15. The Entrepreneur, Risk Taking And The Profit Motive
From The Australian Achievement: From Bondage To Freedom by Dr Mark Cooray (1996)

One of the more important players in the free market is the entrepreneur. In the free market the skills and risks which the entrepreneur is willing to take can be fully exploited by both producers and consumers to their advantage.

Entrepreneurship manifests itself in many ways. Entrepreneurs start businesses, develop new procedures for the production and distribution of goods, act as middlemen between markets and are a source of information. The entrepreneur is also characterised by an alertness for opportunities which have been ignored or unseen by others. These opportunities are almost always accompanied by some profit.

The perception that a profit can be made by a market action is perhaps the prime mover of the entrepreneur. To buy at a set price and then sell at a higher one and the accompanying freedom to keep the difference as reward for his efforts provides the individual with the proper incentive to utilise the skills and abilities, along with a calculated risk, which make an entrepreneur. Moreover, if the entrepreneur is to function at all, it is only by the absence of stifling government restrictions and regulations, which may inhibit any pursuit of perceived opportunities. The reference above to government restriction does not exclude the need for laws to prevent fraud and promote competition. (See sections 5.3, 16 and 26).

The benefits which society gains from the actions of entrepreneurs are generally three-fold: Firstly, the entrepreneur, by learning from past mistakes, often develops better ways of utilising resources. This means greater efficiency and often cheaper manufacturing methods which are introduced into the production process, thus saving resources and providing a relatively cheaper good to the consumer. Secondly, new resources are discovered. For example, in the last one hundred years man has seen electricity provided by coal, then water and now, by nuclear power plants and solar cells. Finally, it is through innovation, chance and alertness that much of our current technology has been produced. It is no mistake that the freest nations of the world have enjoyed supremacy in the field of technology, whether it be medical, biological, chemical, etc. Again, it must be said that these three benefits are available through the presence of those who are alert, who are risktakers and who are able to link markets for a profit.

Some may believe that many of the more restrictive nations of the world also possess the same achievements as the freer western countries. A closer look often reveals that this is not true. In the vast majority of cases it is the West that has provided the Communist countries with what they possess. It is no secret that Henry Ford built many of the transport companies that are found in the Soviet Union today. It is no secret that the period of detente during the mid-1970's was a period in which the Soviet Union gained much needed technology from the United States and Western Europe. Manufacturing processes in the Soviet Union were often inefficient and labour intensive, the costs of which were invariably passed on to the Soviet consumer. It is also true that much of the benefits of technology of totalitarian nations is not available to their citizens, but is reserved for party and bureaucratic leaders or for the generation of export income. This was exemplified by the need of the wife of Andrei Sakharov to be treated for a heart condition in the west. All the cases provided above are maintained by the inability to link markets, discover new production techniques, to do as one pleases, or to think outside the boundaries of official dogma. In other words, the absence of entrepreneurship.

The market order tends to generate goods and services to cater to the demands of the customer. More precisely, individual producers and sellers produce the goods and services, acting on the basis of their appraisal of the wants of the customers. If they are correct in their judgement then they will prosper, if not, they will not attract buyers and they will fail.

Within a free market order, entrepreneurs have to take risks because the last word lies with the potential buyers, the consumers. Ludwig von Mises pointed out in The Anti-Capitalistic Mentality, Illinios (1972),

"In the market of a capitalistic society the common man is the sovereign consumer whose buying or abstention from buying ultimately determines what should be produced and in what quantity and quality".

This involves an element of risk for the entrepreneur and in return for the risk he demands a reward — this is the profit margin. Profits serve the dual purpose of rewarding the successful entrepreneur (that is, the person who caters best to the wants of the public) and providing capital to develop the business. This may take the form of investment in updated plant for increased efficiency and lower prices, it may involve expansion into new products and new markets, it may involve the takeover of less thriving firms in order to put their resources to more productive use.

Profits cannot be obtained by exploitation, unless the market is not free (a situation considered below). They are obtained by bringing the factors of production together in a creative manner that makes the resulting product worth more in the market than the sum of the individual components. In addition, the entrepreneur may find new ways to satisfy the wishes of consumers.

The entrepreneur, within the private enterprise system, has been a target of attack. Entrepreneurs are supposed to be driven by unbridled greed to maximise their profits at the expense of workers and consumers. They use monopoly powers to exploit the workers with low pay and hazardous working conditions. And in modern times they have perfected various means of exploiting consumers as well, especially by advertising and control of the markets to force people to buy things that they do not really need or want.

This overlooks the dimension that entrepreneurial impulse is diverted to antisocial ends when markets are distorted by law and political interference. Everyone acts as an entrepreneur to a greater or lesser extent in making use of their resources and assets to satisfy their wants and to do the best for themselves. In open markets entrepreneurs do the best for themselves by providing better or cheaper goods than their rivals. But another way to improve their position, and to minimise their risks, is to obtain government support to close the market to other competitors. The result can be a state-protected monopoly or a market where some firms have favoured status, for example by tariff protection against foreign competitors. Under these circumstances the monopolists can indeed exploit the consumers but this so-called "monopoly capitalism" is not a product of free market forces. It is a result of those forces being eliminated or reduced by government edicts. Where governments are prepared to make such edicts then a great deal of entrepreneurial flair will be diverted into lobbying and other activities that serve political purposes to obtain more favourable trading conditions, at the expense of the people. This results in guaranteed profits without the risks of the open market.

The extreme form of the closed market is the socialist state or the state-run monopoly. Here the profit motive is absent, as is consumer choice. Those who see profits and market competition as the root of evil in the capitalist system close their eyes and minds to the inefficiency of state monopolies, and the way that consumers are invariably in a worse and more exploited position. Glaring inequalities persist because people with the right political or bureaucratic connections obtain access to the best of everything that is available. This is explained by the fact that the entrepreneurial impulse is not eliminated in state-controlled systems, it is simply turned to ends other than satisfying the wishes of consumers. At the upper levels of state-controlled systems (including the public service in western democracies) people struggle for power and influence, with a tendency to empire building. At lower levels the entrepreneurial flair of the "common man" is diverted to minimising the expenditure of effort or creating alternatives to productive work (ie restrictive work practices).

The socialist attack on entrepreneurs, profits and open markets has been supported by the conservative and capitalist vested interests which were threatened by the transition from feudalism to democratic capitalism, or who fear the integrity of market forces. The industrial revolution ushered in a "market society" where individuals were to some extent forced to make their own way in the world, replacing the "status society" where people tended to take the rank and station of their parents. This created a great deal of tension and resentment among members of the upper classes who did not have the qualities required for success in the new system. The result is a highly conservative tradition of thought that sometimes nearly matches the extreme left in its hostility to capitalism, profits and the market order. There is also a strand of Christian objections to profits, or "excessive" profits, especially in the form of interest on investment, condemned as "usury".