanauer argue that entrepreneurs and investors don’t create jobs.  Instead, they argue that jobs are created by consumers and demand for goods and services which enable entrepreneurs to create corporations, jobs and profits.  Unfortunately, this message gets bogged down in politics which misconstrues the facts and leads to misleading conclusions.

Politics always get in the way of sound thinking

The right wing uses the “job creator” argument to push the position that increasing taxes on the rich will burden job creators and deter from future job creation.  The argument by Blodget and Hanauer opposes this position in an attempt to show that we should increase taxes on the rich and reduce taxes on the real job creators – the consumers.  This is another common case of filtering economics through a political filter in order to validate a preconceived bias.  Let’s see if we can’t filter our economics through an economics filter to arrive at a logical conclusion.

The relationship between the entrepreneur and the consumer

A capitalist economy has, in the extreme aggregate, a theoretical level of infinite demand (stay with me here).  Entrepreneurs and capitalists meet that demand by creating goods and services with the hopes of generating a profit.  Importantly, the consumer and supplier are two sides of the same coin.  One does not exist without the other.  Henry Ford doesn’t exist without demand for automobiles.  Steve Jobs doesn’t exist without demand for tech gadgets.  Clearly, if there is no demand for the goods and services in a capitalist economy then there can be no capitalists and there can be no corporations that employ workers.  So, the argument over “job creators” is a chicken and egg argument.  Clearly, the capitalist needs the consumer and the consumers needs the capitalist.  That’s simply how the trade works.  You buy an iPhone from Apple corporation because the product will serve some role that you demand in your life.  This gives Apple Corporation the potential to generate a profit and leverage their business operation, expand their business, employ more workers and generate higher profits.  Mr. Hanauer succinctly makes this point:

“It is unquestionably true that without entrepreneurs and investors, you can’t have a dynamic and growing capitalist economy. But it’s equally true that without consumers, you can’t have entrepreneurs and investors. “

But what role does the entrepreneur serve in the capitalist economy besides meeting demand and generating profits?  Why is the entrepreneur so highly rewarded on an individual basis for his/her accomplishments?   Because entrepreneurs make our lives more efficient by providing us all with the ultimate luxury – time.

Toil and trouble

At this point, we could have all sorts of fascinating discussions here – what is money?  What is wealth?  What is happiness?  I don’t have the time nor the space to cover these important questions, but this subject intertwines all of these topics to some degree.  Some people believe money is wealth and that money will lead to increased happiness.  Of course, this confuses the idea of money.  Money is not wealth and money does not create happiness.  But how does this tie into our discussion above?    Stay with me here….

Adam Smith once said:

“The real price of everything, what everything really costs to the man who wants to acquire it, is the toil and trouble of acquiring it.”

As I mentioned above, there is a theoretical level of infinite demand in a capitalist economy.  What I mean by this is that, in an extreme sense, we can consume all that time will allow.  If you were unconstrained by time you could, in theory, consume all that the entrepreneur can produce.  Theoretically, this chicken and egg story can go on forever.  Of course, the greatest luxury of all is quite finite.  We are always constrained by time.   The entrepreneur offers us the opportunity to take advantage of the ultimate luxury by giving us more time.

How does the entrepreneurial process work to create real wealth?

The best way to envision this idea is to use an example.  Alexander Graham Bell is one of the greatest innovators in American history.  So what did Mr. Bell do exactly?  He created a more efficient way to communicate by inventing the telephone.  Clearly, communication is vital part of human life.  And in theory, there is infinite demand over the long-term to communicate.

At some point in his life, Mr. Bell sat down and probably said something to the extent of – “it would be far more efficient if I could talk to Mr. Smith immediately as opposed to sending him a telegram”.  Clearly, this desire was not unique to him.  And all Mr. Bell did was fill a demand by inventing a product which helped consumers meet this demand.  But the important role that Mr. Bell played in the job creation process is not that he necessarily created jobs independent of his consumers (as we showed above, they are interdependent).  After all, there were plenty of messengers already employed and working before the telephone came into being (Mr. Bell actually destroyed their jobs).

What Mr. Bell did is give his consumers more time to consume other goods and services.  He reduced the toil and trouble of having to acquire things by providing them with a product that made their lives more efficient and productive.  Just imagine all the ways that the telephone improves our quality of life and makes us more efficient.  The businessman in NYC no longer had to wait for the telegram from his business partner in Chicago to discuss their new business decisions.  Instead, he picked up a telephone and a decision was made in a matter of minutes.  There are innumerable (better) examples of the way that a simple innovation such as Mr. Bell’s helps us to improve productivity, efficiency and ultimately our standard of living.

The key point here is that improvements in our standards of living provide us with the ultimate form of wealth – they give us more time to do the things we think will help us achieve happiness (whatever that might be to any particular person).  This is the ultimate form of wealth.  The entrepreneur gives us more time to consume more goods and services and do the things we want in our lives.  If we look at the modern economy we can see how streamlined this process has become.  For instance, last night at 7 PM I put my laundry in the wash, I put the dishes in the dishwasher, ordered dinner from a local restaurant and went upstairs into my office where I did an hour of work.  At 8 PM my dinner arrived, my laundry was done, I ate dinner on a fresh clean plate and I had done an hour of work in this period.  Imagine trying to do all that 100 years ago?  How long would it take you?  Days?  Perhaps even weeks?  That is a remarkable increase in living standards.  And why are we able to do all these things in such a condensed period of time?  Why am I able to consume so much more than I could have 1o0 years ago?  Because entrepreneurs created a machine that cleans my clothing for me, they created a machine that cleans my dishes for me, they created an oven that cooks my dinner, a car that allows the deliveryman to deliver my dinner, and invented a computer which allows me to efficiently and effectively accomplish work.  We live in a remarkable world.

