Nothing has had more 40-year-old men moving back in with their parents than entrepreneurship.
Well, I suppose there’s divorce. Anyway, you get my point –
Entrepreneurship is quite uncertain.
Why would anyone in their right mind take the risk of starting a business?
I’ve always had my convictions, but you didn’t come here for convictions. So I read the work of Adam smith. I also studied capitalism- what it gets right, and what it could do better.
It turns out, that business is unbelievably important for the world.
It benefits you, me, and just about everybody else alive.
This article will tell you why.
Why you need to understand the importance of business
“Billionaires are evil”
“Money doesn’t make you happy”
“Rich people are greedy”
Many people see the world in this way.
There’s so much poverty out there, and yet a few individuals seem to have amassed all the wealth.
It can’t be fair, can it?
The richest 25 people own more than the poorest 3 billion, after all.
With data like that, it’s normal for good people to object morally to the idea of becoming rich.
The problem is that when you think in this way, you limit yourself.
You live in a capitalist society, and you object to the idea of building capital.
You’re like a fish that’s water-intolerant.
And it’s not like you don’t have a point. Every system has inherent flaws, and ours is no different.
The rich get richer, the poor get poorer.
Wars have been fought over trade routes and commodities, and it’s never the wealthy business owners fighting on the front lines.
But just because capitalism is not completely fair, does not mean that it isn’t the fairest.
In reality, capitalism is the most effective system for the distribution of wealth that society has ever come up with.
We’re going to look at the fundamental economic arguments for why capitalism works so much better than anything else.
Because when you stop seeing the system as evil, you can finally start to play the game that the winners of this world have been playing for centuries.
Business is defined by capitalism
Adam Smith is known as the father of economics. He wrote in depth about how free market capitalism- competitive business with limited intervention from the government- can cause a nation to become wealthy. Here are his main arguments, summarised.
Capitalism is the ultimate incentive system
“It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own self-interest”Adam Smith, The Wealth Of Nations
Smith writes about how ultimately, man will act in his own self-interest. He wants to put food on the table, he wants to put a roof over the head of his family, and he wants various other ends like status and a positive legacy.
Why work hard and be a productive member of society?
In socialism, where businesses are publicly owned, you cannot build disproportionate wealth by being disproportionately productive. You would be encouraged to do so for the “good of everyone”, even coerced to do so, but there would be no personal financial incentive.
In capitalism, you work hard for your own good. To build your wealth, gain status, and have the freedom to choose how you spend your time. This plays perfectly into the self-interested nature of man.
Business benefits society because of “the invisible hand”
“The invisible hand” is the mechanism that makes competitive businesses so efficient and innovative.
Say I own a car wash. I charge 20 dollars for a basic wash, and I’m very profitable. In a competitive free market, sooner or later another car wash will open up in my area. We will have to compete with each other for market share.
They will either have to compete with me on price, charging less than 20 dollars, or offer a service above and beyond mine to try to get customers.
They reduce price, I reduce price.
They offer a free polish, I offer 3 washes for 50 dollars.
They invest in advertising, I invest in better equipment for a faster service.
Let’s say a third car wash opens up in our area. The competition becomes so strong, that we struggle to make any profits at all. In this situation, sooner or later one of the car wash businesses will close. That business owner will either try selling a different product/service, or they will go and work for a more productive company.
In theory, because of this free competition between businesses:
Just the right amount of each business exists
Prices are low
Product quality is high
Innovation is constant
This is the power of “the invisible hand”
Nasa vs space X
If you want to see just how efficient competitive companies can be, just look at the comparison between Nasa and Space X.
Nasa is a government-owned, taxpayer-funded space company. As such, it does not face the competitive forces associated with private enterprise.
As with any government agency, Engineers at NASA must answer to many masters with many agendas. NASA is run by Bill Nelson, a career politician, and big decisions must be made with the consent of the US Senate.
The average Nasa mission costs 90% more than expected.
Space X is a for-profit company. It competes for government contracts with other firms like Avibras, Astra, and Boeing.
Elon musk has 78.3% of the voting control, and as such can make decisions independently. His background is in building technology companies.
Being the largest shareholder, Musk’s own finances change as a result of the success or failure of his management.
The average space X mission costs just 1.1% more than expected.
Business benefits society because it allows for specialization
Businesses are built on commerce. Buying and selling. In a world of free commerce, everybody benefits because everybody can focus on doing specific things really well.
Without business, you would have to create everything that you need in your life directly. If everyone had to spend time making their clothes and heating their houses, no one would have time for anything beyond survival.
Because we have commerce, we can build a society of specialists.
You can be incredible at operating on children’s brains, and completely useless at everything else. Look after our kids’ brains, and we’ll give you money that we earned mowing your lawn and writing your software.
