Cool Capitalism

Entrepreneur. The word evokes heroic images. A creative, hardworking risk-taker with a vision for a new and improved product, an innovative marketing strategy, a revolutionary technological or organizational breakthrough that allows us to do more with less. Someone with the judgment, the ingenuity, the leadership skills, the networking abilities, and the courage to overcome obstacles and put a plan into action. A fierce competitor beset by opponents in a contest to serve customers.

The Invention of Enterprise: Entrepreneurship from Ancient Mesopotamia to Modern Times (The Kauffman Foundation Series on Innovation and Entrepreneurship)

David S. Landes (Editor), Joel Mokyr (Editor), William J. Baumol (Editor)

Princeton University Press

584 pages

$27.54

In recent decades, this conception of the entrepreneur has begun to reemerge as the benign face of business, the paragon of the free market—even the essence of cool capitalism. There is good reason for this recent celebration of entrepreneurship. A growing body of evidence links entrepreneurship to the one thing that modern society seems to want most: rising material standards of living and the elimination of absolute poverty. But what makes some societies more entrepreneurial than others? How can a society become more entrepreneurial? Unfortunately, economists have found it nearly impossible to answer these questions. Our standard approach is to develop mathematical models of economic interaction and to use statistical firepower to estimate the size and impact of each relevant variable. Entrepreneurship—which is all about the dynamic interactions between people with keen, unexpected insights—has proven too subtle and slippery for this approach. Some of the actions of entrepreneurs are quite predictable and easy to model, but the important ones aren’t. Moreover, the heterogeneity of entrepreneurs means that they can’t be easily quantified, counted, and added up. When theory and statistics fail, economists turn to the underused third tool in their bag of tricks: history.

The Invention of Enterprise is a bold, exploratory attempt to answer our most important questions about how entrepreneurship has evolved and what makes it flourish. The volume brings together a stellar cast of economic historians. The important questions and the available evidence for the periods and places analyzed vary tremendously, so authors’ approaches must too. Their scope is almost beautifully and absurdly vast, their insights are numerous, and their conclusions are restrained, yet the book will have a hard time reaching a wide audience; it is written primarily for scholars. In addition, virtually nowhere in these 500-plus pages do we witness the drama and passion of individual entrepreneurs struggling against obstacles, acting creatively, and being human. If that is what you seek, I’d recommend reading some biographies of individual entrepreneurs like the recent Pulitzer Prize-winner, The First Tycoon: The Epic Life of Cornelius Vanderbilt, by T.J. Stiles (Knopf, 2009), or my classroom favorite, The Frozen Water Trade: A True Story, by Gavin Weightman (Hyperion, 2003).

Michael Hudson opens The Invention of Enterprise with a provocative chapter on the ancient world, describing forms of entrepreneurship that will be alien to most modern readers. He argues that Mesopotamian entrepreneurship, which developed fundamental commercial practices like the use of money; uniform weights, measures, and prices needed for account-keeping; and the charging of interest, emerged from the region’s palaces and especially its temples. He paints an idyllic picture of the Bronze Age Near East, which is contrasted with the nasty, predatory entrepreneurship of ancient Rome: “Roman affluence—literally a ‘flowing in’—stemmed largely from slave capture and booty hunting, usury, and tribute from defeated realms.” Thus emerges the volume’s most important theme: there are two kinds of entrepreneurship: productive and unproductive. The key to societal health is giving the right incentives so that the well-organized, well-connected, creative, intelligent, and even ruthless people in society will add value and not subtract from it. This seems like common sense, but throughout the millennia the people who make and shape the rules of the game haven’t generally seen it this way.

The ensuing chapters examine Babylon in the 7th and 6th centuries before Christ, the Islamic Middle East, Medieval Europe, Europe from 1540 to 1640, the golden age of the Dutch Republic, Britain from the Industrial Revolution to the present (three excellent chapters), modern France, modern Germany, the United States (again three excellent chapters), colonial India, late imperial China, and Japan in the century before World War II. The implicit and often explicit conclusion of these authors is that latent entrepreneurial abilities—intelligence, judgment, willingness to take risks and innovate, leadership skills—can be found in virtually every time, place, and group, so that the key to success isn’t particular individuals but the institutions of a society and the incentives offered to potential entrepreneurs. If we want to spur entrepreneurship, we need to take Ronald Reagan’s advice to Mikhail Gorbachev and tear down the walls that imprison it.

