The
scope of Entrepreneurship and the Modern Society
There
is no king or general, prophet or philosopher standing at the gate of our
contemporary civilization. Instead we find the towering figures of the
entrepreneur and his spiritual cousin the innovator. They have brought all
continents, races, cities, and villages together into a global network of trade
and communications. They have taught recent generations a more thorough use of
the resources on this earth. Together they have reshaped life on this planet
and made it possible for millions of ordinary men and women to live as
affluently as old-time lords. After a reluctant beginning they have accepted
the role as provider to the welfare state. There is no doubt that the
entrepreneurial stance is the moral force, not only behind successful
corporations, but behind the general expansion of the civilization of the West.
Both liberal and Marxist economists tend to ignore the entrepreneur and
innovator and speak of capital and labor as “the only two major elements in
production”. Further, it is argued that an entrepreneur is “an
indispensable factor of production independent of, and between labor and
capital, with its own profile and structure”.
The
spirit of entrepreneurship brings labor and capital together in the productive
enterprise. It is a catalyst without which both labor and capital would be
idle. Throughout history men of idle curiosity have been intrigued by
discoveries. But men with the entrepreneurial spirit are intrigued by a very
special kind of discovery: a discovery with widespread appeal and usefulness,
a marketable innovation. As such it does
not have to be novel in an absolute or chronological sense, but new to its
customers. At the foundation of the great achievements of our civilization lies
a partnership of innovators and entrepreneurs to promote marketable innovations
by attracting capital, organizing labor into production, and selling the
products.
The
spirit of entrepreneurship is easy to recognize when we see it, but it is
difficult to define formally. We might see it as a dynamic integration of four
elements:
(1) The development of marketable
innovations,
(2) The charisma to attract capital for
their exploration,
(3) The leadership to organize labor and
technology for their production, and
(4) The marketing skills to distribute and
sell them.
Each
element may be well known by itself, but their integration is a less process.
Systematized
knowledge about entrepreneurship is incomplete. Harvard University, inspired by
the great Joseph Schumpeter, did create a research program in entrepreneurial
history, and its first monograph appeared in 1931. But research in
entrepreneurship has not spread through the community of social scientists. The
topic has not been amenable to the mathematics of the economists. We lack the
data banks, the specialized professorships, the graduate courses, the
fellowships, the research grants, the journals, the conferences; in short, we
lack the scholarly tools that make possible a massive and continuous research
effort into entrepreneurship. So it is that the most pivotal phenomenon of our
civilization is subject to many guesses and intuitive hypotheses but few
systematized facts and few, if any, established theorems.
A
spirit of entrepreneurship can develop in many contexts. But so far capitalism
has been its most hospitable framework. We do not deny the advances of the
communist countries and the success of socialist leaders in raising the
standard of living and allocating new material wealth according to criteria of
social justice. But it is nevertheless a striking fact of our times that
state-run economies of the Soviet type have failed to develop a spirit of
entrepreneurship and a climate of innovation that can match those of the
capitalist countries.
Given
our state of knowledge it is easier to talk about the entrepreneur than about
entrepreneurship. We can readily grasp the former, when the elements of
entrepreneurship combine in one person who himself is the idea-man, inventor,
or designer and who himself puts up the capital from his own pocket, supervises
production and does the selling. The local production of bygone times of the
necessities of shelter, clothing, and food was often in the hands of
entrepreneurial families who ran small-scale industries for building materials,
textiles, and foodstuffs. However, entrepreneurship in contemporary advanced
societies is of an entirely different order. The elements of entrepreneurship
must now combine in an organization whose various functions may house many
product ideas, hundreds or thousands of employees, numerous technologies, a
sales network that may span many parts of the globe, and capitalization counted
in millions of dollars.
The
public’s many encounters with personal entrepreneurship have contributed to the
common confusion that the capitalist and the entrepreneur are one and the same,
or at best, different sides of the same coin. And many who know better and do
make a distinction between the two consider the difference unimportant. For
example, Karl Marx and his followers maintain that entrepreneurs without
capital of their own are in the grip of capital, being kept men. Such may
indeed have been a dominant pattern in the first or second generation of
capitalism. A realistic look at the relationship in today’s affluent societies
would reveal something entirely different: now entrepreneurs try to engage the
services of capitalists more often than capitalists engage the services of the
entrepreneurs.
