The Entrepreneur as Hero

LET’S START OFF TALKING about the entrepreneur with a brief discussion of the sources of income. Some of the rhetoric one hears gives the impression that income is somehow distributed—that there’s a dealer of dollars. Thus, one might think that the reason some Americans have more income than others is that the dollar dealer is a racist, a sexist or a multinationalist who deals out dollars unfairly. Alternatively, some suggest that the reason that some Americans are richer than others is because they got to the pile of money first and took an unfair share. In either case, justice requires that government take the ill-gotten gains of the few and restore them to their rightful owners—in other words, redistribute income. While no one actually describes the sources of income this way, the logic of their arguments for redistribution implies such a vision.

In truth, in a free society, income is earned through pleasing and serving one’s fellow man. I mow your lawn, repair your roof or teach your kid economics. In turn you give me dollars. We can think of dollars as certificates of performance. With these certificates of performance in hand, I go to my grocer and ask him to give me a pound of steak and a six-pack of beer that my fellow man produced. In effect the grocer says, “You’re making a claim on something your fellow man produced. You’re asking him to serve you—but did you serve him?” I say, “Yes I did.” The grocer responds, “Prove it!” That’s when I show him my certificates of performance – namely, the money my fellow man paid me to mow his lawn.

Contrast the morality of having to serve one’s fellow man as a condition of being served by him with the alternative. Government can say to me, “Williams, you don’t have to serve your fellow man in order to have a claim on what he produces. As long as you’re loyal to us, we will take what your fellow man produces and give it to you.”

Obviously, some people are more effective at serving and pleasing their fellow man than others. They earn a greater number of certificates of performance (i.e., higher income) and hence have greater claims on what their fellow man produces. Take Luciano Pavarotti. Why is his income much higher than mine? It’s because of discriminating people like you. You will plunk down $75 to hear him sing an aria from La Boheme; but how much would you be willing to pay to hear me do the same? Those who would call Pavarotti’s income unfair and would have government take part of it to give to others are essentially saying, “We disagree with the decisions of millions upon millions of people acting voluntarily that resulted in Pavarotti’s higher income. We are going to use the coercive powers of government to cancel out the full effect of those decisions through income redistribution.” I might add that income redistribution is simply a legal version of what a thief does—namely, take the rightful property of one person for the benefit of another. The primary distinction between his behavior and that of Congress is legality.

For the most part, in a free society, people who are wealthy have become so through effectively serving their fellow man. Cyrus McCormick and his reaping machine, Thomas Watson Sr., the founder of IBM, and Lloyd Conover, who created the antibiotic tetracycline in the employ of Pfizer Company, are just a few of the exceptional contributors. And while these people and their companies became extremely wealthy, society benefited far more than they did in terms of the value of healthier lives and the millions and possibly billions of lives saved.

Capitalism Raises All Boats

Propaganda and stubborn ignorance has it that the advances of capitalism benefit only the rich. The evidence, as I’ve already pointed out, refutes that. Let’s look at more: The rich have always been able to afford entertainment, but it was the development and marketing of radio and television that made entertainment accessible to the common man. The rich have never had the drudgery of washing and ironing clothing, beating out carpets or waxing floors. It was the development and mass production of washing machines, wash-and-wear clothing, vacuum cleaners and no-wax floors that spared the common man of this drudgery. At one time, only the rich could afford automobiles, telephones and computers. Now all but a tiny percentage of Americans enjoy these goods.

Let’s consider another factor that is nearly completely ignored. The output and wealth generated through free enterprise contributes to a more civilized society. For most of mankind’s existence, he has had to spend most of his time simply eking out a living. In pre-industrial society—and this is true in many places in the world still today—the most optimistic scenario for the ordinary citizen was to be able to eke out enough to meet his physical needs for another day. But with the rise of capitalism and the concomitant rise in human productivity that yielded seemingly ceaseless economic progress, it was no longer necessary for mankind to spend his entire day simply providing for minimum physical needs. People were able to satisfy their physical needs with less and less time. This made it possible for them to have the time and resources to develop spiritually and culturally.

In other words, the rise of capitalism enabled the gradual extension of civilization to greater and greater numbers of people. More of them have time available to read, become educated in the liberal arts, and gain more knowledge about the world around them. Greater wealth permits them to attend the arts, afford recreation, contemplate more fulfilling and interesting life activities, and enjoy other culturally enriching activities that were formerly within the purview of only the rich. How was all this achieved? In a market system, enterprise profits are performance-related; they come about through a process of finding out which human wants are not being met and finding ways to meet them.

In Defense of Profit

Profit has almost become a dirty word, so let me spend a few minutes talking about the magnitude of profits and the role that they play in a free-market economy. Regarding their magnitude, only roughly six cents of each dollar companies take in represent after-tax profits. By far, wages are the largest part of that dollar, representing about 60 cents.

Normal profit is the opportunity cost of using entrepreneurial abilities in the production of a good. It’s what the entrepreneur could have earned in his next best alternative—say, another business venture. Just as wages, rent and interest must be paid in order to employ the services of labor, land and capital, normal profits must be paid to employ entrepreneurial services—the decisions, innovations and risks that drive economic progress.

So-called windfall profits are profits above and beyond those needed to keep an entrepreneur producing a good or service. But they serve a vital social function. They serve as a signal that there are unmet human wants. One of the best examples of the role of windfall profits are those that arise in the wake of a disaster and are often condemned as price gouging. In the wake of a disaster, such as a hurricane, there is an immediate change in scarcity conditions that’s reflected in higher prices for goods and services. Assume, for example, that a family of four sees their home damaged or destroyed. At before-disaster prices, they might decide to rent two adjoining hotel rooms. However, when they arrive at the hotel and see that room prices have doubled, they might easily decide to tough it out in a single room. Doing so makes a room available for someone else whose home was damaged and who needs a place to spend the night. Thus, higher prices give people an incentive to economize on scarce resources.

In the wake of Florida’s Hurricane Andrew, windfall profits played a vital though unappreciated role. Plywood destined to be shipped to the Midwest, West and Northeast suddenly was rerouted to South Florida. Lumber mills increased production. Truckers and other workers worked overtime in order to increase the availability of plywood and other construction materials to Floridians. Rising plywood prices meant something else as well. All that plywood heading south meant plywood prices rose in other locations, discouraging “lower valued” uses of plywood such as home improvement projects. After all, rebuilding and repairing destroyed homes is a “higher valued” use of plywood.

What caused these market participants to do what was in the social interest, namely, sacrifice or postpone alternative uses for plywood? The answer reveals perhaps the most wonderful feature of this process. Rising prices and opportunities for higher profits encouraged people to do voluntarily what was in the social interest—help their fellow man recover from a disaster.

Williams’ Law

Here’s Williams’ law: Whenever the profit incentive is missing, the probability that people’s wants can be safely ignored is the greatest. If a poll were taken asking people which services they are most satisfied with and which they are most dissatisfied with, for-profit organizations (supermarkets, computer companies and video stores) would dominate the first list while non-profit organizations (schools, offices of motor vehicle registration) would dominate the latter. In a free economy, the pursuit of profits and serving people are one and the same. No one argues that the free enterprise system is perfect, but it’s the closest we’ll come here on Earth.

Walter E. Williams is a syndicated columnist and the John M. Olin distinguished professor of economics at George Mason University. This article is reprinted with permission from Imprimis, the national speech digest of Hillsdale College,