Entrepreneurship, the Market Economy and Human Betterment

First Published: 2016-10-27

This article is based on my talk at the College of the Bahamas in Nassau on October 20, 2016, in which I argue that the central factor in man’s increasing escape from poverty around the world, with rising prosperity and general betterment, has been the institutions of the market economy – individual freedom, private property, open competition, and constitutionally limited government.

What this institutional order has set free is the creative capability of the innovative and risk-taking entrepreneur, who serves as the central actor in the social system of division of labor. Yet, the enterprising entrepreneur, the businessman, is the target of criticism and popular denigration at the hands of too many intellectuals, members of the mass media, and political demagogues and power-lusters.

Nothing, I suggest is a more honorable calling in society than being the enterprising entrepreneur who, under the “rules” of the marketplace must cultivate, and demonstrate the qualities of honesty, modesty, tolerance, and integrity, as well as discipline and foresight.

But there is a justifiable basis of criticizing some in the business community, and that is those who gain or maintain their revenues and market shares not through free and open competition, but by favors and privileges from the government at the expense of consumers and potential rivals at home or from abroad – what goes by the name, “crony capitalism.”

But to paint the reality and reasonableness of rightly understood and practiced free market capitalism and market-oriented entrepreneurship with the “crony” color is to misrepresent and undermine the economic system that has given mankind the greatest degree of individual choice and freedom, and rising prosperity.

Entrepreneurship, the Market Economy and Human Betterment

by Richard Ebeling Ph.,D.

Through almost all mankind’s history, the human condition was one of abject poverty and hardship. Yes, there were kings and princes and religious orders that lived better than the mass of humanity. But when looking back at their standards of living, even the most privileged and powerful political leader or tribal chieftain spent his life in a material condition that most of us, today, would consider not much better than bare subsistence.

For thousands of years, this was the circumstance of the human race. Starting less than three hundred years ago, the human condition began to change – slowly, unevenly, and localized at first in just a few areas of Western and Central Europe, and then North America. Since then, this improvement has been spreading around the globe.

Economic historians have estimated the degree to which poverty has been abolished around the world. Only around 200 hundred years ago, in 1820, about 95 percent of the world’s population lived in poverty, with an estimated 85 percent living in “abject” poverty. In 2015, the World Bank calculated that less than 10 percent of humanity continued to live in such circumstances.

Now 10 percent of the 7.4 billion people who live on this planet still equal 740 million men, women and children. But if one recalls that in 1820 the entire human population was only one billion, the vast majority of whom lived in abject poverty, then about 6.4 billion people have been added to the global population with only three-quarters of a billion still to be raised from poverty out of that current total of 7.4 billion people.

In spite of the great advances in reducing poverty and increasing the freedom and dignity of billions of people around the world, the political and cultural climate virtually everywhere around the globe is one of anti-business and anti-capitalism.

Yet, it is wherever the forces of free-market capitalism have been set freest, along with a modicum of acceptance and even respect for business enterprise, that the most dramatic strides have been made in abolishing the worst and most squalid material conditions of mankind.

The Moral Condemnation of Businessmen

Profitable mass production has come from satisfying the needs, wants, and desires of the mass of humanity. If in past times the mass of people bound to the land were compelled to serve the wants of the few who through conquest and plunder lived as the lords of the manor, under free-market capitalism those who take on the role of entrepreneur and enterpriser have no source of personal wealth other than their successful catering to the wants of the many – the large consuming general public. That means all of us.

One would have thought that an economic system that generates a situation in which the creative, industrious and innovative members of society would have incentives to apply their talents and abilities to improve the conditions of others, rather than to use their superior qualities to rob what their neighbors have produced, would be hailed as one of the greatest institutional arrangements ever come across by man.

Instead, the more that the creative and the industrious succeed in this peaceful and productive way, the more they are condemned and accused of some form of economic “crime against humanity” due to the profits they earn in improving the circumstances of all the others in society.

In such an environment, those who pursue leadership positions in business, who demonstrate entrepreneurial excellence in designing, directing and marketing better products, new products and less expensive products, find themselves the targets of condemnation, ridicule and even hatred from the ranks of those whose lives are made better due to their enterprising actions.