Organizational
entrepreneurship on a large scale is a characteristic of today’s advanced
societies. Such entrepreneurship has many advantages over the personal variety
that has dominated in the past and still is growing in many less developed
countries. Organizational entrepreneurship can span generations without the
threats to continuity posed by the whims of inheritance in selecting
successors. It can handle a larger number of marketable innovations at the same
time, making sure that new ones enter the market as old ones become obsolete.
It is not barred from production requiring high initial investments. It can
handle long and complex productions and is not overly dependent on quick sales.
It can afford and encourage the training and specialization of its employees.
The chemical, metallurgical, pharmaceutical, automotive, aerospace and other
heavy modern industries are and must be organizational entrepreneur- ships. The
old-fashioned personal entrepreneurships have declined in number in the
advanced countries, but they are far from extinct. The recent technologies of
the microprocessor and biotechnics will probably be very hospitable to the
small entrepreneur.
A
high tribute is paid by big business to small business. Big business is and
should be deadly afraid of growing stale and bureaucratic. Big business is
anxious to preserve the entrepreneurial morality inherited from the personal
entrepreneurships. Thus successful big business tends to organize itself as
federations of smaller, more personal entrepreneurships.
Entrepreneurial
morality is more positive than negative: it is more concerned with the
obligations of the entrepreneur than with prohibitions. The entrepreneur is to
act, not to abstain. He is to exert himself at all times and make the most of
his opportunities, indeed often to create them. Many will come afterwards and
comment on the entrepreneurial deed: “Oh, I could have done that, too”. But the
point is precisely that they did not do it. The entrepreneur, however, caught
the opportunity and acted upon it with a creative response.
The
entrepreneurial spirit frets at the limitations imposed on human effort and
strives to break through them by some prodigious assertion or cunning
achievement or by some clever application of technology, all done with a keen
sense of timing.
The
entrepreneur enjoys business risks as long as there is a reasonable chance of
gain. He delights in escaping from deadly office routines into the more
exciting marketplace. He enjoys the finished deal as a great glory, but accepts
being outbid in a deal - even if the glory is less.
The
entrepreneur is not a hypocrite: he admits openly that the sweetness of life
requires a certain amount of personal wealth. However, wealth is not usually
sought for itself by an entrepreneur but serves two of his more prominent
needs. The typical entrepreneur has a strong need to achieve. Personal wealth
is one of his ways to keep score on achievement. He has also a strong need for
independence, to be his own master and to control his own destiny. Personal
wealth is a fundamental resource in this striving.
The
entrepreneur is proud of his firm and his family, and in exerting himself for
them he obeys something deep in his nature. He competes fiercely with other
firms and families. But at the same time he honors anyone who can meet a
payroll and close a profitable, useful deal. No competition, however merciless,
need result in an insoluble conflict that ends in the destruction of a fellow
entrepreneur. The entrepreneurial spirit has no room for the total vengeance of
a vendetta. For no defeat of an entrepreneur is definite. He usually comes back
with amazing resilience, in the same field or in another.
The
nobility of the entrepreneurial outlook lies in the prominence it gives to
personal sacrifice for a chosen cause. It is often said that the entrepreneur
is selfish, lives for himself. This is hardly fair. He lives for a cause,
innovations which he wants to promote across communities, nations, and
worldwide marketplaces.
Unlike
the capitalist and the laborer, the typical entrepreneur is exceptionally loyal
to his enterprise. The capitalist will switch his money to a safer and more
profitable company if his investment is threatened. In a publicly held company
he will simply sell his shares without even telling management why he distrusts
the future of the company. The laborer, clerk, salesman, or other employees
without entrepreneurial duties or commitments may also switch jobs to other
companies if wages, benefits, or working conditions seem more attractive there.
The entrepreneur, however, will stick with his firm through adversity. He has
tied his enterprise to his ego and can only abandon it with agony under unusual
and special circumstances.
After
this exposition of entrepreneurial virtue you may ask if there is no vice among
entrepreneurs. The answer, of course, is yes. Entrepreneurial morality has been
criticized - as has communist morality - for ignoring spiritual achievements.
It is too concerned with calculation and too little with contemplation.
Entrepreneurs call many parts of the world underdeveloped, and they are right
in material terms. But the civilizations of the Third World call our parts of
the world underdeveloped in emotional, spiritual, and religious terms.
