Entrepreneurship is Real. Business Is Real. GDP Is a Fiction. The Government Is The Enemy Of Real.

When politicians and journalists talk about “the economy”, they generally have an artificial computation in mind, typically either GDP, a computation of the amount of consumption spending in the country, or the percentage rate of change of that computation from one quarter or year to the next.

If there is such an abstraction as “the economy”, it is more properly thought of as all the businesses in the country that are producing goods and services for other businesses or for end-consumers to buy and use and enjoy. Economists refer to this assembly of businesses as the production function, but that, too, is theoretical. These are real businesses using real resources and employing real people to produce real goods and services.

With every act of production, whether a consumer good or a business or capital good, a business utilizes resources, adds value, and sells to a buyer who appreciates that value. Every productive resource has alternative uses and alternative forms of goods and services to which they could be applied, and so the most valuable use is selected. Value comes from the long progression of production and supply. The steel that is produced is dependent on the cost and effort of mining coal and iron ore, building and maintaining a steel plant, the trucks and ships that transport it, and the wages paid to steel mill workers and coal and iron ore miners. The production of everything requires an entrepreneur, natural or produced resources, work, and capital goods. It is these value-facilitating activities that make an “economy” grow and allow individuals to increase their incomes and wealth over time.

And time itself is an important contributor to production. What we produce today builds on production capacity, processes, and experiential learning of years, decades and sometimes centuries. 

This real activity and historical accumulation of capital is almost invariably ignored in the conceptual thinking about GDP, which is a measure of current consumption. 

Individual businesses are run in such a way as to produce more value than was present in the resources used in the production process. And the only way that can occur is if these businesses are operated by entrepreneurs who personally care about whether their businesses are adding value, because each individual entrepreneur’s own income will depend on whether their business earns a profit.

Actual entrepreneurs with their own personal incomes on the line worry about revenues, costs and profits. This can’t be said of government bureaucrats, regulators, and politicians. Their personal incomes are not on the line.

The real “economy” is driven from the supply side, that is, by businesses and the entrepreneurs who operate them, according to their judgment about whether or not a particular form of good or service that they produce will earn a profit. 

And this “economy” can only exist in a moral and political order in which individuals are permitted to start, run and manage businesses that make a profit, and in a reality where profit-making is not envied or resented or criticized by governments and their partisan voters. 

The “economy” can only thrive where governments do not confiscate profits and incomes through excessive taxes, don’t plunder value-adding businesses, and don’t constrain them via over-regulation, and don’t try to replace them by producing their own goods and services. The “economy” advances when it is widely recognized that everyone’s prosperity depends on allowing businesses to function as freely as they can to earn profits, in a market where the price mechanism operates without government interference and tariffs and trade taxes do not limit global competition to provide optionality and competition.

Businesses and production are real, using real resources to produce real goods and services for real buyers. Politicians and regulators don’t operate in this real world. They operate in their own conceptual world. The best illustration of this truth is their idea that the “economy” is consumption and can be measured as consumption, in the form of GDP. The computation of GDP includes government spending as a major contributor to total consumption. This false logic leads to the conclusion that increased government spending can lead to increased GDP and can therefore boost the “economy”. It has come to the point that the politicians will claim that any and all government spending, from welfare to nuclear bombs, drives economic growth.

This is, today, the state of government economics. It goes by the name of Keynesian economics. What that means is that the “economy’ is treated as an abstraction, a computation of consumption, and a numerical target at which unlimited government expenditures can be aimed without any thought of production, investment, or value.

In this sense, government is the enemy of reality. When the economy is understood as production, with real businesses producing real goods and services for real customers under conditions of real competition, then government spending and regulation is the opposite of production. It is extraction. It undermines production. It diverts and destroys. 

Politicians and regulators have no sense and no appreciation of the real-life entrepreneurs and real-world businesses sourcing and assessing real resources to run real enterprises at a real profit.

Entrepreneurial Economics Explained.

