Monday, 25 January 2016

The beauty of entrepreneurship

I thought it might be good to offer something a little bit up-beat for a change.

I’ve been contemplating the so called “labour theory of value.” That is, the idea that the value of an individual’s work depends only on the amount (and, in some interpretations, also the quality) of the labour put into it.

Now I’m no economist, but even I can see that the labour theory of value is a crock. The argument I use is to adapt the well known proverb, “Beauty is in the eye of the beholder.” In my version, this becomes “Value is in the mind of the buyer.” That is to say, what matters isn’t the amount or even the quality of labour the seller has put into the product, but the value to himself which the potential buyer perceives in it. The greater this value, the more the buyer will be willing to pay.

The labour theory of value is, nevertheless, a very popular idea. Many, many people seem to resonate to phrases like, “A fair day’s pay for a fair day’s work.” Crock though it may be, the idea isn’t going away any time soon. How can this be, I thought?

Park that for a moment. Another thread I’ve been toying with is the idea commonly called “capitalism.” Now, I define capitalism as “the condition in which no-one is prevented from justly acquiring or justly using wealth.” And I see it as an unashamedly good thing. Some libertarians, however, particularly west of the pond, see capitalism as something very different and negative. For example, I ran across the following quote from Kevin Carson: “[i]t is state intervention that distinguishes capitalism from the free market.” So when Kevin and others like him use the word capitalism, they mean what I’d call crony capitalism, or – to use a word popularized by John Stossel – “crapitalism.”

This led me to the thought, what actually does a capitalist do? (An honest one, I mean, not a crony). Well, he pays other people to labour to make stuff, and puts it together into a product, which he then sells. And he pockets the difference in value.

At which point, I said to myself: Hey, there’s another word for what this guy does. One not loaded with all the bad baggage that goes with “capitalist.” That word is “entrepreneur.” Literally, the word means “between taker.” And that’s exactly what he does. He sits between the workers and the buyers of their products. He takes responsibility for the quality and fitness for purpose of the products. And he takes the profits when they accrue.

That sounds like a pretty good deal for him, doesn’t it? So, what does our entrepreneur actually do in return for his profits? What does he have to bring to the party?

Then the thought struck me, that what the entrepreneur actually does is take on a large element of the risk. Not only does he invest in providing places and equipment to enable his workers to create the products. But he also insulates his workers from the full reality of the marketplace. He enables those of them, who are averse to risk, to live their economic lives as if the labour theory of value, which they love so much, was the truth.

Entrepreneurs are, by their nature, risk takers. And the best among them have an instinct for knowing which risks are good risks. If the risks our entrepreneur takes are good ones, and the value perceived by the buyers is more than the cost of creating the products, then all is well. The workers are OK; sometimes better off than that. And the entrepreneur becomes a (more or less) fat cat.

But if, on the other hand, he takes a bad risk and things go wrong, the worst that will happen to the workers is that they lose their jobs, and have to find another entrepreneur to work for. But for the honest entrepreneur himself, the worst is total financial disaster. A dishonest, political entrepreneur, of course – a crapitalist, forsooth! – may be able to manoeuvre himself out of trouble in the style of Donald Trump. But the honest entrepreneur has only one course of action open to him; take his punishment, learn his lessons and start again.

Entrepreneurs are a funny lot. I have to say I don’t always find them very engaging as people. In the eye of this beholder at least, they tend to be too emotionally driven, too unpredictable and too unreliable. But I’m in no doubt that what entrepreneurs do – honest ones, I say again, not crapitalists – is beautiful.

By delivering products which people want, entrepreneurs perform a great service to the economy. But their social value is even greater. They create an environment which approximates to the labour theory of value. And so, they enable many people – and most of all, those who are not self starters or risk takers – to share in the benefits of honest capitalism.

And so, when an honest entrepreneur gets rich, he deserves every single penny he has justly earned.