Creators of Wealth
MAY 01, 1967 by HARRY LEE SMITH
Mr. Smith is a businessman in California.
Karl Marx, whose politico-economic doctrines rule the lives of more than a billion persons and profoundly influence the rest of the world today, deemed labor the source of all production and gave short shrift to such factors as capital and management. But we know now that Marx was wrong, that the plodding effort of labor alone consumes nearly all the wealth it produces, and that all significant creations of new wealth may be traced to the courage, vision, intelligence, and organizational skills of the entrepreneur.
From an economic point of view, an isolated individual is inefficient.
In a pastoral society, without tools and without trade, he barely wrests a living from the soil and is constantly at the mercy of the slightest change in weather or circumstances. Possibly a third of the world’s people live this way today. The miracle of a high standard of living comes through efficient economic interchange, which in turn depends upon organization and tools. Tools can only be financed through savings. However, savings have no economic value until they become capital, channeled into useful paths. When properly invested for appropriate combination with labor — for job opportunities — this capital creates new wealth. The free or voluntary organization required for this process is provided by human catalysts known as entrepreneurs. These enterprising and self-motivated individuals find fulfillment by creating financial institutions, starting industrial complexes, organizing commercial outlets, building transportation arteries, and providing other organizational essentials for a high level of human economic intercourse.
The basic resources used by an entrepreneur are manpower, materials, machinery, markets, money, and real estate. The proper combination of resources yields profit and wealth. Improper combinations result in waste and loss.
To cite a simple example, if a million dollar’s worth of manpower is combined with a million dollar’s worth of building materials to make a structure worth $2,500,000 in the market, then wealth has been created. Were the building to be worth less than $2,000,000, then assets would have been combined to destroy wealth. Thus, contrary to popular belief, wealth can be destroyed even while building.
Recombination of Resources
The entrepreneur relies upon the value of economic resources as determined by the free market. His role is to so anticipate demand and to combine available resources in such a way as to maximize the spread between their costs and the market price of his product or service. The greater the spread, the greater the creation of wealth. This recombining productive process hurts no consumer or laborer or other owner of resources, since it brings to the market more than is taken from it. High profits, derived from efficient service to others, benefit the stockholder, the entrepreneur, and the economy in general while injuring no one.
Resource combinations which produce losses, however, are a net drain from the market. If anyone benefits from such combinations, it is at the expense of others. Free market values are the only "fair" values, and high profits are a measure of good management and efficient service rather than greed. When wealth is created without coercion, it is not taken from any other owner; it is literally created and never existed before.
The successful entrepreneur is a genius as rare in his field as is the outstanding painter in the field of art, or the brilliant author in the field of letters. In addition to intelligence, the entrepreneur must have courage, persuasiveness, perseverance, perspicacity, self-reliance, and a "feel" for business. Pulled and driven by an inner force, as is a genius in any field, he is willing to work long and hard to accomplish his ends. Wealth, to him is a necessary business factor, a measuring stick, a reward for his efforts, but seldom his only goal. He continually seeks ever greater responsibility, and welcomes the pressure of strong competition in the business arena.
Professional jealousy is characteristic of artists, authors, actors, and all other specialists tainted by human nature. Their common denominator is a degree of participation in the economic field. Some wealth is necessary for survival. Consequently, jealousy of the successful creator of wealth is intense and pervasive, generally evidenced as a suspicion that vast wealth can only be created dishonestly or at the expense of others. It is said that a little larceny lies in the hearts of most people and that the businessman is no exception. Indeed, a single act of larceny by one businessman casts suspicion upon all business dealings and leads to the conviction that the entire wealth-producing process requires political control. Few are the politicians who would deny it.
In a sense, the successful politician has much in common with the enterprising businessman. He too has courage, persuasiveness, intelligence, and a driving competitive spirit. However, he seldom possesses the ability to create wealth either for himself or for the numerous humanitarian projects which are his stock in trade. In his frustration, he advocates government-owned enterprises, with capital raised coercively through taxation. Such enterprises invariably suffer losses; yet, a clever politician will persuade his constituents that, far from interfering with the wealth-creating process, he is actually the balance wheel responsible for its success. Thus, he poses as protector of the public interest against the "abuses" of free enterprise. And when he crusades against profiteering, it is likely that neither he nor his constituency realizes that he is actually opposing economic efficiency and better living standards.
Many otherwise intelligent persons attribute their entrepreneurial failures to lack of capital. But successful entrepreneurs often start without capital. Financing involves fairly orthodox methods. More important to entrepreneurial success is the willingness to charge enthusiastically into the competitive arena alone and unaided. This can be such a frightening and frustrating experience that the first failure, or thought of it, will drive most men to the shelter of steady employment or academic tenure. The entrepreneur must be made of sturdier stuff.
Private versus Governmental
The political doctrine is false that the self-activated and self-responsible entrepreneur can be replaced in part or in whole by the state. Government attempts to compete in the business field invariably lose money and destroy part of the wealth already created. This is measured in the United States by the billions of dollars voted yearly in Congress to cover governmental losses in such fields as real estate, finance, insurance, utilities, agriculture, and industry.
The entrepreneur starts with nothing but an idea. "If you can dream it, you can do it," is his motto. Like the struggling artist, he works in a field where enthusiasm and dogged determination play a greater role than formal education. He enlists capital through his persuasive powers, draws upon other economic resources, adds such spiritual qualities as faith and fortitude and self-reliance, and perseveres until successful. This sort of effort produces the greatest return on investment — as well as the greatest risk of loss. The mortality rate is high for new business ventures and new products.
From the date of its birth, the tendency of a given enterprise is toward ever greater conservatism. The security of success attracts additional capital, but from more cautious investors. The dynamic leadership of the original entrepreneur gives way to professional management. The spark of creativity diminishes into the nine-to-five effort of the paid executive and profits tend toward standard for the industry. Thus do entrepreneurial dreams mature.
What, then, shall be said of government-run enterprise? Here, funds taxed from those powerless to resist are devoted to purposes for which customers have shown an unwillingness to pay, under management motivated by tenure in the Civil Service. Lacking is the lure of profit or fear of loss which make for efficiency rather than waste; nor is managerial performance held up to public scrutiny as in the stock exchange. Converting scarce resources to the service of unwilling customers is a thankless and unprofitable venture, characteristic of governmental enterprise. It consumes rather than creates wealth.
New wealth created by entrepreneurial effort is the result of economic efficiency. It benefits society in general by providing new enterprise, new services, new products, new employment, new tools, and further capital formation. Such wealth belongs to its creator and those who backed him with risk capital.
Failure to understand the nature, the source, and the purpose of wealth results in attempts to redistribute it through graduated taxation and other devices. But the taking of wealth without the consent of the creator or rightful owner is wasteful and destructive and harmful to society.
Those unwilling to stand the strain of hard work, risk, self-responsibility, and universal envy should not aspire to the creation and management of wealth. Their greater happiness is to be found in some other less strenuous role in the economic order. They may be thankful for the high standard of living afforded by new wealth in a free economy, and watch with admiration and appreciation the bold adventures of the entrepreneurial spirit.