Entrepreneurism is the most creative -- and revolutionary -- activity in the American economy. Most politicians would just as soon do without it.
Entrepreneurship is the wonder word of this political year. Across the country and around the world -- from Deng Xiaoping in China to Francois Mitterrand in France, from Robert Dole to Walter Mondale in the United States -- politicians who never before seemed to care are modishly celebrating the entrepreneur. In American electioneering, he turns out to be a marvelous fellow: glamorously high-tech in his products yet fetchingly gullible in his politics, cheaply susceptible to campaign pandering yet (unlike so many constituencies) richly rewarding as a campaign contributor. Altogether a great political asset. Plug him into a speech on the American dream. Key him into the computer for a "highly confidential, personalized" fundraising letter: "Dear Mr. Gilda, Like so many entrepreneurs in the Tyringham area . . . "
A few entrepreneurs with free time are responding eagerly to their eminent new suitors. They should be more cautious. There is a lot of hokum in the halo that politicians are looping, like a lasoo, around the head of the entrepreneur. Most politicians envy and disdain businesspeople, and understandably so. The samples they see in Washington tend to be the worst representatives of every industry, people who have given up the fight and are calling in the Feds. The District is crawling with these figures: over-the-hill self-promotors, fast-buck finaglers of special legislation, protectionist whiners and diners, rapid write-off Mercedes-Benz salespeople, affirmative-action anglers -- all racing one another for a parking slot for the handicapped outside the halls of Congress. Closer to home, in his own profession, what does the politician see? He sees his real estate broker spouse win twice his own salary by going to the right parties; he sees an ex-Cabinet official like Joseph Califano earn around $500,000 in one year as a lawyer-lobbyist; he learns that Sen. Howard Metzenbaum (D-Ohio) could be paid $250,000 for a single well-placed telephone call. No wonder the Washington pol soon comes to understand the private sector as a carnival of influence-mongering and free rides, fast shuffles and sub rosa bribes -- and soon dreams of electoral defeat when he, too, can open an influence boutique on Pennsylvania Avenue.
But in all this dubious commerce, the politician rarely meets a real entrepreneur. How could he? Real entrepreneurs are mostly too busy.
Thomas J. Fatjo Jr., for example, a real entrepreneur, never thought of calling a politician when he got into a jam one day early in his career. Besides which it was before dawn, in Houston, and hardly anyone was awake. Fatjo, however, was up to his armpits in garbage. It had abruptly given way under his feet when he tried to stomp the stuff into the back of his truck. The compactor had broken, and he had 70 houses on his collection route still to go. What else could he do but get down into the muck and pack it himself?
Now, it happens that Thomas J. Fatjo combined a number of qualities not normally found in novice garbagemen. He was young, ambitious, and a certified public accountant. More surprising, he saw high opportunities in garbage. Day after day, drowsy on his predawn route, he was elaborating the notion of a national company. And as time passed, out of his leap into the garbage business came a hypothesis, out of the hypothesis came a plan, and out of the plan came the largest solid-waste disposal company in the world. Called Browning Ferris Industries Inc., it earned $800 million in sales in 1983, was listed on the New York Stock Exchange, and commanded units in most of the nation's cities.
Several things are important about this success story, none of which is very well understood by political elites. The first is that Fatjo should have failed. In fact, more than once in the course of building his company he skirted mental and financial breakdown. There was no evident demand anywhere for a national garbage company when he started up. There was no "rational" demand for one: no apparent economies of scale or marketing. Garbage collection seemed an inherently fragmented field that any business-school analyst would have relegated to the attentions of small local companies.
Established elites, most of them, are loud in their praises of a success like Fatjo's. But what they seldom appreciate is that the entrepreneurial act, like his, is fundamentally a rebellion against existing companies or institutions and the political constituencies that support them. The entrepreneurial start-up is the most creative activity in the American economy -- probably in American life -- but also the most revolutionary. It is tumultuous, upsetting, disturbing -- and if it were none of these, it wouldn't be creative. Political elites, if they understand this, fear it.
