Before I get into responding to some of the comments above, I like to restate what seemed to me to be the essence of my post. That is, that as we live in a society based on entrepreneurial visions of the future and the taking of risk positions thereon, it is very odd that only a small minority of the population actively takes part in the creation of such visions and in making speculative investments based on them. Almost the only analogy to this I can think of--in which an absolutely vital, central aspect of society is restricted to a small portion of the population--is the way in which social insects reproduce. As humans have not, to my knowledge, followed the evolutionary path of social insects with their genetically based social hierarchies, but rather have pursued an approach in which most of the skills necessary to survival have been distributed among the entire population, I remarked that I find this pattern in our current economic life uncanny. I'm sorry it apparently gives pain to some of our commentators that I would make such an observation, but there you have it...

Felix:

As usual, we seemed fated to disagree. I am intrigued to know more about your hedge fund manager; I am personally not aware of truly market neutral investment strategies that yield anything like the returns you mention your hedge fund manager earning year after year. Excuse me for asking, but do you have any objective proof that he is telling you the truth about those returns? (It is fairly easy to see why he might want to shade this). But even assuming he can pull this off, I would only point out that he has still concocted a theory about the future and sticks to it in crafting his investments; his agnosticism about future developments hasn't gone so far as to lead him to avoid having set up a hedge fund and marketing it to investors, etc. Also, nothing personal, but his percentage returns are, in comparison to my own, quite modest. My original $50,000 stake has returned itself hundreds of times over. Perhaps formulating a less agnostic, more positive theory of the future pays, no? (I certainly think Bill Gates would agree with me.) And before I leave the topic of your hedge fund manager, do you think he could make money in this fashion (or any passive investor could make money) without the presence of active entrepreneur-managers? I mean, you are using what amounts to a tiny exception to impeach a very large and sturdy rule--perhaps not the most honest argument.

I agree that most entrepreneurs fail, but I think that's not to be wondered at given the remarkably poor training virtually all of them receive (none, in my case.) Clearly, however, where more training is received (e.g., second generation entrepreneurs) the success rate is a lot higher. Also, many entrepreneurs suffer from excessive ambitions. In the early years of my company, because I was playing with borrowed money, I deliberately chose lower-return, lower risk business strategies to ensure I could pay off my loans. I didn't make a fortune, but I didn't fail, either. Of the entrepreneurs I know who have deliberately taken a low risk approach, the success ratio has been quite high; vastly higher than the overall numbers on small business failures would have you believe.

Williamsburger:

I am well acquainted with the transaction cost model as an explanation for the existence of large firms. I am not, however, entirely persuaded of it. I suspect the true cause of the existence of large firms is that they have established themselves squarely on top of very profitable, long-lasting business opportunities (i.e., having a dominant position in the manufacture of jet engines or automobiles, or close relations with key clients ins service industries, etc.) Obviously, joining (or passively investing in) such an organization possessing such a market position is a very low risk strategy. In a population that is chiefly risk adverse, am I surprised that many people would choose to do so? No. Are their employers, who are already exposed to as much risk as they are ever going to be, willing to take on (and underpay) such employees (and passive investors) in order to swell their own profits? Sure. But most opportunities (indeed, the overwhelmingly vast majority of opportunities in this world) are far more fleeting and fugitive than the type that permit the relatively rare existence of a General Motors or a Microsoft. So transaction costs, which are only a significant issue when considering alternative ways of exploiting a given business opportunity, become significant only in the small percentage of opportunities that represent large and long-lasting opportunities. In short, your transaction cost model ignores the fact that it is only in certain contexts that efficiency becomes a determining factor in business structure. If all opportunities were of this nature, then surely the list of America's largest companies would never change, whereas over a century virtually every name on such a list has changed.