The point here is not to prove that the consumer is the job creator or that the entrepreneur is the job creator.  Rather, the point is to show that they are two sides of the same coin and that real wealth is the product of increases in our standards of living.  What the entrepreneur does is help to increase the size of the coin by helping to meet demand through innovation which increases our productivity, ultimately allows us to consume more goods and services and results in more employment.   Without the role of the entrepreneur we are merely a society trading wealth amongst each other.  In other words, without the innovative process our real standards of living stagnate.  The true wealth in a capitalist economy is created by the entrepreneurs who allow us all to maximize the ultimate form of wealth – time.

The danger of the current political debate is that we are pitting the 1% against the 99% without understanding that we are the 100%.  Could the 1% afford to pay more in taxes and “redistribute the wealth”?  Probably.  Personally, I have been arguing for a middle class tax cut for a long time.  I am not in favor, however, of raising anyone’s taxes in the midst of a balance sheet recession.  But more importantly, we should not demonize the entrepreneurs who help create goods and services which increase everyone’s standards of living.  We should applaud their efforts and encourage it. What we should demonize is the “entrepreneur” who innovates new and improved ways to gamble in the casino of Wall Street without actually improving the standard of living of his/her customers and instead retires to a far off land playing golf for the rest of his/her life after imploding their company and taking a government bailout.   But let’s not demonize the wealthy who have contributed to improving our standards of living.  In doing so, we only end up reducing the standards of living of us all.

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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Comments

  1. This ties into our discussion on the MMT job guarantee and why it’s no good. To what degree do government jobs make us, as a society, more productive? Tough question there.

    • The Job Guarantee is an excellent idea because it props up the money circuit and stops sound investment disappearing up its own tailpipe.

      Fundamentally you can’t eliminate the excess population, unless you are suggesting a Logan’s Run world, and so you have to clothe, feed and house them while the private sector goes through its periodic retrenchment procedures.

      JG just catches people as the investment system falls, and allows the malinvestment to be purged *without sound investment also being destroyed by a systemic failure of aggregate demand*.

      JG has nothing to do with the efficiency of the economic system. It concentrates solely on its effectiveness.

        • Here is MY response to part of Cullens question.

          “Is the JG just an attempt to even the playing field? Is an even playing field good? Because I believe the uneven playing field serves a vital role in society. Unemployment serves a vital purpose in a capitalist economy (granted it’s way excessive right now and you and I both know I’d be in favor of much more govt spending in a BSR, but let’s focus on post BSR periods). Unemployment forces people to lift themselves up by their bootstraps”

          First, a JG will NOT level the playing field it simply puts everyone ON the playing field. If you fear that everyone will take the guaranteed 8$/hr job the govt offers(and never leave it), then I must question your view that we are a great and industrious country. There are plenty of places besides the employment/unemployment metric that people will have to struggle and work to improve their lives. We dont have to make people fear complete destitution to get the most out of them.

          “Great people learn to do great things by overcoming great boundaries. There is, no more enduring feature in the American way of life, than the ability to overcome hardship.”

          Yes but again this hardship does not have to mean, “complete lack of income”. We have other ways to get the most out of people.

          “I know there’s a lot of people rolling their eyes reading this, but talk to your grandfather about the Great Depression. You want to know why that was the greatest generation? Because they got kicked to the dirt and said “screw this, I’m gonna get back up”. Clearly, depression is an extreme and unnecessary environment for anyone to have to endure, but it’s an extreme example that gets the point across. The JG creates a society where no one sits on the bench”

          Not true. If I currently make 100,000/yr and have to resort to a 8$/hr job next month……. Ive been benched…… big time.

          “There’s no more 11 men on the field. Now it’s 13 men on the field and no one on the bench. Even the worst players get to play. And the whole team suffers for it because now there’s no incentive to work hard.”

          yes they get to play but they are not the star. By playing they might get a little better. By not playing at all their skills will completely atrophy.

          “The whole team has been watered down by the 2 players with a -ROI. Everyone gets to play all the time. There’s no bottom of the barrel. No losers. No bench warmers who have to be forced to hit the gym harder and reach for a starting position. Does this make our entire society complacent? Lazy? Unproductive? Do more young people drop out of school?”

          Again why do the losers only have to be destitute, completely without income? We can do better

          “Do more workers stop being productive because they know there’s a job waiting for them at the govt? You don’t know. And neither do I. But I certainly acknowledge the risk. And I happen to be pretty damn good at breaking down large systems and identifying risks. Don’t get me wrong, I’m full bore MMTer, but I don’t think you fully acknowledge the potential downsides to a program of this magnitude.”

          Why dont employers have to compete on quality as well. Your view here seems to make it all on the worker. Firms must be incentivized NOT to simply do the simple thing like cut wages to enhance prfoits. Not to simply spend money lobbying for tax breaks to increase their take home pay. Businesses need to innovate and find new ways to do things better and more efficiently. They have gotten by the last few decades by simply plundering the middle class and killing workers bargaining power. Pure bully tactics there, nothing innovative. Bosses have been bullying workers for 5 millenia.

    • Damn government, damn space program, damn transistor, damn computing revolution, damn internet.

      Get off my lawn!

