What are the origins of entrepreneurial capitalism?
Discussions About Entrepreneurial Capitalism
Entrepreneurial capitalism is key to the success for entrepreneurship. But few words are as abused in the lexicon of the business world, as ill defined in the management literature, and as open to multiple meanings as entrepreneurship. The concept of entrepreneurship has been in our modern society for thousands of years and in the history of economic study the word has been overused, and in some cases underused.
entrepreneurial capitalism: private capital, investing in private start-ups, with potential for a viable harvest
Jack Kemp: “Does government create jobs, or do entrepreneurs? Does government spending spur growth, or do lower taxes, less regulation, and spending limits? Can government direct investment better than the private sector? The answers to these questions provide the keys to designing a strategy for long-term growth in America.”
Entrepreneurs, Low Taxes, Create Economic Growth
For nearly every entrepreneur, access to private equity capital, or risk capital, is a key ingredient to successful business growth.
Entrepreneurship, combined with support from venture capital, is a major force driving economic growth in the United States. Thomas McConnell of New Enterprise Associates said, “Venture capital investment is a national phenomenon that helps set the U.S. economy apart from others in the world.” Venture capital financed groundbreaking research and untold improvements in infrastructure and technology. The average venture-backed company employs nearly 100 workers within five years and creates almost twice as many jobs as their nonventure-backed competitors.
Venture capital, risk capital, was perfected in the Reagan era with the help from Jack Kemp. Things changed with President Ronald Reagan’s election in 1980, when the business environment shifted from President Carter’s “Days of Malaise” as the Republicans produced political leaders committed to entrepreneurial capitalism. Their thrust took shape under “supply-side economics,” which was first envisioned by economic adviser Dr. Arthur Laffer. His winning thesis was simply this: Lower the marginal tax rates. He believed that individuals should keep more of their hard-earned money, which would encourage them to make more.
In August 1981, less than seven months after being sworn in, President Reagan signed the Kemp-Roth bill into law. It was the cornerstone of what would become the most successful economic policy for new business venturing in U.S. history. The bill’s treatment of capital gains, a lowering of the top capital gains tax rate from 28 percent to 20 percent, made high risk investments even more attractive, causing a twofold increase in commitments to venture capital funds in 1981.
Entrepreneurs then launched a boom that would last, except for a brief eight months following the Gulf War in 1991, until the end of the twentieth century. It was the longest period of economic expansion in the nation’s history. Between 1983 and 2003, the Dow Jones Industrial average provided an annual return of 11 percent. For comparison, between 1965 and 1983 its annual return was 1 percent.
According to the U.S. Department of Labor Non-Farm Employment Data, the American economy generated over 27 million new jobs between 1980 and 1995. Over 24 million of these new jobs were created by small- and medium-size entrepreneurs operating high-growth ventures. As Dr. Laffer predicted, even Washington, D.C., prospered well, with the U.S. Treasury revenues increasing 28 percent to more than $1 trillion in 1990.
At the closing of the last century, MIT economist Lester Thurow had this to say: “In what will come to be seen as the third industrial revolution, new technological opportunities are creating fortunes faster than ever before. The United States has created more billionaires in the past fifteen years than in its previous history—even correcting for inflation and changes in average per capita gross domestic product.”
Understanding the term: Entrepreneurship
Carl Voigt, dean of the Marshall School of Business at the University of Southern California, explains, "We sort of defined entrepreneurialism too narrowly as someone who wants to start their own business. But entrepreneurialism can also mean finding new business opportunities and expansion at existing companies."
Starting with practically nothing, an entrepreneur is one who organizes a new venture, manages it, and assumes the associated risk. The term entrepreneur is broadly defined to include business owners, innovators, and executives in need of capital to start a new project, introducing a new product, or expanding a promising line of business.
We include technology transfer experts, technologists at leading universities, and consultants and advisors assisting in all aspects of venturing. An entrepreneur's principal objectives are profit and growth, and they will employ formal strategic management practices to achieve them.
Types of Entrepreneurs
We use a broader definition and scope of entrepreneurial activity, segmenting all entrepreneurial activity into seven types of entrepreneurs: small business and lifestyle, franchise, professional fast growth and serial, corporate, creative disrupters and innovators, extreme, and social and nonprofit.
