Leading the Revival of Individualism & Self Reliance

The Innovations Entrepreneurs Discover Depend On The Questions They Ask.

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It is in the interests of some humans to disparage the intelligence and capabilities of others. The most salient instance of this phenomenon is government: politicians and bureaucrats think the rest of us can’t get out of our own way and can’t get along without their help.

Another version of this disdain is to be found in intellectuals and scientists. They think the rest of us are dumb. They capture their arrogant disdain in fancy terminology like “bounded rationality”, by which they mean our ability to think clearly is highly constrained. But sometimes they slip, and let their unguarded language express their true superciliousness. Nobel laureate Daniel Kahneman, for example, tells us we are “blind to the obvious”, and suggested we “replace humans with algorithms wherever possible”. He thinks robots exhibit far more wisdom than humans.

Every Individual Mind Processes The World In Its Own Way.

Teppo Felin is an academic researcher who does not share this point of view, and wants to give the poor, dumb rest of us a break. He takes a more positive view of our capabilities for cognition, and finds the brilliant, value creating way we apply it in entrepreneurship.

Felin points out that the “humans are dumb” crowd base their analysis on what they believe is a limited ability of the human mind to process data. There is a lot of information in the world, and humans don’t always see it or detect it. For example, a lot of people undoubtedly observed apples falling from trees, but until Newton came along, no-one had processed these observations into the theory of gravitation. The data was there, but the pre-Newton humans didn’t “see” it. Hence, blind to the obvious. Felin calls this way of thinking about perception a “world-to-mind “ bias. There’s a lot of data the world presents to our minds and we are remiss in not seeing it all and processing it all.

However, he believes that this “world-to-mind” process is exactly the reverse of the one that actually applies, and the one that makes humans so creative. The real process is “mind-to-world”. Individuals make choices about what they are looking for in the information they receive from the world, and these choices determine what they see and what they discover. The choices are entirely subjective, and are therefore individualistic. Each one of us is discovering new things on the basis of the questions we ask, and each one of us has a unique capacity for discovery. The world doesn’t tell us what is relevant. Instead, it responds to questions. The more distinctive and individualized the questions, the more the potential for each one of us to find unique answers and novel strategies and contribute them to the social learning that drives progress.

Entrepreneurs Are Individuals Who Imagine The Future.

Felin joins the dots from the individual’s capacity to ask creative and generative questions, to the ability of entrepreneurs to imagine the future. Ironically, he thereby answers a question that our intellectual superiors ask and fail to answer: if human beings are so dumb and so constrained in their thinking and so blind, how do they generate the incredible improvement in prosperity and quality of life that we have witnessed over the last few generations? Deirdre McCloskey has estimated the scale of the improvement at 3000% over 200 years.

Felin finds the answer to these questions in entrepreneurship. Entrepreneurs are people who can imagine a better future, for themselves and the people they serve. How do they imagine the future? They ask original and creative questions. How can there be a hand-held computing device that’s intuitive to use without buttons and dials? (Steve Jobs.) What if life online were just like a college dorm? (Mark Zuckerberg?) What if the importance of a web page could be measured by the number of links to other popular web pages? (Sergey Brin and Larry Page.) What would it take to enable people to deliver packages overnight from and to anywhere in the country? (Fred Smith.) What are the implications of the continuous increases in the number of transistors that can be squeezed onto a computer chip? (Gordon Moore.) What if we could harness the power of steam to some sort of engine? (Thomas Newcomen.) What if that engine could power some kind of transportation? (Robert Stephenson.) What if I were to develop a service to help people with the tending of their yards? (Landscaping services all over the world.)

From this ability to ask original, creative questions about an unknown future, Felin’s proposition is that entrepreneurs become theorists. Their second step, after the question, is to develop a theory of how this imaginary future can be made to come about. Felin coins a term for this process through which novel beliefs about future possibilities and strategies emerge: “entrepreneurial theorizing”. Entrepreneurs are individuals with novel theories about the future.

These theories can’t come from knowledge, observation or experience. There may be some fragments of which the entrepreneur is aware or has observed in the marketplace, but, by definition, a theory is a guess that’s not based on existing data.

Entrepreneurial Theorizing Is Something We Can All Do.

Theorizing is not something limited to intellectuals and geniuses and Ph.D. scientists. In fact, Felin tells us, it’s quite childlike. It’s how children learn language, for example. They hear fragments and bits and pieces that they can’t fully recognize, and they must develop a theory of language (although, of course, they wouldn’t call it that) and then test the implications of that theory to see if it works, constantly adjusting on the basis of feedback. Entrepreneurs follow a similar process.

Psychologists tell us that this theorizing, or imagining the future, takes place separately from both the senses and perception. That’s why entrepreneurial theorizing does not require past or current observations and perceptions. It’s not the mere processing of existing data. It’s not analytical (that’s what machines do). It’s uniquely creative. It’s an act of “supposing, conceiving and considering various new possibilities (and impossibilities for that matter)”. (Emphasis original.) Imagination allows for completely new thoughts and completely new imagined scenarios, and permits envisioning an entirely new future. It’s brilliant. And we are all capable of this brilliance.

Brilliant imagination is brought to market by recombining resources in new ways. Entrepreneurs develop theories of how this can be done and set about the task of realizing their imagined scenario. Entrepreneurial theorizing never rests and never stops, from the original question (What if?) to the new innovation, which, itself, comes with more questions. How do you like it? How can I make it better?

We can all be entrepreneurs. It depends on the questions we ask and the theories we develop as a result.

The Wagner Act and Its Impact on the Great Depression

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After several years of economic unrest, in 1935 the U.S. economy seemed as though it might be in recovery. And in the wake of the Supreme Court striking down both the Agricultural Adjustment Act and the National Recovery Act, the Great Depression seemed like it may be coming to an end. In fact, by 1935 the number of unemployed had dropped to 9.5 million. By the next year, it was down to 7.6 million. But this trend would not continue.  

Even though the economy had started improving, the government had still not learned its lesson about intervening in the economy. While the Supreme Court had justly ruled that the AAA and the NRA were unconstitutional, Supreme Court Justices had upheld the constitutionality of the Wagner Act. Serving as a “Magna Carta” to labor unions, union leaders now had new powers that were upheld by the highest court.