You don’t need to do everything.
You just need to do something.
Everyone in society benefits from this deal.
Countries work in the same way. Germany excels at producing cars and machinery, and America excels at producing refined petroleum. So Germany imports petroleum from America and America imports cars from Germany. Both countries focus on doing what they do best.
Business creates jobs
Thanks captain obvious!
I know I know. A basic point, but also one that can’t be overlooked.
If everybody that can work has a well-paying job, in theory:
Less money needs to be spent on things like welfare.
Everybody has plenty of disposable income.
Disposable income gets spent on goods and services, stimulating the economy.
Because of this, less money needs to be spent/printed by the government.
The deficit is decreased, inflation is reduced, and the economy is thriving.
It’s like the start of an upward spiral.
When there aren’t enough jobs then, you only need to reverse the effects from above:
The government needs to spend on welfare/ directly provide jobs.
This is funded either by taxing people with jobs more or by printing more money.
In any case- Disposable income is decreased. People have less money to spend. The economy suffers. This, in turn, could lead to even fewer jobs in the future.
An ugly-looking downward spiral.
When unemployment numbers get high, it’s all over the news. This is a big part of the reason why. Jobs are absolutely fundamental to a functional economy.
Technology advances through competitive business
Here are a few of the most notable technological breakthroughs in the last hundred years.
Not only was technology advanced through these innovations, but vast fortunes were built.
In a world of private enterprise, individuals and companies are incentivized to innovate and advance technology.
Does business benefit everyone?
You only have to compare any socialist system to our capitalism to realize- Although it has its flaws, competitive private enterprise leaves almost everyone far better off.
Of course, successful entrepreneurs benefit because they are able to generate disproportionate wealth.
That’s a given.
But in order for a business to succeed, it typically has to solve some problem or fill some need that people have. Consumers benefit, almost by definition.
Also, a company typically isn’t just one guy. Jobs are created by enterprise. Everybody wins if there are more jobs in an economy. We’ve talked about this.
The government wins too.
Businesses generate taxes. Through taxes on profits, Through taxes on the income of employees, and through VAT paid when employees spend their money on certain products. The government benefits plenty from business success.
You can see that across the board, capitalism does pretty well. It’s worth mentioning, that not everybody benefits from a free market.
A few people who don’t benefit, from a system like ours:
- People who don’t work. Businesses pay employees based on their value and people who don’t provide value, don’t get paid. If someone is lazy, it’s one thing. If someone has a low IQ or a mental illness, an unregulated capitalist economy would be unforgiving.
- Artists, or other creatives whose value to society is undeniable but difficult to measure. There are creative geniuses out there, who have to work some basic job in order to pay the bills. You could argue that a better system could value these people in a different way.
- Entrepreneurs who fail to start successful companies. If you are going to try and start a company and get disproportionately wealthy, you face the risk of failure and losing money. There are no guarantees in business!
Entrepreneurship is problem-solving
Although there are business owners out there with absolutely stupid money, it’s not like they stole all that money.
Typically they saw some problem in society, and they took it on themselves to provide a solution.
Jeff Bezos is the most obvious example, mainly because of how insanely rich the man is.
People will complain that he has too much power, or that it’s immoral for 1 guy to have that amount of wealth.
Do any of those people not use Amazon?
You don’t have some god-given right to buy any product on the internet and have it arrive at your house the next day. Someone built that. Someone found a way to use their intelligence, to make billions of people’s lives measurably better.
He risked his own time, reputation, and money to bring his idea to fruition.
He gave up 90% of his company in order to raise capital- Thousands of investors have built wealth off of the success of his idea.
People pay money to receive value. Usually, when someone has disproportionate wealth, it’s because they figured out a way to bring an astonishing amount of value to the world.
They took the risk of trying to turn their vision into reality, and it worked.
When you look at it that way, guys like Jeff don’t seem so evil after all!
The Problems with business and capitalism
When you start to learn about all of the benefits of business, you start to wonder why governments attempt to get involved at all. Wouldnt we all be better off if they just let businesses compete in the free market?
Well no. In reality. There are plenty of situations where unregulated capitalism doesn’t serve citizens. Governments can and do intervene. Here are a few examples.
The monopoly problem
Competitive business can only benefit society, so long as businesses genuinely compete. Sometimes, one firm can grow so large that it effectively controls the whole market. When this happens, they can effectively do whatever they want with few repercussions.
Say there are two dominant brewers in a certain area. They compete with each other on price and beer quality. Nice. The threat of each company prevents the other from ripping off consumers.
Now let’s say these two companies merge. Or they split the area into 2, and agree to only sell beer within their area. There is now effectively only 1 brewery, that sells all of the beer to everyone.