Origins of Entrepreneurial Capitalism
To better understand entrepreneurship, it is useful to look back to the early development of capitalism. Capitalism depends on harnessing private motives to produce the goods and services that the public wants as efficiently as possible. Historian Charles Van Doren leads us to the early roots of "primitive capitalism" in his book A History of Knowledge: Past, Present, and Future. He provides insight to the ancient Egyptians, economic life before the peasant, the introduction of the merchant, the king, the rise of the labor markets.
Defined today, capitalism is a political, social, and economic system. It is characterized by the private ownership of property—not only of land and buildings but of patents, know-how, and processes that are used by entrepreneurs to create profits for themselves. Capitalism sharply contrasts with other economic systems, like feudalism and socialism. In capitalism, entrepreneurs are responsible for such economic decisions as what to produce, how much to produce, and what method of production to adopt.
Economist Lester Thurow writes, "Entrepreneurs . . . bring the new technologies and the new concepts into active commercial use. They are the change agents of capitalism."
The French Connection
The concept of entrepreneur is borrowed from the French words entreprendre, "one who undertakes"—that is, a "manager." In fact, the word entrepreneur was shaped probably from celui qui entreprend, which is loosely translated as "those who get things done." In the early eighteenth century, a group of thinkers called the Physiocrats surfaced in France around a school of new economic theory. They were the first proponents of laissez-faire and opposed all government intervention in industry, especially taxation. Their doctrine was that the economic affairs of society are best guided by the decisions of individuals.
One of the most famous among them was Richard Cantillon. In a paper he worked on between 1730 and 1734 and that was later published in 1775 as Essai sur la Nature du Commerce en General, he introduced the concept of entrepreneur. He developed these early theories of the entrepreneur after observing the merchants, farmers, and craftsmen of his time. Jean-Baptiste Say, a French businessman turned economist, followed Cantillon with his Trait d'economie politique in 1803. His work commented on the theory of markets and how the entrepreneur is involved in this transaction of goods for money.
Adam Smith's Invisible Hand and Pin Production
The economic system based on the capitalism concept was completed by the Scottish economist Adam Smith. Leveraging the work performed earlier by the Physiocrats, and in particular Francois Quesnay, Smith completed his famous book, The Wealth of Nations, in 1776 at the beginning of the Industrial Revolution in Britain. Some believe that his main contribution to economics is centered on free enterprise. Introducing the concepts of liberal capitalism and entrepreneurial capitalism, Smith is "known as an architect of our present system of society."
Smith concentrated on the growing manufacturing and trade industries. In particular he studied the division of labor in the manufacturing of pins, which was beginning to incorporate new machines. His central argument in The Wealth of Nations is based on the concept of what he called the "invisible hand." He believed that human self-interest is the basic psychological driver behind economics, and that a natural order in the universe makes all individual, self-interested endeavors add up to the social good. He also studied the competitiveness of nations and multinational trade. His major theoretical achievement was to take the first steps toward a theory of the optimal efficient allocation of resources under conditions of free competition.
Joseph A. Schumpeter and His "Creative Destruction"
Joseph Alois Schumpeter, an Austrian-American economist, was one of the first to study entrepreneurs and the impact of entrepreneurial capitalism on society. As he wrote in The Theory of Economic Development, he believed that innovation and creativeness distinguished entrepreneurs from other businesspeople. He observed that innovation and entrepreneurship are closely interwoven. He argued that the entrepreneur was at the very center of all business activity. He observed that entrepreneurs create "clusters of innovations" that are the causes of business cycles because their actions create disruptive dislocations and arrive in huge waves. In fact, Schumpeter believed that entrepreneurs deserve the credit for the industrial revolution.
Schumpeter introduced the phrase "creative destruction," stating that the entrepreneur does not just invent things, but also exploits in novel ways what has already been invented. He identified five types of entrepreneurial activity: new product innovation or the introduction of a new service, new process innovation or new methods of production, market innovation or the opening of new markets, input or resources innovation, and organizational innovation, which is the complete restructuring of an entire industry or the breaking up of a monopoly.