Furthermore, revolutions like Fatjo's almost always begin at the bottom, far from the windy plateaus of statecraft where political elites are wont to graze. From the the fetid bins of creativity, from the "skunk works" of a machine-tool company or the diffusion ovens of a semiconductor plant, an entrepreneur rises up with a sure sense of the physical nature of his business. Only in this way can he face down all the book learning and statistical tables of the established experts, all the fast talk from the financial centers, with the unimpeachable knowledge of his own hands and eyes. Starting at the bottom of a new industry, he doesn't have to climb to the top. He can become the top, raised there by the upheaval of his own success.
All this is largely hidden from our political leaders. Their view is of something called "the economy," an abstract model laboriously constructed by experts called "economists." They are mesmerizing, these models, undulating with the smooth rise of aggregate numbers, the slow accumulation of physical capital, the systematic exploitation of land and labor, and the gradual expansion of scientific knowledge. Within the model the economy is, at any given moment, a problem with a small number of possible solutions -- limited by tastes, technologies, and natural resources -- which can be expressed as a set of simultaneous equations.
But fascinating as it is, the workings of this great capitalist machine is lacking in human animation. The hands that keep it going, especially in the models derived from Adam Smith, are what the man said they were -- invisible. Karl Marx and his intellectual descendants acknowledged the productive genius of the capitalist class, and assigned it a crucial, but transitory, role in the history of cconomic progress. Smith assumed that capitalists would be with us always, but, in the most famous lines he ever wrote, assigned them a moral role about on a par with wolves:
In spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labors of all the thousands they employ, be the ratification of their own vain and insatiable desires . . . they are led by an invisible hand . . . and without intending it, without knowing it, advance the interest of society.
Ideas matter -- to politicians as to the rest of us. If political elites are ignorant of entrepreneurship, the reason is in part that the ideas they receive from economists are of no help to them. In standard economic theories of capitalism, the entrepreneur is a mere "scout of opportunities," a puppet of price signals, a servant of sovereign consumers, a dependent variable barely perceptible in the looming shadow of such major factors of production as land, labor, and capital, such massive numbers as money-supply and aggregate demand. Through the ideas of economists, in short, political elites have learned that capitalism, that great system so warmly hailed at election time, can exist essentially without capitalists.
It cannot. The capitalist, above all the entrepreneur, is not merely a dependent of capital, labor, and land; he defines and creates capital, lends value to land, and offers his own labor while giving effect to the otherwise amorphous labor of others. He is not chiefly a tool of markets but a maker of markets; not a scout of opportunities but a developer of opportunity; not an optimizer of resources but an inventor of them; not a reflexive respondent to existing demands but an innovator who evokes demand; not just a user of technology but a producer of it; not only a producer of garbage but a visionary who can transform it into wealth.
At the human level, down where men like Fatjo actually work their transformations, this indispensably creative function of the entrepreneur seems utterly obvious. It is a wonder that the exploits of businesspeople don't break through the abstractions of economic modeling like a hand through a cobweb. But reinforcing the fragile elegance of the economic models is an emotional compatibility between the political enterprise and the academic exercise, between the would-be servant of constituencies and the would-be modelers of a capitalism without capitalists.
This emotional compatibility forms around fear. What the theorists of campus capitalism offer the politicians is a hope of stilling their fears. These fears stem from the very nature of the endeavors of capitalists. Most entrepreneurial success stories are surprise stories: disruptive, illogical, unpredictable -- in a word, frightening. Nobody likes to be frightened, and political constituencies, especially, have a way of turning their fears into anger -- at politicians. Then economists enter, holding out the possibility of one day, somehow, controlling the tempestuous source of all this anxiety, the great machine, so-called, of "the economy."
