The Entrepreneur as American Hero

                           Walter E. Williams1


Let=s start off with a brief discussion of the sources of income.  That=s important because some of the rhetoric one hears  gives the impression that income is somehow distributed - there=s a dealer of dollars.  Thus, one might think that the reason some people have more income than others is that the dollar dealer is a racist, a sexist, or a multi-nationalist who deals out dollars unfairly.  Or, alternatively, the reason that some people are richer than others is because they got to the pile of money first and took an unfair share.  In either case, justice requires that government take the ill-gotten gains of the few and restore them to their rightful owners - in other word redistribute the income.  While no one actually describes the sources of income this way, the logic of some arguments about the sources of income implies such a vision.


In a free society, income is earned through pleasing and serving one's fellow man.  I mow your lawn, repair your roof, or teach your kid economics.  In turn your give me dollars.  We can think of dollars as certificates of performance.  With these certif­icates of performance in hand, I go to my grocer and ask him to give me a pound of steak and a six-pack of beer that my fellow man produced.  In effect the grocer says, AYou=re making a claim on something your fellow man produced.  You=re asking him to serve you but did you serve him?@  I say, AYes I did.@  The grocer responds, AProve it!@  That=s when I show him my certificates of performance, namely the money my fellow man paid me to mow his lawn.


Contrast the morality of having to serve one=s fellow man as a condition of being served by him with the alternative.  Government can say to me, "Williams, you don=t have to serve your fellow man in order to have a claim on what he produces.  As long as you=re loyal to us, we will take what your fellow man produces and give it to you."


Obviously, some people are more effective at serving and pleasing their fellow man than others and thus earn a greater number of certificates of performance (higher income) and hence have greater claims on what their fellow man produces.  Take Luciano Pavarotti.  Why is his income much higher than mine.  It's because of discriminating people like you.  You will plunk down $75 to hear him sing an aria from "La Boheme" but how much would you be willing to pay to hear me do the same?  Those who would call Pavarotti=s income unfair and would have government to take part of it to give to others are essentially saying, AWe disagree with the decisions of millions upon millions of people acting voluntarily that resulted in Pavarotti=s higher income.  We are going to use the coercive powers of government to cancel out the full effect of those decisions through income redistribution."  I might add that income redistribution is simply a legal version of what a thief does, namely take the rightful property of one person for the benefit of another.  The primary distinction between his behavior and that of congress is legality.


For the most part, in a free society, people who are wealthy have become so through effectively serving their fellow man.  Cyrus McCormick=s reaping machine, Thomas Watson, the founder of IBM, Lloyd Conoverk, in the employ of Pfizer Company who created the antibiotic tetracycline a life-saving antibiotic are just a few of the exceptional contributors.  While these people and their compa­nies became extremely wealthy, society benefitted far more from their contribution than they did in terms of the value of healthier lives not to mention the millions and possibly billions of lives saved.


Propaganda and stubborn ignorance has it that the advances of capitalism benefits only the rich.  But the evidence, as I=ve already pointed out refutes that.  Let's look at more.  The rich have always been able to afford entertainment but it was the devel­opment and marketing of radio and television that made entertainment accessible to the common man.  The rich have never had the drudgery of washing and ironing clothing, beating out carpets or waxing floors.  It was the development and mass production of washing machines, wash and wear clothing, vacuum cleaners and no-wax floors that spared the common man of this drudgery.  At one time, only the rich could afford automobiles, telephones and computers.  Now all but a tiny percentage of Americans enjoy these goods.


Today, as it has always been, the direct impetus for technolog­ical innovation and progress has been the entrepreneurial search for profits and the competitive economy.  In the appendix, there=s a copy of a table taken from a paper written by Stephen Moore and Julian L. Simon A25 Wonderful Trends of the 20th Century.@  I=ll cite a few of their comparison statistics for the beginning of the 20th century versus its end: life expectancy rose from 47 years of age to 77 years.  Deaths from infectious disease fell from 700 per 100,000 of the population to 50.  Agricultural workers fell from 35 percent of the workforce to 2.5 percent.  Auto ownership rose from one percent of the population to 91 percent.  Patents granted rose from 25,000 a year to 150,000 a year.  Controlling for inflation household assets rose from $6 trillion in 1945 to $41 trillion in 1998.


Let=s consider another factor that is nearly completely ig­nored.  The output and wealth generated through free enterprise  contributes to a more civilized society and civilized relationships.  For most of mankind's existence, he has had to spend most of his time simply eking out a living.  In pre-industrial society, and in many places today, the most optimistic scenario for the ordinary citizen was to be able to eke out enough to meet his physical needs for another day. 