Entrepreneurial morality has also been criticized - as have other moralities
that stress a heroic attitude toward life - for a failure to set limits and a
built-in lack of balance. It believes in boundless expansion: all trees can and
should grow to reach heaven. It is not coincidence that much criticism of
entrepreneurship today is leveled in terms of limits and balances - the limits
of growth and the ecological balance.
The
dilemma is a familiar one in the context of Western history. Socrates lived in a
heroic age in which the spirit of entrepreneurship flourished and in which
courage in battle and success in warfare were even more honored than commercial
or artistic successes. He grew concerned over the excesses encouraged by the
heroic morality. Plato tells how Socrates, after a dialogue with Phaedrus,
passes a temple of Pan and offers a prayer:
“0h beloved Pan and all the other Gods of
this place,
Grant to me that I be made beautiful in my
soul within,
And that all external possessions be in
harmony with my inner man.
May I consider the wise man rich?
And may I have such wealth as only the
self-restrained man can bear or endure.
Do
we need any more Phaedrus? For me that prayer is enough.”
Plato
carried the criticism of the Athenian heroic-entrepreneurial spirit beyond
prayers for a balanced personality. In Georgias he complains: “They have filled
the city with harbors and dockyards and walls and tributes instead of with
righteousness and temperance”. He ‘denied most achievements of the Golden Age
of his society and set out to plan a society that would prevent a repetition of
such achievements by free, responsible men of heroic, entrepreneurial actions.
Today
many intellectuals deny the values of the Industrial Age and want to place the
entrepreneurs under guardianship. An increasingly limited tolerance of grandeur
marks also our times.
The Climate of Innovation
The
serious slowdown in economic expansion in the 1970s has, of course, many and
complex causes. On balance, there is no lack of capital and certainly no
shortage of manpower. There seems, however, to be a short supply of profitable
investments in the affluent societies. The reason for this may vary from
country to country. But one common reason is the lack of marketable
innovations.
It
is often heard that innovations occur mostly in small firms and rarely in large
ones. In support of this theses statistics are quoted showing that over half of
the patented innovations emanate from small firms. Thus one tends to look for
the climate of innovation in the small shops. This, however, is misleading. For
every large business there are a thousand small enterprises, and most of them
are not very innovative.
The
appearance of marketable innovations within the large business establishments
in an affluent society is not a matter of chance, nor is it dependent on a
flash of genius. It is the result of a much more orderly, more pedestrian
process. A most remarkable achievement of the modern entrepreneur is the
creation of organizations in which the development of innovations is routine.
The main bench marks in the process of developing marketable innovations are
well known:
(1) Long-range planning enables a
corporation to gauge the need for new products and markets and spreads an
awareness of this through the ranks of the corporation.
(2) There is a separate budgeting of time,
money, and man-hours for innovations inside the firm and for the procurement of
marketable ideas from outside.
(3) An established routine provides for
impartial evaluation of innovative concepts and for the setting of priorities
among them according to how well they suit the firm’s marketing and level of
technology as well as their estimated impact on the market.
(4) Test production and trial marketing are
managed by a special organizational unit.
Corporations
adopting these procedures retain their old concern for volume and quality of
production while adding a new concern for novelty and change.
Experience
shows that these two fields of endeavor need to be demarcated. The research and
development budget must be separate from the production budget. The developers
should not be personnel borrowed from production and liable to be recalled to
their old jobs to handle crises there. Management of production should be
separate from management of research and development, for no day-to-day
production manager can be expected to have the time or motivation to develop
innovations that would render obsolete the very process he is managing. Du
Pont’s development of nylon, Bell Telephone’s development of the transistor,
the bubble memory, and the laser, Battelle’s development of the xerographic
process were all done in separate laboratories; in the case of xerography Battelle
in fact was an outside laboratory commissioned to do the work. We can also
derive an important lesson from the fact that management backed these
inventions not because they were technological miracles - the world is full of
technological miracles - but because management believed that these inventions
would have a tremendous impact on the market.
In
innovation-prone corporations top management should ideally act like the
controller in an airport tower and usher in one innovation after another in an
orderly fashion. This is the ideal. Reality is too often a far cry from this
ideal. Corporations tend to grow complacent about innovations in good times
when the established products sell well. When their sales drop and distress
signals are heard there is a sure shortage of both time and money for the
development of new products and markets.