It is a vain hope. More accurately, it is a hope with a fatal contradiction. For controlling "the economy" always means, at bottom, down there where men like Fatjo strive, controlling the men and women who make it grow, who create the wealth that sustains the world and makes everyone so nervous. But the entrepreneur cannot be controlled -- not if he is to act as an entrepreneur and thereby create wealth. Wealth is created in markets: not controlled ones where the media of exchange tick along like the men and machinery of a tight ship, but disorderly ones, like great ports, where every wealthmaker knows that his niche is a potential Pearl Harbor -- or else it is a scam.
Failure, getting blown out of the water, going belly-up, this is the fear that ultimately gave birth to the fantasy of a capitalism without capitalists. In business failures, lives are disrupted, hopes are dashed, money is wasted -- and fear takes hold. Politicians would banish capitalists for their failures -- at the very least, protect them from themselves.
Most of the ignorance and misunderstandings in the usual political view of entrepreneurial capitalists revolve around their right and freedom to fail. Even socialists tend to tolerate a profitable company. But they will never tolerate for long a thriving economy. This is because growth entails a steady stream of bankruptcies. Socialists take this as a sign of capitalism's failure, and a signal to nationalize; but even theoretical advocates of capitalism often recoil from the prospect of failure opened up by entrepreneurial struggle.
It would be one thing if a company grew and developed like a human being, beginning small, growing smoothly and rapidly during a "growth phase," maturing and stabilizing for some period as it reaches a point of rising costs and diminishing returns before eventually dying of old age and obsolescence. But in entrepreneurial companies, there is no necessary tendency to decline or any inexorable momentum to grow. Outcomes are always open. For a technologically daring and creative entrepreneur, there is no point of diminishing returns. As his learning and experience advance, his costs will tend to drop rapidly. As his prices drop and his products change, his markets can grow forever. No company has ever died of old age.
Start-ups often follow the trajectory of a diver. There is a certain amount of preening on the plank before the entrepreneur discovers that he will have to finance the company himself. This chastening fact ends many a quest for independence. The true entrepreneur, however, will go on, spurred by a vision so compelling -- and a frustration so sore -- that he mortgages his house and borrows from his uncle. Then comes the entrepreneurial splash . . . or splat . . . followed by a terrible period of submergence, its silence broken only by appeals for money, as losses pile up.
During this stretch' which can easily last for years, established companies confidently declare that our entrepreneur has failed. That sound you heard, they all maintain, was a splat: The idea did not hold water. Venture capitalists, as is usual, had rejected it; experts, as always, laughed (did you say garbage?); banks nervously eyed the entrepreneur's dwelling. But the entrepreneur himself, desperate for funds, learned how to cut costs and bring a product to market.
It is a splendid product perhaps. It will change the world. But, alas, the unit cost is far above the price that the world will pay to be changed. The company loses money on each item sold, and the number of items is all too few. Losses mount and inventories grow. Finally the company cuts prices dramatically to clear the shop.
With that comes the first"surprise." Sales soar, personnel are hired, new equipment is purchased, and losses accelerate -- until there comes that magic moment on the learning curve when costs sink below the price, and profits come in.
For a few years the company goes on a runaway course of expansion. Then it suffers its crisis of growth. Although it is selling all it can produce, it cannot finance itself out of its own earnings. Inventory costs rise rapidly; borrowing soars; capital outlays increase; competition rears its head; and the world sours on change. Unless the entrepreneur can take decisive action at this point (Thomas Fatjo, for instance, replaced himself as chief executive officer), the company will struggle and possibly fail. The winners will enter a new trajectory of growth and possibly even go public, enriching all.
The pattern will vary drastically, of course, from company to company, from industry to industry. But almost nowhere can one discover a smooth parabola of growth and decay. The "big picture," elegantly modeled in dominant theories of macroeconomics, almost entirely misses this erratic dynamic of gains and losses, successes and failures, at the source of economic progress. Even microeconomic analysis or financial auditing can barely differentiate between a company on the verge of revolutionary growth and a company on the edge of bankruptcy. Examining balance sheets and P&Ls alone, an accountant can scarcely distinguish between a new bioengineering software company and a failing French restaurant.
