The Faith of Entrepreneurs
Ludwig von Mises didn’t like references to the "miracle" of the marketplace or the "magic" of production or other terms that suggest that economic systems depend on some force that is beyond human comprehension. In his view, we are better off coming to a rational understanding of why markets are responsible for astounding levels of productivity that can support exponential increases in population and ever higher living standards.
There was no German miracle after the World War II, he used to say; the glorious recovery was a result of economic logic working itself out through market forces. Once we understand the relationship between property rights, market prices, the time structure of production, and the division of labor, the mystery evaporates and we observe the science of human action making great things happen.
He is right that understanding economics does not require faith, but there are actions undertaken by market actors themselves that require faith (and Mises would not disagree with this)--immense faith, faith that moves mountains and raises up civilizations. If we accept the interesting description of faith by St. Paul ("evidence of things unseen") we can understand entrepreneurship and capitalist investment as acts of faith.
Everyone who is in business understands this. It requires a thousand daily acts of seeing the unseen future to be in business. The reality of the marketplace is that the consuming public can shut you down tomorrow. All they need to do is to fail to show up and buy.
This is true for the smallest business to the largest. There is no certainty in any business. Nothing is a sure thing. Every business in a market economy is only a short step from bankruptcy. No business possesses the power to make people buy what they do not want. All success is potentially fleeting.
Success does yield a profit, but that provides no comfort. Every bit of profit you take for yourself comes out of what might otherwise be an investment in the development of the business. But neither is this investment a sure thing. Today’s smash hit could be tomorrow’s flop. What you perceive to be a solid investment could turn out to be a short-term craze. What you see, based on past sales, as having a potential mass appeal could actually be a market segment that was quickly saturated.
Emperors can rest on their laurels but capitalists never can.
Sales history provides nothing but a look backwards. The future is never seen with clarity but only through a glass, darkly. Past performance is not only not a guarantee of future success; it is no more or less than a data set of history that can tell us nothing about the future. If the future turns out to look like the past, the probabilities still do not change, anymore than the probability of the next coin toss landed on heads increases because it happened previously five times in a row.
Despite the utter absence of a road map, the entrepreneur-investor must act as if some future is mapped out. He or she must still hire employees and pay them long before the products of their labor come to market, and even longer before those marketable products are sold and turn a profit. The equipment must be purchased, upgraded, serviced, and replaced, which means that the entrepreneur must think about today’s costs and tomorrow’s and the next day’s saecula saeculorum.
Especially now, the costs can be mind boggling. A retailer must consider an amazing array of options concerning suppliers and web services. There must be some means of alerting the world to your existence, and despite a century of attempts to employ scientific methods for finding out what makes the consumer tick, advertising remains high art, not positive science. But it also an art with high expense. Are you throwing money down a rathole or really getting the message out? There is no way to know in advance.
The heck of it too is that there are no testable causes of success because there is no way to perfectly control for all important factors. Sometimes not even the most successful business is clued into what it is, precisely, that makes it products sell more as compared with its competitors. Is it price, quality, status, geography, promotion, psychological associations people make with the product, or what?
Back into the 1980s, for example, Coca Cola decided to change its formula and advertise it as New Coke. The result was a catastrophe as consumers fled, even though the taste tests said that people liked the new better than the old.
If the historical data are so difficult to interpret, think how much more difficult it is to discern probable outcomes in the future. You can hire accountants, marketing agencies, financial wizards, and designers. They are technicians, but there are no such things as reliable experts in overcoming uncertainty. An analogy might be a man in a pitch black room who hires people to help him put one foot in front of the other. His steps can be steady and sure but neither him nor his helpers can know for sure what is in front of him.
"What distinguishes the successful entrepreneur and promoter from other people," writes Mises, "is precisely the fact that he does not let himself be guided by what was and is, but arranges his affairs on the ground of his opinion about the future. He sees the past and the present as other people do; but he judges the future in a different way."
It is for this reason that an entrepreneurial habit of mind cannot be implanted through training or education. It is something possessed and cultivated by an individual. There are no entrepreneurial committees, much less entrepreneurial planning boards.
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The inability of governments to engage in the entrepreneurial act of faith is one of many reasons why socialism cannot work. Even if a bureaucrat can look at history and claim that his agency could have made a car, dry wall, or a microchip, that same person is at a loss to figure out how innovations in the future can take place. His only guide is technology: he can speculate about what might work better than what is presently available. But that is not the economic issue: the real issue concerns what is the best means given all the alternative uses of resources to satisfy the most urgent wants of consumers in light of an infinity of possible wants.
This is impossible for governments to do.
There are thousands of reasons why entrepreneurship should never take place but only one good one for why it does: these individuals have superior speculative judgment and are willing to take the leap of faith that is required to test their speculation against the facts of an uncertain future. And yet it is this leap of faith that drives forward our standards of living and improves life for millions and billions of people. We are surrounded by faith. Growing economies are infused with it.
Mises forgive me: this is a miracle.
Lew Rockwell is president of the Mises Institute and editor of LewRockwell.com. Rockwell@mises.org. Comment on the blog. This article appears in the December 2005 issue of the Free Market, to you which can subscriber for free.