Entrepreneurship is an art. It involves utilizing the knowledge of what people will want or need in the future, plus having the courage to take a risk and put that knowledge to work. As with any art, there are those with real talent and those with none. It is successful entrepreneurs who are the sustaining force behind a strong capitalist economy.
An entrepreneur is a "risk taker,"1 driven by the lure of profits. He operates purely on the hope that consumers desire what he has to offer and will pay more than what it costs him to produce and market that product.
The Entrepreneur's Functions
The entrepreneur's business has two main purposes. The first is to create the "next satisfied customer,"2 striving to fulfill some need, either real or perceived. The second purpose is to "outwit rivals" by beating them to opportunities not yet taken (Herbert, 1988) and, therefore, to make the largest profit possible. He creates satisfied customers by developing new products in response to customer needs. "Each entrepreneur must appeal . . . to others' best interest by offering products and services on the best terms possible" (McKenzie and Lee, 1991). He either improves an existing good or service through innovation or develops a new one. This economic action can also create a need for a commodity by inventing or marketing it in a new way. A risk taker must be perceptive enough to recognize as well as seize all opportunities.3 He must also be constantly aware of what people are looking for and also be aware of potential uses of current goods and services.4 When an entrepreneur is successful, he will make profits.
Innovation and Improvement of Market Offerings
Entrepreneurs are the sustaining force of a healthy economy. The actions of innovators bring about improvements in commodities, work processes, and personal lifestyles. Because of this fact, an economy will continue to flourish if they are allowed to function freely.
Their talents help to ensure that improvements are always taking place. Innovations and creativity arise from the actions of the entrepreneur's business. This helps to increase the standard of living by ensuring that quality goods are offered and that everyone involved in a transaction is satisfied with the outcome. In cases where entrepreneurship is not allowed, the economy becomes stagnant and quality rarely improves. Consider televisions, for example. The TV was invented in Russia. But the Soviet Union prohibited capitalistic entrepreneurship. As a result, this product was not improved in that country. Even today, Russian televisions are known for their poor quality. It was capitalists and entrepreneurs from the United States and Japan who developed that industry.5 Kirzner (1979, 74) states:
When profitable capital-using methods of production are technologically available, where the flow of savings is sufficient to provide the necessary capital, entrepreneurship is required to ensure that this innovation will in fact be introduced.
Although technology may exist for improving goods and services, innovators must be encouraged to put it to use. Therefore, it is safe to conclude that entrepreneurial activity is responsible for many product improvements.
Capitalism not only leads to improved offerings, it also enhances industrial processes. Machinery created by those with an entrepreneurial spirit has made the process of many manufacturing jobs much more efficient, reducing the time required for menial tasks. Just think of what our lives would be like without word processing, spread sheet, and data analysis programs. Services provided by many data analysts are quicker, easier to manage, and more reliable than they have been in the past. These improvements have only come about because entrepreneurs have been allowed to work freely, bringing their ideas to life.
These ideas, which were born in the minds of entrepreneurs, not only make work more efficient, but also improve our lives. In the words of Joseph Schumpter, "The capitalist process [aided by entrepreneurship], not by coincidence, but by virtue of its mechanism, progressively raises the standards of life of the masses'" (Rogge, 1979). The aim of capitalism is to bring those things that once were for the elite to the reaches of the common individual (Rogge, 1979). This can only be done through the successes of risk takers.
Examples of lifestyle improvements brought about by entrepreneurial activities include the fact that less time is spent working now than in the past. Those who used to be forced to spend hours doing what now takes minutes today have the time to do more fulfilling things6, even to become entrepreneurs themselves. These new entrepreneurs will bring other innovations and products to our world that will give us further improvements and efficiency. Examples of products helping to improve our lifestyles are the microwave oven which decreases food preparation time; the personal computer, which can link one to the whole world with the click of the mouse button; even the printing press, which is the reason that every child in America has access to books. 7 Many medical innovations have also helped to improve life. Each moment of one's life is touched by some product that has helped to increase efficiency, comfort, or ease of life. Every day we can see the incredible benefits of products that were developed by those with the courage to step out and take a gamble, those who saw a need and set out to meet it.
