Saturday, July 28, 2012

The Entrepreneur

Essentials of Economics, by Faustino Ballvé

In Chapter 3, Faustino Ballvé discusses the role of the entrepreneur:

We have seen that the market is the pivot around which the whole of economic life revolves.  We can say just as well that the market revolves around the entrepreneur.

Ballvé offers a simple definition for entrepreneur:

Strictly speaking, the entrepreneur is anyone who goes to the market to sell or anyone who goes to the market to buy, not for his own consumption, but to resell what he has bought….The entrepreneur aims at making a profit….

This buying and onward selling function can take many forms – for example: buying a good in one location with an eye toward selling the same good in a different location; buying a good and improving it before resale; buying a good and holding it until more favorable market conditions emerge.

In a statement worthy of Ayn Rand, Ballvé sees the entrepreneur as a hero:

Production, around which all economic life revolves, is, then, the great adventure of mankind: it is the struggle with tomorrow, the struggle with the unknown.  The champion, the hero, and frequently the victim in this struggle is the entrepreneur.  He undertakes some enterprise in quest of profit.  But in order to obtain it, he is obligated to satisfy the consumer…the consumer never loses.  The entrepreneur, on the other hand, can see all his hopes of profits transformed into a loss he alone must bear: the profit that the consumers (the general public) made is theirs to keep, while the entrepreneur is ruined.

A trade requires two participants – often referred to as a buyer and a seller (but in reality both are at the same time buying and selling).  In the free market, a trade results in two winners, as each participant prefers what he is buying to what he is selling.  I want the candy bar while the shopkeeper wants my dollar – after the transaction, each of us feels wealthier…else we would not have traded!

For the consumer, the trade ends in a win and his satisfaction is therefore assured: he has eaten the candy bar at a price he deemed appropriate.  However, for the shopkeeper – while the single trade was certainly beneficial – he must continually asses market conditions and make proper estimations regarding all factors of the business.  If he fails at this, he will eventually lose.  However, each and every one of the consumers of candy bars remains, as he was at the time of the trade, a winner.  Thus, Ballvé rightly points out that the profit made by the consumer is his to keep, while the entrepreneur alone bears the risk of miscalculation.

The entrepreneur must make many calculations when planning and executing his business.  What are costs today and what will be costs in the future as I produce?  What is the demand for the goods today and in the future?  How will this demand affect pricing?  Where is the competition and what actions are they taking or might they take in response to my efforts?  How much capital is necessary in the fulfillment of the business plan?  All of the calculations are calculations of probabilities – none of them can be exact because all of them regard expectations of conditions in the future.

In the meantime, countless numbers of consumers have had wants and needs satisfied.  For the entrepreneur, the calculations continue.  For him, his reward is profit if he properly calculates and loss if he does not. 

What a harrowed existence!  Ballvé asks if all of this can be avoided by political means.  He suggests that he will answer this more fully in subsequent chapters, however here he makes a very simple yet profound statement on the matter:

We shall concern ourselves later with the proposals that have been advanced and even tried with this object [of somehow using political means to avoid or minimize these risks] in view, whether by way of a change in the whole economic system or by way of corrective measures designed to overcome the alleged “weaknesses of free enterprise.”  But here we can already anticipate this much: What the entrepreneur cannot foresee, nobody can foresee, because, as we have said, science is impotent in the face of the unknown.

No one can know more than the entrepreneur.  No one else is risking his capital or the capital specifically entrusted to him.  No other means can be devised to bring to market the items most desired by consumers – that is to say, the general public.

There is no scientific formula for profits that is available to someone else not the entrepreneur- such a formula is not even available to the entrepreneur!  He is making a guess – hopefully a well-educated one, but a guess nonetheless; a guess based on probabilities.

Can the state make a better guess? Actors not in the market, not investing their own capital or capital voluntarily given for investment?  Regulators?

The free market is a market where consumers – the general public – rule.  It is a market where entrepreneurs take the risks.  The consumers always end up as winners in the trade; the entrepreneurs win only if they make good calculations of probabilities.

Instead of the free market, where the general public is the object to be served, much of the world is offered a political market.  In this market, it is the producer that is supported – supported by various means of regulation and restriction of competition.  Supported by subsidies designed to prevent loss or minimize the negative impact of poor calculation. 

Every one of these regulations and subsidies serves to diminish the role of the consumer.  Yet it is the consumer that ultimately is the best regulator of the market.  The consumer decides which producers are properly satisfying wants and needs.  The best form of democracy is the democracy brought on by the wallet of the consumer acting in a free market.

In less than ten pages, Ballvé makes plain the most simple and important of truths: leave the market free and the general public will find the greatest amount of its wants and needs fulfilled.

And the cornerstone and hero of this simple truth is the entrepreneur.

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