The Online Library of Liberty

A project of Liberty Fund, Inc.

• F. A. Harper, Introduction
• Gustavo R. Velasco, On the 90th Anniversary of Ludwig Von Mises
• F. A. Harper, Ludwig Von Mises
• Property and Freedom, Alberto Benegas Lynch
• Technological Progress and Social Resistance, Guillermo Walter Klein
• Principles Or Expediency? F. A. Von Hayek
• Protection For Farmers, Antony Fisher
• For a Philosophy of Choice, Lord Grantchester
• The Surest Protection, Ralph Harris
• Towards the Just Society, Ralph Horwitz
• Size and Well-being, J. Enoch Powell
• Pour Eviter “une Collectivisation Par Annuities”, René Berger-perrin
• En Défense De L'economie Libérale: Réponse à Quelques Objections, Gaston Leduc
• L'occident Pour Son Malheur a Choisi Keynes Contre Mises, Pierre Lhoste-lachaume
• Das Ordnungsdenken In Der Martwirtschaft, Ludwig Erhard
• Unsere Gesellschaftsordnung Und Die Radikale Linke, Edith Eucken-erdsiek
• Privateigentum— Die Für Mitmenschen Günstigste Lösung Bei Den Produktionsmitteln, Wolfgang Frickhöffer
• Macht Oder ökonomisches Gesetz, Ernst Heuss
• The Reliability of Financial Statements, Ulrich Leffson and Jörg Baetge
• Ist Die Inflation Unser Schicksal? Alfred Müller-armack
• Der Reiche Goethe Und Der Arme Schiller, Volkmar Muthesius
• Krise Der Politischen Formen In Europa, Otto Von Habsburg
• The Need to Make Cognizance Available, Ulysses R. Dent
• Ways to Communism, Giuseppe Ugo Papi
• Convergence Theories and Ownership of Property, Kenzo Kiga
• Soaring Urban Land Prices and Market Economy, Toshio Murata
• Jesus and the Question of Wealth, Alberto G. Salceda
• A Program For a Liberal Party, Gustavo R. Velasco
• On the Entrepreneur Andries De Graaff
• La Integracion Economica De America Latina, Romulo A. Ferrero
• Problems of Economic Responsibility and Initiative Re-emerging In Eastern Europe, Ljubo Sirc
• Rent Control In Sweden: Lessons From a Thirty Year Old Socio-economic Experiment, Sven Rydenfelt

On the Entrepreneur
Andries de Graaff

There is no need to say that a free society is essentially based on a free economy. As a free economy means a market economy in which competition is a basic element, it is obvious that such an economy can only exist by the activity of the entrepreneurs. So by consequence the entrepreneur is the central point of both, a market economy and a free society.

We have a few definitions of the entrepreneur and his tasks, developed by von Mises, Schumpeter and Knight. But whereas many books have been written on competition and perhaps still more on the needs of and the ways to maintain competition to keep a market economy alive, literature on the entrepreneur himself is rare. It may look amazing, that the central figure of our economic system is not studied so extensively as other subjects. However, it is not so astonishing as it may look at first glance. Scientists have nearly never been entrepreneurs and on the other hand entrepreneurs neither find the time to think about theoretical problems nor have the mentality to fit into a discipline.

We have schools of management, but an entrepreneur is born and you cannot train or educate him. One can teach him, like a chess play, certain rules; one can teach him to prepare better tools of judgment; one can extract lessons from history and show where entrepreneurial decisions were right or went wrong. But you cannot teach him mind or judgment. We can even go to the contrary; the more a man knows, the better he can evaluate possible risks, the slower will be his entrepreneurial decision.

I remember one of my friends who was a really distinguished economist working for a very big company. One day he was studying the question how to reduce the amount of capital the company needed in its daily operations. By a perfect statistical analysis he came to the conclusion that the stocks of raw material taking into account the consumption and the time needed for provisioning were quite illogical and that many millions could be saved by setting up provisioning and stockholding standards. Two days after he had delivered his report, he met his boss, who complimented him with his report and then added: “but today I have bought copper” and he mentioned a tremendous amount. Needless to say that my friend was strongly disappointed. Six months later, however,—the story took place in the prewar-years and the danger of war was approaching - he had to admit that the entrepreneurial judgement of his boss had brought the company more money than he could have saved in many years.