The intellectuals, the news pundits and self-appointed “critics” of the existing human condition are always pointing the finger at the businessman as the source and cause of all of man’s miseries, frustrations, disappointments and dissatisfactions.

The intellectual and social elites among them dream dreams of “better worlds,” if only they were in charge of mankind’s social arrangements. Businessmen are, in their eyes, the “stumbling block” to societal reconstruction because the institutions of private property and private accumulation of wealth stand in the way of their having full access to and using the material and other means of the earth to implement their conceptions of “utopia,” if only they were in charge of the desired social engineering projects.

Honorable Entrepreneurs and Enterprisers

The low estimation in which business enterprises are held in the eyes of many people around the world is, in my opinion, very troublesome. The reason I say this is that businessmen operating in a free market function on a totally different plane than those who make their living in politics.

Indeed, I would suggest that there is no more honorable and moral way of earning a living than as enterpriser and entrepreneur in the competitive arena of the free marketplace.

To use a Biblical phrase, many are called but few are chosen to take on the leadership role of enterpriser and entrepreneur. Voters do not enter a voting booth to appoint the businessman to his position as head of an enterprise. His is a self-selecting appointment to his position. I mean by this that a businessman sees himself as running a business of his own or as a senior executive in a company or corporation. He wins his position not through promises to voters but by deeds performed for consumers.

In the market economy, those who imagine, design, implement, and direct enterprises and businesses do not need to initially gain the agreement, approval, or consent from large numbers of coalitions of individuals or groups, as politicians must do in the electoral process

The Leadership Qualities of Market Entrepreneurs

The market entrepreneur is self-selecting and self establishing. Indeed, the idea or ideas on the basis of which he is led to start up, organize, and implement his activities leading to the production of some goods or services may be neither understood nor believed in by the vast number of others in the society – that is, before the product is finished and offered to the consumers, who may or may not reject it, resulting in the enterpriser earning profits or suffering losses.

The taking on the task of entrepreneurial leadership, therefore, requires drive, vision, determination, discipline, and the financial support from his own savings or from those who he is able to persuade to lend him the needed funds or to partner with him to bring his idea to market. He is, therefore, a risk-taker as well as a profit pursuer.

Success is not measured in voter ballots as in a political election, but by the degree to which the entrepreneurial leader succeeds in winning customers for his product or service as reflected in total revenues that exceed the total costs that have been incurred in bringing the product to market.

Can he more successfully anticipate the direction of future consumer demand than his rivals in the market? Is he alert to profitable opportunities that others have missed by introducing new products, better and improved products, or less costly products that gain the “votes” of consumers through the dollars they spend on his product in comparison to his competitors in his own and other markets?

Indeed, the Princeton University economist, Frank A. Fetter, once referred to “the market as a democracy where every penny gives a right to vote.” With their dollar “votes” consumers determine who shall retain their entrepreneurial position in the market, and who may lose it.

While the entrepreneur initially selects himself and undertakes his enterprise without the prior approval or agreement or financial support from the general consuming public, it is the consumers who ultimately determine whether or not he shall maintain his entrepreneurial position in the market system of division of labor.

Entrepreneurial Determination and Drive

The business leader must be distinctly single-minded and passionately devoted to his role in the division of labor. Others in the enterprise may show up at nine in the morning and leave at five in the afternoon. But he does not. He is at work “24/7,” even when he is far from his office desk.

Is the company’s supply chain operating efficiently? Are the executives and managers who report to him seeing that their divisions and departments are functioning properly? What are his competitors planning and doing? What’s his own company planning next in terms of advertising campaigns, product improvements, technological innovations, and to adaptation to the changing patterns of consumer demand?

The burden of meeting the payroll of salaried employees for which he is responsible, as well as the obligations he has entered into to “deliver the goods” to customers and clients means as a leader of his business his mind cannot just shut off when the official business day comes to an end.

