Some people would like you to believe that free enterprise hurts the poor. The opposite is true! Free enterprise lifts people up from poverty. Since the year 1970 the percentage of the world’s population living on the equivalent of less than a dollar a day has fallen by more than eighty percent.
The most essential ingredient in wealth creation is knowledge (and knowledge is a gift of God). Knowledge leads to surprises which we call innovation because innovations are unmanageable and unpredictable (more about that later). Innovations by their very nature can’t be managed or planned and innovations create wealth which positively affects culture.
The United States of America has had the most prosperous economy in the world for over a hundred years. But, why is that?
There are numerous reasons why the above is true; but, one reason is that America places a higher premium on the free market over government control of the market. However, America has not always operated that way. It was only after the government failed repeatedly to accomplish sustained economic growth, and only after entrepreneurs were given a free hand, that the United States started to develop the most successful economy in the world.
For example, Jacob Astor formed the American Trade Company and created an incredible business marketing furs throughout the world. It wasn’t long before the government decided they wanted a piece of the fur business, and subsidized their own fur company, run by the self promoting Thomas McKenney. Although McKenney had the federal government backing him, he lost money every year while Astor continued to be profitable. Finally Congress realized its mistake and stopped subsidizing McKenney.
However, twenty years later in 1840, the government attempted to get into the telegraph business, and in doing so steadily lost money each month. In 1845 expenditures exceeded revenue by six-to-one, and sometimes by ten-to-one. Deciding there was no value in the telegraph, government turned the invention over to the entrepreneur.
Telegraph entrepreneurs showed the press how stories could be instantly reported over distances of hundreds of miles. Stock brokers, bankers and insurance companies were shown how they could instantly monitor their investments over long distances. As the quality of service improved entrepreneurs were instrumental in stringing telegraph lines not only across the country but across the Atlantic Ocean.
The government failed in the telegraph business because incentives for government bureaucrats differ greatly from those of the entrepreneur. Washington bureaucrats received no profits from their efforts and their losses were passed onto the taxpayer, so there was no incentive to improve service, find new customer or expand to more cities.
However, entrepreneurs like Ezra Cornell, the founder of Western Union did exactly what the government failed to do. He created a cheaper and better service, created more customers and became extremely profitable. Through the efforts of entrepreneurs like Cornell, just fifteen years after Congress privatized the telegraph, both the costs of construction and the rates for service linking major cities were as little as one-tenth of the original rates established by Washington bureaucrats.
During the 1840s the government also failed in the steamship business. At this time regular steamship travel began between New York and England, with the government backing ship owner Edward Collins. Collins was a man more skilled at political lobbying than at business, and while the government funded Collins, Cornelius Vanderbilt started his own steamship company.
Collins didn’t feel a need to improve, or to even provide safe and regular service. Two of his four ships sank, killing hundreds of people. Apparently his mind set was if he lost money the government would always be there to bail him out. Vanderbilt on the other hand, cut the costs of steamboat travel, filled his ships with passengers and built and incredibly successful business because unlike Collins he knew if he did not serve his customers well he would lose his business.
You think we would have learned our lesson by now that economic prosperity comes from the energies of entrepreneurs exercising their ingenuity in a free market place, and not from the government; but, have we?
If you don’t get a little excited, at least once in awhile, about a wild and crazy brainstorm you’ve just had, you’re probably not going to rank very high on the imagination scale for entrepreneurs. Think of the most outlandish idea you have ever had, and then ask yourself if you had persevered in promoting that idea if you would have succeeded.
When I was in sixth grade back in 1960, I was taught that socialism was a viable alternative for certain countries at certain times in their economic development, and just because capitalism worked well in America, we should not believe it would work everywhere in the world. I liked my sixth grade teacher. He intended well; but, what he was teaching us, as I discovered later in life did not correspond to reality. He was a great guy and during recess he taught us how a backfield was intended to function with a quarterback, a fullback and two halfbacks. Like the game of football, the world has changed; but, common sense is still common sense and reality is reality.
Entrepreneurship and Intelligence
I did my undergraduate studies in psychology. For some reason, I was fascinated by IQ tests. I was intrigued by the concept of measuring a person’s intelligence. I quickly learned three things about IQ tests:
“Intellectuals” in America around the 1920’s through the 1930’s somehow came to believe that capitalism was an inherently flawed economic system. Capitalism was thought to somehow constrain the economic well being of the populace and thereby to suppress freedom. The remedy to this imagined problem was viewed to be a greater amount of calculated government authority.
Entrepreneurship and Risk
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