Are Successful Businessmen just Lucky?

1978 THE cCINVISIBLEHAND" OR THE HEAVY HAND? 719 And there is no place in the free market system for the central plan ners whose inflexible designs would stifle the free movement and initia tive of those who make it work. Paraphrasing Hayek, planning in a society consciously directed from the top could never begin to utilize all the knowledge and energies bound up in the countless individuals who make up the community. Human resources will waste away while all await their marching orders. @) SOME PEOPLE contend that free en terprise is nothing more than a game of chance-that business prof its and losses are purely a matter of luck. Is this true? Are successful businessmen just luckier than the rest of us? Consider a simple example. Sup pose a businessman has net earn ings of $35,000 in a given year. Is that $35,000 all profit? Not neces sarily. If the businessman put his Mr. Summers Is a member of the staff of The Foun dation for Economic Education.

-FOOTNOTES1F. A. Hayek, uThe Trend of Economic Thinking," Economica, May 1933, p. 130. 2Hayek, ((Kinds of Order in Society," Insti tute for Humane Studies reprint, Menlo Park, Calif., 1975, pp. 6-11. 3Hayek, Morgan Guaranty Survey, January 1976. 4Hayek, (The Use of Knowledge in Society," Institute for Humane Studies reprint, Menlo Park, Calif., 1977, pp. 5-13. 5Ibid., pp. 13-15. 6Israel Kirzner, Competition and Entrepre neurship (Chicago: Univ. of Chicago Press, 1973), chapters 1 and 6. Brian Summers Are Successful Businessmen Just Lucky? own labor into the business, and if he could have earned $20,000 work ing for someone else, the business cost him, in terms of lost salary, $20,000. If he has $100,000 of his own capital invested in the business, and the market rate of interest is 10 per cent, his business cost him $10,000 in lost interest. The busi nessman made $35,000 by passing up the opportunity to make $30,000.

His net profit was $5,000. Was his $5,000 profit caused by good luck? If he had earned only 720 THE FREEMAN $25,000, would his $5,000 net loss have been due to bad luck? Profits and losses could be attrib uted to luck only. if they were the results of completely random processes-such as the roll of dice. If businessmen randomly selected products and factors of production, we could say that profits and losses were purely a matter of luck. But if businesses were operated in a completely random manner, there would be no tendency for busi nessmen to emulate successful com petitors. Businessmen would never tend to enter a profitable industry, bid up production costs, and reduce selling prices through increased outpu t. If businessmen depended en tirely on luck, they would never adopt the methods of profitable competitors-they would just keep rolling dice. In the real world, of course, busi nessmen don't depend on luck. They observe competitors and try to learn from their successes and failures.

Successful businessmen are not gamblers; they are alert followers of market trends who use their specialized knowledge to anticipate future trends. The First Principle IDEAS ();'\; But what about innovators who tryout new products and new techniques? Aren't they gamblers? Even the boldest innovators don't randomly select products and factors of production. They know that to make profits they must please con sumers while minimizing costs. Thus, they study the market, per form marketing research, and try to reduce costs by conserving labor, capital, and scarce resources. If they fail, the losses are theirs. If they succeed, consumers enjoy a better standard of living. Businessmen succeed by correctly anticipating consumer preferences and effi ciently using resources to satisfy these preferences. Luck is a factor only when events are beyond our control. In a free market each person controls his own property, thereby minimizing the importance of luck. When govern ment intervenes in the economy, however, luck becomes more important-because with property subject to government regulation, economic success becomes less de pendent on personal initiative and more contingent on the vagaries of politics. , L1BEHTY THE FIRST and fundamental principle, therefore, if one would undertake to alleviate the condition of the masses, would be the inviolability of private property.

POPE LEO XIII Hans F. Sennholz THE CASE for lower taxes is clear and compelling. Projected· federal ex penditures total nearly $500 billion in fiscal 1979 and the budget deficit is expected to exceed $50 billion. Government spending has risen to the point where its burden is felt throughout the American economy. The three sources of government revenue clearly reveal the strain: 1. For many taxpayers the levies are higher than ever before, giving encouragement to tax evasion and outright rebellion. 2. The capital markets show signs of utter exhaustion from government Dr. Sennholz heads the Department of Economics at Grove City College and Is a noted writer and lecturer on monetary and economic affairs. This article Is reprinted by permission from the September 1978 Issue of Privete Practice. demands, causing interest rates to rise and security prices to fall. There is moaning among stockholders and bondholders, whose savings have been devastated in recent years. But in the body politic they are outnum bered and outvoted and, therefore, constitute no threat to the politicians in power.