A good part of the ethics of enterprise, therefore, is reflected in the integrity, discipline and quality of character that must enter into those individuals who choose the role of entrepreneurial leadership.

The Ethical Principles of the Free Market

The hallmark of a truly free market is that all associations and relationships are based on voluntary agreement and mutual consent. Another way of saying this is that in the free market society, people are morally and legally viewed as sovereign individuals possessing rights to their life, liberty, and honestly acquired property, who may not be coerced into any transaction that they do not consider to be to their personal betterment and advantage.

The rules of the free market are really very simple: You don’t kill, you don’t steal, and you don’t cheat though fraud or misrepresentation. You can only improve your own position by improving the circumstances of others. Your talents, abilities, and efforts must all be focused on one thing: what will others take in trade from you for the revenues you want to earn as the source of your own income and profits?

Consent, Not Coercion, a Hallmark of the Market

When have you ever walked into a shoe store looked around, maybe, tried on a pair of shoes, but when you decided to leave without buying anything a gruff and intimidating character with a club or a gun said, “The boss says you ain’t leaving without buying something”? I doubt it any of us have had any such experience.

Why? Because the philosophical and moral premise underlying transactions in the marketplace is that each participant has the right to say, “Yes” or “No” to an offer and an exchange.

Why does every person have this implied right to “Yes” or “No” without attempted physical intimidation or use of force to make him act against his will? This is due to the fact that the foundational principle of a free society is that every one of us has an inviolable individual right to their life, liberty, and honestly acquired property.

Virtually every other philosophical and political system throughout human history has been based on some version of the opposite. That is, that you do not own yourself; your life and property are at the disposal of the primitive tribe or the medieval king, or the social, national, or racial group or “democratic” community to which you’ve been designated as belonging.

That is the premise of all forms of political and economic collectivism. You work for the group, you obey the group, and you live and die for the group. The political authority claiming to speak and act for the group presumes to have the right to compel your acquiescence and obedience to the asserted needs and desires of that collective group.

Only liberal, free market capitalism as it developed in parts of the Western world, and especially in the United States, broke free of this age-old collectivist conception of the relationship between the individual and others in society.

A new morality emerged under which human relationships became based on mutual consent and voluntary agreement. Men could attempt to persuade each other to associate and trade, but they could not be compelled and plundered so one person could get what he wanted from another without their consent.

Capitalism Fosters Honesty and Good Manners

As a consequence of this principle of liberty, in the marketplace of the free society individuals learn and practice the etiquette and manners of respect, politeness, honesty and tolerance. This naturally follows from the fact that if violence is ethically and legally abolished, or at least minimized, in all human relationships, then the only way any of us can get others to do things we would like them to do for us is through reason, argument, and persuasion.

The reason why the shoe salesman is motivated to act with courtesy and deference toward us when we are in his store is precisely because he cannot force on us to buy a pair of the shoes he wants to sell. We can walk down the street and buy those shoes from another seller interested in winning our business, or we can just go home without buying anything that day.

The clichés of “service with a smile,” or “the customer is always right,” in fact are inescapable manifestations of the voluntarist principle at the basis of all market transactions. No businessman is likely to keep his market share or even stay in business in the long run if he earns a reputation for rudeness, deception and dishonesty in his dealings with either other businesses or his customers.

The famous Scottish economist of the eighteenth century, Adam Smith, long ago explained that the motivation for respectful, polite, honest and deferential behavior on the part of any businessman is his own self-interest. If he does not, he may not long remain in business, as every private enterpriser knows who had learned to appreciate the importance of gaining and maintaining his brand-name and personal reputation in the eyes of all those with whom he has dealings.

In a free market, the employer must, at the end of the day, also treat those who work for him in an honest, well-mannered way. If not, over time, he runs the risk of losing the better employees who eventually decide to look for alternative employment where workplace conditions are friendlier and more respectful as well as, perhaps, better paying.

Such polite, courteous, honest and deferential behavior may start out as the self-interested conscious and intentional attempt to merely succeed in the market pursuit of profits, when voluntary and free market dealings and transactions become the common and everyday way in which people associate.

