Do you think it is very worrying that not one government policy encourages the entrepreneurs of the world to create wealth?
Without wealth creation we are doomed to a long slow decline in the productive capacity of the economy. We are doomed to the stagnating to slow growth economy that all the policies of our Great Leader, Gordon Brown, is inflicting upon us. It is all because he does not understand how wealth is created and the role of entrepreneurship in society. Most politicians are the same, I am afraid to say, with a few shining lights and notable exceptions. This is desperately worrying for all of us.
How is Wealth Created?
I have said here on this site before http://www.cobdencentre.org/2009/09/can-the-manipulation-of-interest-rates-create-wealth/ “I would like you to absent the concept of money and consider a situation of barter. As a butcher, when I kill an animal, I may get for the sake of argument, 10 cuts of meat: this is my production. I only need 2 for my immediate consumption, so with the remaining 8 cuts, I trade with Andrew, a garment manufacturer, for some garments to keep me warm. I consume 2 cuts and I save 8 cuts in order to trade for other goods and services. I need to produce to consume: I need to save/invest to consume.
“If I wish to consume more of Andrew’s garments as I have a family to dress and keep warm, 8 cuts of meat may well not be enough to purchase these new needs and requirements of mine. At this point in time, I am faced with a choice, either my production has to increase so I can generate more cuts to exchange for other goods, or I accept my fate and stay where I am. I decide that I can invent a method of cutting up the parts quicker by using a sharper knife, thus I seek to invent the “steel” or knife sharpener that improves my productivity from generating 10 cuts in a day to 15. With these 5 extra cuts, I can get more garments.
“The problem is, that in order to get the steel built, I need to spend some of my time that would be making the 10 cuts. Thus, I have to save and forgo some consumption while I have the steel built. I also have to rely on my savings — those stored cuts of meat — that I have not consumed to keep me afloat. This is what an economist may mean when he says adding capital to an economy lengthens the structure of production. The steel in this example adds a stage to the capital structure of society, to make me more productive, so I can consume more things.
“To be clear, saving is the only thing that allows this to happen. In this example, my personal capital structure has gone from me with a knife in my hand consuming two cuts a day and exchanging 8 saved portions, to me and a knife and a steel to produce 15 cuts of which I consume 2 and exchange 13 saved cuts. Now Andrew will be doing the same, i.e. lengthening his structure of production to meet my new found desires for more goods. He will also have to save — i.e. forgo consumption — to invest with the sustenance that savings gives him, to become more “capitalistic” or capital intensive in his production structure, to meet my demand.”
In summary, during the passage of time, only an act of saving to invest in a longer capitalistic method of production can lead to more goods and services being produced and consumed. No amount of creating money out of thin air creates more goods and services.
The Austrian School Role of the Entrepreneur in Economics
One of the great contributions of Ludwig von Mises to our understanding of the world, in his book ‘Human Action’ is that humans act and they act purposefully to satisfy their most urgent needs and requirements. Absent action and you would not have a moving human society, but a static world with no existence at all. We rank our most immediate preferences first and our most remote preferences last, thus we always have a downward sloping demand curve for things.
Sub Categories of Action: the Entrepreneur
All men act, they are in economic theory either an entrepreneur, a capitalist, a landowner, a worker or a consumer. These are ideal types, ideal styles. The reality is that we are all a combination of more than one of the above.
In the real world everybody is an entrepreneur except the children and elderly we look after, and wards of state that we pay in various forms to do nothing, such as the unemployed and those on incapacity benefit.
Israel Kirzner shows us in his books ‘Competition and Entrepreneurship’ and also in ‘Perception, Opportunity, and Profit’, how the spontaneous discovery of new opportunities by alert individuals is a defining characteristic of entrepreneurship. For example, a man who is more alert than another to satisfying the most urgent needs and requirements of other men, such as Bill Gates in inventing Microsoft and its worldwide and world changing software is rewarded by his fellow consumer entrepreneurs more so than the man who comes and fixes the boiler as he is providing a more valuable and needed service. Gates’s unique ability over the years to be alert to the potential opportunity, to think, to create to make happen, makes him the richest man in the world.
The Economy as Dynamic Creative Process
De Soto, in his books ‘The Theory of Dynamic Efficiency’ and ‘The Austrian School, Market Order and Entrepreneurial Creativity’ shows us that as the economy is predicated by acting man seeking ways to satisfy his most urgent needs and requirements first, and with limited resources, everything in politics should be geared to letting the full creative talents of the most humble entrepreneur to the giants on entrepreneurship flourish. Past Popes such as John Paul the II and Leo XIII, in ‘Centesimus Annus’ and ‘Rerun Novarum’ have been wonderful in expressing the moral ethic of human being s able to express our own creativity unhindered so long as we hinder no one else.
To our current political class, astonishingly, it is never about creating, but about distributing: X, the group of more deserving persons, is going to get Y taken from them, and it will be promptly redistributed to the less deserving class. In most cases the less deserving class is the successful entrepreneur who has satisfied the most urgent needs of consumers the most and been rewarded for doing so by his consumers!
How the Political Class Understands Economics: the Neo-classical Way
Lord Lionel Robbins, a great early Austrian School economist from the LSE, sadly left us with a very negative legacy concerning entrepreneurship in his otherwise exceptional book, ‘An Essay on The Nature and Significance of Economic Science’. My copy is online here, http://mises.org/books/robbinsessay2.pdf This would be the starting point marking when economics is described as the science which studies the utilisation of scare resources which may be put to alternative uses in order to satisfy human needs. So the economic problem is a technical one of allocation.
This contrasts with the real world creative dynamic actors who are constantly alert to creating new means to satisfy new ends by using all their creative talents and those of others they can muster in order to satisfy the largest number of ends. This is entrepreneurship as a discovery process. No economics is about choosing between competing uses to satisfy set ends.
