Entrepreneurship – the narrative of destructive creation

In economics, particularly economics of the Austrian school, we not only have a story about the satisfaction of needs and wants, we have a story with a hero. The hero is the entrepreneur.

The entrepreneur is celebrated because the entrepreneur takes risks. They advance some resources that they already own, their property, in anticipation of a successful venture in which they hope that they will make profit. However, the future is always uncertain. The best laid plans of mice and men often go awry so the entrepreneur can make a loss too.

One of the earliest theorists of this was Richard Cantillon, an Irish refugee in France, whose Essai sur la Nature du Commerce en General has been claimed by the Austrian school of economics as the first economic treatise (in other words before Adam Smith) and also the first example of Austrian economics. He is one of their heros.

Cantillon wrote about how economic actors, lacking control over the market, had to operate in conditions of uncertainty in which losses as well as profits were possible.

“The price of these products will depend partly on the weather, partly on demand; if corn is abundant relative to consumption it will be dirt cheap, if there is scarcity it will be dear. Who can foresee the number of births and deaths of the people in a State in the course of the year? Who can foresee the increase or reduction of expense that may come about in the families? And yet the price of the Farmer’s produce depends naturally upon these unforeseen circumstances, and consequently he conducts the enterprise of his farm at an uncertainty.

The unsuccessful entrepreneur will live poorly or go bankrupt, while the successful entrepreneur will obtain a profit or advantage and cause entry into the market, “and so it is that the undertakers of all kinds adjust themselves to risks in a State.” The entrepreneur brings prices and production into line with demand; in well organized societies, government officials can even fix prices of basic items without too much complaint.“
It is through such stars that the world is “improved” – production is increased and jobs are created. Since the ultimate problem, as conceived by economists, is scarcity, the entrepreneurs’ preparedness to risk their wealth is an act to be celebrated by our people who effectively become our saviours.

The narrative of the intrepid entrepreneur is closely tied with the romance of “innovation” – the entrepreneur is able to see the value of a new technical process or product and their visionary placement of their resources, their organisation of the productive process, and its transformative effects keeps society “moving forward”. This “dynamism” is self evidently “a good thing”.

Other societies have existed that see things differently. They prioritise sustainability and resilience which are not at all the same thing as production increase and resource use efficiency. Indigenous people typically see themselves as having a responsibility to think of the consequences of major change for their descendants, seven generations in the future. Their traditions are about preserving tried and tested approaches to living within the capacity limits of local ecological systems.

If a generation is 30 years then 7 generations are approximately 200 years. We are only now beginning to see whether the entrepreneurship and innovations of the industrial revolution can really be counted as “a good thing”. If we look at how threatening climate change is, as well as at the rate of species loss, the situation is not looking very good.

It may be therefore that the plucky entrepreneur has a tragic destiny. Austrian economists wearing bow ties have been telling them that their creative destruction is wonderful for humanity when, all along, and without realising it, the profit seekers have been leading humanity into hell.

At the time of writing very few conventional entrepreneurs are likely to recognise this. They will be far too busy. An important part of the story that many entrepreneurs themselves like to believe is already tragic but very noble. This is that they can never rest in their ceaseless quest of improvement. The creative soul has a tragic but noble destiny because their successes bring imitators who erode the gains which come from being at the head of the field. So they are on a treadmill. Society benefits however in the form of increased efficiency and new toys that they did not know that they needed. As the entrepreneurs investment grows it must be continually transformed or it will suffer at the hands of competitors, perhaps entering from other parts of the interrelated web of changes in the process of “creative destruction”. The entrepreneur that rests satisfied may find his assets are the ones whose value is destroyed by the next round of innovations introduced by pioneering new competitors. It is a neo-Darwinian world – destroy your competitors or they will destroy you. The successful entrepreneur is the long run survivor in this world.

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Note: This is an excerpt from Brian’s book Credo: Economic Beliefs in a World in Crisis, published by Feasta. You can read other excerpts here.