The real benefit of entrepreneurial capitalism is in its ability to recruit creativity and to harness lots of unstructured information that no formal organization could recruit or process. The more people you have actively thinking about the future, sniffing out market opportunities, the more opportunities you sniff out. If a larger percentage of the population was out prospecting for money making opportunities, and committed to capitalizing on them, if more people were, to put it bluntly, acting like entrepreneurs, the economy would be far larger and more prosperous.

(By the way, your apparent ignorance of entrepreneurship could probably be cured by a decade or so of hard work in your own firm.)

Shannon:

I agree that economics is a sadly neglected field in school and that the level of economic education is sorely lacking. However...as Mr. Williamsburger illustrates, economists are rarely entrepreneurs, and can occasionally miss the forest for the trees, so to speak. I think what would be more useful is for people to know some successful entrepreneurs. I mean, I know a guy who makes a darn good living (many times that of the averge wage-slave) by buying houses, rennovating them, and reselling them for a profit. The skills necessary to engage in this business are widely scattered throughout the population and can be learned by just about anyone. (This stuff is not rocket science--just hard work and paying attention.) I think if more people could just watch somebody else do it, they'd realize they could do stuff like this, too.

Shipshape:

Best of luck on your entrepreneurial ambitions.

Posted by: Friedrich von Blowhard on January 6, 2004 9:48 AM

To. F. Blowhard- then how can we convince successful buisness owners to become mentors of younger people?

Posted by: Shannon on January 6, 2004 10:25 AM

Because this topic is still kicking, can we talk about why it might be that minority women are the new rising class of entreprenuers? Especially those of you who are or live with minority women... anyone?

Posted by: j.c. on January 6, 2004 10:29 AM

One thing that might be pointed out, universities are doing a better job of focusing on real world experience through semester long internships---test driving jobs---than they used to be. My alma mater has a program called Management Fellows which requires students who are enrolled to complete two semester-long off-campus internships in real live companies (often owned by alums) as part of their coursework. What I don't know is how much training they specifically get on "how to actually start your own business" vs. just---do I like marketing or do I like finance kinds of questions. And I'm not sure that communications majors or science majors or arts majors get any of that kind of information.

I'm thinking of trying to hook a professional seminar giving company up with my school, to try to organize a seminar on...exactly what ARE the sources of capital for someone who wants to start their own business? What ARE all the things you have to consider beyond just "the product", etc.

Posted by: annette on January 6, 2004 10:54 AM

FvB wrote:

"I must disagree. Really participating in capitalism, or the market economy, means formulating a view about the future and taking a risk position accordingly. If all you are doing is selling your labor to the highest bidder, you are not really 'playing the capitalist game'--you could do exactly the same under a socialist regime. (You are also not maximizing your income.)"

Wow, I have to agree with Felix here (first time!). This is just plain wrong on all fronts. Your namesake is rolling over in his grave. ;) Every individual in a market economy is applying his personal knowledge and making countless decisions on how to make and spend money. The fact that someone makes a decision to NOT be an entreprenuer and in fact decides to be an employee (and many go back and forth in their careers)is a Hayekian use of knowledge. The point is that people who work as employees have made a voluntary decision to do so. You seem to think this decision is uninformed... perhaps you are suffering a bit from the Fatal Conceit? ;)

As Felix noted, in socialist economies an employee can certainly NOT sell his servicers to the highest bidder. You really did not address his comments. Also as someone else noted, people who decide not to be entrepreneurs often do maximize their income. In fact, how do you know that statistically speaking (like expected value of income or something) employees do not make more money than entreprenuers? Do you have any studies or stats on this?

Your original point, which you restated in the comments above, is interesting and worthy of study. I'm not sure this analogy holds up, but might you also note that in our democracy, only a few people are politicians? Are people who merely vote not involved in the political game?

