Entrepreneurship Aggregate Demand. Smith believed entrepreneurs to
Entrepreneurship requires leadership and accountability, attributes which are somewhat limited within society. Renowned economic thinkers such as Adam Smith believed it was these key attributes along with risk taking, that enable entrepreneurs to generate wealth in abundance, improving the nation as a result. Growth within an economy results from a long-term expansion of productive potential associated with increased Aggregate Demand. Smith believed entrepreneurs to be the key drivers of this growth as their wealth ‘trickles down’ benefiting all of society. He goes on to claim that value is not solely dependent on the labour put into an item’s production, rather, the value of the good comes from the entrepreneur who felicitated its production (Grocott, 2017). By this notion entrepreneurs are deemed vital to economies growth. However, opposing schools of thought would argue the contrary, some viewing capitalism as a ploy to exploit workers’ natural desire to produce arguing that it is in fact labour that produces wealth. To understand the role of entrepreneurs, this essay aims to provide a discussion regarding why the idea that entrepreneurs are the drivers of economic growth is so attractive.
One aspect which illustrates how entrepreneurs are the drivers of economic growth can be seen in the outcomes of their actions. Entrepreneurs develop new and innovative business ideas, some providing goods and services where there have been unmet needs in the market. By responding to the needs of the society which have gone unmet, entrepreneurs create access to goods and services which society requires to remain productive, thereby fostering economic growth in that region (Sappon, 2016). In his book; ‘The Wealth of Nations’, Smith wrote ‘Consumption is the sole end and purpose of all production…’ (Smith,1776, p.660), suggesting that without consumer demand, the production of goods and services is pointless. Assuming firms remain allocatively efficient and in doing so entrepreneurs gain success, this will lead to the generation of much wealth. Such a system, Smith argues creates wealth not just for the citizens but for the nation as a whole. This idea is further consolidated in an expression popularised by President Kennedy in his 1963 speech, where he states, ‘At a high tide, all boats rise’, implying that during a time of economic prosperity everyone in the economy stands to benefit. This idea originates from the trickle -down theory of wealth, which proposes that at the end of the day as entrepreneurs make more money, they’ll set up new businesses, invest in more capital goods which ultimately leads to the creation of more jobs. By allowing for greater job opportunities, employment within the economy rises providing people with greater disposable income therefore allowing for increases in consumption and an expansion in Aggregate Demand. Furthermore, Smith suggested that the more money there is at the top, the more money there is going down to the bottom. Effectively this self -interested nature and greed for maximising people’s wealth serves as a public good in the end. With that being said, it is fair to acknowledge that some boats may not rise as high as others but they rise, nonetheless.
Building on the idea that entrepreneurs are self-interested beings, some argue that it is this attribute that enables them to be the drivers of economic growth. Smith writes ‘It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest…,’ (Smith, 1776). This highlights the notion that it is self-interest that drives many people into enterprise, be that to accumulate massive wealth or for status in society, the greed of the individual is what drives them to become an entrepreneur. This greed goes on to benefit the rest of the economy as the desire for further success results in better innovation, improvements in production methods and subsequently more efficient and more desirable goods and services. An example of such an entrepreneur would be Steve Jobs, the founder of Apple. Jobs was both an inventor and innovator, from his ideas came massive job creation, advancement in technology, not to mention the benefit which come about from trading internationally, a key driver of prosperity acknowledge by Smith (Macat, 2017). This therefore allowed for economic development, due to advancements in technology.
However, a factor which not only helps balance out this self-motivation for profit but also enforces economic growth through entrepreneurship is competition. Within a capitalist society such as the UK and US, there are many businesses offering similar product and services. Competition within these markets helps to off balance the selfishness of business owners while also protecting the interest of consumers as firms must compete with one another. They do this through distinguishing themselves from their competitor’s, a perfect example also being Apple. The iPhone was not the first mobile phone on the market, however it was an improvement from already existing ones, which is what enabled it to succeed and its subsequent dominance in the market. This success by firms such as Apple amongst many others is what has driven both Aggregate Demand and GDP within economies, therefore promoting growth in such regions. Ultimately Smith argued that both these factors, self-interest and competition (SchreiberWWII,2014), what he referred to as the ‘invisible hand’, is what makes entrepreneurs the drivers of economic growth and that the government should refrain as much as possible from interfering in the market, instead they should remain as ‘a night-watchman’.
It was previously mentioned that entrepreneurs are the drivers of economic growth. However, another angle of the debate suggests that alternative agents, that are more attractive drive growth within an economy and that the idea of entrepreneurship and capitalism is in some ways unattractive.
Accomplished philosopher and economist Karl Marx opposed many of Smiths views, instead he declared that it was the worker who created value and therefore the driver of growth within the economy. Marx believed that capitalism takes advantage of an individual’s innate urge to produce things by diverting them into producing things that reaps reward for others the entrepreneur, subsequently stripping them of leisure time. He goes on to emphasise what he described as an ‘exploitative relationship’ between workers and the entrepreneur whereby he views the idea of profit as theft, as opposed to a reward for risk and innovation (The School of Life,2014). Marx concludes that it is the worker that generates wealth but that wealth is taken by the entrepreneur, with only a modest part given back in the form of wages. This view of Marx ultimately provides an argument as to why the idea that entrepreneurs are the drivers of economic growth is not so attractive.