There is a body of economic science that has identified entrepreneurship as the driving force of economic growth. 

The purpose of economic science is to discover and verify methods to achieve increased well-being for individuals, families and any groups they form or choose to belong to, such as communities and firms or collaborative networks and associations. Scientific process and results must be realistic, i.e. relate to the real world rather than to mathematical equations and models.

Economic science uses the language of means and ends: the science aims to identify the best and most appropriate means for achieving chosen ends. In the economics of individual well-being, the ends are not represented by so-called aggregate measures such as Gross Domestic Product (GDP – a measure of the total monetary value of finished goods and services produced within a country’s borders) or total employment. 

The end of this body of economic science is individual satisfaction, often identified via the concept of subjective value – subjective in the sense that the individual decides what is valuable and what they value. In this way, customers run the economy. Whatever they feel satisfies their needs and wants, i.e. what they decide is valuable, is what is ultimately produced. In this sense, customers create value – it isn’t valuable if they don’t say so. Economic growth means more of what customers feel is valuable.

Customers get help in value creation from the entrepreneur. It is the entrepreneur who studies customers, ascertains what they think is valuable, and undertakes a production process to deliver that value. Logically, they are producing for a future value experience, because production takes time. 

This is why the role of the entrepreneur is so pivotal in the creation of new economic value. Entrepreneurs take all the responsibility and all the risk in value generation. They bet on being able to identify customer preferences pretty accurately (they can never be exactly right) and then they bet on being able to assemble resources in the form of a firm to produce for that preference, and they bet that the preferences won’t have changed before they get to market, and they bet that they can get not only the product or service right but also the price, and they bet they can beat competitors who are rivalrously eyeing up the same set of possibilities. 

Economic science observes and recognizes this role of the entrepreneur. It’s not a matter of personality – anyone can be an entrepreneur. There is definitely a method to entrepreneurship, in spite of (in fact, because of) the uncertainty of betting on customers’ future preferences. The economics of entrepreneurship is not fueled by sources of finance like debt or equity, but by imagination. Entrepreneurial projects are built on the choice of which customers to serve and how to serve them, imagining a future world in which customers’ formerly unmet needs are now satisfied. Imagination is turned into the design of a business model, which is the mechanics of actually delivering imagined value to customers. Revenue is the feedback loop that tells entrepreneurs that they have offered something valuable, and profit is the feedback loop that tells them that they chose the right costs.

To embark upon and stay on the path of successful production for profit, entrepreneurs must embrace and overcome uncertainty. How do they do this? They act. They make a commitment. They get started on the project or business initiative. Having once moved into action, they begin to learn. They can never be 100% right, so some parts of what they do will go wrong, and be unsuccessful. 

The entrepreneurial firm learns what doesn’t work and what does, discards the former and does more of the latter. Business strategy is experimentation and learning, not multi-slide presentations and extensive spreadsheets. Agility – fast learning, fast adjustment – beats business school training.

Because of entrepreneurial exploration and experimentation to identify what works, the world advances – people enjoy more satisfaction and a higher standard of living, services and technology improve, and civilization advances. The world we live in is shaped by entrepreneurial economics.

One clear implication of this body of economic science is that there is no place for – and no need for – government economic policy. It can only get in the way of entrepreneurial exploration and experimentation. Governments extract value from the economy through their taxes and regulation, and then sometimes claim to redistribute it via subsidies and rebates. They claim to design policies such as what level of wages to pay, or the cost of imports, or the amount of market share any firm can have before an anti-trust suit. It’s all futile and, worse, damaging. In entrepreneurial economics, the role of government is to stand back, get out of the way, and marvel at the living standard enhancements entrepreneurship brings.

Academics call this body of science Austrian economics, because its early thought leaders came from Austria when Vienna was the commercial and cultural capital of the globe. Thinking in the Austrian way is helpful to entrepreneurial success, but, for economic growth, we don’t need to adopt the name, just the method.