Posted by: Paul Mansour on January 6, 2004 11:07 AM

Mr. Mansour:

I admit that I am using a narrowed and rather polemical definition of what it means to 'participate' in a capitalist economy. Obviously, someone who is an employee can claim to be "playing the game." (Sorry about the offensive phrase.) I think my distinction is justifiable in light of the larger point I'm trying to make, however. In short, following the lead of Mr. Sowell, I am trying to instigate a discussion of what I view as 'cultural' factors limiting the participation of the U.S. population in the 'higher' forms of capitalist activity. I know of my personal experience that people from certain ethnic groups and who have relatives or family members that are entrepreneurs are far more likely to be entrepreneurs than the general population. I do not see, among the nay-saying comments to this blog, any denial of this fact, nor any serious consideration of what it means. I offer my interpretation, which is that a lack of entrepreneurial role models and education concerning entrepreneurial techniques locks all too many people into employeehood; really, far more than the number who are prevented from launching businesses by lack of capital.

Mea culpa: my reference to socialism was, admittedly, sloppy. I wasn't referring to a 'pure' or 'theoretical' socialism, with all property owned by the community, but rather to the closest 'real world' situations I could think of that approximate that situation. I believe in all of them, including the old Soviet Union, that in fact individuals had some freedom to decide where they would work. But I won't belabor the point; consider it conceded.

Posted by: Friedrich von Blowhard on January 6, 2004 12:20 PM

Here is an relevent quote from Hayek in the Constition of Liberty (page 81):

"The successful use of this entrepreneurial capacity (and, in discovering the best use of our abilities, we are all entreprenuers) is the most highly rewarded activity in a free society, while whoever leaves to others the task of finding some useful means of employing his capacities must be content with a smaller reward"

I think the parenthetical is important. An employee who takes action to find a good job, who looks around for opportunites for advancement within a firm, who quits when other, better, opportunites beckon, is, in the end an entreprenuer too. It may be that the best use of one's abilities is in fact working for someone else. For the vast majority of people, this is probably true.

Posted by: Paul Mansour on January 6, 2004 12:31 PM

Friedrich,

I'm on board with your last post. I'm familiar with Sowell's work on this. It was really only your supporting comments that had me going, huh? However, even in groups that have relatively high levels of entrepreneur ship, the number of entreprenuers is still necessarily very small compared to employees. No? The thing that makes a person an entreprenuer with a capital "E" is his ability to direct resources and people, and stomach risk, a whole lot better than the average person. By definition, we cannot all be entrepreneurs with a big E, but as Hayek notes, to the extent we discover that ourselves, and find our own niche, we are all entrepreneurs.

So yes, a lot more people could be Entreprenuers, but still very few overall.

Posted by: Paul Mansour on January 6, 2004 12:42 PM

FvB wrote:

"I believe in all of them, including the old Soviet Union, that in fact individuals had some freedom to decide where they would work. But I won't belabor the point; consider it conceded."

While you have conceded this, I think you still miss the important point. Whether or not you had some freedom in the USSR to decide where to work, the manager at a state factory certainly did not have the freedom to decide what to pay you, or how many employees to hire or ever what the job was. The point is that being an employee in a free-market economy is DRASTICALLY different than being an employee in a socialist economy. It would only be to the extent that people skirt the rules and undermine the state apparatus, that being an employee in a socialist econonmy might be remotely similar to being an employee in a capitalist economy. But in this case the socialist employee is similiar to a capitalist employee, not vice versa.

Posted by: Paul Mansour on January 6, 2004 12:54 PM

Friedrich:

Really participating in capitalism, or the market economy, means formulating a view about the future and taking a risk position accordingly.

True. But not everyone will take the same view of the future as you do. Many people choose not to maximize their income, believing that, beyond a certain point of "sufficiency," other values (spending time with family/friends, blogging, going to movies, knowing that you'll make roughly the same amount of money this month that you made last month, etc.) will be more satisfying than a maximized income. Choosing to reduce risk and reward, or to invest time and effort into things besides monetary concerns, is still a choice. A free market allows individuals to make such decisions for themselves.

