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Political and Economic Entrepreneurship: Freedom Depends on the Latter

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Tags Economic PolicyThe Entrepreneur


Entrepreneurship involves individual's active intention of achieving social and material success. This success can be achieved in different ways and have different sources. However, the common feature is that the individual, inclined to maximize social and material success, enters into active competition to gain advantages in achieving such success with other members of the community. In the process of competing, the individual is forced to develop and use creative, cognitive, and organizational abilities to the maximum extent possible.

Such individual characteristics distinguish the most proactive social members of any group of social chordates. The struggle for overall leadership or niche dominance requires extraordinary abilities to compete. This is especially evident in the social processes of higher primates, where cognitive abilities result in a greater range of strategies and tactics, as well as ones that are more complex and of a multicomponent nature.

Economists have until recently neglected data from biology, neurobiology, cognitive science, anthropology, and psychology in their implications and assessments, making their models and conclusions "supposedly" original. However, other social and biological sciences have significantly supplemented economic concepts with evidence, confirming and simultaneously balancing many economic theories and models. What economic theory needs is a correct interpretation of the behavioral patterns explained by the biological and other sciences in the context of economics, sociology, and political science.

Entrepreneurial intention, as the pursuit of the greatest social and material success, is characteristic of any community and society, and is realized through obtaining the greatest amount of goods or social influence or, as a rule, both. There are always more enterprising members of a community than others. They set more ambitious social and material goals, they are more willing to take risks, and they have the most rational thinking to better assess the potential risks and benefits of achieving their goals. As a result, their success affects the life and prospects of the whole community in one way or another, because the social and material exchanges between these proactive individuals and other community members are more extensive and intense than those between other individuals. However, the results of such exchanges gradually proliferate, and the life of the whole community, in one way or another, changes. 

In general, entrepreneurial intentions are developed in productive economic entrepreneurship and nonproductive entrepreneurship. Productive economic entrepreneurship is expressed in two main functions. The first is proactive participation in the exchange of material and other goods at the level of intermediation between changemakers; i.e., trade.

The second one is the creation of innovation or the copying of an existing good and monetization through the production and distribution of a consumer product. This line of entrepreneurial activity is characterized by the creation of value and, accordingly, is a catalyst for economic growth and the development of society.

Both directions of creative economic entrepreneurship involve the creation and distribution of consumer goods. This means that if goods are exchanged according to the criteria of subjective (personal evaluation of necessity) and objective (general level of availability) utility value is added in relation to production value. It is added value that is the multiplier of economic growth; i.e., the growth of needs and opportunities for society as a whole. 

Nonproductive entrepreneurship is expressed in political competition and the struggle for control over rent sources. The proactive individual, by choosing this direction of entrepreneurship, realizes his ambitions through the actual orderly racketeering of other members of society, primarily active value creators, i.e. economic productive entrepreneurs, as the main creators of public goods.

This unproductive application of entrepreneurial effort is possible because there is a need for social order, rules of social relations, and control over execution. In animal social groups, this function lies with the group leader and the dominant individuals closest to him. In human society, these functions are performed to a greater or lesser extent by the state; i.e., political elites. In both cases - in animal social groups and in human societies - power elites have competitive advantages over the rest of society. These consist in access to the social resources generated by productive economic entrepreneurs, as well as in the right to violence. Both advantages, willingly or unwillingly, are accepted by society and are legitimate until the elite group or domain is replaced by others.

This kind of competitive advantage to maximize material and social success is a point of nonproductive rent-seeking entrepreneurship. It does not involve active value creation. Its main result is to lock the exchange of benefits to one person or a limited group without further multiplication and social penetration of benefits. In fact, this is one of the illustrations of the disequilibrium model; i.e., in fact, leverage "money-commodity," when there is no commodity before money.

The dominance of each of the above directions of entrepreneurship is conditioned by the institutional and mestizo environment and the prevailing social rhetoric. In "natural states" (Douglas North, Violence and Social Orders) - autocracies and autarkies - entrepreneurial efforts are focused on political and rent-seeking entrepreneurship; i.e., nonproductive entrepreneurship, entrepreneurship the fruits of which do not imply value creation and economic growth. In such societies, the state-society-business triangle always has the state at the top, and society and business are the source of benefits for powerful political elites - successful rent-seeking entrepreneurs. They maximize their utility through virtually unlimited control of public resources and their use for personal purposes.

Thus, autocratic and autarkic institutional frames maximally encourage unproductive rent-seeking entrepreneurship as a way to obtain the greatest potential socio-material benefits. Niskanen's theory of bureaucracy, Parkinson's laws, as well as the classical concepts of Mises, Rothbard, Schumpeter, Hayek, Buchanan, Baumol, McCloskey, etc. once again receive practical confirmation in our world today. Once again, we can see for ourselves that bureaucrats are simply rational agents seeking to maximize the utility of their resources and opportunities and to minimize the risks involved.

In states with a free market and liberal-democratic institutions, the competitive advantages of rent-seeking entrepreneurship are substantially limited, and agents' preferences are conditioned by much greater opportunities for maximizing benefits through productive economic entrepreneurship and value creation. The exchange of benefits does not mainly occur through their preliminary centralization in the hands of the state and redistribution by rent-seeking political entrepreneurs - power elites. Benefit exchange occurs horizontally, directly from agent to agent, the state's participation indirect and limited. Nonproductive entrepreneurial orientation has much less attraction for potential entrepreneurs. Institutions, mestizos, and social rhetoric encourage individual socio-material success through creative economic activity and value addition. There is no inherent leverage and distortion of equilibrium in this system, where goods are obtained only through giving (creating) other goods in return, and where the commodity-money-good model works, in contrast to "natural states," where the credit distortion of money-good dominates. 

Thus, it can be argued that an institutional and ethical environment that indoctrinates individual initiative, responsibility, and creative enrichment as premium values implies the dominance of productive economic entrepreneurship. On the other hand, an institutional environment that implies the dominance of public interests over individual interests and an expanded state mandate in the redistribution of resources stimulates rent-seeking nonproductive entrepreneurship.

In other words, the small state and individualistic social doctrine condition economic growth and social development. The big state and the doctrine of the prevalence of the social over the individual imply slower economic growth and socioeconomic degradation.

In conclusion, the modern world is in the dangerous zone of maximizing the values of unproductive political entrepreneurship. This shift in autocratic states has led to a tightening of their regimes and their observed transformation into dictatorships. In market democracies, this shift has led to economic imbalances, state expansion, and the reduction of civil liberties.

It is a good time to reflect.


Paul Tolmachev

The Russian-born Tolmachev is portfolio manager at BlackRock (London, UK) with $500 million in personally managed assets. He also is a visiting scholar at the Stanford Institute of Economic Policy Research, where he researches institutional and political economy.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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