With the rise of capitalism and the concomitant rise in human productivity that yielded seemingly ceaseless economic progress, it was no longer necessary for mankind to spend his entire day simply providing for minimum physical needs.  People were able to satisfy their physical needs with less and less time.  This made it possible for people to have the time resources to develop spiritually and culturally.  In other words, the rise of capitalism enabled the gradual extension of civilization to greater and greater numbers of people.  More of them have time available to read and become edu­cated in the liberal arts and gain more knowledge about the world around them.  Greater wealth permits them to attend the arts, afford recreation, and contemplate more fulfilling and interesting life activities and do other culturally enriching activities that were formerly within the purview of only the rich.


How was all this achieved?  In a market system, enterprise profits are performance-related, namely finding out what human wants are not being met and finding ways to meet them.  In reference to the motivations of the entrepreneur, Adam Smith says, A. . .By directing that industry in such a manner as its produce may be of the greatest value, he intends only his own gain, and he is in this, as in many other cases, led by an invisible hand to promote an end which was no part of his intention.@


That might very well describe an entrepreneur like Thomas Watson Sr. founder of International Business Machines (IBM).  Many of technological gains and previously unimaginable human progress are the direct results of having methods of handling large amounts of data accurately and rapidly.  From the 1930s onward, IBM was at the forefront in the development of machinery to do this.  The huge benefits we enjoy and the human progress that has been made as a result of IBM=s pioneering work was no part of the intention of Thomas Watson or his successors.  They were in it for their gain - profits.


Profit has almost become a dirty word so let me spend a few minutes talking about the magnitude of profits and the role that profits play in a free market economy. 


First, the magnitude of profits.  Roughly six cents of each dollar companies take in represent after‑tax profits.  By far, wages are the largest part of that dollar representing about 60 cents.  As percentages of 2002 national income, after-tax profits represented about 5 percent and wages about 71 percent.


Let=s talk about what might be called normal profit and later about the more emotional windfall profits, what some have labeled obscene profits.  Normal profit is the opportunity cost of using entrepreneurial abilities in the production of a good.  It=s what the entrepreneur could have earned in his next best alternative, say, another business venture.  Just as wages, rent, and interest must be paid in order to employ the services of labor, land and capital, normal profits must be paid to employ entrepreneurial services, the resource that makes decisions, innovates and takes risk.


Whether an entrepreneur makes a profit depends essentially on two things.  The first is whether he is producing a good that consumers value and are willing to pay for and the second is whether he=s using the scarce resources of society in the most efficient manner to produce the good.


Let=s look at an example of the role of profits play in provid­ing incentives to produce what the consumer wants.  Remember 1985 when Coca Cola introduced the "new" Coke?  Pepsi Cola president Roger Enrico called it "the Edsel of the 80's," representing one of the greatest marketing debacles of the 1980's.  Who made Coca Cola Company bring back the old Coke?  Was it congress, the courts, the president, or other government officials who were acting in the interests of soda-drinking Americans?  No way.  It was the specter of negative profits (losses) that convinced Coca Cola to bring back the old Coke.  Thus, one role of profits is to discover what consum­ers want and if producers make mistakes, correct them.


Profits also force producers to employ resources wisely.  If producers waste inputs their production costs will be higher.  In order to cover their cost, they must charge prices higher than what consumers are willing to pay.  After a while the company will make unsustainable losses (negative profits) and go out of business.  As a result the company=s resources will become available to someone else who=ll put them to wiser use.  This process is short-circuited if government offers bailouts in the forms of guaranteed loans, subsidies or restrictions on competitive products from abroad such as tariffs and import quotas.  Government Ahelp@ enables failing companies to continue squandering resources.2


Windfall profits are profits above and beyond those needed to keep an entrepreneur producing a good or service but they serve a vital social function.  They serve as a signal that there are unmet human wants.  One of the best examples of the role of windfall profits are those that arise in the wake of a disaster and are often condemned as price gouging.  In the wake of a disaster, such as a hurricane, there is an immediate change in scarcity conditions and that=s reflected in higher prices for goods and services.  Say a family of four sees their home damaged or destroyed.  At before-disaster prices, they might decide to rent two adjoining hotel rooms.  However, when they arrive at the hotel and see that room prices have doubled, they might easily decide to tough it out in a single room.  Doing so makes a room available for someone else who=s home was damaged and need a place to spend the night.  Thus, higher prices give people incentive to economize on scarce resources.