Despite his opposing views to capitalism, Marx acknowledged that the capitalist system was much more productive than its counterparts. In his book ‘Das Kapital’ he wrote of ‘capitalist production’ that combined ‘together of various processes into a social whole,” which involved developing new technologies. He understood that all countries needed to go through a period of capitalism, but concluded workers would naturally revolt into communism (Investopedia,2017).
Another line of thought stems from the ideas of Keynes who believed that it was the government that drove economic growth, and that their involvement was particularly crucial during a period of economic recession. Keynes was a revolutionary in his time as he rebelled from the Classical Economic worldview which was to do nothing during a recession and allow the market to correct itself, a system known as ‘supply led recovery’. Instead, Keynes suggested that it is the state that should step in with the idea of ‘demand-led recovery’. From his Tract on monetary reforms, Keynes stated that ‘in the long run we are all dead’ (Keynes,1923)1 suggesting that action must be taken now in order restore growth as opposed to waiting for the invisible hand. He goes on to emphasise that what will come about from stimulating demand is the ‘multiplier effect’, which will facilitate growth throughout the entire economy. Pettinger (2017) refers to the multiplier effect as an ‘initial injection into the economy which causes a bigger final increase in national income’. For Keynes, the state was central to the multiplier effect as it had the ability to raise loans and spend in a way businesses and entrepreneurs could not.
Keynes was well known for his contributions during the Great Depression of the 1930s where he advocated the need for demand-led recovery. To help the problems of the Great Depression the government initiated large-scale infrastructure and construction programmes such as the Hoover Dam (Booth,2011). The aim was that by providing people with work, they would use their incomes to help stimulate demand throughout the economy, thus restoring economic growth. However, despite how straightforward the solution sounded, the outcomes of Keynes’ plans were often more complex. To begin with, government spending must be financed in some way, often through taxes or by deficit spending, thus increasing the government debt. When critically analysed the solutions proposed by Keynes come with deeply rooted problems which ultimately undermine the issue it sets out to resolve. For example, to fund spending additional taxes may be levied on both businesses and workers, such a tax may act as a cut in wages, potentially impacting on demand (Booth, 2011). This may therefore imply that entrepreneurs are more attractive drivers of economic growth in comparison to the government.
To conclude, it is evident that entrepreneurs are key drivers of economic growth as they bring about increased employment and international trading which ultimately promotes growth in various regions of the economy. Nevertheless, other drivers of economic growth exist in conjunction with the entrepreneur such as the government and workers themselves, who many views to be the true creators of value and wealth within the economy. In addition to this, Marxism sees the role of the entrepreneur as more sinister therefore limiting its attractiveness. Finally, entrepreneurs are vital to the success of any capitalist society as their innovative ideas and skills bring out technological as well as social improvements which make our day to day life much easier. Without them, many could argue that the world would be completely different from what it is today. It is for this reason that the idea that entrepreneurs are the drivers of economic growth is so attractive.
Reference (in order of appearance):
· Grocott, C. (2017). Lecture 2: ‘Who Creates Wealth, Entrepreneurs or Workers?’ PowerPoint Slides Retrieved from University of Leicester, MN1000, Foundations of Management
· Sappon, E. (2016). ‘7 Ways Entrepreneurs Drive Economic Development’ Entrepreneur, 20 October online Available at: https://www.entrepreneur.com/article/283616 (Accessed 18 Dec 2017)
· Smith, A. (1776). ‘The Wealth of Nations’, Book IV Chapter VIII, v. ii, p. 660, para. 49. Scotland: William Strahan, Thomas Cadell
· Smith, A. (1776). ‘The Wealth of Nations’, Book I Chapter II. Scotland: William Strahan, Thomas Cadell
· Macat (2017). An Introduction to Adam Smith’s The Wealth of Nations A Macat Economics Analysis.’ Available at: https://www.youtube.com/watch?v=GDJiyOlHDGY (Accessed: 18 Dec 2017)
· SchreiberWWII(2014). ‘Economic Theory Adam Smith’. Available at: https://www.youtube.com/watch?v=pa1UmWv9_4g (Accessed 18 Dec 2017)
· The School of Life (2014). ‘Political Theory-Karl Marx’. Available at: https://www.youtube.com/watch?v=fSQgCy_iIcc (Accessed 19 Dec 2017)
· Investopedia (2017). Karl Marx. Available at: https://www.investopedia.com/terms/k/karl-marx.asp (Accessed: 19 Dec 2017)
· Pettinger, T. (2017) ‘The multiplier Effect’. Economic Help, 2nd July Available at:
https://www.economicshelp.org/blog/1948/economics/the-multiplier-effect/ (Accessed: 19 Dec 2017)
· Booth, A. (2011). ‘Marx vs Keynes: Where Does Economic Growth Come From?’ In Defence of Marxism 10th Nov. Available at: http://www.marxist.com/marx-vs-keynes-where-does-growth-come-from.htm (Accessed: 19 Dec 2017)
1 Phelan,J. (2013) ‘John Maynard Keynes, in the long run’ The Commentator 3rd June. Available at: http://www.thecommentator.com/article/3689/john_maynard_keynes_in_the_long_run (Accessed 19 Dec 2017)