Entrepreneurship

Writing over 300 newspaper and magazine articles about business, technology, and culture, I have interviewed very many entrepreneurs. Perhaps my personal favorite was "The Business of Musical Theater: The Dough behind the Do-Re-Mi" for the New Mexico Business Journal.  I have met all kinds of successful entrepreneurs and all kinds of not-so-successful. "All kinds" describes both the limitations and the potentials. In other words, there is no formula. The Austrian School of Economics has worried this problem for over 75 years. As the leading advocates for laissez faire capitalism, the Austrians have never agreed among themselves what entrepreneurship "is."

Part of the problem is that we were raised in schools to want short definitions that are easy to memorize, like Orwellian newspeak.  The very complexity of enterprise works against that.  The Concise Encyclopedia of Economics from the Online Library of Liberty offers this multi-faceted explanation:

“An entrepreneur is someone who organizes, manages, and assumes the risks of a business or enterprise. An entrepreneur is an agent of change. Entrepreneurship is the process of discovering new ways of combining resources.”  Entrepreneurs also increase the value of the resources under their control. “Schumpeter stressed the role of the entrepreneur as an innovator who implements change in an economy by introducing new goods or new methods of production. In the Schumpeterian view, the entrepreneur is a disruptive force in an economy.” (Read the entire article here.)

Peter Schumpeter, Israel Kirzner, and Frank Knight are among the Austrian school economists who have thought through entrepreneurship.  Of course, Ludwig von Mises and Friedrich A. Hayek also addressed it, but their focus was on other problems and their treatment of entrepreneurship was undeveloped. Even though they were passionate advocates for the open market, they did not study the differences between capitalism and enterprise, innovation and invention, market efficiency and marketing.  

“Kirzner's procedure is based on an analogy, or parallel, between what he calls the entrepreneurial element in individual decision-making and entrepreneurship in the market interaction…He isolates the entrepreneurial element by contrasting routine optimizing behavior with what he claims we can know about true individual action …  Individuals spontaneously discover means of satisfying their wants. … Another term he uses is alertness to hitherto undiscovered opportunities.”  This is not mere “economizing” but a deeper insight. “Third, he identifies what he regards as a crucial kind of action in a market economy -- arbitrage. He associates entrepreneurship in the market economy primarily with this action.” Arbitrage is the engine of efficient allocation. (See “Kirzner” by Prof. James Patrick Gunning, Feng Chia University, Taiwan, on Constitution dot Org here.)

 A more subtle approach is being pursued by Nicolai Foss, Peter Klein, and Mario Rizzo who follow Frank Knight and Ludwig von Mises on the entrepreneur’s judgment of uncertain future market conditions.  “Judgment is exercised in the act of investing in  and allocating resources to specific time-consuming production processes that are organized and controlled by the entrepreneur until the completion and sale of the product.  For Foss and Klein the entrepreneur is therefore a capitalist and owner.” (See “Klein Versus Kirzner” by Joseph Salerno on the “Bastiat”pages at Mises dot Org here.)

Traditional college classes in economics teach that markets move toward “equilibrium” that some magical point exists where supply meets demand at a price.  This is not mere observation, but an implicit worldview.  The goal is a static social world of sustainable predictability.  The Austrian school has a different weltanschauung.

Anousheh Ansari of the
X-Prize Foundation

 “I think it is highly useful to think in non-equilibrium terms, to be open to the possibility of change and surprise. You certainly cannot do good economics without understanding the role of surprise. But if one pursues this to the point where the surprises tend to overwhelm the regularities, then I don't believe you have a science that reflects existing realities. … Entrepreneurship is not always equilibrating. …  The idea I reject is this: there is successful entrepreneurship, there is unsuccessful entrepreneurship, and it's a toss-up which is going to outweigh which in the end. … The fundamental Misesian insight into human action is that it involves a tendency to be right rather than to be wrong. People have an interest in being right. …  This does not guarantee "equilibration always." And certainly a permanent equilibrium is out of the question. It would be incorrect even to imply that in any given time period, the changes we observe are necessarily equilibrating. But there are tendencies which tend to overwhelm disequilibrating forces in the market, most of the time.”(Austrian Economics Newsletter, Interview with Israel Kirzner, Spring 1997, Volume 17, Number 1 here.)  (See also "Supplies and Demands" here on Necessary Facts.)

  

Felicia Day:
Acting as Entrepreneurship

Moreover, traditional business management classes teach that the unremitting failures of inventors and early adopters prove that they are wrong.  Success, the B-schools claim, comes from following the wreckage to where the markets are now ready for a mature product or service.  

The modern history of computing echoed much of the early history of railroading in America.  Failures and successes both combined to re-direct existing capital (whether trackage and rolling stock or software and hardware) and did so to attract ever larger investments.  (See The Man Who Found the Money: John Stewart Kennedy and the Financing of the Western Railroads by Saul Engelbourg and Leonard Bushkoff (Michigan State University Press, 1996).  In the days of railroading, the term “venture capitalist” would have sounded redundant. 

ALSO ON NECESSARY FACTS
Venture Capital
Engines of Creation
Objective Intellectual Property Law
Open Secrets
The Genius of Design

Space is the Place: Come to the High Frontier

The successful launch and docking of the Space-X Dragon (read here) validates the long involvement of private efforts to gain the high frontier. 

We have come to accept government involvement in space exploration and exploitation. We perhaps allow for competition between governments as India, Japan, and China join the USA, the European Space Agency, and Russia in launching satellites and astronauts.

In fact, the private efforts were first of course and were only shunted aside during the decades of collectivism in the 20^th century.  In fact, private enterprise has the long term advantage in exploring and exploiting off-planet resources. 

No one in the 17^th century who knew only the British East India Company and the Dutch East India Company could have foreseen the Cunard Line, the Northern Pacific Railroad, or TransWorld Airlines and the immense profits made by carrying very ordinary people on very personal missions. The goal then was to haul raw materials (especially gold and silver) back to Europe. No one in 1620 or 1720 could have seen the world of 1820 or 1920.  Since then, we have gotten better at imagining the future. We now live somewhere between George Orwell and George Jetson. It is not that science fiction predicted the future, but that we learned to expect a future different from the past.  We call it progress. That can only come from spontaneous human action, not from central planning.  Progress cannot be directed.

Anousheh Ansari at Super Science Friday
U of M Flint, 2009.

Charles Lindbergh’s flight across the Atlantic in pursuit of a record (and a cash prize) was privately funded.  Lindbergh introduced Robert Goddard to Daniel Guggenheim.  Then the wars intervened and the governments of the USA and USSR turned to former Nazis in their quest to conquer, command, and control the high frontier. 

Meanwhile, private efforts continued.  Robert Truax, OTRAG, Space Services, Inc., and CSTAR, all met with failure.  However, the Amateur Radio Relay League built its Oscar-1 in 1961 and since then 70 satellites constructed by hobbyists  have joined the dense flock of privately-owned birds in orbit.  Among those was the pioneering Telstar built by AT&T and a consortium which paid NASA £3 million (yes, UK pounds) in 1962, after the successful launch of Oscar-1.

With profits from selling their network switching technology, the Ansari family funded the X-Prize to stimulate the development of private launch vehicles.  Anousheh Ansari used her share to pay the Russian Federal Space Agency to take her to the ISS.  Burt Rutan’s Scaled Composites won the prize. Despite a horrific setback in 2008, they have renewed their agreement with Sir Richard Branson’s Virgin Galactic and restarted their association with Microsoft’s Paul G. Allen.  Spaceship Two is currently undergoing tests (here and here).