Elimination of Some Firms and Jobs
Some argue that the effects of entrepreneurship are harmful because these products lead to the elimination of jobs and firms. Joseph Schumpter called this "creative destruction." The effects of entrepreneurship not only "create progress, jobs, and improved standards of living, but also put some jobs, firms, and products out of business" (Reynolds, 1995, 102). These jobs, firms, and products which are negatively affected by entrepreneurial activities are unnecessary jobs, inefficient firms, and inferior products. If they continue to exist, they harm the economy. If there are any ill effects brought about from entrepreneurship, they apply only to those who are not (or no longer are) part of the market. For example, after the advent of the auto, many blacksmiths were no longer able to make attractive offers to customers in their chosen profession.
The Compatibility of Entrepreneurship and Capitalism
Entrepreneurship and capitalism essentially co-exist. There are certain elements present in a capitalistic economy that are essential for entrepreneurship to exist and function. On the other hand, for a capitalistic economy to thrive, entrepreneurship must be present.
Finders-Keepers: Effort Must Be Rewarded
The main element in capitalism that must be present for entrepreneurs to function is termed by Israel Kirzner as "the finders-keepers rule" (1989, 29). For entrepreneurs to be persuaded to carry out their functions they must be convinced that their efforts will pay off. They must be assured that they will get to keep the gains they make. This is assured only under capitalism.
A Fair Price Must Be Guaranteed
Another consideration is that prices are not dictated under free enterprise. Therefore, a fair price is always guaranteed to both the seller of goods (the entrepreneur) and to the buyer of those goods. This price is determined by supply and demand. This affects the willingness of business persons to function (especially in areas with high entrance costs) because they are not allowed to offer their goods and services at what they perceive as a fair and profitable price. Therefore customers will not receive the benefits that entrepreneurs would have brought if prices had been left to the free market.8
Entrepreneurs Must Be Empowered
Another element of laissez faire is that there is freedom extended to individuals to make their own decisions (Forbes, 1995). Businessmen decide both what they are going to make and what they are willing to buy. In economies where capitalism does not exist, there are few suppliers allowed to operate and, therefore, buyers must take what they can get. Take the Soviet Union, for example. During the Cold War, people would stand in line to buy something they did not necessarily want at that time because there was no guarantee that they would be able to get it at a later date. With free markets, entrepreneurs would be free to search for profits. This helps to ensure that there are always products for sale which consumers want. "[Capitalism] encourages individuals to freely devote their energies and impulses to peaceful pursuits, to the welfare of all" (Forbes, 1995, 376). Without these elements of capitalism (freedom to keep profits and set fair prices, and to make decisions), entrepreneurship cannot exist.
Entrepreneurs Help to Maintain Market Equilibrium
Not only can entrepreneurship not exist without capitalism; capitalism cannot exist without entrepreneurship. As Malcolm Forbes explains, "[C]apitalism is not a top-down system; it cannot be mandated or centrally planned. It operates from the bottom up, through individuals --individuals who take risks" (1995, 377). Entrepreneurial activity ensures that the economy continues to grow by helping to maintain market equilibrium. In fact, Israel Kirzner states that it is his view, "that it is only entrepreneurship which might eventually lead to equilibrium" (1979, 74). Businesses are always taking actions to make sure that they are as close to that point as possible. Of course, it cannot be denied that the economy rarely, if ever, achieves equilibrium. But, market forces are continually pushing us in this direction.
