“In periods of major political, social, and environmental change, the number of problems requiring judgment increases, and the demand for entrepreneurship rises.” – Mark Casson, Fortune Encyclopedia of Economics (1993)
Three Oklahoma Entrepreneurs
In my home state of Oklahoma, in the span of roughly six years in the early 1970s, three men separately started companies that, by the year 2018, would each be a leader in its field. In 1970, David Green borrowed $600 to begin making picture frames out of his home. Today, Hobby Lobby has more than 800 stores and is the largest privately-owned arts-and-crafts retailer in the world. According to the company’s website, it employs nearly 32,000 people and operates in 47 states. The company’s corporate headquarters sits on a 9.2 million acre complex in Oklahoma City.
In 1971, David Smith, a boys basketball coach at Southeast High School in Oklahoma City started Midwest Trophy Company and sold trophies to bowling leagues and softball tournaments. Now, MTM Recognition provides a variety of awards and recognition pieces for Fortune 100 companies. In addition, they provide the NCAA with awards for a variety of sports, including the national championship trophy for Division 1 football.
They were upstarts who, over time, found a way to provide goods or services in a better way than had previously been done.
In 1976, Mike Dillard began selling martial arts uniforms out of his van at local martial arts tournaments. In 2018, Century Martial Arts boasts 650,000 square feet of corporate headquarters, which includes an on-site warehouse, a showroom, and a manufacturing facility. The company provides martial arts supplies to customers all over the world.
What did all three of these men have in common? They were upstarts who, over time, found a way to provide goods or services in a better way than had previously been done. More importantly, as each entrepreneur found ways to provide their goods to more customers and to provide additional goods that their customers wanted or needed, their companies grew significantly.
This drive to create new products and services that meet the needs or desires of customers, or new processes to deliver those goods and services, is the essence of entrepreneurship. It is also the foundation for economic growth.
Entrepreneurs Are Central to Improved Living Standards
In his 1942 book Capitalism, Socialism, and Democracy, economist Joseph Schumpeter identified the critical role of the innovative entrepreneur in driving economic growth. By creating new goods or services, finding new ways of producing those goods or services, or developing new management processes to better deliver goods and services to the public, these innovators disrupt current economic processes and create new ones.
The displacement of jobs isn’t always the elimination of old ones, but rather the relocation of them.
This disruption, what Schumpeter called “creative destruction,” doesn’t just enrich a few entrepreneurs. Rather, it enriches all of us as it creates greater access to more goods and services for increasing numbers of people. Entrepreneurship combined with markets continuously lowers the cost of basic necessities (food, clothing, shelter) as well as luxuries (smartphones, flat screen televisions, entertainment).
This is accomplished by innovation’s displacement of lesser-quality goods and jobs with higher-quality ones. Consider the typewriter, for example. Forty years ago, I’d be typing this article with some version of that machine. And there were all sorts of jobs attached to it—manufacturing, service and repair, and sales, just to name a few. But the advent of the personal computer and word processing software quickly made that product and the jobs related to it obsolete.
Importantly, the displacement of jobs isn’t always the elimination of old ones, but rather the relocation of them. This is especially true in the area of manufacturing. Today, rather than manufacturing computers, Americans tend to be employed in software development, artificial intelligence research, and programming. Jobs that pay significantly more than the manufacturing jobs that have been moved to countries like China and Taiwan.
The companies’ employees, consumers, and all those indirectly connected to them have been made better off.
Companies such as Hobby Lobby and Century Martial Arts were able to become international corporations because of this process. As the manufacturing of goods was moved to other countries, jobs in the areas of product design, market development, and especially services related to their products emerged. This made these companies more efficient and provided greater returns to their employees.
The result has been that these companies have been able to expand the range of goods and services they provide and the markets in which they provide them. In other words, the companies’ employees, consumers, and all those indirectly connected to them have been made better off.
Understanding the critical role entrepreneurs play in driving economic growth should provide direction to policymakers for what should be done to improve the economic engine of the United States as well as other nations.
In their book, Good Capitalism, Bad Capitalism, economists William Baumol (1922–2017), Robert Litan, and Carl Schramm argue that for American living standards to continue to increase, barriers to entrepreneurship must be lowered, and successful entrepreneurs and the firms they build must be motivated to continue to innovate.
Allowing foreign entrepreneurs the opportunity to offer their goods and services to American consumers improves the lives of those consumers.
How do we accomplish this? First, we need to avoid the impulse of protectionism in dealing with global competition. Creating barriers to trade may save a few American jobs, but the cost to American consumers is far greater.
Allowing foreign entrepreneurs the opportunity to offer their goods and services to American consumers improves the lives of those consumers. America needs to embrace globalization as a primary driver of innovation and increasing standards of living for us and those with whom we trade.
Similarly, it means reducing barriers to work and entrepreneurship domestically. Occupational licensing is one such barrier. As a 2017 Brookings Institution report demonstrates, this mechanism not only prevents low- and middle-income individuals from pursuing their own businesses, it also reduces the number of jobs available in the overall economy. It is an excellent tool for trapping individuals in poverty.
America also needs to generate more opportunities for immigration into the U.S., not less. In their follow-up book, Better Capitalism, Litan and Schramm point out that immigrants have a higher rate of entrepreneurship than native-born Americans. Their ingenuity and creativeness make us all richer, and we should welcome them with open arms.
However, it’s not just immigrant entrepreneurs that help create economic growth. Even immigrant laborers, who on average are less skilled and less educated than American workers, help foster increased living standards by allowing American workers to focus on higher-end jobs they are capable of performing.
Smith explained that far from being a zero-sum game, economic growth benefited everyone involved, whether they are individuals or nations.
Trade protectionism, occupational licensing, and closed borders are all branches from the same root—the idea that economics is a “win-lose” activity. Such a mindset puts individuals and nations at odds with one another. It sows seeds of long-lasting conflict. Adam Smith noted this in his Inquiry into the Wealth of Nations.
Smith explained that far from being a zero-sum game, economic growth benefited everyone involved, whether they are individuals or nations. He encouraged policymakers “for the love of mankind, to promote, instead of obstructing, the excellence” of other countries. Entrepreneurship helps foster such mutually beneficial engagements.
Entrepreneurs Make Us Rich
When entrepreneurs such as David Green, David Smith, and Steve Dillard (and countless others) are free to innovate, they improve the lives of billions of people across the world. Their innovations make us all rich. America should grow, recruit, and unleash more entrepreneurs and watch our people (and those around the world) live better, wealthier, and more satisfying lives.