But, over time, such rules of “good behavior” become habituated, a part of the routine of regular day-in and day-out interactions, until, finally, they are transformed into the customs and traditions expected in any and all human encounters, whether in the marketplace or not.

Thus, the practice of self-interested good manners and respectful tolerance fostered first in commercial buying and selling become embedded and reinforced as the general societal rules and ways of civilized and “polite society.” And, thus, capitalist conduct makes its contribution to a more cultured and humane civilization.

Capitalism Creates a Spirit of Humility, Not Political Arrogance

I would suggest that free market capitalism also inculcates a spirit and attitude of humility. In the open and competitive marketplace, anyone who has an idea or a dream is free, in principle, to try to bring it into reality. No private person or political power has the right or authority to prevent him from entering the field of enterprise and trade to discover if his idea or dream can profitability be brought to fruition.

The capitalist “rule of the game” is that anyone is at liberty to enter the arena of enterprise if he has the will, determination and drive to attempt to make that new product, that better product, that less expensive product. This implicitly takes for granted as an underlying assumption that no one, not any of us, has the knowledge, wisdom and ability to know beforehand whose ideas and efforts can turn out to be a success rather than a failure.

The Austrian economist and Nobel Prize-winner, F. A. Hayek, once referred to competition as a “discovery procedure.” If we knew ahead of time who in a marathon, for example, would come in first, second, third and so forth, as well as the actual relative times of the runners, what would be the purpose of running the foot race?

Even when we have the track record of previous marathons, and think we know something about the relative strengths and weaknesses of the competitors looking ahead to a future race, the fact is we do not know how the race will actually play out, until the runners finish the course.

The humility of the marketplace, no matter how strongly confident the individual businessmen may be in their own ideas and abilities, is that no one – neither an private individual nor even the most well-informed government bureaucrat – has sufficient knowledge and forethought to successfully “pick winners” and “avoid losers” for the good of society as a whole.

This can only be found out through the competitive rivalry of the market entrepreneurs who are each trying to make the product or supply the service that will gain the business of customers, as found out from whose products or services the buying public actually decide are the ones that best fulfill their existing or discovered needs, desires and wants.

Government Intervention and Unethical Business Practices

There is another dimension to the belief on the part of many in society that businessmen are not to be trusted, and therefore not fully deserving of the citizenry’s confidence.

Along time ago, back in the late 1960s, a Wisconsin businessman named William Law, who owned the Cudahy tannery company, published an opinion piece in The Wall Street Journal. He said that some of his American competitors in the tannery industry were lobbying the government to impose an import tariff on foreign leather goods that were successfully capturing more of the U.S. market.

Mr. Law admitted that such an import duty would raise the costs of his foreign rivals and make it more likely that he could maintain his market share and his profit margins. But he went on to say that he opposed the call for such anti­competitive restrictions on market entry of the foreign leather suppliers. He declared that he would rather face going out of business than stay in business by using government to rig the market to his advantage at the unjust expense of both American consumers and his foreign rivals.

Many years after Mr. Law wrote this op-ed, I had the opportunity to meet and talk with him, so I think I understand the premise underlying his argument. You see he considered that such an import tariff would be an act of theft at the expense of the American consuming public, which would make him an accomplice receiving ill-gotten gains.

He would be using the force of government to impose a penalty fee on the foreign competitor wanting to bring his leather goods into the United States, for no other crime than that foreign rival’s ability to make a desirable product at a lower cost than his American competitors. The foreign rival would be punished for wanting to share the benefits from his cost efficiencies with the American public by offering his product to them at a lower price.

At the same time, the American consumer is denied the opportunity of buying the foreign version of the product at a price mutually agreeable to him and the seller. As a result, that American consumer might have less to choose from, and would pay a higher price for leather goods than if the tariff was not there. The difference between the lower price the consumer would pay under free trade and the higher price he pays under the protectionist wall of the tariff is the stolen sum out of the consumer’s pocket, Mr. Law said, and into the domestic tannery manufacturer’s revenues.

