by Bakri Musa
Chapter 11: Embracing Free Enterprise
The catalyst that drives, or more accurately the spark that ignites, capitalism is the entrepreneur. She is the individual who sees the opportunity to sell an item or service at a price higher than the cost of making or obtaining it. She sees the need or demand, and then goes about to meeting that need, and in the process makes a profit for herself. Entrepreneurs are, in the words of the MIT economist Lester Thurow, “…the change agents of capitalism.”
It is at this point that the religious types sense an argument against capitalism. Their argument is simply this: capitalism feeds on the individual’s motivation to make a profit, to get rich. My rebuttal is equally simple. The entrepreneur provides a much-needed service or product where none exists before. If that product or service is not needed, then his enterprise will fold soon enough. As for the personal greed motive, it is worthwhile to note that every successful entrepreneur ignites a chain of events that brings benefit to countless others. Ray Kroc who founded McDonalds restaurants with the simple premise that consumers need a reliable place to get consistently tasty and affordable meals, started a chain of process that helps ranchers and butchers (source of meat), potato growers (the chips), and countless youngsters with their first job. This is separate from the great services it provides consumers.
As for the personal greed argument, it is well to remember McDonalds create more Black millionaires in America than the all the professional sports leagues combined. Similarly when Bill Gates created that software operating system, he also provided opportunities for thousands of other software engineers to write applications for his Windows program. Of course Ray Kroc and Bill Gates became fabulously rich, but they were not alone; they brought along countless others. Equally important and bears repeating, they provided much-needed services, products, and most importantly, jobs. The value of the benefits to society they created with their services and inventions far outweigh the wealth and rewards that they get. That is the beauty and genius of free enterprise.
While the religious types may emphasize the material gains accrued on the individual businessman and trader, I emphasize the goods, services, and jobs she provides to the community.
In feudal societies one’s fate depends exclusively on birth and heritage. From there flows wealth and honor. Providential gifts may at times add new players to the scene. In the movie Giant, the scruffy character played by James Dean catapulted himself into the establishment when he found oil (black gold) on his parched desert property. But those were the days. Today, to use that overworked modern cliché, there is a paradigm shift.
“The old foundations of success are gone,” observes Lester Thurow. “For all of human history,” he writes, “the source of success has been controlling natural resources – land, gold, oil. Suddenly the answer is ‘knowledge.’” It is not that the usual rules have changed in the “New” economy, rather that the traditional ingredients for growth – land, resources, and labor (the factors of production, in economists’ lingo) – are being superseded by knowledge.
The old economic axiom – that real wealth results when more is produced with less, that is through increases in productivity – still holds. Consider a padi farmer. By working an eight-hour day he produces a ton of rice. In an effort to increase his harvest, he works an additional four hours per day and produces an additional half-ton of rice. Even though he may bring home more rice, his real wealth has not increased. The reason is that the additional yield was at the expense of his time away from his other activities, such as his bonding with his young family or even at the expense of his health. These too carry their costs. What he would have earned more from the extra rice production, he would have to pay his doctor’s bills for his backache! Besides, there is a physical limit to how many more hours in a day he can work. If he persists with this technique of wealth enhancement to the extreme, he may end up with losing both his family and his health, and the end result would be a big negative.
If he would change his technique however, from simply putting in more hours to making those hours more productive and efficient, then he would be creating more wealth. For example, he could use high yielding seeds. Then the difference between the increased yield minus the added cost of the more expensive seeds would be the newly created wealth. Or he could rent a tractor and cultivate three times the area to yield three times more rice for the same output of time and effort. And after subtracting for the added costs of the tractor rentals, he would still come out ahead. That is real wealth creation, that is, output in excess of the efforts expended. We should not just work hard in the same manner, rather work hard to find ways to work smarter and be more productive.
It is the individual entrepreneur who brings about change and creates wealth, not governments or institutions. Thus we must ensure an environment where entrepreneurs can thrive, where their activities are rewarded and valued so as not only to encourage them but also more importantly, others to be like them. Entrepreneurs are not born; they can be trained and nurtured.
In the West, entrepreneurs like Ted Turner (the man who founded the all-news network, CNN) and Bill Gates have acquired mythic proportions with their massive corporations and fabulous wealth. This larger-than-life image both helps and hinders other would-be entrepreneurs. The hindrance comes when budding and unsure entrepreneurs believe that such enterprising skills are inherent and cannot be taught. But it is well to remember that for every Ted Turner there are thousands of other successful entrepreneurs who may not have the same wealth and fame but nonetheless are providing valuable services to the community and giving employment to their fellow citizens and at the same time making a living for themselves. Each of them, big and small is a contributor to the economy. Every one who starts his own business is an entrepreneur. The youngsters who hawk T-shirts at tourist stops are entrepreneurs in their own right. So too are the sate (Malaysian shish kebab) sellers and wayside fried banana hawkers. In our preoccupation with the major figures, we underestimate and even denigrate these small players. We forget that those big names were once small operators. McDonald’s Ray Kroc started with only one hamburger stand in Southern California.
Economists, unable to understand or more correctly unwilling to study these small time businessmen, dismiss them collectively as the “informal sector” of the economy, not worthy of their fancy econometric models. But worldwide they provide substantial employment especially to those with minimal skills. As we have seen by the successes of the micro credit lending programs of the Grameen Bank, even illiterate Bangladesh women can trained to become successful entrepreneurs in their own right.