The losses and "failures" of a start-up can most accurately be viewed as the costs of an experiment, the price of testing an entrepreneurial hypothesis. Karl Popper, the great philosopher of science, identified a valid scientific hypothesis chiefly by whether it is stated in a form in which it could possibly be disproven. If a theory -- such as that people born under the sign of Leo tend to be temperamental -- is so general and flexible that it cannot be proven wrong, then that theory is incapable of generating new knowledge, and is not scientific. It is a scientifically sterile proposition.
Failure plays the same role in economic progress that falsification does in the progress of scientific ideas. Every entrepreneurial venture is supremely specific and falsifiable and thus can contribute to economic advance, expanding the wealth of knowledge that fuels economic growth. Every new company or project embodies and tests a definite hypothesis about products or markets. Apple Computer Inc., for example, in early 1983 launched the Lisa computer at a price of nearly $10,000 (after an investment of almost $50 million), hypothesizing that sufficient numbers of people could be persuaded to pay that amount to acquire Lisa's integrated software and other features. This was an eminently falsifiable theory, and was soon proven false. The failure, however, yielded knowledge, and the knowledge another hypothesis: that enough people would pay onefourth the price of Lisa for the same technology, reembodied, with serious limitations, in a computer called Macintosh.
Meanwhile, at the same time that the Lisa hypothesis entered its testing ground, a proposition, utterly unentrepreneurial -- that is, with little chance to advance the course of human knowledge -- was making its way through Congress. This was a $3.6-billion jobs bill. Its terms ensured that jobs would be perceived as "created," regardless of their source, their long-term prospects, or what would have happened in the job market without the bill. Legislation like that, which is a typical outcome of bureaucratic thinking, is barren of experimental results. Called in philosophy a "performative utterance" -- for example, "Let there be jobs" -- it is a mere exercise of power. The analogy between science and business activity can be pushed even further. Take, for example, the vast number of economic acts that fall somewhere between the jobs bill and Steven Jobs's Lisa and Macintosh. Thomas S. Kuhn, author of The Structure of Scientific Revolutions, makes a useful distinction between "normal" science and "revolutionary" science. Most entrepreneurial ventures probably belong under the heading of "normal," because most such propositions -- to open a new fast-food franchise in a thriving shopping center, for example, or to plunge an oil well in a working field -- are unlikely to produce major gains in knowledge or financial power. In scientific terms, they merely add refinements to previously formulated working hypotheses.
This is not to disparage "normal" entrepreneurship, which is needed to consolidate and extend every revolutionary breakthrough. Without the emergence of thousands of gas stations and repair shops, Henry Ford's revolution in the auto industry would have gotten nowhere. Normal entrepreneurship keeps the economy going. But normal or revolutionary, every capitalist venture has the potential for a dual yield: a financial profit and a knowledge profit. One without the other is barren (although a knowledge profit will always pay off somehow, at some time, for someone, if only in the knowledge of what not to do).
In a revolutionary enterprise however, the capitalist invests in a totally new product, process, service, or line of research. In so doing, he exposes himself to major reversals, failure, bankruptcy -- but also to major profits in money and knowledge that will yield yet more profits and knowledge, not only for himself but for hundreds of other, "normal" entrepreneurs, as well.
This risk and uncertainty, this potential for failure, does more than arouse fear in political elites. It also offers a rationalization for the exercise of governmental power to prevent failure. At the heart of this rationalization is the problem of how to distinguish an investment from a gamble. Many people don't see that there is any difference at all. An entrepreneurial investment, they will tell you, is a gamble. It is not. A gamble does not test a falsifiable proposition of any sort; it merely tries a random chance. And win or lose, it cannot produce valuable knowledge. The gambler, rolling the dice, is engaged in a kind of performative utterance. "Let it be a seven" he cries, playing God -- or praying to Him. The investor may do a lot of praying, but his investment is not a gamble. It can't be, for he must work, think, plan, to identify a profitable opportunity to make his investment come up seven. And that working, thinking, and planning -- whether or not it pays off in sevens -- will of necessity pay off in knowledge.