    • The job guarantee program should work a great ways towards price stability relative to just handing out free money to everybody who doesn’t have a job…

      If inflation is the result of too much money chasing too few goods and services, putting people to work (but spending money to do so) will create more goods and services, while just handing them money would have the same effect on demand but result in less goods and services being produced. In the end, we should see lower prices as a result of more stuff being produced here.

      Alternately, if we set up a gigantic factory to make simple things now made in china, and then employed the unemployed into said factory, we would be able to run smaller deficits while still providing our private sector with their desired savings and the financial assets they need to carry out business and life, due to having to import less things from abroad.

      Even if our society can truly write an infinite check and there isn’t a question of being able to “afford” the massive welfare system we have, we all pay for it in less output and higher necessary deficits (see logic above).

      Further, by employing people rather than just paying them to sit around and do nothing, we keep them FAR more able to take on a higher, better paying job someday.

      Sit around doing nothing for 5 years and see if you integrate well to the workplace when you go get a job on that 1827th day…

    • For those late to the party “job guarantee” is referring to what specifically? I can guess, and the words combined creep me out, but what is the context used here?

  2. “I am not in favor, however, of raising anyone’s taxes in the midst of a balance sheet recession.”

    There’s a small problem with all this discussion is that once again it is caught in this myth that there is a one-to-one relationship between the nominal and real systems.

    This myth that they are directly connected is one of the most pernicious in the entire world.

    The nominal and real circuits are best seen operating separately but with one circuit inducing activity in the other where they meet.

    Once you understand that then the next step is to realise that wealth is not really earned until the nominal circuit is closed. So an entrepreneur borrows money and causes that to flow through the nominal circuit inducing real production and consumption, causing the nominal level of his bank account to grow. But that wealth is only genuinely earned once the original borrowing is eliminated.

    The consequence of that is that most of the financial wealth in our economies has not yet been earned. Private debt has ballooned and we have hit a crunch point.

    Now we have a decision to make – do we accommodate that excess financial wealth by expanding the fiat money circuit, or do we confiscate it by either allowing a collapse into cascading bankruptcy or taxing it out of existence (ie tax the person with the asset, give it to the person with the liability so that the borrowing can be eliminated that way – or declare a debt jubilee which is the same thing).

  3. “Instead, they argue that jobs are created by consumers and demand for goods and services which enable entrepreneurs to create corporations, jobs and profits”

    Aha! Workers are on the payroll of consumers. And consumers are obliged to fulfil the work-contract that the worker owns.

  4. Excellent post Cullen.

    I want to comment on this though;

    ” we should not demonize the entrepreneurs who help create goods and services which increase everyone’s standards of living. We should applaud their efforts and encourage it. What we should demonize is the “entrepreneur” who innovates new and improved ways to gamble in the casino of Wall Street without actually improving the standard of living of his/her customers and instead retires to a far off land playing golf for the rest of his/her life after imploding their company and taking a government bailout”

    Not much to disagree with there but I ask you, Who IS demonizing entrepreneurs who create goods and services which increase everyones standard of living? I hear no one doing any such thing, at least not in the public sphere. Certainly President Obama never has. He has specifically aimed his criticisms at the type of people in the second half of your quote, the “extractors” (Ill call them). Everyone loves the innovators and no one demonizes them. The thing is every rich guy THINKS he’s an innovator. Thinks he’s special and necessary and doing “gods work” There is a big difference between Steve Jobs and Lloyd Blankfein. WTF has Mr Blankfein done that improves our overall living standards? Mr Dimon?

    Just because these guys get there panties in a wad after the president makes a speech doesnt mean they have a point. I’m sick of every rich guy thinking theyve done something special and that we need their talents. The true entrepreneurs are a small percentage of even that 1% who are extremely wealthy, the rest are just rich guys who have just figured out a way to screw a few more people.

    • Greg,

      I think the OWS movement is demonizing these innovators. Their message has not been clear from the start. When you trash the 1% you are trashing an enormous number of people who have more than earned that place in society. Their message needs to be refined so as to avoid vague class warfare that tears down great great Americans.

      Cullen

      • That’s what happens when you get increasing income disparity and economic “recovery” only in nominal terms.

        Most humans don’t act rationally and in the best for all way, so this is the natural consequence, confrontation and social tensions.

        But it’s all good because the SP500 is over 1200 and corporate incomes were skyrocketing on the last quarter (plus clean balance sheets!), or such is the thinking of theoclassical economists.

      • I will gladly be corrected Cullen, but Ive never seen an OWS attack of true entrepreneurs. They are after the bankers and politicians who support them. Mostly they are after a system which appears to only work for the 1% and goes to great lengths to coddle them and avoid ANY type of accountability. Yes calling the opposition the 1% might make an unthinking person believe they are throwing them all together (YOU are anything but unthinking Cullen) but if one really looks and listens to what they say they are not calling Steve Jobs out they are calling Lloyd, Jamie, Timothy, speaker Boehner and O-man out. Dylan Ratigan has the right idea I think, and he gets where the crux of the problem is. I think you do too.

        You dont want to support a bunch of “loser” OWS types, I get that, but at least admit that this response is not irrational or unexpected. People will only take so much and the people in charge cant claim to not be in control. If you’re in charge but not in control get the heck out of the way. You cant claim to be worthy of all the accolades and great compensation you receive and at the same time not take responsibility when that which you built comes crashing down.

