Principles of Market Fundamentalism, No. 5: Entrepreneurism

Value creators behave in generative and prosocial ways because they have specific gifts, some acquired, others inborn. They make money when they take risks and apply their talents in ways that make customers willing to reward them. Yet, not everyone sees things this way. So, it’s essential to explain why entrepreneurship must be among the market’s Nine Principles.

There are three basic types of entrepreneurs: innovators, arbitrageurs, and organizers. And, of course, truly great entrepreneurs express all three of these personality types:

Innovators are entrepreneurs who see ways to do something novel. If the novelty creates a product or service that is better, faster, or cheaper, then she will be rewarded with profits from those eager to avail themselves of the novel value. Innovators quite literally create new recipes that make the world a better place.

An arbitrageur is an investor who tries to profit from market inefficiencies she perceives, especially when she thinks others can’t see them. These inefficiencies can relate to any aspect of the market, including prices, dividends, or regulations. The most typical form of arbitrage is price. Apples sell for x dollars per pound here. I can find similar apples and sell them for y dollars per pound and still make a profit. The arbitrageur is attuned to these opportunities, and she gets a reward for rectifying the inefficiency.

Finally, organizers serve a valuable function. This type of entrepreneur knows how to configure talent, resources, and management systems to create customer value. Startup founders have to figure out how to put the pieces together to overcome the gravity of liftoff. Seasoned executives have to run complicated operations or implement self-management protocols that allow their firms to grow and evolve. Neither is possible without both a clear purpose and a profit motive.

In this way, purpose and profit become two sides of the same coin.

The principle of entrepreneurship says that anyone who creates value, reflected in revenues over costs, is a kind of entrepreneur. Despite long-standing views of entrepreneurs as exploiters, most entrepreneurs possess relevant gifts that help them sustainably create value. And entrepreneurs need not be CEO types who are lonely at the top. Some entrepreneurs join forces in self-managed organizations. Others, such as social entrepreneurs, find ways to achieve a social mission, but they, too, depend on income, whether in sales or donations.

Every product or service you enjoy, including the words on this page, is made possible by an entrepreneur. But one must be careful not to overstate matters. Entrepreneurs who are successful, because they rig the political game to their advantage, are no better than entrepreneurs who simply fail. A real entrepreneur’s failure comes at his and his investors’ expense.

The rent-seeker is playing a negative-sum game where lost value comes at your expense. For example, if a company does not exist but for taxpayer subsidies, then that company is destroying value. While rent-seekers might be talented, their activity is not prosocial. We exclude them from our formulation because a preponderance of rent-seekers will ruin a society in time. After all, to extract rents is not to create value.

The Principle of Entrepreneurship, which says healthy economies are composed of people creating value, has a connected concept called Strong’s Law, which we have discussed before. From educational entrepreneur Michael Strong:

A society that includes real entrepreneurs will give rise to untold prosperity. And for that, they deserve a little bit of respect and a lot more elbow room.