The Ecology of Entrepreneurship; S. Rydenfelt

The Keynesian miracle drug was, in fact, never tested in the thirties. The Second World War came in stead. Following the war was the "golden quarter of a century" from 1945 to 1970-ahappy period with full employment for which the poli ticians gladly proclaimed credit. Then came the 1970s and the birth of a severe economic crisis, a social Dr. Rydenfelt is professor of economics at the Uni versity of Lund in Sweden. plague developing into a virtual depression with mass unemploy ment. At long last the Keynesian drug could be tested to prove its healing powers. Despite governmental borrowing in volumes Keynes never dreamed of, with doses rapidly increased into wild overdoses, the economic crisis spread. The awkward truth finally became clear: the miracle drug was a failure, producing no visible heal ing effects. Still, the politicians stub bornly refused to open their eyes and desperately continued to increase the Keynesian doses.

New theories and new remedies were sorely needed, and out of the tra vails of the crisis new theories were born. One of them will be pre sented here. The theory of entrepre neurship, explains the roots of the 363 364 THE FREEMAN June crisis and indicates ways out of it. And the time evidently is ripe for the new theory, dry soil is waiting for rain and seed. The idea is spreading even into the camps of the enemies, even into Socialist governments of the West where officials today speak of the necessity of creating a better economic climate for business and declare themselves prepared to ac cept higher profits. Austrian Economics and the Entrepreneurial Role The ideas of the new theory can be traced back to the 18th century where one of the pioneers, the French economist J.B. Say, added to the three classic factors of produc tionland, labor and capital-a fourth factor, the entrepreneurs.

These ideas were further spread by the Austrians Mises, Schumpeter and Hayek as well as by modern American economic historians like Douglass North and Robert Thomas. Mallyeconomists have contrib uted to the work, but so far only Pro fessor Israel Kirzner at New York University has presented a coherent theory of entrepreneurship. The the ory, however, is far from finished and complete, and different versions have been presented by different au thors. The interpretation here is my own. I especially want to emphasize the close relation to modern ecology, the science of the dependence of allliving beings on the environment. While Keynesianism is a mecha nistic theory, treating society like a machine you are able to control by means of "social engineering," the theory of entrepreneurship is fun damentally humanistic. Everything in society is produced by human beings, whose performances are de pendent not only on the physical en vironment but as much on the polit ical and economic one.

In an unfavorable environment we, as a rule, develop only a fraction of our possibilities, while in a favor able one we are able to develop our full potential. If economic growth with full employment and rapidly increasing living standards is to de velop in a society, among other pro duction factors the following three must be present: 1. Capital 2. Entrepreneurs 3. A favorable entrepreneurial environment The third factor is by far the most decisive. In every society there are key groups-in medicine the doctors, in education the teachers-and if so ciety is to function well these groups must be offered adequate incentives to do their best and develop their full potential. In all societies a minority of people are equipped with entrepreneurial talents enabling them to start, man age and develop enterprises. This minority holds the key to business 1985 THE ECOLOGY OF ENTREPRENEURSHIP 365 productivity, growth and employ ment. But they will use their special talents fully only in an environment with adequate incentives. In such an environment they will attract or cre ate the necessary capital.

Modern growth theory has, as a rule, concluded that the shortage of capital is the deciding cause of pov erty in underdeveloped countries. Moreover, the theory holds that the provision of capital via aid from the industrial countries should be suf ficient to start economic growth in the poor countries. Vast discourag ing experiences indicate that this theory is not realistic. Capital, according to the theory of entrepreneurship, is a necessary but not a sufficient condition. According to this theory the cause ofthe dismal experiences is the fact that the regimes of these countries, mostly socialistic, have systematically oppressed and exploited their en trepreneurs. Policies destroying the entrepreneurial environment must have counterproductive effects. Similarly, the theory of entrepri neurship is able to explain the eco nomic crisis of the 1970s and 1980s in the West. During the golden quarter from 1945 to 1970, the en trepreneurs were allowed to work and produce in a largely favorable environment. Stimulated by ade quate incentives, they developed such productive energies that many governments had to apply brakes on their wild investment plans, brakes in the form of special taxes and fees.