        • Cullen, we live in interesting times

          I would say that this;

          “OWS “aims to fight back against the richest 1% of people that are writing the rules of an unfair global economy that is foreclosing on our future.”

          means that OWS recognizes that much of what we have are unelected “leaders” making decisions about the welfare of others (like bond traders in NY telling the Greek govt how much they should pay a sanitation worker) yet they are taking NO responsibility for the results of these decisions (When riots break out the bond trader sits quietly sipping his Mimosa)
          The neoliberal paradigm of privatization of everything DOES in fact lead to foreclosures on the future (Did you hear about the family in Tennessee whos house burned down while the firemen watched because the 75$ fee hadnt been paid….. no public fire dept). The rules they want to write mean if you cant pay for it you dont get it……….. and we dont owe you a job so you can pay for it…… nice little game if you are allowed to get away with it. We will see if they do.

          “So, the “richest 1%” are all bad? How so? I don’t deny that many of them are bad and don’t contribute nearly the output that justifies their wealth or influence, but aren’t we throwing a lot of people under the bus here? ”

          Unfortunately, a lot of people get thrown under buses they had no affiliation with. How about the “Govt is never the solution only the problem” crowd we have had to endure for the last 30 years? Not that there isnt a lot to criticize about the govt but if any movement has taken a lot of good people and meaningful programs hostage its our neoliberal/hyper-small govt crowd that leads the way …… in my view. What you are really critiquing is how politics has always been played. We need a new way to talk about things and your site is one of if not THE best place to hear it.

          I really havent seen a complete demonization of the whole 1% from where I sit, but again, if you can show me some examples I would gladly acquiesce.

          Finally I would point out that there really is one thing I see as obvious. Who is struggling today? Is it the 1%? I have a hard time generating genuine concern for the travails of our elite.

          MMT needs to make some inroads with the OWS movement. Its fertile ground. People who are examining the system and looking for new ways to approach our economy. If this doesnt describe MMT ( the descriptive and the pre-scriptive) I dont know what does.

          • Agree with most of what you say here, Greg. It’s not called “Occupy Silicon Valley” for a reason. As you say, OWS is expected blowback from the recent Tea Party movement, a general 30 year trend of deregulation and pro-business policies, and a lack of willingness of Democrats to take on Wall Street b/c it’s a significant source of campaign funds.

            I think too much is being read into the “1%”, but maybe the language can be tweaked to be directed at the Jon Corzines and Angelo Mozilos of the world.

  5. Nice post Cullen. I especially liked the telephone example…it’s something we don’t think about very often. In James Gleick’s book “The Information” he argues that the telephone actually made building skyscrapers possible (practical) since otherwise the elevators/stairs would have always been jam-packed with messengers passing notes and telegrams throughout the building constantly. Interesting thought.

  6. An entrepreneur is the ultimate consumer. He/she consumes the unfulfilled wants.

    And, all consumers must be entrepreneurs – we all toil.

    Fundamentally, it is Darwinian: instead of hunting each other, we have evolved a system to exploit by piecemeal. Unfortuantely all possible rule-sets (political and religious) systems play. Why tax? To keep the game degenerating in 1% vs. 99% fights. How much to tax? To keep all playing.

    Unfortunately, the entrepreneurship is reduced to play the math games of keeping more from taxes at the expense of others. Cayman Islands corporations is one of the example for this.

  7. Yes, this is a lesson sorely needed among all the candidates and in the political news media.

    The dialogue is SO frustrating right now when one understands where jobs really come from and where currency-issuer government spending really comes from.

    Ignorance about just a few basic economics concepts keeps very workable solutions just beyond our grasp.

    What seems certain is that the ignorance will continue. I don’t think it’s willful. But it’s habitual. I’ll invest accordingly.

    In any case, thanks for staying the course, Cullen. If time goes on, one day they’ll understand.

  8. At a certain level all these discussions, although positive and useful, remind me of people complaining about the weather.

    The balance sheet recession must run its course, and our leaders will bumble from helping that process to impeding it with their various political posturing.

    Ultimately it will run its course. And one day it will all repeat again.

    And the timing of that repetition has much to do with the length of the human memory.

    People who learned the painful lessons of excessive speculation in the last go around were all in the ground before the current one could begin.

  9. I find it odd that the idea that entrepreneurs “create” jobs is even open to discussion. The fact that economists have to debate an issue like this shows you that the “science” of economics is invariably flawed because the prima facie evidence of that self-evident truth exists all around us.

    Why is it that the US has led the whole world in just about every productivity improvement that has led to the current global standard of living?

    How did Steve Jobs know that people wanted a portable music device in a tiny form? Walkmans existed, cassettes played just fine, radios operated, etc. No one creates an IPOD because someone told them a consumer market existed for it.

    The entrepreneur visualizes and crystallizes the future as they see it – they build it and the people come.

    What is masked is that for every successful entrepreneur there are 100 failures. If we do not continue to foster a culture where failure is accepted and rewarded we will end up with an economy that resembles the scelerotic, non-productive, non-innovative economic systems that currently predominate the rest of the world.

    Even fracking has turned a boring pedestrian industry on its head and created the potential for an explosion in known energy reserves and once again it is the entrepreneurial culture of the US that is at the forefront of these developments.

    Entrepreneurs are the most courageous amongst us because they invariably deal in the unknown, unknowns and create a vision which many cannot fathom much less understand. They do so knowing full well that is have never been done before and probably will fail but they try anyway.

    That is the miracle that explains why the US, a young country by any standard, has risen to the most powerful position in the world while simultaneously lifting up everyone else.

    Don’t confuse rent-seekers with entrepreneurs. They are not the same thing. Read “Eat People” by Andy Kessler to truly understand the entrepreneurial mindset.