As explained by Hans Sennholz:

“The law revolutionized American Labor relations. It took disputes out of the courts of law and brought them under a newly created Federal agency, the National Labor Relations Board, which became prosecutor, judge, and jury, all in one. Labor union sympathizers on the Board further perverted this law, which already afforded legal immunities and privileges to labor unions. The U.S. thereby abandoned a great achievement of Western civilization, equality under the law.”

And in 1937, right after the Wagner Act was upheld, The Dow Jones Industrial Average tanked once more and unemployment rates rose in response.

The Wagner Act

Prior to the passing of the Wagner Act, workers were free to either join a labor union or abstain from joining altogether. But after its passage in 1935, this freedom of association was done away with.

Under the Wagner Act, when a majority of workers in a given industry chose to unionize, all workers would be forced to either join or at minimum pay the union dues. The government’s logic assumed that since all workers would benefit from union leaders collective bargaining on their behalf, all workers should have to contribute. But not all workers wanted someone collectively bargaining on their behalf. And to bargain collectively entirely negates the role individual incentives play in employment.

Instead of each employee and employer working together to assess skill sets and value creation and determine an acceptable wage, one union leader would be doing this on behalf of all employees. If you were not as productive as your coworkers, this might be a huge relief to you, but for hard workers, this meant being judged as a group and not on their individual merit. But the affront to individualism did not end there.

If a majority of workers had decided they wanted to unionize under one particular collective bargaining agent, the topic never came up for debate again. This is because, under the Wagner Act, it didn’t need to.

As Tom Woods explains:

“Once officially designated by a majority of workers as the exclusive bargaining agent for all workers, the union is never required to stand for re-election. Even after all the workers who originally voted for the union have died or retired, the union is simply assumed to have the support of a majority of workers. The new slate of workers has no say in the matter at all.”

But in addition to forcing employees to join unions, the Wagner Act also mandated that employers must play ball with the unions, or else face the consequences with the National Labor Relations Board. In fact, if any employers were concerned with the presence and power these labor unions were having and chose to voice these concerns to any of their employees, they could be reported for “unfair labor practices.” If this sounds like a violation of the First Amendment rights to free speech, that is because it absolutely is.

It is no surprise then that the Supreme Court’s upholding of the Wagner Act made many labor unions feel invincible. All any union leader, or member, had to do was threaten to strike and they could manipulate employers into caving to every one of their whims. But their coercive tactics didn’t end at mere threats. In fact, the Wagner Act ushered in an era of militancy on behalf of unions. Violent strikes and demonstrations occurred regularly throughout this period. And legally, there was little anyone could do about it.

As Woods writes:

“Furthermore, the Wagner Act gave labor unions a degree of legal insulation afforded to no other group in society. The Act made labor unions immune to claims of vicarious responsibility. In plain English, that means that labor unions are not legally responsible for any violence their members might commit, even if union officials themselves order the violence.”

And as the great F.A. Hayek once wrote, “We have now reached a state where [unions] have become uniquely privileged institutions to which the general rules of law do not apply.” And while the Wagner Act took a toll on the concept of private sector employment, its economic consequences were disastrous and served to prolong the Great Depression even longer.

Impacts on the Economy

Explaining how the Wagner Act impacted the economy in 1935,  The Wall Street Journal states:

“A principal factor in the meltdown that year was the U.S. Supreme Court’s surprise 5-4 decision in early April to uphold the constitutionality of the Wagner Act, which had passed two years earlier. This measure, which is still the basis of our labor relations regime, authorized union officials to seek and obtain the power to act as the “exclusive” (that is, the monopoly) bargaining agent over all the front-line employees, including union nonmembers as well as members, in a unionized workplace.”

In the first few months after the Supreme Court’s decision, industrial production fell and with it, employment rates. In fact, the situation grew so dire, employment rates fell back to the 1931 levels when the Great Depression had just begun. But what is particularly interesting is that employment rates fell even as union membership continued to grow.

And with the rise of unions, employers and business owners suddenly became the bad guy. Looking for any excuse to squeeze money from the private sector, the Wagner Act also solidified FDR’s war on the business class. He imposed new stock market restrictions and even taxed retained corporate earning with the “undistributed profits tax.” And as we have already seen, taxing the business owners, who also serve as job creators, harms the entire economy and results in increased rates of unemployment.

But business owners and employers would not get relief from the Wagner Act until the Taft-Hartley Act of 1947 gave each state the authority to pass “right to work” laws that would protect employees from being forced to join labor unions or pay dues.

Does Amazon Really Destroy Jobs?

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Amazon has become the target of just about everyone who is envious of its success or wants to find a way to take a piece of Bezos’ digital empire. Recently, the city of Seattle passed a new law, levying a new employment tax on the company. The city is essentially blaming its rising rates of homelessness on Amazon’s generous employee salaries. City officials claim that since Amazon employees can afford to pay for more expensive homes, housing costs are rising, thus resulting in many Seattle residents taking to the streets in desperations.

And, of course, many outdated brick and mortar establishments, like Toys R Us for example, have also blamed Amazon for their demise. Even President Trump has joined in on this war on Amazon, accusing the company of dodging taxes, once even tweeting:

“Amazon is doing great damage to tax paying retailers. Towns, cities and states throughout the U.S. are being hurt – many jobs being lost!”

This anti-Amazon rhetoric is, of course, nothing new for the president. During his campaign, he made his opinions of the company well known. Going as far as to threaten the company before even being elected to office, the then-presidential candidate said, “believe me, if I become president, oh, do they have problems. They’re going to have such problems.”

And after a year and a half in office, the President still hasn’t seemed to have a change of heart for Bezos and Amazon. But is there any truth to Trump’s claims that the Amazon is both destroying jobs and “stealing” money from the taxpayer?

The Ultimate Job Destroyer?

The American people are not united on much these days, or so it would seem. However, if you wanted to give Americans a reason to unite against their leader, threatening their Amazon Prime accounts would be a surefire way.

Earlier this year, a report produced by the Consumer Intelligence Research Partners (CIRP) found that over 80 million people in the United States hold Amazon Prime memberships. A number worthy of recognition especially considering that it has doubled in less than two years.