Top
management, of course, should be required to take a special interest in the
development of marketable innovations. Innovations should be a standing item on
the agenda for board meetings. It is counterproductive to reward top management
only on the basis of the results in the next Annual Report. The development and
marketing of innovations requires a longer-range perspective than that afforded
by the accountant’s annual statements.
In
advanced countries, then, marketable innovations do not simply happen: they are
managed. This does not mean that we rule out the individual tinker of the
independent inventor. But judging from patent applications, an increasing share
of inventions nowadays emerges under a corporate umbrella as part of the
research and development effort. Independent inventors are declining in number
in affluent countries, and are not as important as one would expect from the
attention they receive from journalists. In the United States a new profession
of “invention brokers” has recently come into being. They assist independent
inventors and companies that have innovations which they themselves do not want
to exploit.
There
are no general statistics available on the rate of failure in the innovative
process. The diagram below has been used by consultants in Finland and Sweden
to introduce management to the expected ratio between success and failure in
launching new products for the household market.
The
diagram tells the entrepreneur’s version of the little pigs that went to
market. The moral of the story is that one must take a statistical view of
success, and not give up until rejections reach a predetermined rate.
Like
other types of investments, the return on R&D is marred by increasing
uncertainty in times of inflation and currency instability. In the late 1970s,
we can see that government spending on research and development in the OECD
countries is not increasing; in the United States it is actually declining.
Money spent on corporate research remains at a figure that is less than 2 per
cent of sales.
Government-sponsored
inquiries into the worsening climate of innovation are under way in the United
States, Great Britain, Sweden, and other countries. As these studies report, we
are likely to hear in more or less polite paraphrase that government itself is
at fault. By design or accident, governments are strangling the spirit of
innovation in a web of bureaucracy, regulation, and taxation. To get new products
or services into use is nowadays often as much a task for lawyers as for
innovators. We live in the aftermath of the environmentalist and consumerism
movements. And the aftermath has afforded us not only a better environment and
safer products honestly presented. It has also introduced an incredible web of
regulations, some of which are contradictory and some of which are obsolete
products of bygone, unrealistic, and occasionally invalid public concerns. The
political system clearly needs better devices to get regulations off the books,
more systematic efforts to simplify the law, and better routines to get new
legislation into harmony with existing laws.
In
the conflict between innovators and regulators the role of the mass media
cannot be ignored. It seems the media not only focus more on the conceivable
harm an innovation can cause than on its obvious benefits. The media usually
present the encounter between innovator and regulator as fight between the big
guys and small guys, as a class struggle in which the interests of capitalists
are pitched against the interests of the masses. Regardless of the outcome, the
entrepreneurs and innovators usually walk away feeling dishonored in the media.
A more realistic perspective is to see the struggle as one between two vested
interests and two styles of life, the bureaucratic and the entrepreneurial, not
as a class conflict.
However,
the business community cannot put the entire blame for the worsening of the
climate of invention on governments and other external forces. Some of the
problems are home-made.
We
select and promote more readily to captains of industry those who are skilled
in handling manpower, capital, and marketing than those who are skilled in
handling knowledge arid inventions. The number of civil engineers in top
positions in the listed companies of the world is. Steadily declining. Also in
the parliaments of the world the engineer is very rare; there are actually
countries entirely dependent on advanced technology without a single civil
engineer in their parliament. What will become of the greatest technological
civilization known to history when it stops admitting engineers to the decision
process? No country today has engineers in corporate or political office to an
extent that is commensurate with the importance of technology for national
destiny.
We
have also had some obvious difficulties in harboring the innovators in the
corporate structure. The innovator needs periods of isolation from the
day-to-day business process; he must be allowed periods of apparent inactivity;
he needs freedom of thought and the stimuli of unorthodox approaches; he must
be permitted a dual loyalty: to his firm and employer, and to an invisible
college of fellow scientists-inventors- technicians. The innovator needs
encouragement: generous treatment from the payroll office and the tax man.
Innovators thrive where exceptional achievements can bring exceptional rewards.
Venture Capital
The
cost of an innovation increases exponentially as it approaches the market. The
diagram below gives a general idea, of how costs surge downstream from the
spring, the original concept of the innovation.
