The State's Use of Hobgoblins To Outlaw Entrepreneurship

by Chris Brown by Chris Brown Recently by Chris Brown: ObamaWorks: A ‘Compelling’ Investment

The state thrives and expands on crises. As HL Mencken put it: "The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." The global financial crisis, in addition to global terrorism, swine flu, etc., has become one of the state's best mates, used as a rationalization and justification for more government intervention. Yet, as one of Murray Rothbard's favorite authors put it, it is merely the latest hobgoblin. As I try to point out in this article, one of the main problems with government growth is that in many cases it makes entrepreneurship illegal or practically impossible; and the attempts by the US government to eliminate entrepreneurial opportunities are especially antithetical to recovery during a recession.

A recession is a source of myriad entrepreneurial opportunities. Although a bit of a stretch, it is sort of like the successful mortician: the more deaths, the more business; and while death is unfortunate, this is the nature of the mortician's business. Recessions are excellent in terms of the quantity and quality of entrepreneurial opportunities that exist. If we think of recessions in terms of a misuse of resources and economic miscalculation – brought about and now prolonged primarily by the Federal Reserve – then there remains a multitude of opportunities for entrepreneurs to better forecast and meet consumers' demands. Entrepreneurs can use their judgment to organize resources in ways that are more pleasing to consumers. But this assumes that they are able to do so, that competition is allowed and there is no government interference. This is not the current world we live in.

Entrepreneurs currently face immense battles. In increasingly more industries nominally public and private companies are becoming bedfellows with the US government and their love of its fiat currency. For example, imagine an entrepreneur who wants to enter the car industry, now with almost impenetrable barriers to entry. Government (aka General) Motors, Chrysler, and Tesla are receiving billions of dollars in government loans. The government now "owns" 61% of GM and 8% of Chrysler. In fact, explicit in GM's bailout was the requirement of expanding its operations and hiring more workers, which is essentially a requirement to further misuse labor and capital. In contrast, Ford closed over 10 factories and let 45% of its workers go in North America. Ford, who did not take government money or go into bankruptcy, turned a billion dollar profit in the third quarter.

Companies in the car industry are backed up by government programs, schemes and incentives, including access to the government money machine. How does an entrepreneur compete? The fictitious role of a government that exists to protect the rights of the minority – in this case a hypothetical new venture in the car industry – should be seen for its absurdity.

Of course, car bailouts pale in comparison to the staggering $12.2 trillion overall government bailout. The government is prolonging the recession, forcing many consumers to buy cars they would otherwise not, and not allowing entrepreneurs to solve the problem. In short, resources are still being misused; entrepreneurial opportunities are made impossible or extremely difficult simply by government mandate.

In the current situation irrationality abounds: the worse car companies do, the more government money they receive. This has always been true of nearly any government program; it is now true of many failed companies. Any parent who rewards their child for poor behavior can undoubtedly expect more of it. In contrast to the current corporatism on display, those entrepreneurs who consistently perform poorly in the market – who inaccurately forecast consumers' demands and further contribute to the maladjustment – eventually go out of business. Those who succeed and earn profits are those who make better use of resources, demonstrated by the preferences of consumers who voluntary purchase their products. As Murray Rothbard pointed out in Man, Economy, and State (1962, p. 468), "profits are an index that maladjustments are being met and combated by the profit-making entrepreneurs."

If the government would allow it, crises can actually increase the number of entrepreneurs. Some individuals who are unemployed become entrepreneurs out of necessity. "Necessity-driven" entrepreneurship is an important form of entrepreneurship, one where the opportunity cost of starting a business may be lower for those unemployed. Other entrepreneurs spot arbitrage opportunities that enable them to offer lower prices to consumers, who have become more prudent with their expenditures. Such "opportunity-driven" entrepreneurs are looking to exploit perceived opportunities. The Global Entrepreneurship Monitor's 2008 Executive Report (2009, p. 8) discusses the role of entrepreneurship in an "innovation-driven economy" such as the US:

Often, small and innovative entrepreneurial firms enjoy an innovation productivity advantage over large incumbents, enabling them to operate as "agents of creative destruction." . . . innovative entrepreneurial firms may emerge as significant drivers of economic growth and wealth creation.

Even new ventures are able to innovate and compete, à la Schumpeter, with more established and larger companies; but to compete with a company backed up by a government that possesses unlimited access to money and the ability to outlaw competition is to be up against an incredible monopoly.

However, the government can do something: get out of the way and allow entrepreneurship to flourish in the car industry and in all industries. Such "agents of creative destruction" should be allowed to freely compete and truly end the recession. As Austrian economists know, the recession is the recovery, and outlawing entrepreneurship will have disastrous consequences.