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The Forum > Article Comments > Entrepreneurs are innovation’s essential agreement > Comments

Entrepreneurs are innovation’s essential agreement : Comments

By Chris Golis, published 1/2/2010

Labor needs to build an ecosystem for entrepreneurs - an Institute on Entrepreneurship.

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All government can do to promote entrepreneurship is protect private property rights, and then get out of the way. Any more than that can only be counter-productive, or unjust, or both, for a number of reasons.

The economic problem of entrepreneurship is to predict the future state of the market. If the factors of production, bought earlier, can be sold later for a higher price, the business makes a profit; if only for a lower price, it makes a loss. Profit results from, and is proof of, the fact that the entrepreneur has adjusted the scarce factors of production from being used to satisfy less urgent wants, diverting them to uses that satisfy more urgent human wants, as judged by the consumers. Thus value is created, because scarce goods are used to satisfy values that are higher in the consumers’ scale of preference.

The people who can do this successfully are in a small minority, and there is no way of discovering who they are, but by the operations of profit and loss, the quintessential tools of the entrepreneur.

By contrast, the purpose of any given governmental action is to substitute a state of affairs different from that which would otherwise have obtained by the operations of profit and loss. In the absence of profit and loss, government officials have only compliance with rules and regulations, the virtue of the bureaucrat, to go by and are flying blind.

The inputs for government action come from taxation, which by definition is a compulsory exaction, that is, a violation of property rights. The billions of dollars you are talking about for government to promote entrepreneurship cannot come from businesses making losses: it is taken from businesses making profits, thus destroying and stifling successful businesses to subsidise businesses that might be successful, by way of government bureaucracies that live by preying on successful businesses.
Posted by Peter Hume, Monday, 1 February 2010 10:11:26 AM
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If you, who have spent your professional life assessing capital ventures, don’t know how to create an ecosystem of entrepreneurship, what reason is there to think that someone who gets the funding by forcible confiscation, and who pays no price for getting it wrong, without having to account to any payer, consumer or voter, is going to be in any better position?

Furthermore, even if a business makes a profit from such governmental intervention which it would otherwise not have made, that is in effect to socialise the costs and privatise the profits.

There is no reason or evidence to think that government has now, or can ever get the knowledge necessary to undertake, or to promote the entrepreneurial function; and lots of reason and evidence to think it can’t: see www.mises.org
Posted by Peter Hume, Monday, 1 February 2010 10:12:34 AM
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Chris, you should not be surprised that the word “entrepreneur” is mentioned only once in a government report allegedly promoting innovation.. In my experience as an economic policy adviser to the UK, Australian and Queensland governments, neither ministers nor bureaucrats have any concept of entrepreneurship or how to foster it. To me, the simple answer is to create conditions in which entrepreneurs can exercise their unique skills to create and retain wealth. This involves, inter alia, removing regulatory, industrial relations and tax barriers to such activity; i.e., going completely against the mindset of politicians and (the great bulk of) their advisers.
In my 2006 paper on Achieving sustained economic growth, I noted that policies which embrace openness, competition, change and innovation will promote growth. Policies which have the effect of restricting or slowing change by protecting or favouring particular industries or firms are likely over time to slow growth to the disadvantage of the community. The incentives for politicians and bureaucrats unfortunately favour aligning with vested interests, rather than entrepreneurs who by definition will challenge them.
A few instances. I once snuck into a meeting of staff from Queensland’s so-called Department of State Development and the head of the venture capitalists’ body, AVCAL. I think that I was the only one who understood what she said. Her clear statement that the best thing that government could do to promote innovation and entrepreneurship was to get out of the way was met by proposals for government initiatives from each one of the DSD staff.
Some years ago, I and my then boss worked up with David Millhouse a proposal for what became The Corporation Builders, a successful venture in helping innovative firms. Our role was restricted to helping develop the concept and kick it off with Queensland Treasury’s imprimatur and a nominal $15,000 grant. Thereafter, TCB was to thrive or fail on its usefulness to private entrepreneurs. The Treasury head couldn’t understand this. He was much more sympathetic to a counter-proposal from DSD’s predecessor to set up a permanent government unit with $1.5 million a year to offer TCB-type services. (more)
Posted by Faustino, Monday, 1 February 2010 10:59:35 AM
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As head of QT’s economic policy branch, I directed economic modelling and financial analysis of a proposed government-subsidised magnesium smelter, a project which had been mooted for over 30 years without attracting commercial support. We showed that it could never be viable, a view shared by Teksid, who DSD had sought as the buyer of the magnesium. Our analysis and arguments were never refuted, as usual our opponents (whose promotion depended on getting up this non-viable project) resorted to abuse: “You are ivory tower economists, you don’t understand the real world!” I responded that I had worked in policy for the huge UK generating industry, my economic modeller had worked for BHP Steel and my financial analyst had for eight years been a project analyst for CRA copper smelters. (We had also all worked for Commonwealth economic agencies.) Our opponents were all career-long bureaucrats.