If all you are doing is selling your labor to the highest bidder, you are not really 'playing the capitalist game'--you could do exactly the same under a socialist regime.

No, you can't.

Let's take an admittedly extreme example of a socialist regime: Castro's Cuba. Now, in this economic system, the government sets rates for labor. If you are a worker, you cannot sell your labor to the highest bidder, since everyone must bid the same amount. If you try to sell your labor for a rate higher than the government allows, you will be arrested, tortured, imprisoned, and/or killed.

Likewise, since you cannot be fired from your job without government approval, you have no fiscal incentive to provide quality labor. You can, in theory, goof off as much as you like -- assuming, again, that you are not arrested, tortured, imprisoned and/or murdered for disrupting official State industries.

It doesn't stop there, either. Under Cuban socialism the government also pays workers directly. Unfortunately for the workers, they only receive nearly-worthless Cuban currency, good only in government-sponsored and -operated businesses. The workers' corporate employers, however, must pay the Cuban government for the laborers it provides them -- and they must pay the government in dollars, which are good anywhere.

So under the directed economy of socialism, the government determines who you work for, how much you receive, what kind of money you receive, and what you can do with it once you get it. That, Friedrich, is why your namesake called this system "serfdom."

Still care to claim that free markets don't serve most workers?

Posted by: Tim Hulsey on January 6, 2004 4:35 PM

Mr. Hulsey:

I accepted correction on this point from Mr. Mansour, and I accept correction from you as well. I withdraw my remark as entirely ill-considered.

I don't recall, however, claiming that free markets don't serve most workers. But free markets can do much more for people than providing them with the status of 'worker,' and I'm trying to get at the odd phenomenon as to why more people don't seem to pursue these additional rewards.

Posted by: Friedrich von Blowhard on January 6, 2004 4:42 PM

Friedrich, you said:
Really participating in capitalism, or the market economy, means formulating a view about the future and taking a risk position accordingly. If all you are doing is selling your labor to the highest bidder, you are not really 'playing the capitalist game'--you could do exactly the same under a socialist regime. (You are also not maximizing your income.)

Maybe if all you do is mindlessly sell your labour to the highest bidder, you are not really "playing the capitalist game". But how many employees actually do that?

When I decided, on finishing high school, to study electrical engineering at university, I was formulating a view about the future and taking a risk position accordingly. The view about the future was that there would be jobs available that, thanks to my engineering degree, would pay enough to make up for the time I spent studying, and that I would be able to pass the degree, and I would want one of the jobs available. At 17 my view of the future led me to embark on the risky decision of studying engineering (there was no guarantee that there would be jobs available).

At age 20 I reassessed my position and decided that I didn't want one of the jobs available and that I would in all likelihood go nuts if I spent much more of my life doing engineering. So I finished my degree and did an economics one. Then found a job making use of both degrees.

In terms of formulating a view about the future, and taking a risk position accordingly, how was my thinking inherently different from if I'd decided to start a business?

And BTW, most people on the planet don't want to maximise income. Firms are generally assumed to want to maximise profits - a rather different thing - and the vast majority of people occasionally want to enjoy their incomes, and take leisure time, even if it is only to do things like get married.

Posted by: Tracy on January 6, 2004 6:25 PM

Friedrich:

Really participating in capitalism, or the market economy, means formulating a view about the future and taking a risk position accordingly. If all you are doing is selling your labor to the highest bidder, you are not really 'playing the capitalist game'

How many employees just "sell their labour to the highest bidder?" This may have been what I did when I got my first job at high school (in fact, I don't think I even searched for the highest bidder, instead I needed a job that I could get too easily and could fit in around school and other activities, and took the first one I found), but certainly looking for a job is not separate from formulating a view about the future and taking a risk position.