In entrepreneurial risk-taking, gambling is simply a metaphor. But metaphors are very powerful instruments of thought. It matters, deeply whether you compare your beloved to a summer's day or to a baby -- or to a pinball machine. By the same token, the gambling-investment metaphor has had immeasurable repercussions on the way we think about capitalism. For if gambling is bad, which most people believe; and if gambling with other people's money is criminal, which it is; and if everyone believes that he or she has a stake in how large sums of money are used, which seems to be the case in democracies; then it follows that gamblers who call themselves investors are players in a lottery or vendors of a scam.
Furthermore' if the primal capitalist act, investment, is just a roll of the dice, a "speculation," then social critics and political elites can put anyone who indulges in such acts in a perfect double bind. If he succeeds, they needn't credit him for it, either intellectually or morally. If he fails, they can blame him for recklessness. Either way, one thing is obvious: The entrepreneur-gambler, the "cowboy capitalist," deserves little place, and very limited consideration, in the affairs of government and the economy.
But the virtual absence of these vital and creative, tenacious and sacrificial souls from the economic and moral ledgers of society depletes and demoralizes the culture of capitalism. It leads to a failure to pass on to many youths a notion of the sources of their affluence and the possibilities of their lives. It leads to a persistent illusion among intellectuals that we live in an "age without heroes." It leads to a public sense of entitlement to the bounties of "society," to a "social surplus," which in fact is the product of the labor and ingenuity of particular men and women, and which will slip away unless they are permitted to reinvest it.
Above all, the theory of capitalism without capitalists allows politicians to pretend that economies grow chiefly because of their own economic policies, rather than because particular individuals risk their wealth and work in the creation of new goods and services for others. Thus, politicians may ignore the impact of their so-called wealth-creating schemes and industrial policies on the actual creators of wealth and industry. Whether they endorse new income surtaxes on the nation's personal savers or new social security gouges against proprietors, whether they impose new national security snarls on high-tech exporters or new police powers and penalties on immigrants and their employers, whether they commit any variety of assault against real entrepreneurs, politicians may still pretend to be "pro-growth and pro-entrepreneur."
The problem is not merely "liberalism" or "social democracy." Ironically enough, in the entire post-World War II era, the worst assaults against America's entrepreneurs occurred under two Republican administrations, full of businessmen and conservative economists. For eight years, the regime of Dwight D. Eisenhower refused to retrench America's 90% tax rates on "unearned" incomes; and twice, in 1969 and 1971, Richard Nixon signed into law taxes that virtually extinguished the real return (after inflation) on capital gains. Neither administration thought that entrepreneurs were as important as balanced budgets and other macroeconomic aggregates. During the early Eisenhower years, the number of business starts remained less than one-seventh the level today, and the tax-cutting economies of Europe and Japan began to surge ahead of a torpid America. Even today, the Reagan Administration has managed to adhere to its tax-cutting mandate only in the teeth of fierce opposition from conservative economists with Adam Smith ties and balanced-budget fetishes.
Still, the chief dreamers of a capitalism without capitalists, wealth without the rich, progress without risk, tend to be in the social-democratic left. In pursuit of the dream, the crucial step is to deprive entrepreneurs of disposable funds. Even in Silicon Valley, the center of sophisticated venture capital, around 90% of all technology startups begin with personal savings. All programs that take them away, that favor established companies, certified borrowers, and immobile forms of pay, pensions, and personal wealth; all programs that militate against mobile capital, disposable savings, and small-business borrowing; all these schemes of capitalism without capitalists will tend to thwart the turbulent, unpredictable processes of innovation and growth.