In the wake of Florida=s Hurricane Andrew, windfall profits played a vital, though unappreciated role. Plywood destined to be shipped to the Midwest, West and Northeast suddenly was rerouted to South Florida.  Lumber mills increased production.  Truckers and other workers worked overtime so as to increase the availability of plywood and other construction materials to Floridians.  Rising plywood prices meant something else.  All that plywood heading south meant plywood prices rose in other locations thus discouraging Alower valued@ uses of plywood such as home improvement projects.  After all rebuilding and repairing destroyed homes is a Ahigher valued@ use of plywood.


What caused these market participants to do what was in the social interest, namely, sacrifice or postpone alternative uses for plywood?  The answer reveals perhaps the most wonderful feature of this process: rising prices and opportunities for higher profits encouraged people to do voluntarily what was in the social interest: help their fellow man recover from a disaster.


At this juncture let me say a few words about the modern push for corporate social responsibility.  Do corporations have a social responsibility?  Yes, and Nobel Laureate Professor Milton Friedman put it best in 1970 when he said that in a free society Athere is one and only one social responsibility of business - to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.@


It is only people, not businesses, who have responsibilities.  A CEO is an employee, an employee of shareholders and customers.  The failure of the corporate executive community to recognize this, and engage in activities unrelated to the pursuit of profits, means national wealth will be lower, product prices will be higher and the return on investment lower.

If we care about people's wants, rather than beating up on profit-making enterprises, we should pay more attention to government-owned non‑profit organizations.  A good example are government schools.  Many squander resources, produce a shoddy product while administrators, teachers and staff earn higher pay and perks while customers (taxpayers) are increasingly burdened.  Unlike other producers educationists don't face the rigors of the profit discipline and hence they're not as accountable.


How about the U.S. Postal Service?  They often provide shoddy and surly services, but the management and workers receive increas­ingly higher wages while customers pay higher and higher prices.  Again, wishes of customers can be safely ignored because there's no bottom line discipline of profits.


Here's Williams' law: whenever the profit incentive is missing, the probability that people's wants can be safely ignored is the greatest.  It's not just the post office and schools but delivery of police services and garbage collection as well.  If a poll were taken asking people what services they are most satisfied with and those they are most dissatisfied with, for-profit organizations (supermarkets, computer companies and video stores) would dominate the first list while non-profit organizations (schools, post office and offices of motor vehicle registration) would dominate the latter list.  In a free economy, the pursuit of profits and serving people are one and the same.  No one argues that the free enterprise system is perfect but it=s the closest we=ll come to perfect here on Earth.



Table 1

25 Wonderful Trends of the 20th Century









Life expectancy (years)






Infant mortality (deaths per 1,000 live births)






Deaths from infectious diseases (per 100,000 population)






Heart disease (age-adjusted deaths per 100,000 population)


307 (1950)




Per capita GDP (1998 dollars)






Manufacturing wage (1998 dollars)






Household assets (trillions of 1998 dollars)


$6 (1945)




Poverty rate (percent of U.S. house­holds)






Length of workweek (hours)






Agricultural workers (percent of workforce)






TV ownership (percent of U.S. house­holds)






Homeownership (percent of U.S. house­holds)






Electrification (percent of U.S. households)






Telephone calls (annual per capita calls)






Cars for transportation (percent of U.S. households)






Patents granted






High school completion (percent of adults)






Accidental deaths (per 100,000 population)






Wheat price (per bushel in hours of work)






Bachelor=s degrees awarded to women (percent of degrees)






Black income (annual per capita, 1997 dollars)






Resident U.S. population (millions)






Air pollution (lead, micrograms per 100 cubic meters of air)


135 (1977)




Computer speed (millions of instruc­tions per second)


0.02 (1976)




Computer ownership (percent of U.S. households)


1 (1980)



 aValues are for earliest year for which data are available.

  bValues are for latest year for which data are available.


 Source: AThe Greatest Century That Ever Was: 25 Miraculous Trends of the Past 100 Years@ by Stephen Moore and Julian Simon.  Policy Analysis No. 364 (Washington, D.C.: Cato Institute, December 15, 1999)


1John M. Olin Distinguished Professor of Economics, George Mason University,    Fairfax, Virginia.  Speech delivered to Hills­dale College, February 6, 2005

2A business going bankrupt doesn’t mean that its productive resources will vanish into thin air. It means someone else will own them.