Amazon has revolutionized the American retail experience. Not only do Prime members get free two-day shipping on essentially any item they wish to purchase from food to electronics, but members also have access to Amazon’s library of streamable films, shows, and music at their fingertips. Need an item in less than two days? No problem! Amazon Now offers delivery services in under an hour for participating products. Even more amazing, Amazon Prime now also dabbles in the restaurant delivery service business competing with the likes of Uber Eats and GrubHub.

And yet, in spite of all these subcategories, each requiring its own set of employees, Donald Trump has accused Amazon of inhibiting job growth in the United States. As of January of this year, Amazon had 306,800 employees and a promise to hire an additional 100,000 full-time employees by mid-2018.

On their own these numbers are impressive, but they do not account for the additional employees who will find future part-time employment via Amazon’s participation in the sharing economy.

Amazon Enters the Sharing Economy

Receiving an Amazon Prime package as an adult is akin to opening up a Christmas present from Santa Claus as a child. You don’t know how the package arrived, but it doesn’t matter. You asked for it and 48 hours later it appeared on your porch as if by magic. Unfortunately, there is no mythical Amazon being responsible for delivering these packages. There is, however, an army of Amazon delivery personnel who operate on the sharing economy model.

Like the “Uber of packages,” Amazon couriers work when they want. As with the rest of the sharing economy, this allows millennials interested in side hustles or others looking to get ahead financially the opportunity to work around their own schedules.

In the few years since the sharing economy has grown in the United States we are already seeing the benefits it brings both in job creation and consumer satisfaction. Amazon’s restaurant delivery service works the same way.

As Americans are generally discontent to live mediocre lives with mediocre salaries, these side hustles have become essential to living a full and prosperous life. Amazon’s contributions to the sharing economy as well as the overall job creation in the country is something worthy of praise. Yet instead, the company’s reputation is being eviscerated by the President in very public social media posts.

Why All the Condemnation?

Trump has made the claim that Amazon hasn’t paid its fair share of taxes and is thus, stealing money from the American people. This is entirely untrue, but what Trump is implying by this comment hits at the core of his real problem with the company: he’s a brick and mortar enthusiast.

After Trump’s tweet, Politifact dissected the president’s post to decipher which, if any, of his claims were true. According to the site:

”While Amazon takes advantage of tax breaks and loopholes, it pays federal corporate tax, and charges sales taxes in 46 U.S. jurisdictions. Last year, Amazon paid $412 million in federal, state, local and foreign taxes.”

So if it’s not about destroying jobs or stealing tax dollars, what is Trump so mad about?

Trump is a traditional businessman who made much of his money through the real estate business. By nature, the virtual business realm is almost completely foreign to him. Trump has made his living buying and selling physical space. Subscribers to the belief that Amazon is the boogieman of the brick and mortar world will appreciate this, as they see Amazon and other online retailers as a threat to their existence.

As Jeffrey Tucker says:

“It’s not just about ideology; it’s a battle of economic interests. Trump is joining an emerging war between old-style economic institutions, rooted in brick-and-mortar and nation-state loyalism, vs. new-style digital institutions that span the globe and empower producers and consumers directly

But it is not and never has been the president’s job to decide which companies succeed and which ones fail. That power rests with consumers who utilize the power of their own purses at their own discretion. Unfortunately for Trump and other brick and mortar protectionists, Amazon is constantly proving that consumers prefer to use its retail platform above all other options. For a president to openly condemn a company for outperforming the competition is antithetical to the free market that Trump pretends to support.

At the end of the day, Trump is worried about his own interests, not the interests of consumers.

Hitting the nail on the head perfectly, Tucker explains the situation:

“Consider that Trump is the consummate physical-world capitalist. He builds towers, casinos, hotels, country clubs, all rooted in real estate, and all with a gawdy 1980s-style aesthetic. With that comes “the art of the deal.” The deals are done on golf courses, in “old boys” clubs, through personal networks. It’s about meeting in board rooms with mayors and city planners and trading favors. He hires contractors to dig and build and rent. He puts his name on large structures and they reach to the skies to proclaim his personal glories.”

But there is another layer to Trump’s disdain for Amazon. And like many of Trump’s stances, this one is also rooted in personal drama.

Facts have never meant much to our president, but any criticism cast in his direction has quickly garnered his attention. Jeff Bezos, the CEO of Amazon, recently purchased the Washington Post, a publication that hasn’t shied away from attacking Donald Trump.

Addressing this issue head-on, Trump has even made statements questioning Bezos’ motives:

“I have respect for Jeff Bezos, but he bought The Washington Post to have political influence, and I gotta tell you, we have a different country than we used to have.”

He later continues this line of thinking saying:

“He owns Amazon. He wants political influence so that Amazon will benefit from it. That’s not right.”

Unfortunately for Trump, he has chosen to attack a mighty monument of consumerism. Amazon’s services are just too good and too plentiful to fall victim to Trump’s attacks. In fact, Amazon Prime’s 80 million subscribers outnumber the 57.6 million people who voted in the 2016 election. Sorry President Trump, consumers have already voted with their dollars and they choose Amazon.

Portland Is Trying to Tax Airbnb to Fund Local Home Ownership

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Just a few months ago, the mayor of Portland, Oregon, Ted Wheeler, proposed a new tax on Airbnb and other home sharing companies. Hoping to bring in an additional $1.2-$2.5 million towards the city’s housing budget, this new tax would charge $4 per night, per room on all home sharing businesses operating within city limits. Additionally, hosts who list their homes on these home sharing platforms will also be required to pay a 2 percent charge to the city, which is estimated to bring in an additional $720,000 to $840,000 a year, all of which will go towards the city’s tourism department.

As with most taxes of this nature, advocates are fueled by good intentions. In this case, Portland officials believe that Airbnb and the home sharing sector are somehow making it harder for Portland residents to find housing. Unfortunately, the logic behind this proposed tax is severely lacking.

City Commissioner Nick Fish stated:

“Short-term rentals take apartments off the market for people who live here—it’s only fair that companies like HomeAway and Airbnb offset their impact by helping us replace the affordable homes Portland is losing to this industry. We look forward to a conversation about the best use of those funds.”

