Saturday, June 01, 2013

How Does Prosperity Happen?

Your ‘progressive’ politician – mayor, congressman, senator, governor, Liberator,  Generalisimo, Beloved Leader – would have you believe that whatever wealth you have, you owe to Him, his programs and policies (with a cut for his allies in the media and academia). Through increasingly expansive and expensive social programs – welfare, public pensions, union privileges, labor regulation, health care, protective tarrifs, bailouts for ‘too-big-to-fail’ institutions, subsidies, giveaways, pork, earmarks, ‘cash for clunkers’ etc. – he strives to transform that vague belief into a reality, to lock in your dependency, your vote and your submission to His authority.  But as the examples of Greece, Spain, France, Venezuela, California and other basket-case nations around the world demonstrate, all the privileges, pensions, bread and circuses doled out by Santa Claus politicians do not sustain themselves; they have to be supported by other people who still produce stuff. Suppress the productive sector of an economy and the house of cards crashes to the ground.

Politicians don’t create wealth; entrepreneurs do.

In the real world in which we live, the only constants are change and uncertainty. There are floods, wildfires, tornadoes, earthquakes, hurricanes, AIDS, volcanoes, swine flu and a million other unpredictable disasters. Even in the absence of natural disasters, economic activity such as farming or manufacturing products for sale frequently require long time cycles from initial groundbreaking until harvest and/or final sale to consumers. These extended time spans would leave people starving if they didn’t have some food and other resources saved up or provided to them in the interim. For this reason, it would be extremely beneficial to most of us if some people were able and willing to assume for themselves a greater share of the existing risk, to store up food, shelter, Miller Lite and other goods, and in so doing provide for the sustenance and reduce the level of uncertainty for others.
Fortunately, such people do exist. They’re called entrepreneurs. They’re called investors. They’re called businessmen/businesswomen, speculators, and insurance companies; in a word, the rich.
In other words, the class (if class is the right word) of people most vilified by the political Left as evil, greedy exploiters, are in fact the most indispensable material benefactors of their fellow human beings.
Too often we discuss entrepreneurs, investors, speculators or insurance companies in emotional terms. To some, these people are heroes to be put on a pedestal. To others, they are like disease-carrying vermin; parasites that reap obscene profits, destroy the environment and crush the rest of us with their monopoly power. But emotions aside, in the science of economics there is a critically important objective role for a class of people who assume a greater share of risk in exchange for a correspondingly higher share of net gains – profits – when their forecasts, projects and decisions turn out correct, and a (negative) share that corresponds with the greater part of the losses when they turn out wrong. Unsuccessful entrepreneurs become the employees of successful ones. Successful entrepreneurs bid up the wages of employees with each round of capital accumulation and investment. Those higher wages afford more opportunities for employees to try their own hand at entrepreneurship and investment.
Employees do not directly enjoy the profits of the entrepreneur or investor, but neither do we directly risk the losses. The money that employees get paid does not come from the future profits that their work in the present makes possible (because by definition those future profits haven’t been cashed in yet), but rather with the savings from the prior round of the investment cycle. The entrepreneur has to wait months, years, or even decades for profits (or losses) that are uncertain, while the employee receives his paycheck every week or month, virtually guaranteed. Put another way, the employee’s risk of not being paid for giving his labor to the entrepreneur is measured in days or weeks, while the entrepreneur’s risk of not seeing a return on investment is measured in months or years.
Entrepreneurs may be big headline-grabbers like the founders of Google, Facebook, Apple, Microsoft and Standard Oil. But the vast majority are small, family-owned businesses; dry cleaners, local niche booksellers, auto repair shops, hardware stores, franchise restaurants. These are the people who make the economy work, provide vital products and services, and account for the lion’s share of job growth.
We are all entrepreneurs to one degree or another. Every time we make a commitment to a certain course of action instead of another without a guarantee, betting on the outcome, we are acting as risk-taking entrepreneurs.  Students act as entrepreneurs when they choose a major in college, betting on the future prospects of a career in a certain field to which they are personally suited.
To quote Rich Karlgaard of Forbes Magazine: “Entrepreneurs are not just a cute little sub sector of the American economy. They are the whole game