1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

The Ludwig von Mises Institute

Advancing Austrian Economics, Liberty, and Peace

Advancing the scholarship of liberty in the tradition of the Austrian School

Search Mises.org

Acting Like He Owns the Place

Mises Daily: Thursday, July 14, 2011 by

A
A

Even two decades later, I still have vivid memories of my first job after college. I worked at the headquarters of a privately owned home-improvement company — a company that continues to operate stores throughout the United States. I was employed as a programmer, sitting at a small desk without privacy walls set inside a drab Quonset hut with dimmed lights and little in the way of comfort, heating, or cooling. My fellow workers never grumbled about the conditions, which really were not that bad, all things considered. They all seemed to understand the reason behind the madness, so to speak.

But what really stands out in my mind are those instances where a middle-aged man toting an unlit cigar would loudly appear out of nowhere, acting like he owned the place. And he did. Meet the entrepreneur.

While most schools of economic thought ignore the entrepreneur, replacing his exotic cigar with esoteric calculus, the Austrian School always finds him front and center, actively guiding his firm toward his own personal ends. Peter Klein, in his recent and wonderful book, The Capitalist and the Entrepreneur: Essays on Organizations and Markets, continues the tradition of embracing the entrepreneur, and in doing so extends the frontier of Austrian thought — of economic thought.

Can't You Turn Up the AC?

When someone comes into my house for a visit, I do not expect to find him fiddling with the temperature controls. In fact, I would be horribly offended if such an incident ever occurred. Why? It is my house, of course. And my rules are the only rules. A man's home is still his castle (with the exception of those growing areas where the state is a squatter, gun in hand). This follows from the right to property. So it also follows that an entrepreneur's facilities are his castles as well.

Now, my visitor may complain about the temperature of my home. And I may show him the door, or I may oblige. It is my call, just as the electric bill is my responsibility. The very same holds for my cigar-toting entrepreneur, whose reappearing face was a reminder to every employee that all company expenses hit his wallet in the end. And if those conditions of employment were not suitable, the door opened outward all day long.

I set my home thermostat to satisfy my end of comfort, constrained by scarce resources, and he set his office thermostats to satisfy his end of profit, constrained by employee efficiency. When I was working for him, my desire for a subjectively better work environment was a desire to reach into his wallet. I knew that, and everyone working there knew it as well. We accepted the arrangement. It was, by demonstrated preferences, our best option.

This is all understood. A man owns his business and gets to set the rules (absent government, of course). But what of the manager who walks the halls of the office building acting as if he owns the place? This is one of the questions that Klein addresses in his book.

Ultimately, my employer, the entrepreneur, was responsible for all decisions. Not only his decisions, but also the decisions of those he appointed as his agents — the managers.

For most of us, a jack-in-the-box stogie is not the ultimate owner of our place of employment. While the most significant face is usually the CEO, he neither holds the same power nor carries the same burden as the owner-entrepreneur. He is simply a manager operating the firm for a host of stockholders.

Every decision made by the owner of the home-improvement company was with the goal of increased profits, both monetary and psychic. His decisions were ex ante in his best interest — we could image nothing else. It also holds that the manager's decisions are in his own best interest. And it should not come as a shock that the interests of the manager and owner occasionally collide — the agency problem.

But, at this company, anyway, agency problems were overcome by the only vote that mattered.

Switching Directions

My employer-entrepreneur despised bureaucracy. That is not to say that bureaucracy did not exist, but it never stifled the actions of this acting man.

In this use of the term bureaucracy, I differentiate the bureaucracy that forms by necessity as growing firms establish governance and operating policies and procedures from the more pernicious government-driven bureaucracy that Mises noted "is an outcome of government meddling with business." The company certainly had policies that occasionally hampered productivity. But unlike in government-driven bureaucracy, company-based policies and procedures that affect the bottom line are quickly repealed.

What about the chain of command? When the chain of income flows from wallet to wallet, so to speak, the chain of command flows from face to face. If the man with the cigar wanted to know what one of his employees was working on, he asked the employee. No need to talk to manager or manager of manager. Because, in essence, my hand was in his wallet during the workday, he had the right to ask what I was doing with his money.

One day I went to work and found that the store had changed its direction — a decision made by the man who stood to either gain or lose by it. The decision was not the end result of meeting after meeting. The decision was based on the whim — the gut feeling, if you will — of the entrepreneur. He didn't like what he saw in his stores and didn't think it matched his view of his customers. And, in the end, he was right.

The Real Boss

What allows me to claim the entrepreneur was right? Certainly, he made a decision that satisfied one of his immediate ends. However, the real judges of his decision were the consumers. And it was a tally of the dollar votes cast by consumers after his decision that allows me to say, "He was right."

Yes, it is true that the entrepreneur could have chosen to drive his business into the ground, but the supply of expensive cigars would have ended with his bankruptcy. So the entrepreneur, by necessity, aligned his ends with consumer wants, and all benefited as a result.

How Big Can You Get?

During my employment, the entrepreneur was always looking to expand into new markets. He was looking to open additional stores, but he was not looking to increase the scope of his company. While he did have a small subsidiary that produced one building product, the entrepreneur seemed to understand that his true area of expertise was driving hard bargains by getting other entrepreneurs, who were more skilled on the production side, to find ways to reduce costs.

In essence, the knowledge problem kept the company from growing too large. Of course, this is an individually recognized knowledge issue where the entrepreneur simply concentrates on the aspects of the market that he understands. There is also the other knowledge problem, and its requisite calculation problem, that keeps a firm from growing beyond its ability to calculate internal costs with respect to alternate costs in the market. While the company was big, this aspect of the knowledge problem was never a concern.

Conclusion

The entrepreneur is center stage in the market — albeit at the center of a stage he shares with consumers, other entrepreneurs, and the ever-increasing state. This is why the Austrian School takes the entrepreneur into account: no matter how carefully a school of economic thought aggregates and defines the attributes of economic agents through mathematical and statistical models, it can never fully define the attributes of a man holding an unlit cigar while watching out for his own wallet. And if a school of thought refuses to consider those very individual attributes, and very personal ends, it will be built on a foundation that is hopelessly flawed.