Not unemployment, but a shortage of labor, was the problem during this period. Economic "doctors" of the present crisis often try to explain hardships as a product of "technological un employment," resulting from labor saving machines and devices such as computers and robots. But such ex planations are mere nonsense. All machines since the industrial revo lution in the 18th century have been "labor saving." In spite of this, shortage of labor was still the prob lem in the 1960s. Since the 18th cen tury the bogey of "technological un employment" has been picked up from dark closets during all slumps and depressions and sent back to its hideout whenever better times arrived. Just like garments and other cul tural manifestations, governmental policies are strongly affected by changes of fashion. In the entire Western industrial world the 1970s meant a rapid expansion of state regulations, restricting the freedom of entrepreneurs. Simultaneously, the increasing taxing of firms and entrepreneurs was transformed into confiscation policies. In total, this meant a systematic destruction of the entrepreneurial environment.

An obvious conclusion arises from the entrepreneurial interpretation of the present Western crisis. A sit366 THE FREEMAN uation with full employment and ra pid growth-a situation similar to that prevailing before the 1970s can be created only by restoring eco nomic environments with adequate incentives for the entrepreneurs. Critics often object that such pol icies would imply the establishment of a new privileged class-the entre preneurs. However, policies produc ing adequate incentives for entre preneurs should be pursued not for the sake of the entrepreneurs but for the sake of the unemployed and other victims of the crisis. In countries like the U.S.A. and Sweden we have the best educated and most healthy manpower of the world. But what is the use of these unique resources as long as our pol iticians systematically kill the in centivesand .possibilities-of our entrepreneurs to invest and to cre ate jobs? @ Factors of Production -REFERENCESCasson, Mark. The Entrepreneur: An Economic Theory. Oxford: Martin Robertson, 1982.

Gilder, George. The Spirit of Enterprise. New York: Simon & Schuster, 1984. Hayek, F. A. Full Employment at Any Price. London: The Institute of Economic Affairs, 1975. Kirzner, Israel. Perception, Opportunity, and Profit. Chicago: University of Chicago Press, 1979. Kirzner and others. The Prime Mover of Prog ress: The Entrepreneur in Capitalism and S~ cialism. London: The Institute of Economic Affairs, 1980. Mises, Ludwig von. Human Action: A Treatise on Economics. 2nd printing. New Haven: Yale University Press, 1949. North, Douglass & Thomas, Robert. The Rise of the Western World: A New Economic His tory. Cambridge: Cambridge University Press, 1973. Rydenfelt, Sven. A Pattern for Failure: Social istEconomies in Crisis:San Diego, New York, London: Harcourt Brace Jovanovich, 1984. Schumpeter, Joseph A. The Theory of Eco nomic Development. Cambridge, Mass.: Har vard University Press, 1951.

IDEAS ON LIBERTY PHYSICAL EXERTION turns into a factor of human production when it is directed by reason toward a definite end and employs tools and previ ously produced intermediary products. Mind-reason-is the most im portant equipment of man. In the human sphere, labor counts only as one item in a combination of natural resources, capital goods, and labor; all these three factors are employed, according to a definite plan devised by reason, for the attainment of an end chosen. Labor, in the sense in which this term is used in dealing with human affairs, is only one of several factors of production . . . . Entrepreneurial judgment directs the toil of the workers and the employment of the capital goods toward the ultimate end of production, the best possible removal of what causes people to feel discontented and unhappy. LUDWIG VON MISES John K. Williams Redigging Old Wells TUCKED away in the book of Genesis is the simple report of an incident re ferring to the Jewish patriarchs Abraham and his son Isaac. When residing in the arid wasteland that was Gerar, Abraham labored long to dig wells. Years after his father's death, Isaac returned to Gerar. The Philistines, he discovered, had filled Abraham's wells with earth and sealed them off. So Isaac, as the Bib lical writer puts it, "dug again the wells ... of Abraham his father ... and gave them the names his fa ther had given them."