Entrepreneurship is a building block for economic development. Individuals who invest and invent are instilled with a passion to create wealth. The integral role played by entrepreneurship in economic and human development is almost universally accepted as true. The main point of contention is in pinpointing the source of the incentive to invest. Is the drive to devote time and capital into an investment a natural phenomenon within the human race? Or, does it need to be harnessed and inspired by some higher authority, such as government? If the latter is true, then without the State is humankind forever condemned to stagnation and eventual self-extermination?
Although to many these questions may seem bizarre, there are intellectuals who believe that passion and entrepreneurship rely on the guidance of the State. In an article titled “Bringing the World out of Denial: The Power of Passion, the Fallacy of Fear”, James Cusumano appeals to government as a means of avoiding the pitfalls of human fallibility. He even goes as far as to praise government spending programs, such as NASA, as methods of adding wealth to economies.[1] Without the State, human passion will never be provoked to a sufficient degree such as to bring about great advances in human society.
He writes:
World-renowned Harvard biologist, E.O. Wilson thinks that human beings may be hardwired to avoid worrying about future generations. He points out that, “For hundreds of millennia, those who worked for the short-term gain within a small circle of relatives and friends lived longer and left more offspring—even when their collective striving caused their children and empires to crumble around them.[2]
What is his solution?
In my opinion, there is only one force that can erase this self-protecting, laissez faire attitude towards critical global challenges, or any critical change for that matter: the energy of unbridled passion.
He makes a clear distinction between laissez-faire and factors that channel the “energy of unbridled passion”. Further along the article, Cusumano explains how this unbridled passion is brought about:
How do we instill such passion? I think there are three components that must be present. First, and foremost, the challenge must appeal to a person’s need to help the “greater good.” This is the key ingredient of unbridled passion.
…
People must perceive and believe deep down that they are part of a team that will change the world for the better. That is the magic. It has been done before quite successfully. U.S. President John F. Kennedy galvanized Americans after the successful launch of the Soviet’s Sputnik satellite. He roused their passion with his personal commitment to what some saw as a daunting goal: “We must and we will put a man on the moon in less than one decade.” And we did. NASA was formed, which not only achieved this goal, but also spawned numerous new technologies and companies, ultimately creating millions of jobs and stimulating the world economy with trillions of dollars of GDP.
For James Cusumano, it is clear that individuals require an exogenous source of motivation. Furthermore, these motivations must revolve around tangible utilitarian objectives. Great minds—Gandhi and Edison, in this case—work for long-term, long-reaching developments for the purpose of a greater good. There is an important distinction between a utilitarian motive and a utilitarian outcome—the possibility of development inspired by self-interest, that ultimately benefits all of humanity is discarded as unrealistic or non-existent. These motives, or reasons for passion, must be instilled by the government, because people must be made to believe that “they are part of a team”.
To his credit, Cusumano addresses another factor behind passion:
Let them play a role in developing the strategic plan. This creates ownership and commitment.
Cusumano hits here on the concept of ownership. Taking it to the next logical step, what Cusumano seems to be referring to is the concept of private property. Unfortunately, this valuable point is muddled by his attempt to incorporate government-led collectivism and argue within his narrow utilitarian framework.
Passion and entrepreneurship are innate in the human mind. They are products not of outside motivation, but of internal rationalization—the drive to always maximize utility. This, not State stirred utilitarianism, is the driving wheel of economic and societal development. Since an individual can only excel by bartering with his neighbors—i.e. the division of labor—, the individual’s developments must be able to satisfy his neighbors’ wants and needs. This is what ultimately gives the impression that progress is done for the greater good. The emphasis should be placed on utilitarian outcomes, as opposed to utilitarian motives.