For starters, there is no substantial evidence that Airbnb is making it harder for Portland residents to find housing. Correlation, after all, does not always spell causation. But to make matters worse, the city intends to direct these funds to a program that has already failed dismally. Initially created to help Portland residents displaced by city development, the government program has only managed to help six people in three years. This doesn’t create a whole lot of confidence.

And then, of course, there is also a huge problem with asking a private company to pay for a problem simply because they are successful and profitable.

Prior to Portland’s proposal, Seattle passed a new law that would levy employment taxes on big businesses and direct that revenue towards helping the homeless. By their logic, since Amazon offers highly competitive salaries, it has caused an influx of people to Seattle who now have the means to afford more expensive homes. This has driven up housing costs and, according to the city, has meant that many Seattle residents are now left homeless.

Apparently, Portland caught wind of Seattle’s big business money grab and is not attempting its own version of the scheme. But condemning Airbnb for making housing harder to find is ridiculous, especially since the opposite is true. When an article announcing this tax was posted on a local news site, one commenter wrote:

“You know what helps people keep their homes when they suffer reduced income, a large medical expense, or some other major financial issue? Being able to rent part of their home out on Airbnb.”

And this commenter hit the nail on the head. In neighborhoods where housing costs are high, residents have found a way to earn extra income by renting out space on Airbnb and other home sharing sites. This has allowed people to be able to live in pricey, popular cities that they may not otherwise have been able to afford. Airbnb is actually helping to ease the burden of finding housing in Portland.

Additionally, levying a tourism tax on hosts who list their property on Airbnb is also absurd. Airbnb is helping to drive more tourists into the city. Hotels are expensive and often hard to find, that is why so many tourists have turned to Airbnb. In fact, that is precisely why Airbnb originally became a household name. 

During the Democratic National Convention in 2008, the entire city of Denver, where the event was held, was out of hotel rooms. People were desperate for lodging accommodations and it also happened to be when Airbnb launched their site. As a result, many tourists were able to find housing. This is the beauty of Airbnb.

So by levying this tax on the hosts, Portland is essentially penalizing Airbnb for bringing in tourists, and then using that money to further fund the city’s tourism. It doesn’t make a whole lot of sense, but neither do any of these types of laws.

If cities like Portland and Seattle are not more careful, they will start to see big businesses flee their cities so as to avoid having to deal with these burdensome taxes.

Got a License for That Sandcastle? If Not, You Might Face Jail Time in One City

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Bryant Rylee lives a seemingly simple life. Before the state intervened in his life, his Facebook page—which has a modest 591 friends—was relatively quiet. However, that was before a sandcastle built by his son caused the city of Panama, Florida, to threaten him with a $500 fine and up to 60 days in jail, a threat that caused his Facebook page to get its “fifteen minutes of fame.”

Sandcastles are the epitome of childhood innocence and the manifestation of youthful creativity and wonder. As adults embarking on a day at the beach, we see only grains of sand that serve as nothing more but an uneven cushion beneath our feet. For children, the sand is a blank slate upon which they can build anything they want—kingdoms included.

Anyone who grew up or spent a great deal of their childhood on an American coastline knows the joy of playing in the sand.

Whether they are indeed putting their burgeoning engineering skills to good use and building intricate sandcastles with high towers and moats to guard against their siblings and rogue seagulls, or are building vast holes in which to bury each other, both are apparently illegal if you are spending the day on Panama City Beach in Florida.

The Law Strikes Back

As Florida residents, a day at the beach is pretty typical for the Rylee family, and this particular day in late March seemed no different than any other. As his son began carving out the foundation for his kingdom, Rylee was approached by a law enforcement officer patrolling the beach under the guise of looking out for public safety.

Rather than compliment the boy on his impressive building skills, the officer on the scene told the Rylee family that they were breaking the law and would be fined accordingly.

The Rylee family must have initially thought this was a joke since there did not appear to be any “criminal activity” going on. There were no drugs, alcohol, or any other dangerous or hazardous items—except for metal sand toys.

Apparently, the use of metal sand toys—like shovels and buckets—are forbidden on Panama City Beach, though few locals could tell you this because very few actually know this is illegal. Additionally, it is illegal to dig a hole that is deeper than two feet and likewise, longer than two feet.

Since Rylee’s son’s castle was only one foot deep, he was able to talk his way down to a $25 fine, but the situation only escalated from there.

Rylee has been coming to Panama City Beach for thirteen years and has used metal tools to dig with for just as long. As any informed and wise individual would do, Rylee asked for the proof that this was, in fact, an illegal act by asking for the corresponding ordinance number that was to be used to levy this $25 fine.

His audacity to dare question the power of the state apparently made the female law enforcement officer on the scene uncomfortable, which caused her to call for backup. Within minutes four additional beach patrol units swarmed the scene and surrounded Rylee’s family.

While this did at least bring some attention to the brilliant beginnings of the sandcastle Rylee’s son had started building, this was a bit of an overreaction considering this was a young child playing in the sand and not a cartel drug bust.

Why Am I Being Punished?

Additionally, it is unclear if any actual criminal activity or otherwise public safety issues were ignored because four officers were called away from their work to discuss the matter of a sandcastle.

Upon reaching the scene, one officer told Rylee that if he and his son would just fill in the hole, and rescind his request to see the ordinance, the “gracious” state would let him go without any fine. While this sounds bizarre, it seems this offer was most likely given because truthfully, the officers themselves did not even know what the ordinance number was or what the actual ordinance entailed.

Rylee refused and insisted on paying a fine if he could at least see the ordinance that declared his son’s activities to be illegal. According to his Facebook post, Rylee said it took officers 20 minutes to track down the actual ordinance before being able to show him why he was being punished.

While Rylee, a devout Christian, says he supports law enforcement and prays “daily for their protection,” he also said on his social media account that, “I do believe that ‘we the people’ have a right to ask what ordinance number or to see the ordinance.”

Rylee is absolutely correct. In the American legal system, there is a pillar of jurisprudence known as Mens rae, which is latin for “guilty mind.” The principle itself comes from the latin phrase actus reus non facit reum nisi mens sit rea, which translates to, “the act is not culpable unless the mind is guilty.”

This is a standard test of criminal liability that asks the state to consider whether or not a person has broken a law knowingly before guilt can even be assessed.

