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The Faith of Entrepreneurs

December 23, 2005

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.


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