Mises Wire

How Ray Kroc of McDonald’s Built an Entrepreneurial Empire

The Founder, a movie based on the life of Ray Kroc, vividly illustrates crucial points about entrepreneurship and the market stressed by Mises. In the film, Kroc, played by Michael Keaton, begins as a salesman selling milkshake machines. He meets the McDonald brothers, the owners of a small diner in San Bernardino, California. Kroc has come to investigate because the brothers, Dick and Mac, had purchased six of his machines.

He finds a thriving business. The brothers offer a plain hamburger at very low cost. People can obtain their food in minutes, but silverware and plates are nowhere to be found.  Instead, customers get their hamburgers wrapped in paper.  Kroc immediately sees the profit opportunities available in franchising the business. The idea had occurred to the brothers, but they had been unable to carry it into execution in a profitable way.

The brothers reach an agreement with Kroc for him to handle the franchising, and, after some initial mishaps he proves amazingly successful. A financial consultant informs Kroc that the key to business success is to own the land on which the franchisers operate; and, given this clue, Kroc’s astonishing energy does the rest.

Unfortunately, Kroc is less than a paragon of virtue, and, insistent on doing things his way, he defies his agreement with the McDonald brothers. He pressures them to agree to sell him their interest in the business and reneges on an oral agreement to pay royalties. Under the new arrangement, the brothers cannot use the name “McDonald’s” for their own San Bernardino diner. Kroc opens a McDonald’s franchise just across the street ; and the brothers’ diner, unable to compete, closes.

The success of McDonald’s illustrates a point Mises again and again stressed. Capitalism is a system of mass production for the masses. The market will provide whatever customers demand, so long as this can be done profitably. As Mises says in Liberty and Property,

[the consumers’] buying or abstention from buying determines what has to be produced, in what quantity, and of what quality. In buying what suits them best they make some enterprises profit and expand and make other enterprises lose money and shrink. Thereby they are continually shifting control of the factors of production into the hands of those businessmen who are most successful in filling their wants.

Under capitalism private property of the factors of production is a social function. The entrepreneurs, capitalists, and land owners are mandataries, as it were, of the consumers, and their mandate is revocable. In order to be rich, it is not sufficient to have once saved and accumulated capital. It is necessary to invest it again and again in those lines in which it best fills the wants of the consumers. The market process is a daily repeated plebiscite, and it ejects inevitably from the ranks of profitable people those who do not employ their property according to the orders given by the public. 

(Incidentally, when Mises writes about the daily plebiscite, he is alluding to the famous essay “What Is a Nation?” by Ernest Renan.)

McDonald’s is unlikely to win a star from Michelin, but for the market this is irrelevant. Successful businesses appeal to the preferences consumers actually have, rather than external criteria.

It is not enough for success, though, to have an idea that customers like. Sales must be balanced against costs, and high demand by itself does not suffice for a profitable product. It was only when Kroc realized the importance of owning the land on which the franchises operated that he was able to achieve spectacular success. The successful entrepreneur must be able to estimate future revenues and costs better than his competitors. As Mises notes, “Yet the real entrepreneur is a speculator, a man eager to utilize his opinion about the future structure of the market for business operations promising profits. ... What distinguishes the successful entrepreneur and promoter from other people 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.” (Human Action, p. 582)

At first glance, the idea of owning the franchiser’s land sounds less creative than the notion of fast food itself. Once more, though, this is irrelevant from the point of view of the market. It was only the former idea that enabled fast food to be produced profitably in mass quantities; and it was Kroc, not the brothers, who realized this and was able to secure the funds to get his vast enterprise going.

Image Source: http://thefounderfilm.com/
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