Obviously, while there are some crimes, like murder, that are commonly understood to be illegal and immoral, there are other frivolous city and state ordinances, like the one used against Rylee, that most average Americans would never know they are breaking. Thus, imposing fines and threatening jail time for crimes that are committed “on accident” is not only immoral, it goes against the very foundation of justice.

While Rylee did, in fact, ask to see the ordinance, this was after he was already accused of a crime he did not knowingly commit. Without the foreknowledge that there was even any statute to be broken, this situation should never have escalated this far or even happened at all. But this is what happens when a government grows too large to maintain.

How Good Entrepreneurs Create New Value For Consumers, While Bad Entrepreneurs Act Like Managers.

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Entrepreneurship theory is at the core of Austrian economics. So what? Theories aren’t much good to actual entrepreneurs, surely? Per Bylund, Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University, is one of the world’s leading experts on entrepreneurship, and here, he explains exactly how a better understanding of entrepreneurship theory – and specifically how to create new value and discover paths to profit based on meeting customer needs – can help real world entrepreneurs to commercial and competitive success.

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Not long ago, I needed the help of a plumber to fix a leaking bury hydrant on my property. While I could probably dig the hole and then, thanks to the glorious Internet, figure out how to fix it myself, it would hardly be a valuable use of my time. I am better at researching and teaching, and then spending some of my earnings to get other things done. So, I relied on the specialization offered through the division of labor in the market.

Using a well-known referral service to separate the wheat from the chaff, and thus find a reliable and reputed plumber, I was able to get an appointment the next morning. Long story short, the plumber shows up, looks at the bury hydrant, says something about “oh, you have one of those” followed by “I didn’t bring tools for that kind of job,” and gets in his van and drives off.

Four hours later, the leak is fixed. I am presented with the bill, payable immediately (“cash or check”), for a total of four hours of work: two hours of driving, most of it for the trip back and forth for the tools this plumber didn’t bring, and two hours of digging and fixing. When I make clear that it’s not my responsibility to make sure the plumber brings the appropriate tools for the job, and that I’m therefore opposed to paying the outrageous $85 per hour for him to drive his car, the response is simply that I’m being charged for his “time.”

I ended up having to pay the ludicrous amount, half of it for nothing of value to me. But the point is not that another licensed (state-sanctioned and protected) plumber over-charged yet another customer. The point is that this plumber didn’t work for a larger business, but was self-employed—and failed completely to understand what it means to run a business.

Entrepreneurship Is About Creating Value.

This failure among entrepreneurs to understand entrepreneurship is ridiculously common, and we’re all worse off because of this fact. The problem is that even though they would have a whole lot to gain from taking just a small step in the right direction, they fail to do so. While one cannot blame them for being ignorant (entrepreneurs have “better” things to do than study entrepreneurship theory, for example), it is a sad fact that many entrepreneurs think of their businesses as their employment. That’s exactly the wrong assumption.

Entrepreneurship is not employment, and calling owner-managers of very small businesses “self-employed” is doing all of society a disservice. It only causes confusion. Employment is the assignment to carry out specific tasks (or produce a set of fairly standardized outcomes) within an existing business. When you are employed, your time and effort are introduced into a larger and tightly knit production process that is centrally coordinated (see my book, The Problem of Production: A New Theory of the Firm, on this).

This is nothing like starting your own business, which does not have a set framework and no pre-existing production process. The thing with entrepreneurship is: you can offer whatever service you like in whatever way you like. You certainly cannot do that if you are employed in an existing business. These roles are actually more different that many might realize.

To put this in economic terms, entrepreneurship is about creating new value: to do this, one must first find out what consumers value and how you, the entrepreneur, can satisfy those wants. You make money by making consumers happy—solve their problems, satisfy their wants, make their lives more comfortable, etc. Whether you are successful is completely on the consumer’s terms (and relative to what others offer).

Entrepreneurship Is Not About Cutting Costs.

Within an existing business, the value is already established. Existing businesses have already figured out some type of market position where they can make money – a niche where the value they offer to consumers is higher than the price they charge, which in turn is higher than the costs of production at the relevant production quantities. Your role as employee in a business is thus to contribute to the production process by carrying out the assigned tasks (or your part of the process) and do so as effectively and as cheaply as possible. Your role, and the role of management too, is to cut or keep down costs.

See the difference? While your role as employee (or manager, for that matter) is to keep costs down so that the business can continue to sell goods and services at a profit (at the already determined market prices), the role of the entrepreneur is to figure out how to provide value to consumers and how much to charge for it. (I elaborate on this non-cost perspective in Dr. Matthew McCaffrey’s recent anthology, The Economic Theory of Cost: Foundations and New Directions.)

An entrepreneur who focuses on cost is in effect acting as the manager and not entrepreneur of his or her business. This works if there is already a production process with a given beginning and end as well as known prices. But if you are “self-employed,” you do not have the luxury of focusing on keeping down or cutting (your) costs instead of creating value.

The aforementioned plumber, for instance, charged for “time” (his cost) rather than the value provided (stopping the leak). Leaving destructive incentives aside (“forgetting” tools is a great way of getting paid for not doing much work at all), it is very unlikely that I will use his services again. And I will certainly not recommend his business. In other words, he has destroyed the value of a potential repeat customer and a “free” inflow of customers (which could have been the result of keeping my, his customer, satisfied).

This is different in an existing, already established business, which — if properly managed — offers standardized goods or services in a standard way. No employee has the right (or is trusted) to change the business model.

But entrepreneurs do — and should. Starting your own business to do things exactly like everybody else is asking for trouble (unless, as with plumbers, licensing effectively thwarts competition). Nobody will recommend that you start a business to compete in a commodity market — unless you have an innovative approach (which, by definition, means you’re not actually competing in a commodity market). Incumbents have already tweaked and improved their production processes to keep their costs per unit of output below what you can accomplish as a startup doing the same thing.

Entrepreneurs Doing Entrepreneurship.

Entrepreneurs must create value. Note that some of the value creation can be as simple as using proper communication. Had this plumber, instead of charging per hour (and, as this one did, stating that it took him two hours to drive home to get the forgotten tools!), charged a fixed rate or even stated that he took some off the total since it was only driving time, I would have been more satisfied with the service.