Back to the definition of an entrepreneur. It has been said that the entrepreneur is an innovator. Well, to a certain extent and under certain circumstances, this is true. But he has to be far more. The best proof is that an inventor who is an innovator by definition seldom is a good entrepreneur. In fact, the entrepreneur is combining elements. At a certain moment innovation may be the most necessary point; at other moments it may very well be that his main activity looks like that of an administrator. There are many examples in the history of companies where a very agressive president had to be succeeded by a more balanced administrative type because the company was running into danger of lack of consolidation and equilibrium of resources.

We have to acknowledge that the task which the entrepreneur has to fulfil in our eyes will differ with the time in which we are living. This is a logical consequence of the fact that the entrepreneur is working with uncertainties, that he has continuously to take and evaluate risks. At one moment his main job will be anticipating the future state of the market; at another moment he will have to find a solution for an equilibrium between investments and available financial resources; at again another moment it may be necessary for his survival to press on technical innovation or to ameliorate efficiency in his own organisation. In theory both the president of a big company and the owner of the retailshop at the corner of the street are entrepreneurs. It is correct that they both are combining the factors of production. But it is also very clear, that although in a very broad sense we can reduce their activities to the same denominator, their day-to-day decisions will vary widely.

It is obvious that in taking risks the entrepreneur evaluates good and bad chances. He may not only rely on the possible development of the market, he also has to take into regard possible actions of his competitors, changes in production technique, changes in the labour and capital market and changes in government policy, just to mention a few, which may be decisive for the outcome of his decisions. He does not take this risk just for fun, but as every human being he is looking for success. And he knows or will learn that the secret of success is to find a certain equilibrium of good and bad chances.

The possibility of creating this equilibrium is in fact the basis of existence of our market economy and our free society. I feel really sorry that some of the most fervent defenders of the market economy don't understand that the existence of this equilibrium is most essential. When they get the impression that possibilities of competition are diminishing, they want anti-trust laws and similar measures to keep up competition and to prevent developments that could do harm to free competition. They don't understand that they are asking for the impossible, that they are ruining the free society far more by the consequences of their policy than the diminishing of competition in fact could do.

The entrepreneur by his character is an individualist. This means that even if he is in contact with his colleagues in his branche, he is certainly not in favour of giving up independence, as he does partially when entering into trust-agreements and more or less totally when entering into mergers. The history of mergers clearly shows that after some time one of the partners takes the lead and the other leaves or looses his identity.

Much to the contrary of what is normal belief, only a few entrepreneurs are really out for direct maximum profit. The wide majority is so proud of its own creation that expansion is the prime goal which the entrepreneur is after. It is well known that especially in small private business profits are seldom used for private purposes, but mostly for investments in the business. This is the way many enterprises, which started as a small business, went when growing to some size.

The essence of the functioning of a market economy is that those who want to work under these conditions have to look for optimal solutions. The entrepreneur, who in his co-ordination of production factors did not reach an optimal or nearly optimal solution, will in the end be driven out of business by his competitors who did better.

There is no doubt that many elements are influencing and continuously changing the optimum. Some examples may illustrate the impacts of developments on optimal solution. When during the last century steam was introduced as a primary source of power in production plants, people were forced to go in for - in the dimensions of that time - relatively big production units as steam could not be produced in small quantities in an economic way. The introduction of electricity as a source of power completely changed the picture. The cost of electricity was exactly or nearly the same in a big or in a small plant. So electricity strongly favoured the rise of small business units which could not have existed if we had remained in the steam-age.

In this case new technology favoured the small production unit; in many other cases just the opposite takes place. The continuous rise of wages and stiffening of other labourconditions has in itself the tendency that the costs of the productionfactor labour is increasing faster than its productivity. By consequence people are looking for machinery which by means of automation reduces the number of manhours in the final product. This development has far-going consequences in a market-economy. Many times we experience that the new production tools can only be used efficiently in bigger units. So the entrepreneur of a smaller unit - for example because his market-region is not big enough - has to come to a decision. He knows that if he continues to produce in the present way, he may struggle for another couple of years but finally will have to leave the market. So what he may do is to look for a combination with somebody else in order to arrive at a turnover figure which enables the use of the new machinery. Some people may say that if the combination takes the form of a merger, the entrepreneur is reducing competition. In fact he is not; he is looking for optimal dimensions to survive. If we want him to live in a free society and to bear himself the risks of his entrepreneurial activity, we cannot forbid him to look after the optimum and to take the consequences of technical development and the changing of the ratio of relative costs of production-factors.