In this situation, if they wanted to raise their prices, there would be no alternative for people to choose. Consumers would have no option but to pay the higher price.
This example illustrates why it can be bad for economies to have excessively dominant businesses. Governments tend to intervene, for this reason, to prevent any one company from gaining too much power.
In 1907, American tobacco was accused of having monopoly power. It was ordered to be dissolved initially, and then eventually split into 3 companies after an appeal to the US supreme court.
Unregulated capitalism doesn’t prioritize human rights
The fundamental assumption of capitalism is that firms are profit-maximizing. Left to their own devices, business owners might exploit workers and deny them a reasonable quality of life.
This is exactly what happened during the industrial revolution. In the name of profit, children were employed in factories and worked like dogs. Working conditions were dark and dingy and purely functional. Employees often worked 6 days per week, 15 hours per day.
In the 1800s, business owners built vast sums of wealth on the backs of an impoverished struggling working class. It became clear that the government would have to intervene and oversee how workers were treated in the name of profits.
The minimum wage laws are an example of one of these measures. Also, there are laws that entitle you to breaks, and inspectors checking working conditions are reasonable for employees.
Fortunes are made off of unhealthy food, porn, and drugs
If people spent money on those things that are genuinely good for them, then society would look very different.
As it stands though, in addition to wanting food and education and time with their family, people also want porn and heroin and a burger for 99 cents.
As long as people are ready to spend money on these things, these industries will continue to thrive.
It’s sadly not the case that all successful businesses appeal to people’s desire for health and freedom and fulfillment.
Plenty of companies appeal to the least noble parts of the human character.
In practice, there are a number of ways the government police these industries. In the case of class drugs, fines and prison sentences are handed out to try to keep people safe.
Other more moderate government measures include a tax on sugar-sweetened soda or a minimum age requirement for high caffeine drinks.
Everybody can build wealth
For almost all of human society, not just anybody could put themselves in a position to build wealth.
In Ancient Greece, despite a thriving economy, only the upper classes (known as the citizens) could really benefit. The metrics (the foreign-born middle class) and the commoners (slaves who had earned their freedom) couldn’t hold titles to land or serve in politics, although they still had to pay taxes and serve in the military.
During the industrial revolution, owners of industrial capital built insane amounts of wealth. But this was not an option for many people. There was no modern banking system or accessible stock market. Building a real company was a possibility only for a select few.
In both of these examples, you better not be a woman or a foreigner if you want to build a business. You’d really have no shot. You might even be enslaved!
Compare these circumstances to the modern first world.
Education is almost free and available to everyone.
Anyone with any money whatsoever can buy shares in any public company.
Almost no one struggles to get a job based on their race or gender.
Modern employment laws call a 50-hour week a full week, giving us all time to pursue other things.
There are really no barriers to international trade today. I can sell something on this blog, to anyone anywhere in the world.
That’s right! Blogging! In our society, almost anyone can build a business of their own. You don’t need to know the right people or be born in the right part of town.
I’m struggling not to go on and on and on. Sh-t is just so lucrative for you and me.
Even the worst jobs, where I’m from, pay £10 per hour. Not because I’m upper class, but because everyone in the country can make that by taking any job. I write this blog on the weekends, hoping one day it will be a huge business, and it basically cost me no money to start.
We’ve really never had it so good.
Businesses make an economy successful, not governments
This is really the overarching point of guys like Adam Smith. Governments are certainly important, but they have their limits. Their role is to help competitive business to thrive in an economy, rather than attempt to overly augment state power as the British did under Queen Elizabeth.
Because the government, if you think about it, cannot invent the personal computer. It cannot develop the iPhone. It didn’t make Facebook or Amazon or have the vision to put all the books on the internet. Those brilliant risk-oriented entrepreneurs, whose ideas often fail and occasionally change the whole world, never work for the government.
Barack Obama said something in one of his speeches, that I think works better in a different context.
He was talking, based on the context, about how he planned on implementing different politics from previous presidents. I think the quote speaks more accurately to the limitations of government itself.
A government that puts laws in place, to encourage entrepreneurship and competitive business- will see a change in an economy far more impactful than one which tries to run businesses and remove incentives from citizens.
Business is, en masse, an unbelievably powerful force for good in our world.
It’s not perfect, and we need to keep our eyes open. But it’s pretty amazing.
And if you are reading this article, then you live in the greatest most meritocratic society humanity has ever produced.
You don’t need to know anyone, you don’t need to be born with money, none of that stuff.
If you can figure out a way to fill some need or solve some problem in society, you can succeed in business and so can the rest of us.
Don’t waste being part of such a rare moment in time!