Even better, had this plumber stated up front that he’d charge a certain price for this kind of job, I would have already committed to paying it. Instead, he — and, presumably, most other plumbers — treat their business as a job: they do nothing different, they charge the same, and they focus on charging the customer for their cost (and not the value provided).

In hopelessly regulated and non-innovative industries like plumbing, non-entrepreneurial entrepreneurs can make a lot of money off of customers whether or not customers value their services. And since basically none of them think as entrepreneurs, consumers suffer comparatively outrageous bills for low-value services. But all it takes to disrupt this market is one innovative plumber to implement a different business model than everybody else is using.

To do this, the innovative plumber must think differently. He or she must place the customer and their satisfaction first — and adjust costs to the value provided. Not the other way around. Focusing on costs, and then “charging” customers based on those costs incurred, means leaving loads of money on the table. This is money that would benefit both plumbers thinking as entrepreneurs and their customers. That is what entrepreneurs do: they create value.

Managers, in contrast, keep costs down in producing the already given value. Both are needed in a well-functioning economy, and to contribute to a higher standard of living. We cannot take a shortcut directly to management and expect miracles, because we’ll only get more of the same. That applies both to the individual business owner, who will at best earn normal profits, and society at large, which will at best experience marginal economic growth.

Per Bylund is assistant professor of entrepreneurship & Records-Johnston Professor of Free Enterprise in the School of Entrepreneurship at Oklahoma State University. Website: PerBylund.com. This article was first posted at mises.org.

How One Individual Saved the World from Nuclear War

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Apocalypse Almost

Stanislav Petrov was working the overnight shift on September 26, 1983 when he inadvertently saved the world from nuclear war.

As a lieutenant colonel in the Soviet Union’s Air Defense Forces, Petrov was tasked with monitoring the country’s satellites, looking for possible nuclear weapons launched by the United States. There was nothing particularly unusual about this shift until the alarms began to sound at dawn.

The alarm had indicated a warning that America had launched five nuclear intercontinental ballistic missiles. And it was Petrov’s job to sound the alarm that would initiate a retaliation before it was too late.

“The siren howled, but I just sat there for a few seconds, staring at the big, back-lit, red screen with the word ‘launch’ on it,” Petrov remembered.

Earlier that same month, the Cold War had further escalated after the USSR had shot down a Korean commercial airliner that had flown into its airspace. The incident resulted in the deaths of 269 people including a United States Congressman from Georgia, Larry McDonald.

The heightened tensions between the two global superpowers made the decision forced on Petrov even more grave.

Petrov recalled:

“There was no rule about how long we were allowed to think before we reported a strike. But we knew that every second of procrastination took away valuable time, that the Soviet Union’s military and political leadership needed to be informed without delay. All I had to do was to reach for the phone; to raise the direct line to our top commanders — but I couldn’t move. I felt like I was sitting on a hot frying pan.”

Countless Lives Saved

Petrov hesitated because he had a gut instinct that something was off. This technology was still fairly new, and he was sure it had some kinks to be worked out. In his training, he was taught that any strike from the U.S. would most likely come as a full-fledged attack. Yet, the satellite system was only showing a handful of missiles. This hardly constituted all-out warfare. What if the satellite was incorrect? Was he willing to call in his superiors and start a nuclear war over a system error?

On the other hand, if the monitors were correct, Petrov only had 20 minutes to act before the missiles struck. After a torturous internal debate, Petrov decided not to act in haste. He quickly checked to see if the satellite had malfunctioned, causing it to report a false launch.

He soon discovered that there had in fact been an error and no missiles had been launched at all.  

If Petrov had simply sounded the alarm for his superiors, as he was trained and ordered to do, there is a good chance counterstrikes would have been launched on behalf of the USSR and the world may not be as it is today.

Commenting on this historic event that almost was, arms control expert Jeffrey Lewis told NPR:

“[Petrov] just had this feeling in his gut that it wasn’t right. It was five missiles. It didn’t seem like enough. So even though by all of the protocols he had been trained to follow, he should absolutely have reported that up the chain of command and, you know, we should be talking about the great nuclear war of 1983 if any of us survived.”

Petrov serves as a great reminder that one individual can make a huge difference. Before his passing a year ago, Petrov said, “…they were lucky it was me on shift that night.” And he is absolutely right.

In The Cause of Urban Poverty, Economic Education Or Economic Activism Are The Choices.

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It was recently announced that the United Way CEO of a major Midwestern city has created a new initiative. A local news Special Report states that the objective of the United Way is to fight poverty; and the report summarized the problems related to urban poverty, the root cause of those problems, and it explained the new solution designed to eliminate both.

Defining the Five Conditions of Poverty

The main problems facing the urban poor are broken down into these five areas:

Housing – “Renter families are ‘housing insecure,’ meaning they are spending more than 50% of their income on rent and utilities.”

Families – “More than 75% of the children in poor families are not ready for kindergarten.”

Violence – “People in poverty have a higher exposure to violence.”

Subsistence Living – “Minimum wage workers struggle to cover the cost of housing, food, health care, and childcare.”

Despair – “No one wants to live like this, but they cannot afford to break free of the cycle.”

Ready, Fire, Aim

Of course the first step toward solving a problem is to admit there is a problem. The new CEO “remembers the exact moment he realized that his organization was no closer to solving the issues that give rise to poverty than it was when it opened its doors more than a century ago.” Problem acknowledged.

And successful problems solvers are adept at crafting effective solutions, recruiting a team, and implementing the plan. “The answer became clear, striking him like an epiphany: an ambitious collaboration between government, non-profit agencies, foundations, and the private sector.” Solution prescribed.

Discovering the root cause generally requires scientific testing and evidence, “And United Way’s role? Tapping into its unique power to raise money, to convene the conversation, and to condemn the racism that fuels social disparities.” Cause identified?

Which begs the question – Does this mean a century of futility could have been avoided if only for a fresh idea like government and non-profit agency collaboration, all funded by the private sector?

The Smartest Folks at the Institute

So finally, “media outlets have supported the United Way in its effort to direct investments toward finding solutions.” To guarantee the  success of this new Institute, “representatives from the county and other local governments are guaranteed seats at the table. Others will “have proven track records of collaboration, creativity, and offering wrap-around services. In addition to convening  the conversation and inspiring philanthropy, the Institute will shape public policy to disrupt systemic racism.” This is a sweeping vision.