There is no doubt another very important element in this technical development. The amounts involved in investments are getting relatively bigger and bigger. This creates problems for the entrepreneur. He needs flexibility in order to live with his risks and the less flexible his position for technical reasons is getting, the bigger will be his risks. The man who is carefully evaluating risks will have to take care that the risks are not going beyond what is supportable for his enterprise. If he forgets he is starting to gamble, mostly left with bad chances. And even if he himself is fully confident that his gamble will be succesful, it may be that his banker has quite different ideas.

There is in my opinion no doubt that at present we are once again going through a period of sharply increasing risks as a consequence of diminishing flexibility in the production factors. This is partly due to technical development, partly to the social environment in which we live. There have been in the industrial countries more periods of this kind and these have exactly been the periods of the rise of trusts and kartels. If the entrepreneur gets the feeling that his flexibility is in danger, that the equilibrium of the risks he is running is no longer present, he will look for ways and means to reduce the risks and to restore by that way the optimalisation of the equilibrium.

It may be that he arrives at the conclusion that it is wise not to put all eggs in one basket. He may look for diversification, knowing as experience has shown that the up and downs in the different branches of industry dont occur at the same moment. The diversification may allow him to take bigger risks in one of his branches, risks which should be too big if this specific branch was his only field of activity. It may be that antitrust legislation forbids him to do so, but in most cases the legislator shows then a considerable lack of knowledge of the functioning of the free society. In the name of the maintenance of free competition, its pillars are destroyed.

It is correct that there are giants where giants are really a necessity and there are other cases where a giant is not an absolute economic necessity. We have to realize that in modern technology the costs of design and tooling are becoming out of proportion to the price of the product. The car-industry is still able to pay for its own new models, because the costs of design and tooling can be depreciated over many units bought by nearly the same number of customers. In aircraft-industry, however, the costs of designing,for example, a new supersonic passenger-aircraft are so gigantic that they are far beyond the riskbearing-capacity of even the giants, especially when taking into account the small number of potential sales. What then happens is that governments are called in to subsidize or minimize in some way or another the risks involved in the new development. In the case of the aircraft-industry the absolute size of the amounts involved is decisive. There are, however, many other cases wherein the government in the name of “industry-policy” takes away some of the entrepreneurial risks. Shipping is heavily subsidized, shipbuilding favoured with low interest credit and in a lot of countries many other industries get governmentguaranteed loans and other forms of facilities, specially to promote capital acquirement. In general, where profit fails to enable the enterprise to make the necessary capital-accumulation for the next step, governments are too willing to aid business enterprises with the productionfactor capital. In many cases, however, this aid proves to be not sufficient to create a successful enterprise. It looks as if an entrepreneur who is not able to create the necessary capitalfunds, nor to acquire them from banking or other financial resources, is not the type of man who is able to run an enterprise.

Daily experience shows that when risks are running out of proportion, people are looking for ways and means to reduce these risks. This shows that an entrepreneurial society can only exist where risks are bearable and can only survive where there is an equilibrium of opposite forces in economic development.

Coming back to the entrepreneur himself, it is obvious that the picture one draws up will differ with the time in which we live and the prevailing circumstances. When Schumpeter was creating his concept of the entrepreneur, economic life differed widely from what it is today. He could stress the innovator-character just because the economic society was of a relative stability. At the same time the quantities of the productionfactors the entrepreneur needed to bring together to start his business were small and most business was and could be run as a privately owned firm.

Today this is considerably changed. The privately owned business is losing its place. Even in the retail-business and the hotelbusiness - two branches of traditionally family business - the corporation has entered and is progressing rapidly.

With the corporate organisation a new figure entered the field of business, the manager. Unfortunately our democratic society, which is fond of titles, has created a complete mess around the word “manager”. We nowadays have managers everywhere, using this word for departmentheads, shop-bosses etc. Where, as a consequence, no common-sense opinion exists about what is a manager, it gets very difficult to use this word.

Nevertheless, when the shareholders of a corporation, who by buying shares show that they want to run a risk, appoint somebody to run day to day operations of a company, they are looking for an enterpreneur. They want somebody who with the capital made available to him can create a business and who can originate profit. There is no doubt that this manager has to be an entrepreneur at the same time. While the classical entrepreneurship has disappeared to a certain extent, a new kind of entrepreneur has taken the place.

The new type of entrepreneur is still a decision-maker, he is an employer of productionfactors, he lets his company take risks because of the uncertainty under which he is working. Mostly it will not make for him any difference whether he is risking his own capital or the capital made available to him for his operation by shareholders. So in many respects he is acting in the same way as the classical entrepreneur was supposed to do.

