Freeman

ARTICLE

Are Successful Businessmen Just Lucky?

DECEMBER 01, 1978 by BRIAN SUMMERS

Some people contend that free enterprise is nothing more than a game of chance—that business profits and losses are purely a matter of luck. Is this true? Are successful businessmen just luckier than the rest of us?

Consider a simple example. Suppose a businessman has net earnings of $35,000 in a given year. Is that $35,000 all profit? Not necessarily. If the businessman put his own labor into the business, and if he could have earned $20,000 working for someone else, the business cost him, in terms of lost salary, $20,000. If he has $100,000 of his own capital invested in the business, and the market rate of interest is 10 per cent, his business cost him $10,000 in lost interest. The businessman made $35,000 by passing up the opportunity to make $30,000. His net profit was $5,000.

Was his $5,000 profit caused by good luck? If he had earned only$25,000, would his $5,000 net loss have been due to bad luck?

Profits and losses could be attributed to luck only. if they were the results of completely random processes—such as the roll of dice. If businessmen randomly selected products and factors of production, we could say that profits and losses were purely a matter of luck.

But if businesses were operated in a completely random manner, there would be no tendency for businessmen to emulate successful competitors. Businessmen would never tend to enter a profitable industry, bid up production costs, and reduce selling prices through increased output. If businessmen depended entirely on luck, they would never adopt the methods of profitable competitors—they would just keep rolling dice.

In the real world, of course, businessmen don’t depend on luck. They observe competitors and try to learn from their successes and failures. Successful businessmen are not gamblers; they are alert followers of market trends who use their specialized knowledge to anticipate future trends.

But what about innovators who try out new products and new techniques? Aren’t they gamblers? Even the boldest innovators don’t randomly select products and factors of production. They know that to make profits they must please consumers while minimizing costs. Thus, they study the market, perform marketing research, and try to reduce costs by conserving labor, capital, and scarce resources. If they fail, the losses are theirs. If they succeed, consumers enjoy a better standard of living. Businessmen succeed by correctly anticipating consumer preferences and efficiently using resources to satisfy these preferences.

Luck is a factor only when events are beyond our control. In a free market each person controls his own property, thereby minimizing the importance of luck. When government intervenes in the economy, however, luck becomes more important—because with property subject to government regulation, economic success becomes less dependent on personal initiative and more contingent on the vagaries of politics.

 

—FOOTNOTES—

¹F. A. Hayek, "The Trend of Economic Thinking,"Economica, May 1933, p. 130. ²Hayek, "Kinds of Order in Society," Institute for Humane Studies reprint, Menlo Park, Calif., 1975, pp. 6-11.

3Hayek, Morgan Guaranty Survey, January 1976.

4Hayek, ‘The Use of Knowledge in Society," Institute for Humane Studies reprint, Menlo Park, Calif., 1977, pp. 5-13.

5lbid., pp. 13-15.

6lsrael Kirzner, Competition and Entrepreneurship (Chicago: Univ. of Chicago Press, 1973), chapters 1 and 6.  

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December 1978

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Unfortunately, educating people about phenomena that are counterintuitive, not-so-easy to remember, and suggest our individual lack of human control (for starters) can seem like an uphill battle in the war of ideas. So we sally forth into a kind of wilderness, an economic fairyland. We are myth busters in a world where people crave myths more than reality. Why do they so readily embrace untruth? Primarily because the immediate costs of doing so are so low and the psychic benefits are so high.
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