As economist Thomas Sowell explains in his book The Quest for Cosmic Justice, “the more sweeping the vision – the more it seems to explain and the more its explanation is emotionally satisfying – the more reason there is for its devotees to safeguard it against the vagaries of facts.”

So what is this racist system? How can we disrupt it? What good would that do? How is success measured? At whose expense? What is the track record of these inspiring and creative collaborators, fundraisers, and policy shapers for issuing disruptive condemnations?

The Peculiar Institution Redux

Coincidentally, historian Kenneth Stampp used the same five problems listed in the Special Report to describe the living conditions of slaves on southern plantations. His classic book on the subject is The Peculiar Institution: Slavery in the Antebellum South. Of course living conditions for 19th century slaves were horribly worse. Systemic racism was a root cause, as it has been throughout human history; but is it also the root cause of our modern urban plantations?

The history of the modern problem can be traced back to 1964. Dr. Thomas Sowell addressed the five living conditions of urban poverty in his article –  The War on Poverty Revisited.

Housing – “Brand-new government housing projects almost immediately became new centers of crime and quickly degenerated into new slums.”

Families – “The black family, which had survived centuries of slavery and discrimination, began rapidly disintegrating in the liberal welfare state.”

Violence – “The murder rate had also been going down, for decades. Then the new 1960s policies toward curing the “root causes” of crime began.”

Subsistence Living – “The economic rise of blacks began decades earlier, before any of the legislation and policies that are credited with producing that rise.”

Despair – “In various skilled trades, the incomes of blacks relative to whites more than doubled between 1936 and 1959 — that is, before the magic 1960s decade when supposedly all progress began.”

Is the system in question really the political apparatus of the War on Poverty? Is the racism in question embedded in this system?” Will this new Institute become an unwitting agent for the status quo?

Of Political Visions and Scientific Visions

The CEO of the United Way has set in motion a political vision, and Dr. Sowell compares that with the scientific:

Visions are not inherently dogmatic. Einstein’s vision of the universe was at least as revolutionary in science as Lenin’s was in politics. Yet Einstein insisted from the outset that his theory of relativity must be checked against observable facts before it could be accepted – and so it was, by scientists around the world.

The facts observed politically in this case are limited to the racial component of existing conditions, meaning circumstantial evidence. The political root cause is nebulous at best. 

The facts observed scientifically are long-term data sets of complex systems. The scientific root cause is a specific set of government policies that were implemented just before the problem mushroomed and began to metastasize.

The United Way CEO describes the real problem eloquently: “I know it seems obvious. But a lot of big organizations think they have the secret solution to everything. And we don’t.” Yet his political solution is more and bigger. Iconic social commentator W. C. Fields had a cure for this common definition of insanity, “If at first you don’t succeed, try, try again. Then quit. There’s no point in being a damn fool about it.”

As Hunter Hastings has written, the scientific solution is a decentralized one . “Economics is the essence of civilization, the moral science. It can teach kids to deal with the circumstances of the world around them, to sustain themselves as individuals.” For proof, Sowell observes that “The poverty rate among black families fell from 87 percent in 1940 to 47 percent in 1960, during an era of no anti-poverty programs.” Now is the time to replace government monopoly activist education with economic education in the marketplace of ideas.

 

Degenerate And Delusional Elites Are Being Toppled By The Exotic And The Outliers.

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We need new leaders – a better elite, a better ruling class.

So says Patrick Deneen, a Harvard social scientist, in a discussion of his book, Why Liberalism Failed. While we would disagree with him (we don’t need any leaders, nor an elite, nor a ruling class) it is nonetheless instructive that the elite is calling for its own abolition. This can only be a good thing.

Coincidental with Deneen’s call for an assisted suicide of the ruling class, we noted two significant recent examples of the new wave of the elite questioning itself, one in politics and one in technology.

An “Exotic” Nationalist Questions Radical Centralization.

Ryszard Legutko is a university professor who represents Poland’s conservative governing party at the European Parliament. That’s about as elite as it gets in Europe.

But Professor Legutko questions the status quo, and uses some challenging language in doing so. For example, he states  that “the European Union reflects the order and the spirit of liberal democracy in its most degenerate version.” As a result, “the EU doesn’t merely have individual dissidents in its midst, but dissident states”. (Just like the USA has California.)

Poland is one such dissident state. It is currently involved in a dispute with the EU central body because Poland wants to reform its legal system (80% of the Polish people support the reforms, according to Prof Legutko) to get rid of Supreme Court judges who “faithfully and shamelessly served the communist regime”. Legutko sees the reform as surgery to remove this dead tissue from the rotten corpus of the judiciary. The EU disagrees because, Legutko says, it is liberalism incarnate. “A liberal is someone who will tell you, I will organize your life for you. The Poles refuse to have their liberty organized for them, and are therefore branded by the elite as stupid, dangerous or both”.

Legutko’s term for Poland is that it is an”exotic” country in Europe. The term is one of opprobrium, hurled at the country that is trying to throw off its communist past to enter the community of Western nations. The Western elites will not welcome the return of a prodigal if it refuses to conform precisely to the norms of the liberal establishment.

Legutko doesn’t think it’s because of what Poland does “wrong” that the country is so criticized and so ostracized. It is “because of who we refuse to be”. The feeling that there are different worlds and different cultures, unlike the one the elites live in, “is disappearing because of the homogenization of Western culture”. The elites are very intolerant, which is why Poland is searching for new leadership.

A Technology Prophet Predicts An End For The Delusional Ideas Of Silicon Valley.

We’ve been persuaded to think of Silicon Valley as a pinnacle of innovative technologies and the home of the leaders of the tech revolution. George Gilder thinks they’re delusional and will soon be replaced.

“The Google paradigm of massive data centers and artificial intelligence determinism will be transcended in the next era”, which Gilder believes is starting right now. The advances in machine learning that Google trumpets and preens about really are just advances in the speed of processing. It’s not super-intelligence, it’s just the same intelligence accelerated to terahertz speeds.