It is not the fact that in many fields of activity the corporation has taken the place of the former private ownership that has changed the work of the entrepreneur. Far more important is that the size of the need for and the availability of resources has changed with the industrial development. As a consequence the innovation-element, when still existing, is to a certain sense diminishing. Not only because the preparations for an innovation take more time, but far more because a long period of operation is necessary before one can say that an innovation really was a success. The amounts involved are mostly relatively so high that there is no way back. A continuous change is rarely possible. This means that the entrepreneur after launching his ideas has to give a long aft-care in order that his baby can grow up. The execution of his ideas gets more and more important for their final success or failure. Here is the link in today's economy between the entrepreneur and the manager. The man in the shop at the corner may change overnight from selling icecream to selling chips, just because not much more than his own labour is involved. In modern industry, however, the capitals employed are so big that a change gets really difficult and thus it takes a rather long period before one can say that his idea was a success. We can pick up innovation-ideas nearly every day from scientific institutes, publications, etc., but it is a long and difficult way to bring these ideas to a positive result. In order to be successful the entrepreneur needs to be a manager; too often just the way of execution determines failure or success.

It is certainly not a degradation to say that a big part of the entrepreneurial activity is in the managementfield. The big number of management consultants which have come up, clearly prove how difficult management can be and how much entrepreneurial skill and vision is necessary to be a good manager. To give just a few examples. Whether the decision to build a new aircraft or a new computerserie was right or wrong will not be known before perhaps ten years after the decision is made. During that period it is the managerial type who by his decision and by his way of conducting the business has the answer in his hands.

Another example: It was not so difficult to foresee the possibilities of application of semi-conductors and integrated circuits. Nevertheless only very few of those who entered this field succeeded. In nearly all cases the innovation-entrepreneur failed when he had to be the management-entrepreneur.

And perhaps we got a very good lesson of what an entrepreneur has to be from the president of one of the biggest concerns. For a vision of the future, he said, when retiring, it is not sufficient to do planning with very clever people, to solve technical problems with excellent technicians, to have smart finance people and marketing people with great experience. As the head of his company, with productionfacilities and organisations in 71 countries of the world, he had learned that the entrepreneurial task in to-day's world asks for far more vision than just the combination of productionfactors like capital and labour. Here indeed is shown that there is a big gap between the entrepreneurial tasks at the time of Schumpeter and our present age; that there also is big gap between the small entrepreneur and the man who is heading a big group which is spread worldwide. The small entrepreneur, if we may call him so notwithstanding the fact that many times he is a bright character, may still be the innovator, the combinator of productionfactors in a limited field. For the “big” entrepreneur, if we may speak of him in such a way, the combination of productionfactors has become a kind of routine business. He has to make decisions on world-development, he has to look after national aspirations, he has to sacrifice today's profits for a position in the future, surely without knowing what this position will be. One may call him the innovator type; but his innovation is something completely different from a successful combination of productionfactors or a fine nose for what the consumer-market will be in the very near future.

It is quite true that our world still has millions of small entrepreneurs against only thousands of the big entrepreneurial type. But we have to realize that our theoretical concept of the entrepreneur is somewhat outdated, that time has come for its innovation and adaptation to the greater dimensions of our present society. When we succeed in creating a more up-to-date picture of the entrepreneur, his problems and his motives, we will also be able to get a better understanding about his reactions. When we look upon the entrepreneur as the man who is willing to take risks and who by doing that acts as the motor of development in a free society, we need a better knowledge of the kind and size of his risks, and not less of the limits beyond which the risk-bearing function cannot be fulfilled.

Here are some basic tasks of the entrepreneur of today.

