Why Business Matters; Entrepreneurial Capitalism in the Age of Omniscient Government.

Posted: Jul 22, 2013 12:01 AM

Carl Schramm, an economist and entrepreneur, was recently asked to give a short speech to the graduating class of UC Davis. Below are his remarks to the next generation of entrepreneurs:

It is a great honor to be with you today.  It is particularly humbling to give the graduation address because in many ways this is the graduates’ last lecture.

In the next few minutes I am going to conduct you through a reflection on a question central to the years you have spent here in Davis and to all the years ahead of you.  Let us consider why the study and practice of business matters.  To do so requires that we think about this question in the context of our shared life in the United States.

To begin, think for a moment that the degree you are about to receive, a masters in business administration, is itself an American invention.  Your faculty is handsomely arrayed in the regalia -- the robes, hoods and caps – that signal their status as doctors of philosophy.  Their Ph.D.’s are European, specifically German, in their origins.  In America, business has been so obviously central to our national experience that we made a formal study of how to improve its practice.  A new discipline required a new degree.  Dartmouth awarded the first Masters of Science in Commerce in 1900, which morphed into Harvard’s MBA in 1908.  No foreign university granted an MBA until 1950; and that was, not surprisingly, neighboring Canada!

How odd it is that many politicians, most of the press, and, surprisingly academics in other disciplines, treat the study of commerce as almost not quite legitimate, somehow a lesser intellectual pursuit than other academic fields.  They seem to see medical students and nurses as engaged in science-based “caring” professions.  Engineering students are valued because they will make the next generation of airplanes.  People studying biology and chemistry are respected because they will make our products better or beat back disease.  Agriculture students will see to our sustenance.

Indeed, in many graduation speeches this season, those graduating in other fields will be told in so many words that their apparent career choices are better, more important, and more virtuous, than yours.  It is hard to understand why commencement speakers can even suggest this.  If they only considered that more than ninety percent of all those receiving degrees in our institutions of higher learning will be working in business most of their lives I am sure they would not be so quick to give implicit offense to the majority of their audiences.  

Most college graduates apply their unique creativity, their inventive talents, and their dedication to serving the human family in the realm of commerce. Those of us who work in commerce play roles that make our economy function so that it creates the wealth with which we train doctors, fund hospitals, build our engineering schools, and support basic research.  It is our society’s ability to make wealth that allows some among us who, blessed with different but not better or more valuable creative skills, to enrich all of us with their work.  Without society’s ability to generate wealth there would be fewer people composing and performing music, curating museum exhibitions, executing prefect changements, striving to capture on canvas the perfect sunset over the student vineyard behind the Mondavi Institute, or working in non-profit and philanthropic organizations.

To understand why business is so important to the American saga we should start at the beginning.  The Declaration of Independence announced that freedom was at the heart of the incomprehensible daring of those who started a revolution in a weak, loosely affiliated group of colonies against the strongest empire on Earth.  They wrote, “We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the Pursuit of Happiness.”  It is clear that as the founders saw liberty it involved the freedom to determine how anyone could apply himself or herself to making a living, trading, making things, and inventing new products and ideas.  In many ways it was this quest for the freedom of individuals to advance their economic condition as they saw fit that required inventing a new country!

The protection of “business freedom” was even more important eleven years later when the Constitution was ratified.  Recall that the father of economics, Adam Smith, had written The Wealth of Nations in 1776, the same year as the Declaration.  Hamilton and Franklin understood Smith’s powerful argument that countries prosper when individuals operate in their own self-interest.  They saw, unlike Jefferson who believed that America’s experiment with democracy would only succeed if it formed itself as an agrarian utopia, that the idea of self-governance could succeed only if it showed that it produced expanding economic welfare for its citizens.  In its pre-constitutional years, the United States were flourishing because a diverse economic base was emerging that already revealed that freedom had unleashed new levels of human inventiveness. That the Constitution reflected the innovative potential of the new nation’s commercial life is evident in its unprecedented and explicit protection of new ideas as a form of individual property in its patent clause.  