In the Neoclassical world – and we must remember the School of Keynes and Friedman, the Keynesians and the Monetarist are but subsections of the Neoclassical School – it is impossible for there to be pure entrepreneurial profit or genuine discovery, as they are enclosed in a world where there is call for intervention in the distribution of scarce resources. Technical allocation is the height of the Neoclassical Mission. The man who ‘discovers’ the wheel, the internal combustion engine, the computer etc are all acts of great creativity and are examples of where pure entrepreneurial profit is generated. To the technician/administrator/bureaucrat/resource allocator of the Neoclassical School, there is no role for this, but when it does happen, lo and behold there is a role of how to technically allocate its benefits!
The Role of Knowledge and Information
I was fortunate to study under Dr Robert Orr at the LSE who was a protégé of the outstanding political philosopher, Michael Oakeshott. I will never forget my first introduction to his 1962 classic book, ‘Rationalism in Politics’, where Oakeshott cleverly distinguished between “practical knowledge” and “scientific knowledge.” The former he describes as the dispersed know-how that we all have that allows us to do things that cannot be formalised, like the tacit knowledge a cook has when he/she cooks a fantastic dinner. Putting the food together in various combinations and heating for various times are, after all, simple acts that could be described in a very formulaic fashion. But how many of us have that practical, unquantifiable knowledge to cook an outstanding dinner? The former, formulaic knowledge, is the scientific knowledge or technical knowledge that we can formalise such as the knowledge of science itself. The study of entrepreneurship or economics in general is about the study of which entrepreneurs use this practical knowledge to bring about co- ordination and more goods and services by doing more things to satisfy more people. Scientific knowledge may boost this process as entrepreneurs exploit the information that the scientific knowledge produces. The danger is when the people who study economics and the application of entrepreneurship or the use of this dispersed practical knowledge or know how think they can scientifically manage it.
Harmony / Coordination and not the Creative Destruction of Schumpeter
Technical direction by the ‘enlightened’ entrenched administrators who dominate large parts of our lives is no match for the co-ordinating forces of entrepreneurship. The price mechanism throws up information that suggests opportunities to alert entrepreneurs to supply goods and services or solutions to satisfy peoples’ most urgent needs. This co-ordination can never be facilitated by administrators. Each time a profit opportunity is found and then satisfied, a creative and co-ordinating act has happened. Entrepreneurship is coordination. Each act of entrepreneurship in fact smoothes out dis-co-ordination in society. It is the most civilising act. This is very different to the creative destruction of Joseph Schumpeter who, in ‘Capitalism , Socialism and Democracy’ says that entrepreneurs enter established industries that start to exercise some monopoly power, thus allowing a smaller, nimbler competitor to enter and value-destruct and then value re-create something new and better. Schumpeter, unlike his Austrian contemporary, Mises, viewed booms and busts to be caused by innovation and not by excessive credit creation.
The Austrian Approach
So for the Austrian, we all act to satisfy our ends. Some do it better than others, some do it to many others, and these latter entrepreneurs are, in truth, the dynamic, creative, co-ordinating and above all harmonious drivers of the economy and facilitators of a peaceful society. This is in direct contrast with the homo oeconomicus of Robbins and the Neoclassical School, whose modern members are Keynesians and Monetarists. Resource allocation between competing needs is the name of their game.
They conflate scientific knowledge with the practical. This allows them to advocate constant spending by a thing they describe as a third party: Government. Government is meant to inject new money into the economy to get us all moving again. There is a horrible inevitability here: like a Greek tragedy, it is played out on epic proportions. There is no such thing as a government standing above and separate from us that can stimulate us. The government can only take from one section of the population and give to other sections of the population. When they spend money, they are spending the money you would have spent. The positive government spending multiplier is exactly negated by the negative spending multiplier from where the government has extracted the money in the first place. The net effect is zero extra spending. However. It does not stop there. For a great dis-co-ordination in the practical knowledge of people will take place when a government spends as the entrepreneurs will now be confused as to which activity in the economy will produce a sustainable outcome. Which bits of price information are driven by the most urgent needs of consumers that needs satisfying? Which are driven by the technical director of some government department directing who he thinks – or his political master thinks – the given set of resources should be allocated?
We are told we should print more money. I tell no lie, I witnessed one economist, Roger Bootle, see here http://www.cobdencentre.org/2010/02/policy-exchange-and-the-near-consensus-on-the-merits-of-qe/ say we should, if need be, print money indefinitely until people knew we were so serious that we would not allow a deflation! He equates a growing money supply with more wealth. But a growing money supply without more goods and services means a lowering of each money unit’s purchasing power! This has nothing whatsoever to do with the creation of wealth, as I have demonstrated above. Both endless spending and endless printing of money are the policies of the mystic and witch doctor!
In conclusion,the correct and urgent policy for the political class must be to remove all restrictions on the ability of each person to use their best entrepreneurial endeavours. Each person can then take advantage of the practical knowledge that is out there and create, ex novo, new combinations of the factors of production to produce new things. Abolish all laws that prevent and hamper business unnecessarily; pro-union legislation; employment law excesses; presumption of guilt by you, the employer, for anything your staff does, thus absenting you from any individual responsibility. Stop paying the people who abuse the benefit system, who form the massive, larger than the army size workforce we have idle on unemployment and or incapacity benefit. Stop wasting resources going to war. Stop printing money and creating confusion as it is harder for an entrepreneur now more than ever to distinguish between what is or is not a bubble supported activity that is never going to be sustainable. This latter disruption in the co-ordinating ability of entrepreneurs to bring about economic harmony is the worst part of the legacy that this current government will gift the next.
Until they understand the nature of entrepreneurship, we are in for a prolonged and rough recession.