• 1. He has to combine the basic productionfactors. In doing so, he has to decide on the quantities he is going to use of each of them. For example, to what extent he will use labour to perform some job or to what extent he will let the job be done by machinery, which to him means the production-factor capital.
• 2. He has to attract the productionfactors he decides to use. In a small shop he may use his own labour and his own capital, perhaps renting a building. If the business is bigger and his private funds are not sufficient, he has to make up his mind whether to use shareholders-capital and/or to use loans and bankcredits. Once he is deciding on credits, he will have to evaluate his possibilities to pay the interest due and to repay the loans he has got. He also has to make up his mind which ratio between his own (including shareholders) capital and loans is acceptable in view of the risks involved in his operation.
• 3. He has to control the efficiency of his operation. It is not only necessary to attract the necessary productionfactors, but once having them to let them work continuously efficient. In every organisation there is a tendency that tradition creeps in and that by consequence the organisation gets less efficient. The struggle for efficiency is on many occasions the biggest worry for the entrepreneur and will be decisive for success or failure. Not only the internal efficiency is involved but also the make or buy decision of certain parts of the product.
• 4. He has to watch his market. Watching a market depends strongly on the kind of product he is producing. If he makes an article for the consumer-market, he will have to look after fashion, after pricing, after distribution methods, but he will also in a more general and long term way have to keep an eye on consumerhabits, on the most likely movement of consumable incomes and the way of spending. It is obvious that there are no fixed ratio's how the consumer will spend his money and the producer of consumer-articles needs to have a common sense feeling about the modifications to be expected in the spending pattern. If the entrepreneur is not in the consumerfield, but is producing semi-manufactured articles his attention to the ultimate consumer-market may be less but may be focussed on the production methods of his buyers or their possibile use of other materials.
• 5. He has to pay attention to the raw material market. This is easily understandable when he uses raw materials depending on crops. But in the longer term this is also true for produced raw materials. The textile manufacturer has to decide whether and to what extent he will use wool or cotton or man-made fibre. The producer of pipes will have to decide on iron and steel or plastics. The producer of electrical wire may choose between copper or tin and his decision will not depend on the consumer-market, but on the development of availability and price. In many cases a change in raw material does not simply mean an act of purchasing, but heavy investments due to manufacturing changes may be involved.
• 6. He has to look after technological development. The influence that technological development can have may be completely different. It may be that he has to decide on buying new machinery or tools in which case he will have to weigh increased speed or saving of labour against costs of investment. But it may also be, as was the case when tubes were replaced by semi-conductors and integrated circuits, that his decision is related to a completely different production technique. In this case he has to decide whether or not technological development will outdate his product.
• 7. He will have to give consideration to his field of activity. This does not only mean that he has to make guesses about his competitors. But once having invested considerable amounts and running an operation at high fixed costs, he may come to the conclusion that he has to compensate the decrease of flexibility by vertical integration in order to stabilize his turnover and to get a better ratio to the flexibility of his costs structure. This may as well mean that he tries to acquire sources of raw material as that he will enter into the next stage of production. And it may even be that he is interested in a completely different field of activity, hoping that through the diversification the overall flexibility of the totality is more favourable than that of his field of origin alone. But it can as well be that he comes to the conclusion that some of his activities don't fit any longer in his production set-up.
• 8. He has to understand general development. There are numerous elem nts in the development of our society that have a big influence on entrepreneurial activity. When the standard of living is ameliorating this certainly does not mean increased purchasing of everything that was bought before, but a change in the consumptionpattern will follow. The same may happen when population changes or when for example the youngsters get relatively higher pay. In the international field the entrepreneur has to guess about the slower or faster development of the economy of the different countries. In his own productioncenter he may have to watch the development of the labour-market and he may arrive at the conclusion that he will have to change his location or that he has to buy automatic production equipment not because it is cheaper now, but because in the near future he will not be able to find labour willing to do dirty jobs or sufficiently skilled for the jobs he has to perform. Or to take quite a different point: If the entrepreneur is living in an unstable environment, his view on the way the value of money goes may have great influence on his decisions how to finance his investments and sometimes even on the question whether he will invest now or to-morrow.
• 9. Crystal ball looking. Unfortunately the answer to the problems the entrepreneur is facing is seldom black and white, but mostly grey. If the choice between black and white was in fact the problem, we would not need an entrepreneur. A planning office should be sufficient. However, if we look at the results of the best planning offices, we only can say that the deviations between their predictions and reality are so big, that an enterprise could hardly live with them. The market economy in principle is unstable because of the many decisionmakers. These are not only all the consumers, but also the weather, the development of technology, the policy of governments, the influence of pressure groups and so on. The grey which the entrepreneur is facing only gets black and white if he uses a number of ifs as the basis of his assumptions. Whether he is successful or not, depends on the question whether the ifs turn out rightly. The entrepreneur may be aware or unaware of the ifs in his assumptions. But if he is aware, he will understand the risks he is running, he will try to evaluate them and to come to a calculated risk. It will depend on his character and the size of his resources, whether he judges this calculated risk to be supportable or he comes to the conclusion to abstain from action. And it may very well be that before taking the decision he looks for ways and means to make the outcome of his risk calculation more favourable by trying to increase either stability or flexibility.

Some people may say that all this - and much more - is part of the “job-description” of the innovator-type. But even if so, for better understanding it looks preferable to elaborate the conception of the entrepreneurial task.