True entrepreneurs don't need encouragement

Small business is the subject for debate in today’s Wall Street Journal.  Small business is said to be the main job creator in the U.S. economy and with unemployment still high, and a punk business climate, a goosing from government policy is thought to be the tonic to put us right back comfortably in bubble land.

All we need is a massive wave of entrepreneurship and we’re off to the races.  And if you believe Noam Wasserman, who teaches entrepreneurship at Harvard Business School, we can all be entrepreneurs.  Dr. Wasserman says doctors, lawyers and engineers are trained, why not entrepreneurs?

Forget about the school of hard knocks, students can study other people’s mistakes, learning what pitfalls to avoid and presto:  any business school grad has what it takes to launch the next Facebook or maybe just  an internet cafe downtown.

But Ludwig von Mises contends,

What distinguishes the successful entrepreneur and promoter from other people is precisely the fact that he does not let himself be guided by what  was and is, but arranges his affairs on the ground of his opinion about the future.  He sees the past and the  present as other people do, but he judges the future in a different way.

Peter Klein explains that for Mises, entrepreneurial judgment is not a mechanical process of formulating values using known probabilities.  Instead it’s “a kind of Verstehan that cannot be formally modeled using decision theory.”   This echos the view of Frank Knight, who believed entrepreneurial decision making is not modelable.

Klein explains,

Mises emphasizes, some individuals are more adept than others, over time, at anticipating future market conditions, and these individuals tend to acquire more resources while those whose forecasting skills are poor tend to exit the market. Indeed, for Mises, the entrepreneurial selection mechanism in which unsuccessful entrepreneurs–those who systematically  overbid for factors, relative to eventual consumer demands–are eliminated from the market is the critical “market process” of capitalism.

Instead of the unfettered market directing capital to successful entrepreneurs, the Small Business Administration (SBA) seeks to direct capital to anyone who thinks they might be an entrepreneur, especially  if they fall into certain favored categories of race and gender.  Veronique de Rugy argues that the SBA is a waste of money, citing Frederic Bastiat’s insight that those helped by government policy are very visible, while those harmed  by the same policy go unnoticed.    Ms. de Rugy writes, “we don’t know how many more jobs might have been created if market forces determined the allocation of capital.”

Arguing the other side is Barbara Kasoff who claims the SBA “helps keep capital, contracts and know-how flowing to small businesses,” citing plenty of big numbers making the case for government’s capital steering involvement.   But the SBA assumes capital is homogeneous and that everyone (who can qualify for an SBA loan) is equally gifted as an entrepreneur.   However, if these borrowers had proven track records of entrepreneurial acumen, presumably no government guarantee would be needed for banks to be induced to make the loans in the first place.

The mere fact that government has interceded means capital is being misdirected away from those with proven entrepreneurial ability  and toward those who are lacking the same.  Over time, while its proponents claim the SBA program is creating jobs, it is in fact destroying capital, and jobs along with it.