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.