Most
independent inventors are squeezed out of the picture by the increasingly heavy
costs and the management skills required as an innovation goes through this
process. There are, of course, outstanding exceptions to this: the name of
Edwin H Land of Polaroid comes to mind. But to survive with an innovation that
has such a growing appetite for capital the inventor needs the services of
realistic venture capitalists. In Sweden the government has a program to assist
inventors along the expensive road between prototype and production model. It
is too early to tell whether this measure will keep the small cadre of
independent inventors alive. Additional and larger assistance is needed on the
still more expensive road between production model and marketing.
When
innovations for households and industry are explored under a corporate umbrella
the problem of capital is not normally a serious one. In interviews with
persons responsible for product development in Swedish industry we found that
“lack of capital” ranked twenty-first in importance and frequency among the
problems mentioned. Twenty problem areas were considered worse than that of
shortage of capital.
The
most serious obstacle to product development as revealed in this study is a
lack of protection of the development work from intrusions from production and
administration. The innovators in most corporations are apparently not allowed
to use their time for innovation! The second most serious problem area is a
lack of knowledge of what the market will buy and use. There is a failure to
use contacts and proper research to ascertain the needs of the market. The
innovators need to come closer to the future users of their innovations, to
learn about their problems and about their complaints with existing products
and services.
The Fight Against Obsolesce
A
pressing problem in the advanced countries is obsolesce in basic industries.
Obsolesce is a failure to adapt to changes in the market, failure to adopt the
most effective production technology, and a failure to develop and adopt
innovations for production.
Capital
and management requirements to fight obsolesce in the affluent countries are of
serious scope today, so serious that the banking systems and capital markets in
most countries have government help to cope with it. When a government - or a
group of governments such as the EEC - is faced with the problem of large-scale
obsolesce in a basic industry it can respond in two ways: (1) It can give in to
the crisis and the accompanying political pressures by providing protection and
subsidies, including the biggest subsidy of all, nationalization; or (2) it can
take a longer-range view by providing rewards through a series of incentives
and/or resources, generally on terms which are themselves incentives.
We
have in the recent decade gone a long way on the subsidy route. Several
affluent countries now spend more on subsidies to distressed industries than
they spend on research and development. But few will argue that we now have a
healthier structure, say, in steel or shipbuilding than we had prior to large—scale
subsidization. Of course, a government must be allowed to give temporary aid to
industries in temporary trouble. But lasting subsidies, particularly those to
export industries, are a threat to worldwide economic well—being; they become
prolonged protection of inefficiency and obsolesce.
The
boom in world trade in the 1960s was ushered in to the tune of the Kennedy
round of mutual tariff reductions. The boom of the 1980s could be accompanied
by a Carter round of negotiations on mutual reductions in subsidies. These
talks might also include the special kind of subsidies to manufacturing
provided by the so-called Free Trade Zones in the Third World. For a healthy
development of the world economy and of a world trade with decent prices is
threatened today both by the rich welfare states that rescue jobs in obsolete
export industries by subsidies and by poorer states that serve international
companies with cheap labor without charging the normal costs for pensions,
health benefits, and environmental protection.
How
can the affluent societies work out alternatives to government subsidies to
obsolescent industry? We have set up in recent decades many institutions to
serve the capital needs of the less developed countries. We have the World
Bank, the United Nations Development Program, the Interamerican Development
Bank, the African Development Bank, the Asian Development Bank, and the Central
American Bank for Economic Integration. But in the affluent countries we do not
have an International Bank for Reconstruction.
The
existing banks for developing countries were initially financed by government
contributions, but they are gradually beginning to float bond issues and
attract funds from the private money market. An international bank for
reconstruction of obsolete industry in affluent countries could, from the
beginning, obtain the lion’s share of its capitalization from non-government
sources.
Until
recently the banks designed for the developing world concentrated heavily on
government projects, mainly of an infrastructure character. Recently, however,
there has been more emphasis on getting closer to the people. For example, the
World Bank has shifted priorities to agriculture (small farmers), education,
nutrition, and community development. As a result there is greater emphasis on
creating local instrumentalities to disburse funds to small farmers and small
communities through cooperatives and local banks, especially agricultural
banks. The World Bank has also created a quite active subsidiary organization,
namely the International Finance Association, which has the responsibilities of
encouraging the creation of privately controlled industrial and business banks,
in Latin America called Financerias. The Association has also taken equity
capital in such banks.
