Profits and Entrepreneurship

Presentation © 2006 by Barry Brownstein

Prologue

“Without the light of new knowledge and the roots of ownership (an economy) it withers.” – George Gilder

“The belief that wealth consists not in ideas, attitudes, moral codes and mental disciplines, but in definable and static things that can be seized and redistributed, is the materialistic superstition... It betrays every person who seeks to redistribute wealth by coercion…The means of production of entrepreneurs are…minds and hearts.”- Gilder

Entrepreneurial Functions Makes use of widely dispersed knowledge Follows new paths, sometimes makes

mistakes and helps to discover ‘error’ Helps allocate resources from lower to

higher valued uses Helps to uncover gaps in the mutual

coordination of decisions thus ensuring a greater fulfillment of expectations (promotes the spontaneous order)

Conceives of new solutions, new products, new ideas, and new technologies

Entrepreneurship in Action

“There has been more material progress in the United States in the 20th century than there was in the entire world in all the previous centuries combined.”

Strong association between life expectancy and human freedom.

No amount of wealth could have purchased a 100 years ago what we take for granted today.

How Are Profits Earned?

Economic profits are the return earned above a "normal" rate of return. They are earned:

Either by the use of coercive force or theft or by:

Entrepreneurial insight- "the only source from which an entrepreneur's profits stem is his ability to anticipate better than other people the future demand of the consumers."

Profits: Entrepreneurship or Coercion?

Archer Daniels Midland (Dwayne Andreas) billions of subsidies for corn sweeteners, sugar and

ethanol every $1 of profit in ethanol costs taxpayers $30

Chrysler Corporation (Lee Iaccoca) profited from quotas on Japanese cars

Standard Oil (John D. Rockefeller) “Let the good work go on. We must remember we are

refining oil for the poor man and he must have it cheap and good.”

cheap energy made after dark activities and heating possible

Even before he died he gave away $550 million dollars

Profits (Continued) Entrepreneurs known- Michael Milken, Bill Gates And unknown-Tim Janis- In the early '90s, he

moved into his first studio, a barn in York, Maine, with no plumbing, heat, or electricity. For a month, he lived in his car, working as a dishwasher to save up enough money to hire musicians to perform his music.

Soichiro Honda- “success can only be achieved by repeated failure and introspection.”

Masaru Ibuka and Akio Morita- after World War II built their first tape player from paper tape- this effort became the chief asset of Sony- its knowledge base.

What Firm Are They Talking About? “It operates 16,000 stores, earns revenues

which dwarf all competition, promises no frills & low prices

“This behemoth sells inferior goods, pays low wages, busts unions, unfairly leverages suppliers, and puts local merchants out of business.”

“Huge community pressures on local and state politicians, a national effort to "tax the chains out of business," acts of Congress, and "an avalanche of court decisions."

The Ever Changing Market

They are talking about A&P in the 1930s who was subsequently dethroned by more efficient rivals

Wal-Mart dethroned K-Mart and Sears.

Microsoft and Apple dethroned IBM Will Google and other unknown

companies dethrone Microsoft?

Is Size Overrated? “The elephant's main problem is that he is too big.

Just to absorb all the oxygen he requires, he needs an acre of lung surface. He has to roam around 16 hours each and every day to find hundreds of pounds of grass and foliage to satisfy his hundreds of feet of intestines and complex digestive organs.” -Ringer

“Worse, because of his enormous size, he can't even jump over a seven-foot trench. He's been known to be freaked out by dogs, mosquitoes, and even ants. And he is unusually prone to such illnesses as colds, pneumonia, mumps, and diabetes.”

Wal-Mart “Wal-Mart has given residents a new

perspective on their city. Wal-Mart "makes everyone feel our living standards are rising,“ resident of Nanchang, China

In the U.S. from 1985-2004 Wal-Mart saved consumers $263 billion.

The money saved at Wal-Mart is spent on other items or saved, creating countless “unseen” jobs.

Profits (Continued)

“Profits is an index of the altruism of the product- a measure to the extent to which an investment reflects an accurate understanding of the needs of others and a suppression of the immediate needs and desires of the producer.”- George Gilder

Profits

"They are never normal. They appear only when there is a maladjustment, a divergence between actual production and production as it should be in order to utilize the available material and mental resources for the best possible satisfaction of the wishes of the public." –Von Mises

What About "High" Profits?

“The greater the profits the greater the divergence between where a resourcewas being used and where it should havebeen used in order to satisfy the most urgent needs of the consuming public.”- Von Mises

Higher Valued Uses

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Lower Valued Uses

Entrepreneurs move resources into higher valued uses. There is no cap to this transformative activity and it is thus inherently win-win.

Entrepreneurship is Inherently Win-Win

Not only does one entrepreneurs’ insights not block another there is a synergistic effect

This synergy exists because a major source of entrepreneurial opportunity and insight is other entrepreneurship

For example- the computer led to opportunities in software; the internet leads to an ever increasing list of opportunities.

Karl Popper on Knowledge

There are no ultimate sources of knowledge uncertainty clings to all assertions

Thus the questions of which are the ‘best’ source of knowledge should be replaced with ‘how can we hope to detect and eliminate error.

Growth of knowledge is unpredictable Every solution of a problem creates new

unsolved problems our knowledge is finite, our ignorance is

infinite

What Should A Firm’s Policy Be Toward Discovery?

“In the absence of a known way to solve the unknown, it seems that the best alternative is to allow all the unknowns to be explored.”

“To loosen the reins, to allow a thousand flowers to bloom…is the best way to sustain vigor in perilous, gyrating times”.- Peters

“If you prune long- if you are tolerant…you may not have this year’s largest roses, but you have increased the chances that you’ll have roses every year.”- Arie De Geus

Principles of “Organizing For Forever”- McMaster

Social Connection- “if we want to be aware and sensitive to our environment, we must be aware and sensitive to our people.”

Resource integrity- unfaltering integrity in financial dealings, honoring promises, low debt.

Enabling the Periphery-”those who see changes coming see different signals in different ways and have different interpretations of them.”

“When a corporation loses contact, it can manifest in different ways. One is to build a protective shell around the corporation, an executive or the top of the corporation.”

The Entrepreneurial Element In Decisions

“For the truth is that the calculative aspect is far from being the most obvious and most important element in decisions. When a wrong decision has been made, the error is unlikely to have been a mistake in calculation. It is far more likely to have resulted from an erroneous assessment of the situation- in being overoptimistic about the availability of means or about the outcomes to be expected of given actions; in pessimistically underestimating the means at one's disposal or the results to be expected from specific courses of action.”- Kirzner

“Choice and Reason are different things in nature and function, reason serves the chosen purposes, not performs the selection of them.”

“A man can be supposed to act always in rational response to his 'circumstances': but those 'circumstances' can and must, be in part the creation of his own mind.”

The Limits Of Rationality

Entrepreneurship, Innovation and Knowledge

“(We need to ) understand how entrepreneurial individual actions, and the systematic market forces set in motion by freedom for entrepreneurial discovery and innovation, harness the human imagination to achieve no less a result that the liberation of mankind from the chaos of complete mutual ignorance.” - Kirzner