Entrepreneurship, Passion and Private Property
“Is there anything more injudicious than to act against our own interests… in order to serve the interests of another person?”—Juan de Mariana
Entrepreneurship is the act of an individual investing time, capital and passion into fulfilling an idea. The overarching motivation is to reap the maximum gain at the lowest relative loss, otherwise known as maximizing utility. What defines a gain and a loss is ultimately based on the subjective preference of the individual.
For all intents and purposes, an individual could very well be working toward what he perceives to be utilitarian ends, and thus the benefits he earns from his endeavors revolve around the satisfaction of his need to fulfill “the greater good”. Those “utilitarian” objectives are selfish in nature, as the satisfaction he is really fulfilling is his own.
The passion an individual allots to any particular action is dependant on how important the objective is to the individual. Two students striving to graduate from their local university may not invest the same amount of passion. The importance of an objective is also a subjective evaluation.
What drives human action? What motivates an individual to invest in one thing or another? The action taken is that which offers the highest marginal utility. James Cusumano’s utilitarian argument ignores the virtue of subjectivity behind every individual action taken and the virtue of selfishness. Did Bill Gates, for example, found Microsoft to provide for “the greater good”, or were his motivations based on his interest in his own well-being? The likely answer is the latter, yet Microsoft has made the consumer wealthier, because its products are now cheaper and of far greater quality than that of its predecessors.[3]
The right to private property is a keystone. If the action taken is that which maximizes marginal utility, then it follows that the utility gained must be guaranteed. An entrepreneur will make an investment only if he believes there is a fair chance of reaping the rewards of his efforts. A loss in property rights will be met by a loss in entrepreneurship, because the incentive to invest is removed. Alternatively, full property rights will allow entrepreneurship to flourish to its furthest extent, ceteris paribus.
Does development seeking to help humanity as a whole have more merit than any other? James Cusumano writes:
World-renowned Harvard biologist, E.O. Wilson thinks that human beings may be hardwired to avoid worrying about future generations. He points out that, “For hundreds of millennia, those who worked for the short-term gain within a small circle of relatives and friends lived longer and left more offspring—even when their collective striving caused their children and empires to crumble around them. The long view that might have saved their distant descendants required a vision and extended altruism instinctively difficult to marshal.”
All successful investments are important in the long-term. Incremental investments may seem less important than those that are world-changing, but this view is misleading. There is no successful investment made only for short-term gain. By its very nature, an investment necessitates an individual to forego current consumption for future consumption. Furthermore, successful investments ultimately conclude in a net creation of wealth, which is only beneficial to future generations. It follows that entrepreneurship is future-oriented, and thus one cannot accuse such actions of sacrificing future generations for the present generation.
Role of the State
“The only agreeable country is one where no man is afraid of the tax collectors.” —King Theodoric
We have already established that the drive and passion to invest and develop are innate characteristics of humanity, and that infringements upon private property are disincentives against investment. Government can give one the means to invest by redistributing it from the pockets of another, but the idea and passion were already there. Can the government serve in the role of distribution of capital, to guarantee the maximization of utility in the utilitarian sense? Should the government give capital to entrepreneurs who lack their own?
To avoid tangential disagreements, the purpose of this article is not to argue the benefits of government, but to argue the detriments. Why is the redistribution of capital inefficient, and why is it met with negative consequences?
In order to spend, the State must tax. It follows that all expenditures necessarily come out of the private sector. If we assume all government expenditure to be honest and virtuous in nature, it still remains true that in order to make this expenditure the State must infringe on private property rights by taxation in order to pay for the spending. We can thus establish that at its best government spending is analogous to taking money from one pocket and putting it in the other. But as aforementioned, taxation discourages entrepreneurship and investment, since an increase in uncertainty translates as an increase in the factors which constitute risk or potential loss. This necessarily decreases the foreseen marginal utility of any individual action. So, in reality, State expenditure leads to a net loss in wealth in the private sector.
Can government spending create wealth? That is, can public spending increase productivity? Generally, government spending is directed towards fulfilling present needs. That is, government expenditure is usually routed towards consumption. In that sense, government does not invest, and so no net increase in wealth can come about.