Organizational
inventiveness in this effort in the less developed countries is impressive. We
can learn much from it when setting up instrumentalities to deal with
obsolesces in the basic industries of the developed countries.
Take
a leaf from the book of experience in international finance in the less
developed world and add a thorough knowledge of the innovative process and you
can see the contours of a bank for reconstruction of obsolete industries in the
developed world. Such a bank could identify needed innovations that are
transferable between countries, provide capital for the introduction of
innovation and for the modernization of plant and equipment, and provide
capital for the needed investments in selling and marketing. It would be an
institution set up that it would earn a profit, could pay interest on its
bonds, and be financially self- sufficient. Through its services it would
preserve a worldwide market economy, not hamper it as do subsidies to export
industries from national governments.
The Scope of Entrepreneurship
One
of the earliest and best sociological treatises on modernization of a society
is Sir Henry Sumner Maine’s Ancient Law, published in 1861. It traces the main
line of modernization as a trend “from status to contract”. In underdeveloped
societies man’s experience and destiny are predetermined by ascribed statuses -
his birth and other events beyond his control. Tribal Africa, caste-dominated
India, as well as feudal Europe are thus described as status-dominated, i.e.
underdeveloped societies. These ascribed statuses determine nearly all
activities and affiliations, whether religious or secular, including
occupational pursuit, business associates, mate, home, style of life, and power
and influence in the larger community. The modernization of a society,
according to Sir Henry, comes about as an ever increasing number of actions and
life histories become dependent upon freely negotiated contracts rather than on
predetermined statuses. In a developed society the individual himself can
decide and negotiate his entry into a church, an occupation, a trade relation,
a marriage, a neighborhood, a political body, etc. Modernization thus means
lifting restriction imposed by status and opening opportunities for negotiating
contracts.
The
history of the Northern Hemisphere from the time of the French and American
revolutions is very much a history of the movement from status to contract. It
was this movement that opened the gates for an entrepreneurship which no longer
became dependent on royal privilege and permission. When the modern
entrepreneur organizes production and approaches the market he enters into
freely negotiated contracts with employees, suppliers, buyers, and
shareholders. The right to contract is as essential to him as the air he
breathes.
At
present the right to contract is no longer expanding, except, perhaps, for
women. The remnants of the status society in terms of sex roles have been the
last to go. It is interesting to note that at a time when this last area moves from
status to contract, many other areas have moved from old-type contracts to new
forms.
A
most important modification of contract in affluent societies has given
voluntary associations the right to enter into agreements that are binding upon
their members. The individual laborer and the individual employer have to abide
by the contract made between the labor union and a federation of firms. Thus,
some effective right to contract and to control one’s own destiny has been
taken from the individual and become vested in his organizations. Parallel
trends, although less formal and codified, can be ascertained for farm groups,
consumers’ cooperatives, and other voluntary organizations. These groups also
make enforceable contracts on behalf of their members. Sometimes the other
party to the contract is an employer, sometimes it is the state itself, acting
as cosponsor of a welfare program.
An
old-fashioned contract was achieved by shopping around for the best deal and by
competitive bidding. Contracts made by large, powerful organizations acting on
behalf of their members in collective bargaining cannot be of this nature. A
situation in which the winner takes all and the loser gets nothing is
impossible. Rewards reaped from organization contracts tend to be modest gains,
and to be fairly equally distributed among all members, regardless of the merit
and effort of the individual. This has proved discouraging to the innovators
and entrepreneurs, who thrive on the prospect of truly big rewards.
The
impact of organizations equipped with these rights to collective contracts is
considerable. To a very great extent a person’s political influence and
financial circumstances in today’s affluent societies in Europe depend on what
associations he belongs to. This new pattern, however, is not quite the same as
the feudal one when a man’s status as nobleman, farmer, or burgher determined
his entire life. The movement from status to contract has not been reversed.
Although strong forces make for collective and compulsory joining of the large
organizations, the citizen is still free to leave them, something not true of
the feudal estates.
The
main effect of unionization has been felt by the capitalists, not the
entrepreneurs. Unions have tilted the balance of power between capital and
labor in favor of labor. Taking an average year the 1970s in the affluent
societies we find that the ratio of what labor receives from the listed
corporations to what capital gets is about 100 dollars to 4 dollars. And to get
the figure 4 dollars for the capitalists we have to add both dividends and
retained earnings. A major consequence of the welfare state has been to
preserve the individual’s ambitions and motivation at times when adversity
strikes.