As this framework suggests, the institutions that unfetter entrepreneurship can be obvious—for example, the rule of law, which prevents the emperor, king, dictator, or majority voting bloc from confiscating the property of successful entrepreneurs—but they can also be much more subtle, such as the gentlemanly code of behavior that Joel Mokyr identifies as crucial to explaining why Britain was the site of the first successful industrial revolution. In 18th-century Britain, “a businessman’s most important asset was perhaps his reputation as a gentleman even if he was not [by heredity] a gentleman … breaking the rules of gentlemanly conduct was costly …. It was, above all, important not to come across as greedy and rapacious.” This gentlemanly code allowed for trust in a wide range of business relationships, which allowed entrepreneurship to flourish. In contrast, Michel Hau shows how the attractiveness and prestige of gentry status and high public office in nineteenth-century France was an important roadblock to entrepreneurship, as talent was continuously seduced away into these less productive arenas, as was the prestige given to intellectual and artistic élites who derided, misrepresented, and misunderstood the accomplishments of entrepreneurs.

In the volume’s conclusion, editor William Baumol expresses the standard economists’ view that studying history is of little use, mere entertainment, unless we can draw some practical implications or “useful knowledge” from it. Baumol concludes that the primary determinants of a society’s entrepreneurial success are cultural—especially religious and other attitudes and beliefs. But because we know so little about how to change a culture, he turns to public policies that can be legislated—with a tepid discussion of the patent system, antitrust law, bankruptcy protection, and banking laws. I found these conclusions disappointing. Where are the bold—dare I say “entrepreneurial”—proposals for spurring American entrepreneurship? (See below.)

Naomi Lamoreaux and Margaret Walsh in their chapters on entrepreneurship in the United States conclude that the “golden age” of entrepreneurship was the era between the Civil War and the Great Depression. The prestige of entrepreneurs plummeted with the Great Depression and didn’t begin to rebound until the past few decades. The enemies of entrepreneurial renewal today remain strong—a coalition of misinformed, envious, and rent-seeking individuals.

Jealousy and self-interested attempts to steal a piece of the pie from entrepreneurs are, alas, inevitable. However, I believe there is considerable hope for the misinformed. Because of deficiencies in our educational system, this group simply lacks an understanding of how the economy functions, an understanding about how successful business ventures generate immense benefits that spill over to the rest of society. Take the case of poverty reduction. What individual did the most in the last decades of the 20th century to alleviate poverty in the United States? Economic evidence would suggest the hero in the “war” on poverty was probably an entrepreneur—perhaps Sam Walton. Estimates by a range of economists suggest that typical Wal-Mart customers save about $1,000 per year, and the biggest savers are low-income people. Yet detractors see Wal-Mart as a scourge, underpaying its employees and driving “mom and pop” out of business, a low-brow blot on the landscape. This indictment is based on gut reactions and prejudices, not careful economic analysis, which shows that Wal-Mart pays its workers on par with competitors, barely influences the overall labor market when it enters a locality, benefits those who don’t even shop there because competitors must cut prices—and the $1,000 or so that Wal-Mart’s loyal customers save each year ends up being spent on something else, thereby supporting the local economy. Wal-Mart isn’t perfect, but the vast majority of economists have concluded that its benefits to society clearly outweigh its costs. My point is that a clear-eyed, balanced assessment of the impacts of an entrepreneur like Sam Walton or entrepreneurship in general can’t rely on knee-jerk reactions and superficial analysis. And notice the moral implications. Sam Walton did an immense amount of good in the world; entrepreneurs—when given the incentives to add value and not destroy it—are doing God’s work of feeding the hungry, clothing the naked, curing the sick, and serving the rest of mankind.[1]

If we want a more entrepreneurial society, entrepreneurs like Sam Walton need to be cultural heroes. Instead they are depicted as “robber barons” in so many one-sided public school textbooks and classrooms. Bold proposal time. Perhaps a separation of education and state would help revitalize American entrepreneurship. If parents were given real choice in their children’s education—say a universal school voucher system which would make entrepreneurs out of educators—would our dysfunctional school systems turn away from preaching their anti-market fairy tales and begin to teach young people how and why to become successful entrepreneurs? Worth trying.

Robert Whaples is professor of economics at Wake Forest University and book review editor for EH.net.

1. This case has been made superbly by the Acton Institute. See www.acton.org or works like Michael J. Miller, “Business as a Moral Enterprise,” in Christian Theology and Market Economics, edited by Ian R. Harper and Samuel Gregg (Edward Elgar, 2008).