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Wednesday, October 1, 1986

A Reviewers Notebook: The Start-Up Entrepreneur

In his Discovery and the Capitalist Process, which was reviewed in The Freeman last winter, Israel Kirzner speaks of three levels of entrepreneurial endeavor. One is at the level of arbitrage, where paired buying and selling transactions are simultaneous. A second level of entrepreneurship is pure speculation on the future. This depends on alertness but without any simultaneity in the buying and selling of physically identical objects. The third level in Kirzner’s triad is that of productive creativity in which the entrepreneur sees possibilities in novel forms of combination.

Though the Kirzner levels may overlap in gifted individuals, a case can be made that only the third Kirzner type of operator deserves to be called the true entrepreneur. The arbitrage dealer creates nothing by his trades as such, though he may use his profits creatively at a different time. The pure speculator may help his own bank account to grow, but it will be the bank’s business to use the speculator’s profits creatively. In his The Start-Up Entrepreneur (New York, E. P. Dutton, 306 pp., $18.95) James R. Cook pays his respects to all types of enterprisers, including managers such as Alfred P. Sloan of General Motors who also had creative flair. But for the most part Cook is concerned with people who, perceiving market gaps and unsatisfied wants, bring improved or new products and services into existence.

There is a strong autobiographical thread to Mr. Cook’s book. He had been a small-town insurance agent in Minnesota, but he yearned to start a manufacturing and servicing company of his own. Without doing any research whatsoever in the field of water purification he plunked down some of the cash he had received from selling his insurance agency for a franchise to market “Crest Water” in the Miami-Fort Lauderdale area of Florida. The Crest Water machine that went with the franchise could really do a purifying job, but it soon became apparent that Cook and his partner Jay Anderson didn’t know Florida. They thought they could sell to the restaurants. After a score of turn-downs and some unfortunate encounters with antagonistic Health Department inspectors they decided to concentrate on condominiums and apartments. When they finally made several inroads in North Miami, they discovered that the machines they sold rusted within weeks. And there was a fish taste when the de-ionization tanks wore out.

There had to be corrections in the machines. Before the manufacturers came through with something workable the problem of getting customers remained acute. Luckily Cook and his partner got a tip that the thoroughbred horses at the Tropical Park race track were drinking bottled water. Cook’s partner made the rounds of the trainers, and in a few days he had a lifesaving order. After further trials and tribulations Cook found a Key Biscayne developer who was willing to test a coin-operated machine in one of his flagship buildings. The coin-operated concept proved the breakthrough. There were still other difficulties, both of money-raising and manufacture, to survive, and the business never did become a gold mine. But fourteen months after they had started Cook and his partner found someone to buy their business for $120,000.

What Cook learned from his Florida experience was persistence. Back home again in Minnesota he began to keep a notebook compilation of “needs” and “errors.” As a gun collector he noticed there was no market price guide for prospective gun purchasers. So he began to publish the Blue Book of Gun Values. He formed a group to offer insurance on safe deposit boxes after he had gone into the business of selling gold and silver to investors. Market gaps seemed to open up everywhere. He put up the capital to help start a company that sold nonalcoholic mouthwash to members of Alcoholics Anonymous. The company—Morning Magic Mouthwash of Colorado—is still prospering. During the off crisis he beat a formidable competitor in providing wood stoves. The market gap here lasted all too short a time, but, with his Investment Rarities Incorporated, which does a lot more than buy and sell precious metals, Cook has never been at a loss for new diversified entrepreneurial ventures.

As a “how to” book as well as an autobiography The Start-Up Entrepreneur is filled with all sorts of valuable advice to beginners. The problem of diversification must be handled carefully. Oddly, investment capital for small enterprises never seems to depend on interest rates. If the “cut in” prospects seem good to friends and relatives of small-time enterprisers, the money comes through. This probably explains why the vast increase in jobs under Reagan has come from small companies that have not had to borrow at particularly high interest rates.

Much of Cook’s advice comes in the form of quotations from the famous entrepreneurs and free market thinkers of both past and present history. Ray Kroc of McDonald’s is quoted so often that he might well have been listed as a co-author. In certain sections the book reads like an anthology, with wisdom coming in short and effective spurts from Andrew Carnegie, Peter Drucker, Cyrus McCormick, J. C. Penney, Napoleon Hill, Ludwig von Mises, Leonard Read, Conrad Hilton, Henry Ford, Stanley Marcus, George Gilder, and Dale Carnegie, just to name a few of Cook’s chosen mentors.

Cook seems to have done superlatively well for himself despite government regulation and the depredations of the Internal Revenue Service. He is always mindful, however, that he might have started more businesses if the State had not asked for half his profits. He surmises that if Thomas Edison had been bothered with modern taxation he would have failed to carry through on half his inventions. The paperwork involved in keeping track of the many Edison false starts would have driven the man crazy.

  • John Chamberlain (1903-1995) was an American journalist, business and economic historian, and author of number of works including The Roots of Capitalism (1959). Chamberlain also served as a founding editor of The Freeman magazine.