Since
the state steps in with a helping hand in crises - whether they are related to
the individual’s work situation, family, or health - he is not easily pushed
into a despair or fatalism. Contrary to conservative ideology, there is much
individual competition and ambition to achieve and get ahead in the welfare
states.
The
change is this: competitors do not have to face the roughest consequences of
their losses. A system has evolved in the advanced welfare states according to
which one can still make both small and big gains, but one can make only small
losses. The Swedish pension reform enacted in the late 1950s is indicative of
the principles of the welfare state: each citizen is guaranteed an annual old
age pension amounting to some 60 per cent of his average earnings during the
ten best paid years of his employment. In the same way health benefits are tied
to earnings. Motivation is high, then, to improve earnings. By retiring from
the labor market a Swede may lose some income, to be sure, but never more than
40 per cent of what he earned in his best years. A floor of another kind is
represented by the large number of positions, both in government and industry,
that have tenure contracts. In these positions one’s job is secure but
promotion is dependent upon performance. Both these examples indicate a curious
mixture of status and contract: a man’s status is insured as in a feudal
society, but he can compete for better contracts as in the developed society.
This kind of “insured contract” is very characteristic of the affluent welfare
state.
A
society based on insured contracts is not of itself hostile to entrepreneurship
and its ambitions and rewards. The welfare politicians who set up the insured
contracts do a job that is important and necessary and for which the
entrepreneurs usually lack both skill and inclination. The welfare politicians
redistribute the enormous wealth generated by enterprise so that life in all
segments and corners of society becomes more bearable. The wealth generated by
entrepreneurship finances the modern welfare state. The first generations of
entrepreneurs in the industrial age tried to handle the redistribution function
themselves. They contributed generously to churches and welfare causes -
agencies often set up by or run by their wives and daughters. This system of
private charity did a great deal of good but proved grossly inadequate
for
the needs of a society in which more and more people left self- sufficient
farms and became urban dwellers and workers in an entrepreneurial economy. Thus
the welfare politicians entered the scene. It is worth stressing that
entrepreneurship and social welfare in the affluent societies represent a
sensible division of labor. The two are quite compatible, a fact that has been
confirmed over and over again since the welfare concept was first enacted in
Bismarck's Germany. The conflicts that do occur between entrepreneurs and
welfare politicians come about when the latter use a flat rate of dole
unrelated to performance in the labor market which kills motivation to work, instead
of insured contracts. And when politicians impose a level of taxation that
threatens to kill the goose that lays the golden egg, the most stupid thing
politicians in the affluent society can do is to strangle the entrepreneurs to
slow death by taxes.
In
sum, the scope of entrepreneurship has been broadened by the trend from status
to contract, and has not been seriously affected either by the modified
contracts involved in unionization or by welfare politics. The threats come
rather from two other sources: the decline in profit- based activities and the
increased use of majority rule in place of entrepreneurial judgment.
If
we, like the proverbial man from Mars, look at the big organizational
structures on this earth we quickly discover that they fall into two classes:
(1) Those that get their resources from
taxation,
(2) Those that get their resources from
profits.
This
is a great divide in the man-made landscape. The future life of our planet
depends very much on the balance between these two types of organizations.
Roughly, they correspond to government and business. (But the correspondence is
not entirely precise in all countries since there are government agencies that
live on fees for the goods and services they provide and there are corporations
with such a monopoly status that their prices are a kind of taxes.)
Opinion
polls in the 1970s tell a story of declining confidence in government. In the
United States this has been interpreted as a reflection of Vietnam and
Watergate. But the same declining confidence in government is found in the
other affluent countries of North America and Europe. (This trend, however, is
not matched by an increased confidence in business.) There is reason to believe
that the expansion of tax-based activities is near its peak in the Western
countries. An extrapolation of current trends would make British, Dutch and
Swedish taxes 100 per cent of GNP within some 30 or 40 years.
If
we look at how decisions are made and justified in the big structures of today
we find another great divide:
(1) Decisions resulting from negotiations
and justified by contracts,
(2) Decisions resulting from voting and
justified by majority rule.
In
the first instance a single person or group may enter a contract with many
others and the contract is valid in spite of the fact that there are few on one
side and many on the other. When majority rule applies, the will of the many
decides over the few.