Hamilton and Franklin didn’t know what the American economy would look like but they knew that government control of commerce via royal land grants, crown monopolies, escheats, corporate chartering by parliament, and royal corporate warrants, was antithetical to individual citizens practicing the arts of commerce.  Simply, unruly, unpredictable, unplanned commerce was the promise that democracy held that would secure its success.  Free market capitalism, a word that would await Karl Marx to invent, was itself being shaped as part of the American experiment with self-governance.  

Before we even knew what was on the other side of the Alleghany mountains, before Lewis and Clark made it to the Pacific, America’s exceptional economic future was determined by the notion that individual freedom, the promise of increasing human welfare, indeed the success of participatory democracy itself, hung on free markets.  And free markets were free because governmental control through regulation and planning and favoring certain commercial interests at the expense of others was minimized.  American capitalism was to be entrepreneurial and “messy” by its very nature.  Individuals were free to make capitalism work for them and in the bargain work for the good of all.

Today it has become fashionable for some politicians and intellectuals to declare that there is nothing to the idea of America being an exceptional nation.  To allege such a view requires consciously suppressing the record of history, particularly that of American business.  For 237 years, ever since the electrifying news of 1776 reached the world, ambitious people wanting to make new lives for themselves have set out for America.  They still do.  The promise America held was that once here, unlike most other places on the earth, anyone could improve their lot in life by applying themselves, expanding their talents, and working hard.  In America you could turn ideas into businesses that made money!  You could make something out of nothing using your own talents. Everyone in this room has a story that is different but wonderfully similar as to how it is that you came to be here.  Common to all are ancestors who invested in the promise of America.  My relatives, like yours, made conscious choices about coming here!  

America’s belief in free markets fueled those immigrant aspirations.  In only a century after we became a nation we showed the world what individual freedom when expressed in commerce could achieve.  America became the wealthiest nation on earth.  We began to beat back poverty.  We became confident in the working of democracy and its promise of economic expansion.  This confidence allowed us to reconcile our stated beliefs with the reality that not all could participate in freedom and its economic promise.  America is the only nation that fought a civil war, a long and horribly costly conflict, to enfranchise a minority both politically and, importantly, economically.  

Our national journey has also included many other achievements that benefit mankind. We pacified the world three times.  President Carter will be forever remembered for making human rights the world’s agenda.  And, in the later twentieth century we emerged as the world’s schoolhouse for a new kind of “entrepreneurial” capitalism.  America helped advance our unplanned and messy free market as the matrix of entrepreneurship that when adopted in China and India has led to the greatest decrease in world poverty every known. In just the last thirty years the world’s population living under the U.N. standard of poverty has been cut nearly in half.

The emergence of revolutionary new businesses in the United States has had an enormous worldwide impact, raising living standards for billions.  The global impact of our innovations in computers, telecom, medicine and air conditioning, have had such unmitigated benefits that America should rightly think of itself in the terms President Clinton’s Secretary of State, Madeline Albright, urged when she called ours “the indispensable nation.”   American innovations such as the World Wide Web just might lead to the spread of participatory democracy itself.  Free markets really do birth freedom.

But as we reflect on these achievements a troubling concern, foreign to the American experience and our historic philosophy of government, has begun to invade our civic life that will surely result in the dampening of innovation and entrepreneurship and, hence, our nation’s economic wellbeing.  Only a few weeks ago the President told graduates at Ohio State there was no cause to worry that our government could ever become a sinister force in the lives of individuals.  Perhaps he knew that a few days later news would break that the IRS, the most powerful domestic arm of the federal government, was indeed being used for political purposes.

In a few more days we learned the disturbing news that every telecommunications transmission, every email, every query handled by a search engine, has become the property of the government with the assistance of secret courts and without any objection from giant firms holding these data including Google, Facebook, AT&T and Verizon.  The government has the ability to monitor each of our lives, both the part we conduct in public and the part we conduct in presumed privacy.  The record is now indisputably clear that the government has actively punished political speech.  If one happened to be aligned with the “wrong” political movement, in this case, the T-Party, the government’s apparent interest in your political thinking was a great deal stronger than if you were a member of, say, Democratic Socialists of America, a decidedly political 501(c)(3).