Entrepreneurship Helps to Maintain a Healthy Economy
The fact that entrepreneurs earn greater profits by satisfying customers also helps to boost the economy and the success of capitalism. "We succeed as capitalists by offering goods and services that others are willing to buy" (Forbes 1995, 376), and this will happen only through those who put their imaginations to work. If capitalists do not function well, they tend to lose profits and eventually go bankrupt. They are replaced by others who are more efficient. Thus, the free market economy never becomes sluggish. If consumers cannot acquire products they want, improvements are slow to come, and efficiency suffers. If the economy sickens as a result of a lack of entrepreneurship, the whole system of capitalism is impaired. This is why governments are well advised not to discourage business through high taxes, attacks on profits, regulation, anti-trust, etc. Entrepreneurship and capitalism are two sides of the same coin: successful and innovative risk-takers on one hand and capitalism on the other, and entrepreneurship is the spirit.
The role of the entrepreneur in the economy is very important. His business helps to increase both the quality of work and the quality of life by bringing about creativity, improvements, satisfaction, and efficiency. The health of an economy depends on the successful entrepreneur because of the functions of his business: 1) creating satisfied customers and 2) working to make profits. He can only operate within capitalism, but capitalism also depends on his success. The strength of a capitalistic economy depends upon successful entrepreneurs.
Drucker, Peter F., "Post Capitalist Society," Harper Business (New York, 1993).
Forbes, Malcolm S., Jr., Three Cheers for Capitalism, Taking Sides, Thomas R. Swartz and Frank J. Bonello, eds., 7th ed. (Guilford, 1995), 376-380.
Herbert, Robert F. and Albert N. Link, The Entrepreneur (New York, 1988).
Kirzner, Israel M., Competition and Entrepreneurship (Chicago, 1979).
Kirzner, Israel M., Discovery, Capitalism, and Distributive Justice (Britain, 1989).
McKenzie, Richard B. and Dwight R. Lee, Quicksilver Capital (New York, 1991).
Reynolds, Morgan, Economics of Labor (South-Western College Publishing, 1995), 102.
Rogge, Benjamin A., Can Capitalism Survive? (Indianapolis, 1979).
1. Herbert, Robert F., The Entrepreneur, 2nd. ed. (New York, 1988), 2. ... such people are usually first-born children, generally male, college-educated, in their thirties at the time of their first significant venture, highly motivated, creative, energetic, and willing to accept risk ... symbols of individualism, drive, and intuition, they are the embodiment of our romantic view of capitalism.
2. Drucker, Peter F., 1993. Satisfied customers should be the foremost concern of businesses.
3. Kirzner, Israel, 1979, 74. I view the entrepreneur not as a source of innovative ideas ex nihilo, but as being alert to the opportunities that exist already and are waiting to be noticed.
4. Bartos, Phil, 1997. Whether a business has been established for a long time or is just being started, the spirit of the entrepreneur must always endure. There must exist a continual willingness to take a risk so that customers remain satisfied.
5. Bartos, Phil, 1997.
6. It is not just an accident that today's laborers spend much more time in leisure activities than they did in the past. Because of the improvements brought about by entrepreneurship, workers today spend much less time at work.
7. Researchers and politicians alike agree that early development of reading skills can greatly boost a child's later ability to learn. If the printing press had never been invented due to a lack of entrepreneurial spirit, many children would be at a disadvantage academically. Furthermore, the cost of advanced education would be much more expensive. Just as before the press was invented, education would only be accessible to the elite.
8. Kirzner, Israel M., 1973. --Without entrepreneurship ... the long-term benefits may go untapped.
- Gail Betts
Dr. Block is chairman of the Department of Economics and Finance at the University of Central Arkansas. He can be reached at [email protected].
Gail Betts is a wife and a mother of two small boys. She received her Bachelor of Arts degree in General Business Management in 1998 from the University of Central Arkansas and is now earning a Master of Business Administration degree, also at UCA. She plans to pursue a career in Human Resource Management and has passed the HRCI Certification Exam. She can be reached at [email protected].
- Walter Block