An
increasing number of decisions in the affluent countries are nowadays based on
the majority principle, and the contractual principle is loosing ground, except
perhaps for insured contracts. For example, in large organizations the
employees are many and the employers few. There used to be and still is a
straightforward hiring contract between employer and employee. However, we find
increasing demands that varieties of majority rule and codetermination shall
apply also in situations previously covered by contracts. In the name of
majority rule, the labor unions act as if they held the places of work as
fiefs. Trends in legislation in several countries regarding codetermination and
union rights often support such claims.
Majority
rule is a great achievement when applied to tax-based activities. No taxation
without representation in the legislature, and no rule against the legislative
majority. Such is the essence of political democracy and it should be honored
and defended.
But
should majority rule also apply in profit-based organizations? Here we must
pause, and thoughtful men will reflect that there are obvious limits. The
entrepreneurs and innovators thrive in a contractual society, and feel ill at
ease if decisions about their life and work are made by a vote. Business
decisions by majority rule also tend to be slow, cautious, and defensive, a far
cry from the assertive risk—taking of the entrepreneurial spirit. To replace
entrepreneurial judgments with majority decisions may drain business of dynamic
qualities. For wherever majority rule applies the entrepreneurs tend to became
outvoted by majorities of non-entrepreneurs. The entrepreneurial spirit, then,
cannot perform its catalyzing role between labor and capital. To adopt the
socialist solution and make labor the owner of capital is no remedy in this
dilemma. For labor in the role of wage-earner normally gets the upper hand over
labor in the role of guardian of capital.
The
A-sector is the traditional scope of entrepreneurship, and the D-sector is the
traditional political democracy. The B- and C-sectors represent other elements.
In C we find anything from public authorities (i e the hybrids of government
and business that operate toll roads and bridges and also many ports and
airports in the United States) and subsidized business of all kinds, to state
capitalism. In B we find Maoist enterprises after the Cultural Revolution,
Yugoslavian factories and other varieties of guild socialism as well as some
versions of codetermined enterprises. It remains to be seen whether the spirit
and morality of entrepreneurship can survive when fused with such encroaching
elements from other sectors. The A-sector, the entrepreneurial territory par
preference, is shrinking while all other sectors expand. The story seems to be
the same in all affluent countries.
The
Industrial Civilization started in England around 1770 and is only 200 years
old. It has developed with unrivalled rapidity. The results are so impressive
that one is apt to neglect any indication that the structure of Industrial
Civilization is not built on unshakable foundations.
Few
people realize how narrow the ranges are in the balance of forces - private,
public, political, technological, educational, ideological - that have made the
Industrial Civilization grow and prosper. While it lasts the balance of forces
is rich in rewards. If or when it breaks down it will bring down the
comfortable and exiting civilized life as we have learned to live it in the
affluent countries. It is to the undying credit of the men who shaped the main
parts of 19th and 20th centuries that they maintained the precarious balance of
forces: allowing dynamic entrepreneurship to achieve growth and allowing
humanitarian compassion to distribute the resulting welfare.
However,
by not paying attention to the delicate balance of forces that favor
entrepreneurship and innovation some of the affluent societies of today have
probably come dangerously close to stagnation and actually face the threat of
decline. For they refuse to recognize that the spirit of entrepreneurship and
the climate of innovation are rare, if sturdy, plants in the human garden. Such
plants do not sprout spontaneously but must be consciously cultivated in order
to grow and survive. Political, educational, religious, and other institutions
can promote or smother entrepreneurship. Politicians and educators of today -
perhaps because of the success of the entrepreneurs and innovators - have
tended to take them for granted. In affluent societies the entrepreneurs
themselves now complain that the spirit of entrepreneurship and the climate of
innovation are threatened by the spreading weeds of government regulations, the
draining of resources by taxation, and the growing application outside the
political realm of majority rule in place of entrepreneurial judgment. The
critics of business argue that this is the usual griping of businessmen, and
they are right in the sense that earlier generations of entrepreneurs expressed
similar worries. But can we trust these critics to distinguish a gripe from a
cry of a drowning man?
So
far entrepreneurship in the affluent societies has weathered the storms and
adjusted well to new conditions. But there are limits also to the amazing
resilience of the entrepreneurs. The conditions of entrepreneurship should be
studied more thoroughly and articulated wide and clear.
No comments:
Post a Comment