I want to emphasize that this is not a partisan observation on my part – it is entirely descriptive.  The reason I raise this question is my concern that when government intrudes upon our privacy, for whatever reason including security in an age of terrorism, there are economic consequences.  American capitalism depends of individual freedom.  With individual freedom comes the liberty to think “crazy” new thoughts about goods and services that have never been thought about before. Hamilton and Franklin saw the importance of keeping government small in just this context.  

The economy they envisioned, the economy that ours became and was for many decades, was in its very essence unpredictable largely because it was the manifestation of the thinking and action of millions of highly innovative individuals.  Each inventor, innovator, and entrepreneur sees a world that could benefit from something that doesn’t exist. Every entrepreneur is engaged in the process that was characterized by Joseph Schumpeter (himself a refugee) as “creative destruction.”  America, unlike totalitarian and unfree states, did not embrace planned economic activity.  Here no one had to ask anyone, especially politicians and bureaucrats, for permission about thinking up a new business.  Our founders knew that a free economy, one that could not help but look messy, where big firms failed in the face of changing technologies invented by people working in garages, was the way that the entire society’s welfare would increase.  They settled early legal contests in favor of freely forming corporations and in easily discharging creditors’ claims in a unique approach to bankruptcy.

Two and a half centuries ago the framers of our Constitution knew that governments, by their nature, always abhor the unplanned, the unpredictable and the “messy.”  Governments in developed countries tend to establish and enforce “industrial policy” protecting large incumbent firms.  Rent taking becomes the order of the day – big firms become indebted to and support incumbent regimes.  An economic environment that is entrepreneurial by nature threatens political leadership in any political system.  Clearly, as Schumpeter tells us, the job of the entrepreneur is to displace, hence threaten, the large entrenched and likely inefficient firms – the ones that government sees as necessary to the economy because it believes, incorrectly, that they are the largest source of jobs.  

In the end, the most disruptive part of entrepreneurship is the innovations that it begets.  It is precisely these disruptions that drive economic expansion, including the creation of most new jobs!  But for innovation to happen there must be unbridled individual freedom.  When one hears of the superiority of our entrepreneurial “ecosystem” they are really hearing about the workings of individual freedom inside a democracy that values liberty including the freedom to think up new commercial ideas.  

This is why when the government benignly says it has to intrude on our privacy in the name of protecting us we must ask ourselves what is the price we will pay in terms of individual creativity, and in turn, our economic welfare.  When the government can know of our conversations, can read our emails, can analyze our Internet searches, can track our travels and purchases, can keep our most intimate medical secrets, and can figure out what we eat, there is no doubt that the price we pay can be metered in fewer and fewer crazy, innovative new ideas.  By their nature such ideas will be seen as somehow threatening to the order that political regimes always seek above all else.  Today the situation of a government empowered with so much information reminds one of George Orwell’s worry that the government can control what we think just by letting us know it knows what we are thinking.   

What then is the take away of this, your last lecture?   It is simple really.  It boils down to this: one of the glories of free-market capitalism is its vital ambiguity, its unpredictable nature, which will permit each of you and millions more like you to bring your quest for making something new or making something better or cheaper into a reality, a new product or service, a new company, that will benefit humankind.  But this freedom of action is inexorably linked to freedom of thought!  It is always going to be threatened by government advancing the idea that it can control the future and make it predictable, planned and free of economic danger.  

This is, as history teaches, a false promise.  We have prospered because our markets have been free, especially freely absorbing the disruptions of innovation and entrepreneurship.  Starting a company always begins with a new idea.  Thus, we must protect and, indeed, encourage the disruptive thoughts that drive new businesses and that government will always find disquieting.  Anyone with a good idea must be free in attempting to bring us something new that will improve our collective welfare.  And, it is the market alone that can determine value.  

The questions I raise today will never be settled.  It is, however, critical to your success that you know that what happens in the world of politics bears directly on your ability to apply all of your talents to business.  It is business that has made America’s wealth and made her promise of increasing welfare for all a reality -- the exceptional reality that we have shared with the world.  That is why our ancestors came; it is why immigrants still want to come, and it is the legacy that we must pass to our children.  As the business leaders of tomorrow it is your duty to be guardians of our political freedoms because without individual liberty our nation’s welfare will slowly erode one entrepreneur and one business at a time.