By Mason Mohon | USA
Imagine, if you will, a society in which every creation ever made was caught by a governmental safety net, and entrepreneurs were duly compensated by the state for their innovations and creations. At face value, this sounds great! Everybody creates, innovates, paints, writes, sings, and performs, and in the end, the government gives them a check for what they’ve done.
This is the societal proposition I receive these days from advocates of any sort of collectivist or planned economy when I accuse them of stifling the entrepreneurial spirit. Innovation is great for boosting standards of living for everyone, not just the ruling elite. After all, the poorest of our society today have access to technologies the emperors of the Qing dynasty of China couldn’t have dreamed of, notably air conditioning. Entrepreneurship is helping everyone, so we should obviously pursue an economic structure that allows for it to flourish.
So what is wrong with my opening example of providing compensation for all innovators and creators? The issue is a fundamental misunderstanding of what an entrepreneur actually is. An entrepreneur looks at an issue, not as such, but rather as an opportunity. An entrepreneur must seek to solve problems, and when she does, she is rewarded. But why must she solve problems, and if she does, who will reward her?
First off, an entrepreneur must solve problems because if she doesn’t, nobody is going to buy her creation. Entrepreneurs need to pierce the fog of uncertainty by searching for demand. They test for demand by creating a product, and if people desire the product, she gets profit at the end. If they don’t, the entrepreneur has suffered a loss. Because of this, entrepreneurs must do one of two things – look at the world and see what problems there are, and try to solve them, or, attempt to solve what they think is a problem and run the risk of failing. Neither of these options is necessarily better than the other.
Furthermore, who will reward the entrepreneur? This was already touched on in the first point, but the consumers will. The problem itself is demand for a product. Take sliced bread as an example. When Frederick Rohwedder invented his first sliced bread machine in 1912, it was because people faced the problem of slicing bread themselves, and he could solve that problem by creating a means of doing it for them. The consumers then reward people like Fred by paying money in response to the development of his product, in return for his product.
When a creator is compensated for what she creates, no matter what she creates, she no longer has to look at a problem to find a reason for creation. She is rewarded for everything she solves, even if there was no problem there in the first place, which effectively means she has solved nothing. A reward for solving nothing eliminates a crucial aspect of development and innovation in the market: creative destruction.
Ivan Pongracic of Hillsdale College described creative destruction as the most salient characteristic of capitalism. What creative destruction means is that if the entrepreneur does not solve a problem, she will fail, and time, money, and resources will not be put into something nobody wants on a regular basis. A great example is the change of social media giants, from MySpace to Facebook. MySpace was destroyed because of a new creation, which was Facebook, because Facebook tailored itself better to the desires of individuals. The same thing happened with Yahoo! and Google. Creative destruction is the reason people who make bad music usually fail (with the exception of Nickelback).
Of course, most of these examples are digital and in the world of the internet, and that is because the internet is very loosely regulated by the government. There is free reign for the market forces of creative destruction and competition to provide desirable products to the consumers and users. The American economy has shown things very similar, although less rapidly, with the development of the iPhone nearly killing the flip-phone, and the creation of the Roomba making a sizable dent in the vacuum cleaner industry.
People need to be allowed to fail, and that is why a socialist approach to entrepreneurship can never work. A safety net means we are stuck with bad products in far greater abundance than good products because there is not necessarily an incentive to create good products. With this safety net, we would have many more Nickelback’s in the music industry, and that alone should be enough for any reasonable person to desert the socialist doctrine.