According to Gilder, we will leave behind the big tech view that there’s an inexorable Darwinian model that allows the big winners to take all. But the GAFA conglomerates will dissolve, and the clouds of concentrated computing and commerce will disperse. “We’re moving beyond digital and silicon to carbon nanotubes with hybrid chips and sensors and 5G antennas everywhere. Even money is being disaggregated and reinvented. The clouds are dispersing into the skies – sky computing rendered on your laptop and smartphone, spread across blockchains, transparent and transformative.”

There are new leaders for this new architecture. In an interview in Forbes, Gilder mentions several, starting with Vitalik Buterin who created Ethereum, “an amazing new computer platform based on a new blockchain that he…programmed with a new computer language and financed with a new currency….based on a new unit of computational value”. Gilder assesses Buterin as one of the great figures in today’s world economy, leading a global movement, raising money for an array of new inventions, new distributed systems and new architectures.

Austin Russell, founder of Luminar, appraised all the current systems for self-driving cars and realized that none of them could produce a functional vehicle that would survive amidst the myriad conditions a car actually encounters on the world’s roads. He started from scratch to build a 50-fold better system based on new frequencies and new chip technology.

Thomas Sohmers started Rex Computing as a 16-year old, and is completely changing chip architecture. All these leaders and all these advances are coming from outside the normal channels. These entrepreneurs are outliers. They are defying “the Silicon Valley centralization of leviathan companies that chiefly buy up their own rivals and buy up their own stocks with zero-interest money pumped out by central banks”.

The New Leadership Will Come From The Bottom, The Edge, The Outliers, And Wherever The Elites Don’t Expect.

These examples – the political and cultural dissidence of Poland, and the tech dissidence of Ethereum, Luminar and Rex Computing – share the common attribute of anti-elitism. They are attacks on conventional wisdom. The new world never looks like the old one, but the established elites can never realize that fact.

Patrick Deneen wants a new elite. Much more likely is the emergence of a system of no elites, and no ruling class. The change will come from the bottom, not the top. It will come via radical decentralization and radical individual innovation, not from top-down reform. It’s already in motion.

The New Deal Prolonged and Worsened the Great Depression

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I can still remember learning about the Great Depression during while studying American History during my undergrad. My professor may as well have been standing on a soapbox when she declared to our class that Franklin D. Roosevelt was this nation’s greatest president, and anyone who said anything to the contrary was wrong. There was no room for debate and certainly no room for further discussion. But that didn’t stop her from continuing this rhetoric throughout the entire Great Depression unit.

FDR’s standing as the nation’s greatest president may be up for debate, but the opinions of my professor are most certainly important because they reflect a deep flaw in our nation’s understanding of the Great Depression. There is this belief that by intervening and implementing the New Deal, FDR saved Americans from the depths of the Great Depression. But in fact, the opposite was true. FDR’s New Deal actually prolonged the Depression and made it far worse than it otherwise would have been.

As discussed previously, booms and busts occur in the market when governments meddle in the economy as they do. If left alone, the market will correct itself and the economy can be prosperous once again. But as soon as the government steps in, correction is inhibited and recessions and depressions prolonged. This is precisely what happened when the New Deal went into effect during the Great Depression.

The Agricultural Adjustment Act

Everyone has been taught that during the depression, many Americans were starving and unable to feed themselves and their families. But what most do not fully understand is that farmers actually had an abundance of crops. However, thanks to the Agricultural Adjustment Act (AAA), which was part of the new deal, farmers were actually required and even compensated to destroy both crops and livestock. If this sounds like an absurd thing to do while your nation starves, that is because it is.

As part of the AAA, a new tax on agricultural processors was levied and the funds generated from the new tax were then used to implement the destruction of crops and farm animals. Of course, the larger commercial farmers really benefited from this, as they could more easily afford to lose so much of their inventory. But for smaller farms, this destruction sealed their financial fates.

As the Cato Institute explains in Tough Questions for Defenders of the New Deal:

“FDR promoted higher food prices by paying farmers to plow under some 10 million acres of crops and slaughter and discard some six million farm animals…This policy and subsequent programs to pay farmers for not producing victimized the 100 million Americans who were consumers.”

Tax and Spend 

One of the most egregious aspects of the New Deal was the National Industrial Recovery Act which established the National Industrial Administration (NRA). The NRA essentially commandeered certain private industries and put them under the control of the NRA. But to add insult to injury, the industries that were taken over were forced to fund the NRA with revenue collected from a series of new taxes they now had to pay.

Needless to say, this did not bode well for businesses that were already struggling to stay afloat. It is even estimated that the NRA increased the cost of operating a business by 40 percent. It is a shock that any businesses were able to survive the tax burdens placed on them under New Deal policies. In addition to raising taxes on businesses, the income tax was also raised. And the money being generated was not exactly put to good use.

Under the new deal, jobs were created for the sake of creating a job and not out of actual market demand. Under public relief programs, actors were even hired to entertain librarians while they cataloged books. While this may have been appreciated by the librarians, providing entertainment is not the job of the federal government. Nor was it a job needed at the time.

In additional to useless jobs, the New Deal ushered in an era of worthless infrastructure as well. After the Public Works Administration was instituted, more than 77,000 bridges and 116,000 buildings were built. And while leftists love to use this point in particular, to prove just how beneficial the New Deal was, there was no actual need for this new infrastructure, making all this new architecture virtually useless. But since the government kept taxing the people, they had money to spend, even if that spending was only serving to prolong the Great Depression.

Freedom from the New Deal

It wasn’t until 1935 that the economy finally got some relief from FDR’s New Deal policies. In 1935, the Supreme Court ruled that the NRA was unconstitutional in the case of Schechter Poultry Corp. v. United States. In 1936, the Supreme Court also ruled that the AAA was unconstitutional in the case of United States v. Butler. Eventually, other programs started under the New Deal were also struck down and they disappeared.

It should surprise no one, then, that in the years following the Supreme Court’s decisions, the economy began to rebound. By the end of 1935, the national unemployment rates had already begun to fall. Of course, this was not the end of the government’s interference with the economy.

The fact remains that had the government taken a hands-off approach to the economy, the market would have corrected itself in a shorter amount of time. But as a result of this interference, millions of American families and businesses suffered longer than needed. Of course, even though the Supreme Court had struck down the NRA and the AAA, the federal government had still not learned its lesson. In fact, in 1937, the Wagner Act would once again cause unemployment to rise.

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