As the global recession continues to shatter wealth and jobs around the world, it’s heartening to know that some people aren’t looking to governments to solve all their economic problems. From shanty-towns in developing countries to the once-mighty centers of international finance, thousands of people are turning to their greatest resource – themselves – and trying to create new streams of wealth through the power of entrepreneurial discovery.
Entrepreneurship has been a popular subject for some time now, but this wasn’t always the case. For much of the twentieth century, most economists underplayed the entrepreneur. Economist Israel Kirzner observes that “as economic theory became more sophisticated, as marginal analysis and market equilibrium theory came to be more carefully and more fully articulated, the entrepreneur receded more and more from theoretical view.”
Over the past 30 years, however, entrepreneurship has received renewed attention, partly because of the immense wealth generated by information-technology breakthroughs. But also because many people realized that they had no choice but to be entrepreneurial if they wanted to escape the economic graveyards created by Communism and socialism.
This turn to entrepreneurship, however, was not just a question of circumstances. It also reflects who we are as human beings. We need only read the Bible, Aristotle, or Joseph Schumpeter to realize that entrepreneurship is something distinctly human. Unlike animals, people possess imagination, reason, and free will. Thus we are capable of being creative and turning into reality our insights into what might be valuable to others.
Awareness of entrepreneurship’s ability to transform entire societies has flourished to the point whereby it seems everyone is talking about entrepreneurship. Entrepreneurship is slowly moving from the periphery of business school curricula to becoming a compulsory subject. Cities now compete to host fairs for entrepreneurs. Many Western organizations working in developing countries are trying to shift the emphasis from giving aid to teaching entrepreneurship. There are even prisons in America where business leaders teach inmates entrepreneurial skills, thereby enhancing prisoners’ chances of creating new lives and legitimate incomes after serving their sentences.
But in the midst of this enthusiasm about entrepreneurship, we risk forgetting that entrepreneurship’s capacity to create wealth is heavily determined by the environments in which we live. In many business schools today, it’s entirely possible to study entrepreneurship without any reference being made to the role played by factors such as rule of law, property rights, and low taxes in stimulating wealth-creating entrepreneurship.
In short, entrepreneurship doesn’t just depend on a particular understanding of human nature. Its wealth-creating character also requires a certain moral and institutional setting. If taxes are high, property rights unprotected, and corruption the norm, then the environment embodies major deterrents to wealth-generating entrepreneurship. Why would people risk being entrepreneurial when they can’t assume their ideas won’t be stolen or their profits arbitrarily confiscated?
Lending proof to this argument is a recent fascinating study of modern China’s economic development. In Capitalism with Chinese Characteristics: Entrepreneurship and the State (2008), Yasheng Huang argues that China’s economic take-off in the 1980s was fueled by private entrepreneurship, which was facilitated by microeconomic flexibility, access to capital, and enhanced property protections.
In the 1990s, however, Huang illustrates that major economic indicators reflected significant deterioration in the Chinese economy. He contends that this resulted from the state’s subtle reassertion of control over parts of the Chinese economy. Privatization, for example, was increasingly accompanied by the Chinese government retaining and acquiring significant equity shares in large enterprises. The result was actual declines in entrepreneurial activity in parts of mainland China, including Shanghai. The lesson, Huang writes, is that “missing entrepreneurship means missing incentives.”
We should, however, also ask what happens when incentives to entrepreneurship become misaligned and are instead found in politics rather than the economy. In these cases, entrepreneurship is no longer about creating ideas or products that others value. Instead people become ‘entrepreneurial’ in identifying and exploiting political contacts and bureaucratic opportunities to amass power and/or transfer wealth to themselves and their clients and supporters.
Welcome to the world of trial-lawyers, lobbyists, Chicago politics, Chavez’s Venezuela, and Putin’s Russia. If left to fester, it results in a thriving middle class being replaced by a parasitic political class.
The implication is that anyone serious about promoting wealth-creating entrepreneurship must at some point direct attention toward how the moral, legal, and political environment aligns incentives. This may indeed involve considering controversial subjects, ranging from the impact of tax rates on entrepreneurship to politically incorrect matters such as whether certain cultures are simply not amenable to wealth creation.
Entrepreneurship – like everything else – doesn’t exist in a vacuum. It’s long past the time we stopped pretending it does.