    Anyway as a former and current entrepreneur I see this issue as inherently non-political – it should be a self-evident truth.

    • > What is masked is that for every successful entrepreneur there are 100 failures.
      ———————-
      For one Steve Jobs there are probably a million of failures, the middle class people who lost everything on their bet and will never become rich or financially comfortable.
      Being enterpreneur is not very rewarding comparing to other occupations.

      • ES,

        Very rewarding for me. Given I had a negative net worth when I graduated and now well I am pretty comfortable. Being an entrepreneur worked out for me.

        Don’t sell yourself short. Quoting Yoda:

        “Many of the truths that we cling to depend on our point of view.

        Try not. Do or do not, there is no try.

        Luke: I don’t believe it. Yoda: That is why you fail.”

        The people who work in those “occupations” you mention do so because of the one time efforts of entrepreneurs just like you.

        Walt Disney was considered a nutjob to many in his time.

        I wish you well. Good luck.

        • Please do not quote Yoda (well, George Lucas). Yoda is an example of failure on the most profound level. Under his leadership the (hardly believable, but whatever) one thousand year term of the jedi knights came to a crashing end wherein on two survived (one, conveniently, being himself) and ushered in the tyranny of the empire.

          Second, the advice “Do or do not, there is no try,” is rubbish. Absolute codswallop. But perhaps his broken English (a language whose grammatical basics he appears unable to grasp, despite being so damned smart) is to blame and what he meant was: “Your effort needs commitment if it is to succeed.” Or, as an older expression puts it: “Anything worth doing is worth doing well.”

          • How dare you trash Yoda?

            That’s like blaming the Dalai Lama for the Chinese invasion of Tibet.

            Them’s fighting words :)

            Anyway, I disagree 100% with everything you have said. What Yoda says is completely clear in intent regardless of the enunciation which is what gives its charm. I could have easily quoted any number of aphorisms with similar meaning.

            Dismissing the power of Belief and Thought in the creative process basically means you don’t understand what it really takes to be a true entrepreneur.

            The premise that “… entrepreneurs and investors don’t create jobs” is codswallop as you put it. It is an idiotic viewpoint that doesn’t merit discussion regardless of the proponent’s pedigrees. Obviously there is an interdependent relationship between producer and consumer but creative destruction is what has driven the US economy to its premier position in the world based upon the efforts of its entrepreneurial class and its system of laws and rights as represented by our Constitution.

            “If you think you can do it, or you think you can’t do it, You are right.”
            Henry Ford

    • lifetime entrepreneur here, patent holder, including one I wrote at the ripe old age of 20 and argued myself with the patent office on a table waiters budget.

      but here is the point of the billionaire from Blodgets blog: did the invention of the IPod cause more jobs? Did it cause more spending? Or did it just transfer from some other part of the economy to Ipods?

      Somewhere below I argued both cases, but… two things I think are inarguable here and generally supportive of the sentiment Blodget offers:

      1. any given business hires more people only if it needs more labor to meet demand, NEVER or extremely rarely and for ego reasons are hirings made just because of increased profits. Like perhaps someone hires a hot secretary just to feel good about their life if they are making huge money but doesn’t if they are only making $50k. But…

      2. a 5% tax increase (repealing of the bush tax cuts) will not discourage people from hiring.

  10. The truth is, it is not the enterpreneurs and real innovators who are rich in our economy. There are a few examples here and there, but they are not the majority. Usually truly innovative and prescioent people are not good marketers and it is others, the middle men, who rip ost rewards anyway.
    In modern day US the rich are – finance operators and politicians and those who surround them. Also, obviously, those who inherited the wealth.
    So, this whole ” rising taxes on job creators” line is a lie. Financiers don’t create jobs. Politicans do, but they are uinproductive jobs – auditing and controls and military.
    The true job creators are not rich, they belong to the millde class, which is currently the most panished element of our society as far as taxes and productivity are concerned. This is why the society is crumbling.

    • Agreed Jay. Very good piece indeed. The real scum are those with no “skin in the game”. That must be stopped immediately!!

      Capitalism must have losers. A casino is fine, we just must eliminate the clowns who take out huge markers and when they win they buy another vacation home.

      But when they lose they expect everyone else at the casino to satisfy the marker. It should not happen that way. Fix that and all else will follow.

  11. Cullen,

    There is no question that entrepreneurs and engineers and innovators of all sorts improve our standard of living… and I don’t think that the bilionaire in that blog intended to argue that they do not.

    And I am sure it is true that if nobody innovated anything new, the economy would crash. Why would we go buy a new shirt all the time if styles never changed? Why would we trade in our cars if they never changed or improved? Why would we buy new computers if they never got faster? Etc. Innovation gives us new reasons to buy, and almost certainly increases aggregate demand.

    But do businesses hire because of inventions, or because of demand?

    Does the store, restaurant, manufacturing plant, pub, or contracting crew nearest you hire because the owners are making more money? ABSOLUTELY NOT. They hire because the existing staff can no longer handle the workload so they need more people. They hire because of demand.

    I think that is the point the guy was getting at, and it is essentially inarguable.

    • I don’t deny that demand is the cause of hiring. I have been saying this for years. It’s the revenues that are causing the lack of hiring in the current recession….

      My bigger point is that we should not demonize the innovators because they are the ones who offer us the ultimate luxury, time, which allows us to consume more, increase our std of living and become more efficient in our every day lives. It’s not fair to claim the consumers or entrepreneurs play a more important role in this process. But we also shouldn’t go around making ridiculous claims trying to undermine the role of the entrepreneur in our lives.