The smelter went ahead and collapsed with losses of $450m. I rest my case.
Posted by Faustino, Monday, 1 February 2010 11:08:12 AM
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I heartily agree with Chris Golis concluding comment: "Australia needs the entrepreneurship equivalent of the Lowy Institute for International Policy or the St James Ethics Centre".

I think that the reason that Cutler's "Venturous Australia" does not mention the word "entrepreneur" is because it uses it interchangably with the word "innovator"- innovation being the process of transforming an idea into something that works.

I made a submission to the Cutler Inquiry on this matter- unfortunately the submissions now seem to be off-line. Nonetheless, Cutler did recommend a Centre of the kind Chris suggests-
Recommendation 12.13 (page 179) of Venturous Australia states:
A National Centre for Innovation Research should be established to advance knowledge of the innovation system through high quality, independent research which is strongly relevant to policy and practice.

From the experience of one of the few people who have conducted an innovation management course at masters level in Australia, I can assure Peter Hume that there is an acute need for these courses and for government participation in establishing such a centre. Given the structure of modern universities, the cost and risk of establishing a significant Centre is too great for them to bear without support.

I tackled Minister Carr on this matter at a breakfast in Perth late last year. The response was some hand-wringing about tight budgets.
I'll support anyone who can raise the profile of this idea and lobby governments- and the private sector of course.
Posted by Jedimaster, Monday, 1 February 2010 11:32:53 AM
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We can - almost - agree entirely on this,Peter Hume.

>>There is no reason or evidence to think that government has now, or can ever get the knowledge necessary to undertake, or to promote the entrepreneurial function<<

(Where we part company, of course, is your automatic genuflection to Mises. But the main thrust - governments are not designed to recognize entrepreneurship - is spot on.)

No government department that has ever been invented believes that they are in any way an impediment to running a company. They firmly believe, from sunup to sundown, that what they are doing is by definition beneficial to business. Which is the first, fatal conceit, and inevitable disconnect.

The problem is that government departments have a single role, which is to implement government policy. In order to do this in a fair and even-handed manner, they insist that you fill in a whole lot of forms.

Depending on how well you fill in the form, they will give or withhold money. They do sort-of understand money, a little bit, but only because it is the sole useful resource they have.

Hence Firepower.

http://www.theage.com.au/business/smoking-out-firepower-kidnap-extortion-and-money-long-gone-20100129-n41d.html

"Though Firepower made little and sold little, Austrade handed over $394,009 in export grants and devoted a special section on its website to Firepower, endorsing it as an export succes"

And what is Austrade's purpose?

"Austrade assists Australian businesses contribute to national prosperity by succeeding in trade and investment"

Firepower would have filled in all the forms, and received a big tick from a functionary, together with a recommendation to spend big. Undoubtedly, that functionary has been promoted - probably twice - since making that call.

All the advice to Government so far on this thread seems to head in the same direction: get out of the way. But it isn't a matter of "hand-wringing about tight budgets".

It is simply that they have no way to convert "get out of the way" into government policy.
Posted by Pericles, Monday, 1 February 2010 12:46:12 PM
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