Using Government to Plunder Some at Others’ Expense

Take the logic of this example and apply it to government subsidies covering part of a manufacturer’s costs of production at taxpayers’ expense; or paying farmers not to grow crops or guaranteeing them a minimum farm price support that is paid for through tax dollars and higher prices for consumers of agricultural goods; or to domestic business regulations that limit entry into various professions and occupations, which, again, limits consumer choice, prevents potential rivals from earning a living in those corners of the market, and make the product or service more expensive for the buying public by using government intervention to limit the supply.

In the financial and banking sector it has taken the form of “too big to fail,” which meant that those who made bad investment and lending decisions were not required to fully bear the responsibility and the cost of their poor or misguided decisions. Instead, taxpayer money was made available to wash away part of their bad decision-making sins.

In everyday life, we presume that the ethical thing to do if we see that someone has dropped their wallet is to return it to them. We take it for granted that if we see that someone has left their car unlocked with the key in the ignition, we should not take advantage of this to drive away and steal the car.

If someone does take the dropped wallet or speeds off in the car we label them a thief, a bandit, a crook. That’s because we take for granted an individual’s right to his private property and the income he has honestly earned.

Business ethics, I would argue, calls upon every entrepreneur and businessman to follow similar rules of the game in the free marketplace: you don’t kill, you don’t steal and you don’t defraud. This includes neither accepting nor lobbying to receive favors, privileges, or other special interest benefits through the powers of government to tax and regulate, all at taxpayers’ and consumers’ expense.

Many people sense that some businesses and businessmen are not playing by the rules when they obtain such favors, privileges and benefits through political power. The deeper problem is that the reasonable suspicion and disapproval of government special favors for various businesses easily spills over, over time, into a willingness to assume the worst about all business and businessmen in general.

This opens the door to those more ideologically driven by an anti­capitalist agenda to win the argument that it is business and businessmen as a group who cannot be trusted and who need to be watched, regulated, and controlled – if not just taken over – by government in the name of “fairness” and “social justice.”

Capitalism’s Moral and Virtuous Watchwords

The watchwords of capitalist free market morality, therefore, are and should be: liberty, honesty and humility. The freedom of each individual to live and choose for himself; the ethics of fair dealing – that is, human relationships on the basis of force and fraud are banned in all their forms; and the modesty to admit and accept that none of us is wise enough to arrogantly claim the right to plan and coercively direct others in society.

Not only would it be morally wrong to presume to tell others how best to live by reducing them to the status of commanded followers of our own ideas and desires, it would limit what all mankind can accomplish to what the government central planner or regulator can imagine and know within the limits of his own mind’s possibilities for understanding all that there is to know.

How much better, both for the individual and all the rest of us, to leave everyone at liberty to think, imagine, and act as they consider most profitably best for themselves, so all in society can, also, benefit from what a human mind can creatively conceive that others may not.

We live at a time in which real-world capitalism is hampered and stymied in almost every direction by the heavy hand of government regulation, control, restriction, prohibition and taxation. It is politically managed and manipulated capitalism, and very far, therefore, from the truly free market capitalism that I have outlined in terms of its moral premises and social virtues.

It is certainly not the twisted conception of “capitalism” that is presented in the media and the movies. Real free market capitalism, by recognizing and respecting the right of the individual to his own life and liberty and honestly acquired property, is that economic system that offers humanity the most moral system of human association imaginable by and for man.

Free market capitalism is the ethical highroad to human dignity and mutual prosperity – if only we are willing to fully establish and consistently practice it.

(The text is based on a talk given at the College of the Bahamas in Nassau, sponsored by the Nassau Institute, on October 20, 2016)

Dr. Richard M. Ebeling is the BB & T Professor of Ethics and Free Enterprise Leadership at The Citadel in Charleston, South Carolina, He was formerly professor of Economics at Northwood University. Was formerly president of The Foundation for Economic Education (FEE), was the Ludwig von Mises Professor of Economics at Hillsdale College in Hillsdale, Michigan, and served as president of academic affairs for The Future of Freedom Foundation (FFF).

Visit Dr. Ebeling’s Archive here…

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