  12. If you look at the two bloated, unproductive sectors of the economy (health care and finance), you will find the sort of rent-seeking behavior that does not contribute to higher standards of living.

    Many (almost all these days?) in the finance world are simply gambling in the world’s largest and most leveraged casino, without producing anything of real value. I suppose we can’t denigrate this activity too much, it’s kind of like a video game, really – people watch dancing numbers for a sort of “entertainment”, feeling great when they’re winning and so on. But it’s clear to most that modern finance doesn’t increase the efficiency of capital allocation greatly enough to justify the size of the sector. It exists because it’s easy to collect a slice when you’re near the money.

    In the health care sector, the government (via Medicare/Medicaid) provides another sort of casino for hospitals, doctors, and other providers: if you can game the system of CPT codes (medical reimbursement codes) effectively, and only do procedures with a high reimbursement/time ratio, then you come out way ahead. At least health care providers do provide the benefit of better health to their patients, even if they do it within the context of a game-like system that promotes rent-seeking (while it’s unclear what benefit most financiers provide).

    Does this mean that policies will change to increase productivity in these sectors? Highly unlikely, given the entrenched interests in place.

  13. The vast majority of wealthy people are not entrepreneurs. Most of them are just using their power and position to skim as much off of the top as possible.

    • where does Albert Pujols and Lady Gaga fit in to this most interesting discusssion.

  14. “The key point here is that improvements in our standards of living provide us with the ultimate form of wealth – they give us more time to do the things we think will help us achieve happiness (whatever that might be to any particular person). ”

    AMEN to that !

  15. Right. So what does the golf course builder or TMZ creator do? He is capitalizing on our enormous real wealth. In other words, entrepreneurs have given us the ability to amass such enormous wealth that we don’t have to spend all day hunting for dinner or collecting water or doing our laundry, etc. Instead, we have such great wealth that we choose to spend time on golf courses or reading about celebrities. Capitalists are just taking advantage of this in various ways……

  16. Cognitive scientist George Lakoff notes that whoever gets to frame a debate wins rhetorically. Then, beyond the emotional charge created by the rhetoric, even the logical reasoning becomes sophistical because the issue is already decided by accepting the framing.

    Where does the freshly coined term “job creators” come from? Listen to who first used it. It is a GOP talking point crafted by propagandist Frank Luntz, who advised the GOP to use “job creators” instead of the usual terms like “entrepreneurs” and “investors” in order to frame the issue favorably. It was first used by the GOP leadership and surrogates, and then Fox News, and the media echo chamber. This is now SOP. Nothing new to see here.

    Look at Luntz’s latest advice, and compare it with Lakoff’s analysis. Lakoff on Luntz

    Let’s not get taken in by double-speak or give it credence by entering that frame. Instead, let’s call it what it is — ideological propaganda that pushes a sophistical argument through the use of rhetorical devices. This kind of bogus argumentation has been criticized since the days of Plato. See his dialogue, “The Sophist,” for example.

    • You mean like the phrase “the 99%” and the “1%” have become SOP for the left?

      “Let’s not get taken in by double-speak or give it credence by entering that frame.”

      One man’s propaganda is another man’s truth apparently.

      This whole point of view based upon cliches is a load of crap regardless of your viewpoint.

      Demonizing your fellow citizen is not what this country was built upon. We had no income tax until 1913 so the notion of “fairness” appears to be a construct that is under constant revision depending who is in power at any given time.

  17. Mr Roche,

    I respectfully disagree with your analysis. I agree that entrepreneurs increase productivity; however, entrepreneurs would not start a business unless they know that consumers have money to buy thier products and services. Yes, you can say that some entrepreneurs (Steve Jobs, etc.) can make consumers buy their products but what are consumers going to buy with if they do not have money? This is not a chicken and egg problem as you stated. Your own MMT theory suggests unless govt spends and people borrow or earn an income only then ability to purchase goods is created.

    Yes, entrepreneurs increase productivity but they are only taking advantage of an opportunity provided by the system. Some succeed and some fail but overall they make our world more productive. That is all. Increase in Productivity IS NOT EQUAL to more happiness. Period.

    Please do not claim entrepreneurs save us time so that consumers can have time for other enjoyable things in life. There are people in this world who are very happy without all the materialistic things this world has to offer. Consumers choose to buy products and services because they think buying those products will make them happy. Otherwise marketing and advertisement industry will be out of business.

    AK

    • I don’t know how anyone is reading this piece and concluding that I don’t believe demand is vital. I clearly state that it is. The entrepreneur and consumer are interdependent. I say this many times in the piece. Read more closely before jumping to conclusions.

      I never said more productivity or more goods and services = happiness. I said happiness is different things to different people. But for most people, more time will correlate to more happiness because more time affords us to do more of the things that will make us happy (that could be hitting golf balls off a yacht, it could be smoking a big fat joint in a ditch somewhere or it could be spending more time with your family – happiness is relative). The entrepreneur gives us more time by making our lives more efficient and giving us the time to do the things that we want with our lives.

      The claim that more goods and services do not make us happier is a dangerous generalization. If you think this is true then I challenge you to go live in the forest for 4 weeks without ANYTHING. You want to get back in touch with your caveman roots? Go hunt your own food without any modern innovations. Try to stay warm without any modern innovations. I once had an argument like this with a woman at a party. She was barreling over me with some hardcore political stance that tried to demonize capitalism. I asked her to turn around. I pulled the tag out of the back of her shirt which had the name of a publicly trade corporation and the words “50% cotton, 50% polyester”. I asked her if she understood how that shirt came to be produced and got on her back. She seemed to think that cotton and polyester just somehow sprung onto her back without someone inventing ways to brings these materials together to offer her a good that would clothe her. Those damn capitalists trying to keep us clothed and warm!!!!!! She didn’t like the reality that she was supporting everything she supposedly hated.