No discipline of the money supply or reduction in government spending, no support scheme for innovation and enterprise, no program for creating jobs, no subsidy for productive investment can have any significant effect without an increase in the numbers and savings of entrepreneurs. Even with an array of government bureaucracies, loan guarantees, and celebrations of entrepreneurship, the social-democratic economy gradually comes to resemble the feudal and static societies of the precapitalist era.
This may be precisely what social-democratic idealism wants -- a society in which individuals rise and fall according to academic and corporate standards of "merit" or "comparable worth," but in which the larger structures are as placid, and as safe, and as comfortable as a college campus, an industrial park, or a great cultural foundation. There are no conflicts among organizations, no crazily erratic courses to triumph or disaster -- all is tranquil and controlled.
Neither, however, will there be any wealth-making in this society. For wealth-making is the province of the entrepreneur, the adventurous capitalist, the creative revolutionary, the very sort of "mover and shaker" whom social-democratic traditionalists will have banished from the peaceable kingdom.
This process of entrepreneurial decline is already well under way in the social democracies of Western Europe. Whether these countries will be able to recover their entrepreneurial vitality remains uncertain. But in the United States, the forces of paralysis are much less effectively organized. With the competitive clash of 50 different state governments, a continuing impulse toward deregulation which flourished even under President Carter, a disruptive onrush of immigration, legal and illegal, a potpourri of religious faiths and ethnic factions, a rebellious cowboy individualism, and a populist revolt against excessive taxation, the United States continues to resist the blandishments of social democracy, still reverberates with entrepreneurial flair.
Largely expelled from the capital-intensive domains of heavy manufacturing, American entrepreneurs and venture capitalists performed miracles in the skill-intensive realms of high technology and uncapitalized software. But during the mid-1970s, when the capital-gains tax rose to a nominal level of nearly 50% -- confiscating more than 100% of all net real capital gains -- the United States nearly succeeded in destroying its most precious assets of entrepreneurship.
Nonetheless, with the tax act of 1978 and the rise of the spirit of enterprise, Americans broke free of the social-democratic slough. During a time when leading economists on all sides of the political spectrum were predicting worldwide depression, America's entrepreneurs have been making a defiant statement of their optimism and faith. They have been starting new companies at an all-time record rate of some 630,000 a year, more than three times the number begun annually in the supposedly thriving years of the early 1960s, and more than seven times the rate of the high-tax 50s. Venture capitalists are pouring unprecedented billions into thousands of start-ups in a range of new technologies, from bioengineering to fiber optics.
Scores of new semiconductor and computer companies are rising up in the face of massive efforts by giant Japanese corporations in league with a commercially ambitious government. Wildcat oil and gas prospectors are still fanning out across the country and around the world in the face of sinking prices and a short-term glut of oil. Most important in this American resistance to social-democratic planning are the immigrants from Latin America, Asia, Europe, Russia, and the Middle East who continue to press to the shores of the United States, starting companies and creating jobs, in the face of perennial xenophobia and unbelief from the prophets and protectionists of the welfare state.
Entrepreneurs everywhere ignored the suave voices of expertise: the economists who deny their role as the driving force of all economic growth; the psychologists who identify their work and sacrifice as an expression of greed; the sociologists who see their dreams as nostalgia for a lost frontier; the politicians who call their profits unearned and their riches pure luck; the pundits who call this investment-led and entrepreneurial recovery an effect of the "consumers" rather than of the producers of wealth.
Bullheaded, defiant, tenacious, creative, the American entrepreneur kept solving the problems of the world even faster than the world could create them. Whether these triumphs can continue will depend on whether the politicians who win in America for the rest of the decade celebrate entrepreneurs chiefly to tame them and take their money -- or whether they foster the high adventures and redemptive risks of an economy of heroes.*