What if the government invests into a development program, or into a private company? In order to succeed, the ultimate product of an investment must somehow satisfy the wants of customers in the future. Private companies judge the viability of an investment through profit and loss. Profits signal that a company is doing well on the market, while losses suggest that the company’s products are not desired. Governments do not respond to profit and loss. Government programs do not aim to be profitable in the fiscal sense, as long as the supposed needs of citizenry are met.[4] A government can always increase revenue by raising taxes, and so feels no immediate necessity to remain profitable.
We conclude that the government serves no role in rousing passion, and initiating or funding entrepreneurship. Instead, the State serves only as a detriment in fomenting entrepreneurship.
Necessity of liberty
“Government is essentially the negation of liberty.”—Ludwig von Mises
Entrepreneurship is a phenomenon inborn in the human spirit. The right to private property, and by extension one’s own profits, serves as the motivational factor behind the action of investment. There is a direct relationship between the level of freedom and the speed of economic growth. Therefore, government is a burden on economic development, as it cannot positively influence entrepreneurship. Instead of looking for benefits, it is far more important to recognize where the State fails. Once one realizes where the State fails, one can only logically conclude that the best course of political action is to reduce the size of the State or even do away with it altogether.
[1] On the topic of NASA, see: Swanson, Tim, “What Won’t NASA Invent Next?”, Mises Daily: 2 January 2007; and: Anderson, William L., “The Trouble with NASA”, The Free Market: April 2003.
[2] It is ironic that it was John Maynard Keynes, the founder of a theory which glorified the government as a means to an end to the ill effects of “animal spirits”, said, “In the long run we are all dead.”
[3] Relatively, at least, given the latest round of criticism directed at the quality of the latest Microsoft operating system.
[4] In reality, government may spend with the intention of doing harm, as long as they are fulfilling the desires of a special individual or group. This can be defined as “corruption”. Given that corruption is in universal distaste, this article need not consider it.
I believe that government surely can encourage entrepreneurship by providing incentives, like NASA projects. But this kind of entrepreneurship is not even an entrepreneurship. This is because NASA faced no competition and the demanded “good” was not in shortage. Soviet Union’s Project cannot be considered as competition. Actually no one demanded such thing. Government decided that people wanted it.
Of course poor people might felt better that some other people, who happen to have the same citizenship, reached the moon. But this didn’t make the poor people richer. People might have put their foot in the moon when they would consider that their benefits would outweigh the costs. Reaching the moon earlier is considered a success but I cannot see the reason.
Finally, this kind of arguments have some other fallacies as well. They assume that all people have the same preferences as the author or speaker. For example, they assume that all people want to feel members of a team or all people benefit from such projects. Even if people want to feel members of a team that doesn’t mean that government is the only team available. Otherwise, Kobe Bryant would have joined NASA instead of the Lakers.
Taking all of this into consideration,someone should be aware that a lot of arguments that are considered true from generation to generation, are actually not well constructed and a careful analysis can provide some interesting results.
Spyros,
Regarding NASA, I would suggest looking up those two articles I suggested in footnote #1. They can be found on Mises.org. Whether NASA provided wealth is questionable, including the idea that much of today’s technology is thanks to them. Although this is a blanket statement, it is questionable whether any public enterprise has seen wealth creation (this includes events such as the Olympics, which are said to bring in wealth; the net result has always been greater fiscal costs than profits, in the private sector [factoring in taxes]).
Agreed, although I would change this to: government believed that it would be beneficial, even if nobody really demanded it.
I believe (well, in theory) that government can only provide utility where the private sector cannot provide it for itself. An anarchist might believe that all industries can be provided by the private sector, and create wealth, while a minarchist would disagree and suggest there are some essential industries (the most common being security). That said, I do not think that these services can be provided for a profit, by the government, because the government simply does not act that way.