      I’d like to meet all of these naturalists living off the land without ever benefiting from an innovation or good that was invented by someone hoping to make our lives easier. The comment that people can be entirely happy without benefiting from the goods and services that capitalists make available is just about the biggest load of garbage I hear repeated all the time…..But hey, feel free to counter my argument as you type into your sleek computer, on high speed internet likely sitting in a comfortable office sipping on a nice warm coffee…..Not to be a smart ass, but you have to see the hypocrisy in these comments…..

  18. No one is demonizing entrepreneurs. No one!!!!

    If you think they are you have bought into ring-wing PROPAGANDA. Rich does not equal entrepreneur, and entrepreneur does not equal rich. You might be both, but Steve Jobs, Bill Gates, Michael Dell and Mark Zuckerberg started in garages and dorm rooms on shoe string budgets. They would have started companies and created jobs in just about any economy, and any tax environment. If a wealthy person is sitting on his wealth because of regulations or taxes – he is NOT a job creator, he is NOT an entrepreneur, and has no fire in the belly – the kind that drives people like Jobs and Zuckerberg to create, invent and thrive regardless of the obstacles thrown in front of them.

    Meanwhile their kids may inherit untold wealth ($5M tax free right now) and they likely will create nothing and hire no one other than servants. 1.6% of Americans will inherit $100,000 or more. Yet the GOP never fails to mention the unfairness of “death taxes” and got it from $1M to $5M tax free. Who are they speaking for when so few even get $100,000 in inheritance?????

    demonizing entrepreneurs – NOT.
    demonizing massive tax breaks for the uber-wealthy – yes.
    demonizing those who signed a pledge that says they will not raise any taxes or any kind for any reason, or close any loophole – UNLESS it is paired with other tax breaks – yes.

    Per MMT – public “debt” is private savings – yes? Well, corporations and the wealthy are saving TRILLIONS. If we want the “debt” to come down – we need to force that money out of its hiding places. Or we need to print and spend a LOT more directly aimed at the NON-Wealthy – the 99%. Yet one party refuses to do either of these things.

    • The OWS movement should have considered this before making this a 1% vs the 99% thing. There are a lot of people in the 1% who do great things. I don’t deny that they could afford to pay more in taxes. I specifically state that in the piece. But the general message that is being portrayed right now is dangerous and unfair. It is politically motivated and nothing more. If the OWS movement wants to get their message across then they should refine their message and target it at the problem. Demonizing the wealthy just because they’re wealthy is a very dangerous and useless tactic.

      • And maybe those of the excessively greedy in the 1% should have considered this before they raped the economy? There are a lot of honest 99%’ers that are trying to do great things. History shows that what those in the 1% are doing is dangerous and unfair. It is financially (i.e., define it how ever you want) motivated and nothing more. They should refine their message instead of using using euphemisms like “job creators”. Demonizing OWS just because they should only be eating cake seems like a useless tactic.

        • Both sides are going to attempt to frame the debate to their advantage. The Democrats have failed to do this and let the GOP and Tea Party frame the debate. Occupy is a reaction to the failure of the left to meet the right on its own terms. This was a predictable development.

  19. Mr. Roche,

    I am not saying that Capitalism is evil. In fact I agree with you that Capitalism made our lives much easier. However, our economy has evolved way beyond food, shelter and clothing needs. It seems we have to create “new demands” and unless consumers decide that they need more than those basic needs I don’t think there is an opportunity for entrepreneurs.

    I can provide a basic example from this decade. Imagine a world without Facebook. I think we all will be fine without it. But now imagine a world without Microsoft or Apple. I think the world will not be the same. The whole economy will feel the pain. It is this excess such as “Facebook” beyond basic computing is only consumed when teenagers are targeted by marketing and advertisements. I hope this make example gives you an idea that excess consumption is a decision made by consumers and not because entrepreneurs wanted our society to be more productive.

    Like I said before. Some innovations are useful and some are not. However, there is one thing common. Both type of innovations require consumers to give up some of their savings to acquire it. That is all.

    • I don’t disagree. But you have to understand why there is demand for things like TMZ or other useless things. Because we are an incredibly wealthy society and the fact that I can put my laundry in a machine, order dinner and have a machine clean my dishes means I can afford to watch a little bit of Monday night football tonight while all of this is being done. We can afford to go home and watch TMZ for a few hours or waste time doing things that our gransparents would look down at us for. That’s because their days were spent working MUCH harder to achieve just as much. I’m not saying that TMZ makes the world a better place, but it certainly makes some people happy and I’m not here to be the judge and jury of what happiness is to certain people. Clearly, it would be great if that time was used more wisely, but it is what it is. But let’s not forget why we have all been afforded these great luxuries.

  20. seems like the question is who is creating the demand. Entrepreneurs like Steve Jobs identify some demand but by the time marketing is done with it, it is really a created demand. The government could create jobs burying bottles with money.

  21. Entrepreneurs help to increase productivity – do more with less real resources, including less labor.

    People decide how big their government should be (what they view as public purpose). After the political elections the new government sets the tax level according to its size.

    It is just silly to tax more or less than it’s needed for the relevant size of government. Taxes should only fluctuate with the changes in non-government saving desire.

