Freeman

ARTICLE

The Ecology of Entrepreneurship

JUNE 01, 1985 by SVEN RYDENFELT

Dr. Rydenfelt is professor of economics at the University of Lund in Sweden.

J. M. Keynes’ theories with prescriptions promising to cure unemployment and depression were greeted as gospel by economists and politicians of the 1930s. Just as peace-lovers all over the world launched the slogan “no more war,” so the newly-fledged Keynesians felt strong enough in their faith to promise “no more depression and mass unemployment.”

The Keynesian miracle drug was, in fact, never tested in the thirties. The Second World War came instead. Following the war was the “golden quarter of a century” from 1945 to 1970—a happy period with full employment for which the politicians gladly proclaimed credit.

Then came the 1970s and the birth of a severe economic crisis, a social plague developing into a virtual depression with mass unemployment. At long last the Keynesian drug could be tested to prove its healing powers.

Despite governmental borrowing in volumes Keynes never dreamed of, with doses rapidly increased into wild overdoses, the economic crisis spread. The awkward truth finally became clear: the miracle drug was a failure, producing no visible healing effects. Still, the politicians stubbornly refused to open their eyes and desperately continued to increase the Keynesian doses.

New theories and new remedies were sorely needed, and out of the travails of the crisis new theories were born. One of them will be presented here. The theory of entrepreneurship, explains the roots of the crisis and indicates ways out of it. And the time evidently is ripe for the new theory, dry soil is waiting for rain and seed. The idea is spreading even into the camps of the enemies, even into Socialist governments of the West where officials today speak of the necessity of creating a better economic climate for business and declare themselves prepared to accept higher profits.

Austrian Economics and the Entrepreneurial Role

The ideas of the new theory can be traced back to the 18th century where one of the pioneers, the French economist J.B. Say, added to the three classic factors of production—land, labor and capital—a fourth factor, the entrepreneurs. These ideas were further spread by the Austrians Mises, Schumpeter and Hayek as well as by modern American economic historians like Douglass North and Robert Thomas.

Many economists have contributed to the work, but so far only Professor Israel Kirzner at New York University has presented a coherent theory of entrepreneurship. The theory, however, is far from finished and complete, and different versions have been presented by different authors. The interpretation here is my own.

I especially want to emphasize the close relation to modern ecology, the science of the dependence of all living beings on the environment. While Keynesianism is a mechanistic theory, treating society like a machine you are able to control by means of “social engineering,” the theory of entrepreneurship is fundamentally humanistic. Everything in society is produced by human beings, whose performances are dependent not only on the physical environment but as much on the political and economic one.

In an unfavorable environment we, as a rule, develop only a fraction of our possibilities, while in a favorable one we are able to develop our full potential. If economic growth with full employment and rapidly increasing living standards is to develop in a society, among other pro duction factors the following three must be present:

1.       Capital

2.       Entrepreneurs

3.       A favorable entrepreneurial environment

The third factor is by far the most decisive. In every society there are key groups—in medicine the doctors, in education the teachers—and if society is to function well these groups must be offered adequate incentives to do their best and develop their full potential.

In all societies a minority of people are equipped with entrepreneurial talents enabling them to start, manage and develop enterprises. This minority holds the key to business productivity, growth and employment. But they will use their special talents fully only in an environment with adequate incentives. In such an environment they will attract or create the necessary capital.

Modern growth theory has, as a rule, concluded that the shortage of capital is the deciding cause of poverty in under-developed countries. Moreover, the theory holds that the provision of capital via aid from the industrial countries should be sufficient to start economic growth in the poor countries. Vast discouraging experiences indicate that this theory is not realistic.

Capital, according to the theory of entrepreneurship, is a necessary but not a sufficient condition. According to this theory the cause of the dismal experiences is the fact that the regimes of these countries, mostly socialistic, have systematically oppressed and exploited their entrepreneurs. Policies destroying the entrepreneurial environment must have counterproductive effects.

Similarly, the theory of entrepreneurship is able to explain the economic crisis of the 1970s and 1980s in the West. During the golden quarter from 1945 to 1970, the entrepreneurs were allowed to work and produce in a largely favorable environment. Stimulated by adequate incentives, they developed such productive energies that many governments had to apply brakes on their wild investment plans, brakes in the form of special taxes and fees. Not unemployment, but a shortage of labor, was the problem during this period.

Economic “doctors” of the present crisis often try to explain hardships as a product of “technological unemployment,” resulting from laborsaving machines and devices such as computers and robots. But such explanations are mere nonsense. All machines since the industrial revolution in the 18th century have been “labor saving.” In spite of this, shortage of labor was still the problem in the 1960s. Since the 18th century the bogey of “technological un employment” has been picked up from dark closets during all slumps and depressions and sent back to its hideout whenever better times arrived.

Just like garments and other cultural manifestations, governmental policies are strongly affected by changes of fashion. In the entire Western industrial world the 1970s meant a rapid expansion of state regulations, restricting the freedom of entrepreneurs. Simultaneously, the increasing taxing of firms and entrepreneurs was transformed into confiscation policies. In total, this meant a systematic destruction of the entrepreneurial environment.

An obvious conclusion arises from the entrepreneurial interpretation of the present Western crisis. A situation with full employment and rapid growth—a situation similar to that prevailing before the 1970s—can be created only by restoring economic environments with adequate incentives for the entrepreneurs.

Critics often object that such policies would imply the establishment of a new privileged class—the entrepreneurs. However, policies producing adequate incentives for entrepreneurs should be pursued not for the sake of the entrepreneurs but for the sake of the unemployed and other victims of the crisis.

In countries like the U.S.A. and Sweden we have the best educated and most healthy manpower of the world. But what is the use of these unique resources as long as our politicians systematically kill the incentives—and possibilities—of our entrepreneurs to invest and to create jobs?


References

Casson, Mark. The Entrepreneur: An Economic Theory. Oxford: Martin Robertson, 1982.

Gilder, George. The Spirit of Enterprise. New York: Simon & Schuster, 1984.

Hayek, F. A. Full Employment at Any Price. London: The Institute of Economic Affairs, 1975.

Kirzner, Israel. Perception, Opportunity, and Profit. Chicago: University of Chicago Press, 1979.

Kirzner and others. The Prime Mover of Progress: The Entrepreneur in Capitalism and Socialism. London: The Institute of Economic Affairs, 1980.

Mises, Ludwig von. Human Action: A Treatise on Economics. 2nd printing. New Haven: Yale University Press, 1949.

North, Douglass & Thomas, Robert. The Rise of the Western World’ A New Economic History. Cambridge: Cambridge University Press, 1973.

Rydenfelt, Sven. A Pattern for Failure: Socialist Economies in Crisis: San Diego, New York,

London: Harcourt Brace Jovanovich, 1984. Schumpeter, Joseph A. The Theory of Economic Development. Cambridge, Mass.: Harvard University Press, 1951.

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June 1985

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