At high school I decided to study electrical engineering. Since I am not independently wealthy, this was a risky decision (although I am always able to fall back on the checkout chick job). I had to formulate a view about the future, which included whether I would be able to pass the degree, whether there would be jobs available that would repay the investment of time, and whether I would want to take one of those jobs. At age 17 my view of the future was that all these three factors pointed to a yes. At age 20 the third one turned into a "no", so I finished that degree and then did one in economics. On going looking for job offers, I got several and then had to decide which one would be best for the future, another risky decision. The relevant issues were not just who was offering the best bid for my labour now, but what skills would I develop in the future, and how interesting the work would be.

How is that inherently different from what I would have thought about if I'd decided to start a shop, and then part way through running a shop changed my mind and turned the shop into a mail-order business?

(You are also not maximizing your income.)
Basic assumption of economics is not that people maximise their income, but instead their utility. Firms are assumed to maximise their profits, an importance difference since any firm that only focuses on maximising its income risks expenses getting greater than its income and thus going bust. Returning to people - all the business owners and self-employed I know take time off work occasionally to enjoy their income, even if it is only an hour a week at a nice restaurant. Some of them even retire.

As for why there are certain families with more entrepreneurs, yes, people do tend to pursue careers and life-paths that they see their family members pursing. This doesn't just apply to starting businesses, my Dad's father had a general expectation that you would go to university and get a good, safe, government job (government jobs in NZ are not necessarily underpaid compared to the private sector), which Dad duly did though he started his own business a while ago. Other families I know expected their kids not to go to university, and not many of them went.

There may possibly be something genetic in this. My mum's side of the family has always been very enthusaistic about education. One of her cousins was adopted out at birth, and we did not know of her existance until she tracked us down in adulthood. She was brought up by a small-town NZ family, for whom the highest a girl could hope to achieve was getting a job as a teller in a bank (a boy could become an All-Black of course, a position slightly higher than God). But she'd always wanted to go to university, and unable to persuade her parents of this, convinced them to let her to go to teacher's college as a second-best option - a big shock to her parents, but very much in line with her biological family.

Posted by: Tracy on January 6, 2004 6:46 PM

But free markets can do much more for people than providing them with the status of 'worker,' and I'm trying to get at the odd phenomenon as to why more people don't seem to pursue these additional rewards.

The answer is simple, really: These additional rewards come with additional risks and opportunity costs, which many people do not wish to incur.

Opportunity costs can be divided into two categories: leisure and security. We'll take security first. Some people prefer to make less money, yet be more secure in their income. Some people are more entrepreneurial, willing to risk more of their income -- and to allow that income to fluctuate wildly -- in order to have a chance at a greater reward. Their success is by no means guaranteed, but they're willing to take the risk.

A similar principle works for leisure. Some people prefer to work long hours and make more money. But others choose to make less money, and take advantage of their extra leisure time. Perhaps these people are parents who wish to spend more time with their children; perhaps they just like to go to the theater or the movies, and don't want to work evenings when they could be out having fun. In any case, they're willing to settle for less of one thing, so that they can have more of another.

These are rational decisions, in the sense that they are motivated by individuals' sense of self-interest. Whether you or I consider these choices the best ones possible is beside the point. These are individual decisions, and a free market leaves them up to the individual.

Posted by: Tim Hulsey on January 7, 2004 4:28 AM

I very much agree that finance should be taught in school. Just giving students a feeling for compound interest and why you want it working on your side rather than against you would be quite a help. Throw in some understanding that lotteries are charities/buying a chance to daydream rather than a significant chance of winning would be a big help.

As stated, there should be more about starting and running a business, too. It's one of the basic ways of living in this society, and it's a shame that it isn't taught.

None of this means that all or most people should be entrepreneurs. I would think that modern tech lowers the cost of running a business (accounting software instead of having to the number-crunching by hand, ebay for some types of marketing, etc.), but I don't know whether a higher proportion of people own businesses now.

Posted by: Nancy Lebovitz on January 9, 2004 6:26 PM






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