  22. The issue here is distinguishing productive contribution and its share, and economic rent — land rent, monopoly rent, and financial rent. Michael Hudson has written extensively on this. Wealthy = “job creators” masks this distinction.

    I summarized this in a couple of comment recently at MikeNormanEconomics.

    Classical economics was chiefly about rent extraction and how to limit it.

    Profit (ROI) is defined as capitalists’ income.

    The problem is excessive rent-seeking owing to institutional arrangements and perverse incentives that lead to imperfect competition and the replacement of productive capital with economic rent. If government does not offset demand leakage to saving, then the domestic private sector will either have to run a deficit (increase in private debt) or the economy will contract. But savers (the wealthy) do not want to see larger deficits because they believe they are inflationary. The other way out is to create an export economy but then the country is at the wrong end of the stick in terms of real terms of trade and its workers are working for foreigners (erstatz emigration).

    Because of failure to understand monetary economics, as country we are having the wrong argument.

    • Tom, thanks for your comments as always. Why is rent seeking so bad? Rent seeking is essentially an alternative to ownership, right? Land owners offer a cheaper way to afford housing. Bond owners offer an alternative option to income investing. I don’t follow the argument that rent seeking is so bad. Can you elaborate?

      • Economic rent is non-productive, extractive, and parasitical on the economy. It adds no productive contribution, and since a great of the proceeds from rent get saved as financial wealth, rent-seeking does not add to consumption either. It lives over the circular flow of production – distribution – consumption by extraction, just as parasites do from a host.

        • Sounds a little like spreading the wealth. Are you trying to discourage ownership? If a wealth person has achieved a lot in their life it is their right to own things outright. If they want to lease those assets to less wealthy people then that’s their right. No one is making people rent houses. People choose to rent. You can’t eliminate that. It’s the market working.

          • It isn’t like renting a house. “Rents” are typically extacted through manipulation of government to lock in profits while minimizing productive investment. VISA rasing someone’s interst rate to 32% because they changed the payment date without informing the borrower is entirely legal, has no productive use and is entirely predatory on the borrowers ignorance. That’s why they issue credit card contracts in forty pages of arcane terminology you need a lawyer to decipher, so you’ll make a mistake and they can extract rents from you.

    • Are you saying that we have persistent high unemployment because workers prefer leisure?

      The problem is not due to workers preferring leisure or the wealthy being over-taxed. Nor it is due to the wealthy being under-taxed. Nor is it due to “structural issues.” Etc.

      MMT makes clear from the sectoral balance approach what the issue is and how to solve it. Increase effective demand by staunching demand leakage to domestic private and external saving using the government fiscal balance.

      MMT shows that the problem here lies neither with workers nor those that would hire them. The problem is with lagging effective demand because the government fiscal balance is not offsetting the domestic private and external desire to save.

      • I’m not saying that we have persistent high unemployment because workers prefer leisure. I totally agree with you that the problem with unemployment at this moment is due to lagging demand.
        When i say that employment is created by workers willingness to work it doesn’t imply that unemployment is created by workers unwillingness to work, unemployment can have other causes.
        But employment is ultimately created by workers.
        We don’t need capital or demand to create jobs, the will to satisfy our needs and desires is sufficient.

  23. But let’s not demonize the wealthy who have contributed to improving our standards of living. CR

    I don’t demonize the wealthy per se; many have earned their wealth honestly (I doubt that includes many billionaires though). But many (most?) of the wealthy have stolen purchasing power (via the banking cartel) from the entire population including and especially the poor to achieve their wealth. That should not be.

    In doing so, we only end up reducing the standards of living of us all. CR

    A high standard of living does not require theft. Common stock as a private money form allows the necessary economies of scale without the theft inherent in so-called “credit”.

    We should move on to genuine free market capitalism (after a universal bailout of the entire population, including savers, from all private debt). That way, the 99% will not have just cause to complain and the 1% will not have just cause to fear.

  24. Mr. Roche,

    I think we both are on the same page. I understand that innovations such as laundry machine, cars, etc. have given us more time to enjoy other things. But it is up to us whether we want to consume TMZ/Facebook…. It is OUR DECISION to consume TMZ/Facebook.

    • I totally agree. Hey, if I had it my way there would be no TMZ. But that’s not my choice to make. We live in a great free country where you can choose to sit in a ditch and drink beer all day if you want. Certainly not the way I want to live my life, but I’m not the judge and jury of happiness…..

      The more important point to me is, by understanding what real wealth is, what money is and what affords us happiness, we will motivate people to be productive and do great things with their lives. That’s my hope anyhow….

    • Yeah we learned to save time so much that we now need ways to waste time. Like posting blog comments ;)

  25. I cannot understand why anyone listens to Henry Blodget. People who listened to his “insights” lost huge amounts of money in the dot-com bubble. A thoroughly disgusting character.

    Lets say that Henry Ford and other entrepreneurs had not created the automobile industry. All those people who are employed in making automobiles might now be employed in making horse buggies, raising alfalfa, etc. So perhaps Ford and the others didn’t actually lower the unemployment rate. But they certainly did improve the standard of living by replacing less productive jobs with more productive ones.

  26. I agree. Entrepreneurs do create jobs. But after some time those entrepreneurs/corporations seek to maximize their profits and that – sooner or later – means moving manufacturing jobs abroad. This happened in e.g. the US, Europe and Japan. And that’s a job killer for the middle class and the “”working class”". Precisely the kind of folks that are the backbone of any country/society/economy.