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I believe that one of the more important players in the free market is the entrepreneur. In the free market the skills and risks which the entrepreneur is willing to take can be fully exploited by both producers and consumers to their advantage.

Entrepreneurship manifests itself in many ways. Entrepreneurs start businesses, develop new procedures for the production and distribution of goods, act as middlemen between markets and are a source of information. The entrepreneur is also characterized by alertness for opportunities which have been ignored or unseen by others. These opportunities are almost always accompanied by some profit.

The benefits which society gains from the actions of entrepreneurs are generally three-fold. First, the entrepreneur, by learning from past mistakes, often develops better ways of utilizing resources. This means greater efficiency and often cheaper manufacturing methods which are introduced into the production process, thus saving resources and providing relatively cheaper goods to the consumer. Secondly, new resources are discovered. For example, in the last one hundred years man has seen electricity provided by coal, then water and now, by nuclear power plants and solar cells. Finally, it is through innovation, chance and alertness that much of our current technology has been produced. It is no mistake that the freest nations of the world have enjoyed supremacy in the field of technology, whether it is medical, biological, chemical, etc. Again, it must be said that these three benefits are available through the presence of those who are alert, who are risk takers and who are able to link markets for a profit.

Within a free market order, entrepreneurs have to take risks because the last word lies with the potential buyers, the consumers. This involves an element of risk for the entrepreneur and in return for the risk he demands a reward – this is the profit margin. Profits serve the dual purpose of rewarding the successful entrepreneur (that is, the person who caters best to the wants of the public) and providing capital to develop the business. This may take the form of investment in updated plant for increased efficiency and lower prices, it may involve expansion into new products and new markets, it may involve the takeover of less thriving firms in order to put their resources to more productive use.

Profits cannot be obtained by exploitation, unless the market is not free. They are obtained by bringing the factors of production together in a creative manner that makes the resulting product worth more in the market than the sum of the individual components. In addition, the entrepreneur may find new ways to satisfy the wishes of consumers.

The entrepreneur, within the private enterprise system, recently has been a target of attack. Entrepreneurs are supposed to be driven by unbridled greed to maximize their profits at the expense of workers and consumers. In open markets entrepreneurs do the best for themselves by providing better or cheaper goods than their rivals.

The industrial revolution ushered in a “market society” where individuals were to some extent forced to make their own way in the world, replacing the “status society” where people tended to take the rank and station of their parents. This created a great deal of tension and resentment among members of the upper classes who did not have the qualities required for success in the new system. The result is a highly conservative tradition of thought that sometimes nearly matches the extreme left in its hostility to capitalism, profits and the market order.

Entrepreneurship is the ability to see what others who came before missed, to make connections between things that others had not, to get all other factors to work together to create that which had not existed before. It is this insight, this creativity that makes the other factors productive.

Now, who is an entrepreneur? One example I often site in my speaking engagements was a young man who was born in Bavaria in 1829 and emigrated in 1847 with his family to New York City, where his older brother opened a dry goods store (a store selling clothes, cloth, shoes, hats, almost anything but food). In 1853, he became a U.S. citizen and sailed to San Francisco to open a branch of his brother’s store and become a supplier to the increasing number of miners following the discovery of gold at Sutter’s Mill.

He was a good businessman and his store thrived. He was so trustworthy and successful that one of his customers, Jacob Davis of Reno, Nevada, came to him with an idea. Davis was a tailor, and his customers complained that they’re pants started to come apart in the same places over and over, the pockets and seams. He had developed a way to rivet these stress points and used a strong fabric often used for work clothes, serge. He thought it was a good idea but lacked the $68 it took to file a patent. The San Francisco merchant saw the possibilities and became Davis’ partner, and their patent was granted on May 20, 1873.

The merchant had been born Loeb Strauss, but when he became a citizen in 1853, he changed it to Levi. Similarly, the pants he made were originally called “waist overalls,” and it was not until about 1960 that they were popularly called jeans. Even though much of the company’s early history was destroyed in the 1906 San Francisco Fire, May 20 is still celebrated by the company as the birthday of blue jeans.

Often the entrepreneur is not the person or persons who actually create the new goods or services. Rather, he or she is the one who has the vision of how that idea can be turned into reality for the benefit of everyone. For example, Oliver Winchester was a successful shirt maker, but he bought the patents for the Henry lever-action repeating rifle. His faith in this invention, along with his efforts in marketing it, made it the most widely known rifle of its day and earned it the nickname of “The Gun That Won the West.”

Does this mean that entrepreneurs aren’t creative? Not at all! Quite the opposite, but theirs is a different kind of creativity. Often an inventor, an artist, a composer, a writer will know his or her area of interest but not know how to make others aware of their creations.

The entrepreneur’s creativity finds ways for the ideas to enter the marketplace and be of benefit to all of society. Incidentally, entrepreneurs also reward those who came up with the new ideas in the first place, which encourages them to make more and better creations. People are much more likely to be creative and productive when they are promised a reward than when they are threatened with punishment if they don’t create. This promise of a reward is called incentive, and incentives are possible only when there is profit.

The entrepreneur makes sure this situation happens, because when the others profit, so does the entrepreneur. He or she is no different from other members of society. The entrepreneur wants a comfortable life, and he or she realizes that the best way to do this is to get the cooperation of others. That is achieved by appealing to what motivates others, because people tend to do what’s in their best interest. In a free market, no one can be forced to do anything against their interest, so the entrepreneur must motivate and organize for everyone’s benefit.

Jerry R. Mitchell

This Entrepreneurship article was written by Jerry R. Mitchell on 2/11/2005