This is a CU Colorado Springs student blog for the following courses: Intermediate Microeconomics and Austrian Economics.

March 31, 2013

On the Entrepreneur

On the Entrepreneur
Karl Marx' labor theory of value assumes that all value attributed to any particular good or service is derived directly from the factors of production, what he called the "productive forces", consisting of the "means of production and labor power" (Thomas, pp. 3). Basically, the "means of production" are what are often known as natural resources: land, minerals, water, etc., and "labor power" is the work exerted by a laborer or group of laborers. So according to Marx' theory, the value of a good is based solely on 1) the natural resources, and 2) the labor that went into producing a good.

What Marx neglected in his theory is the role of the entrepreneur, but this is not accidental: Marx believed that the business owners (Bourgeoisie) only exploited the laborers (Proletarians), and did not provide anything of value. He sought to correct this 'market failure' by removing the exploitative role from the production function. But one might wonder, if the role of the entrepreneur is valueless, why did Marx think that the government should assume this role?

In a true capitalist society, entrepreneurs will necessarily be the leaders, for it is their ideas that will be the source of all change and innovation within the economy (aka the world). All others not exercising the entrepreneurial role, are merely just following protocol, doing the same thing over and over again. If it were not for the entrepreneur, an economy would be a never-ending repetition of people doing the same thing over and over every day; this is the essence of the concept of an "evenly-rotating economy".

When thinking about an "evenly-rotating economy", I am reminded of John Stuart Mill's On Liberty. In his essay, Mill explains that the diminishing of individual thought and action would lead to a "stagnant pool" society. This means that if everyone were to do the same things over and over again and there was never any change; just like a pool of water that sits unmoved, the society would become stagnant. Mill referred to the "geniuses" of society as being those who prevented the stagnant pool from forming by coming up with new ideas and ways of doing things, and thus "stirring the pot", if you will. I would contend that the role of Mill's genius is parallel in many ways with the Austrian understanding of the entrepreneur, as presented by Schumpeter, Mises, Kirzner, Rothbard, et al. In fact, through his many writings, Mill contributed significantly to the popularization of the term "entrepreneurship" (Sobel, para 5).

So, what does all of this mean?

First of all, it is important to recognize that Marx neglected the value of the entrepreneur. In seeing the class struggle between the Bourgeoisie and Proletarians, he perceived that the workers were being exploited. He saw workers receiving low wages and business owners making much more money - and perceived this to be an issue that needed corrected, and one that he thought would be as the result of a series of social revolutions. Marx thought that the government, free from the profit motive, and instead, committed to meeting social needs, would be a beneficent replacement for the so-called "exploiters", who were fueling the class struggle he perceived.

Secondly, widespread disdain for "profit" has made the role of the entrepreneur even more neglected. The idea that a non-profit organization will serve society and a for-profit business only wants money has also reinforced the neglect of the entrepreneur. It is interesting to note that profit literally means progress, and is the opposite of loss. This makes me wonder why so many progressives are anti-capitalist; apparently they are more supportive of companies that suffer losses (greater losses = greater service to society?!?).

Thirdly, as demonstrated by many Austrian economists and also J.S. Mill , a society needs entrepreneurs to innovate and to avoid stagnation. If there were no entrepreneurs, and everyone performed the same job every day, eventually a system of this fashion will go bankrupt. The entrepreneur makes sure that the economy is always growing and reshaping to better suit the needs of its participants.

In a capitalist system, entrepreneurial action serves the purpose of allocating resources to their most desired uses. It is very important to recognize that these entrepreneurial choices will only have a widespread effect if they are 'adopted' by the non-entrepreneurs within the economy. If the choice of the entrepreneur is not supported by others (made evident by the purchasing of his product or service), then the entrepreneur will not be able to sustain his endeavor. For this reason, under unhampered market conditions, if a business is not providing a good that people perceive to be valuable/profitable to them, the business will not be profitable, and thus, entrepreneurial profit indicates whether a business is serving people or not.

On the other hand, if a government decides to produce a 'good', each individual within that nation will have to buy the good whether or not they perceive the good to be profitable. So, a government can continue to produce any 'good' whether or not the people believe it to actually be (a) "good", but in the unhampered market only producers of goods and services that consumers believe to be valuable will return a profit. Businesses in the 'free market' cannot produce goods people do not want to pay for (at least for very long). Governments can and do produce goods people do not want to pay for (as long as people pay their taxes).

The role of the entrepreneur is vital to the well-being of individuals. Successful entrepreneurs are those who are best at anticipating consumer needs and finding how to produce and provide these goods at the lowest cost. Thus the free market system, expanded by the vision and work of the entrepreneur, will provide the conditions in which individuals needs are met to the greatest degree. It is therefore in the best interests of every individual to recognize the significance of competition in fulfilling individual wants, and the vital role that the entrepreneur plays in ensuring competition, profit, and progress for all.

"I don't want to do nothing, there's plenty to do,
The question I ponder is who plans for whom?