Entrepreneurial Value Creation and the Professors Who Can't Understand It

University faculties are often ignorant of the fact of entrepreneurial value creation. One such faculty member is the influential human rights scholar Judith Blau, Professor of Sociology at the University of North Carolina-Chapel Hill. Through her membership in the American Association for the Advancement of Science (AAAS) Human Rights Coalition she defines the human rights agenda for the world's largest and most prestigious scientific association. Through her leadership of Sociologists Without Borders she promotes an activist "public sociology" agenda internationally. She has published dozens of articles and more than a dozen books, and she has served on numerous professional committees, advisory boards, editorial boards, etc. 

And yet, in a 2006 interview, she could dismiss the role of entrepreneurs.

I don't use the word "entrepreneurs," at least not anymore. It does not go with the global predicaments we face today, which, in my view, require collective solidarities and collective action.

This is consistent with her Marxist orientation (she was Chair Elect of the Marxist section of the American Sociology Association in 2007-2008) and her Marxist economics, which she articulated in her major book on economics, Social Contracts and Economic Markets, in 1993:

... in purely economic terms, the entrepreneur owns the capital, the means of production, and hires workers to produce commodities or services to make a profit. ... The potential for profit is created by workers: Specifically, surplus value is, put simply, the difference between what workers are paid for their work and what the work is worth -- as products or services -- in the market [1].

According to Blau, an entrepreneur is merely someone who owns capital and hires workers, and any profit is, in essence, stolen from the workers. Her ignorance makes her a superb case study of an influential scholar, writing frequently on economic issues, who is clueless regarding the role of entrepreneurial value creation.

Israel Kirzner identified the entrepreneur as the economic agent who is "alert to opportunity" and who acts on that opportunity. An entrepreneur is someone who recognizes that there are economic goods or services that are currently undervalued, and he or she then takes action, in the hopes of realizing a profit, by means of selling the undervalued goods or services at their market price. Kirzner thus identifies "profit" as the entrepreneurial reward for being alert to opportunity. It is analytically distinct from returns on capital investment received by the owners of the capital or managerial salaries received by managers of the enterprise (though one individual might simultaneously play the roles of entrepreneur, investor, and manager).

But even Kirzner's "arbitrage" theory of entrepreneurship undervalues the entrepreneur. Many entrepreneurs do not merely buy low and sell high; they actively create new value in the process of identifying undervalued goods and services and discovering new ways to combine them in order to create more value. Leonard Shoen, the creator of U-Haul, realized that gas stations across the U.S. had empty parking spaces on which they would be happy to park his trailers and thereby provide themselves with an additional revenue stream. Sam Wyly made his first fortune by realizing that many users who needed computer processing power could not afford their own mainframe, so he bought up mainframe time and sold it as time-sharing. In each case, the "arbitrage" interpretation of their entrepreneurial story fails to do full justice to the combination of vision, development of new systems, marketing and sales savvy, and sheer chutzpah in creating something out of nothing. Ex post, such arbitrage opportunities may sound obvious; ex ante, each new endeavor is challenging, risky, and requires tremendous talent and commitment to pull off (thus the entirely justified Randian notion of entrepreneur as hero).

An entrepreneur is an individual who sees opportunities that are invisible to others. Entrepreneurs create value because they identify situations in which some goods or services are undervalued and apply their life's energy to creating a reality which does not yet exist, with no guarantee of either financial or reputational reward. More than half of all new firms fail within four years in the U.S.[2]. Most entrepreneurs are losers, at least the first time.

My wife, Magatte Wade, is a Senegalese entrepreneur whose first company, Adina World Beverages, began by selling an organic hibiscus beverage that was traditional to Senegal. When she created her company, the hibiscus industry in Senegal was dying as the Senegalese were switching from hibiscus to Coke and Fanta. Meanwhile, Senegalese hibiscus was not competitive in international markets; Chinese hibiscus, for instance, was half the price and of much higher quality. Magatte recognized, however, that with the right branding and marketing, she could sell an organic hibiscus beverage to U.S. customers in the "cultural creative" demographic because they care about the social and environmental conditions under which products are produced. But in order to create her company, she first had to spend months convincing potential investors to invest in her enterprise (again, Blau's notion that the entrepreneur is simply the person with the capital is often false). Once she had raised the first round of financing, she had to spend numerous trips to Senegal training the women's co-ops to grow high-quality organic hibiscus, and then she had to spend several years flying around the U.S. selling her products to Whole Foods Markets, Wegmans, and other high-end retailers. Meanwhile, she and her partners went through all of the usual business nightmares of management problems, employee problems, production problems, marketing problems, etc.  Anyone who has actually created a new enterprise knows that it is often a matter of nonstop problem-solving in a frenzy of work, with the constant risk that it will all collapse at any point in time. It is not mere price arbitrage, less alone is it simply a matter of exploiting the "surplus value" created by workers.

At this point, Adina is growing successfully, and if Magatte's shares become liquid (no guarantee of that), she may become wealthy and thereby exacerbate the inequalities of wealth with which Blau and other academics are often so obsessed. In the meantime, Magatte is starting a second company, for which she is again raising capital, through which she hopes to create even more and better jobs in Africa. 

There are 500,000 aid workers in Africa who have not brought prosperity to the continent, nor will they. All nations that have become prosperous have done so by means of entrepreneurial value creation. Rather than 500,000 aid workers, Africa needs a million entrepreneurs, half of whom may succeed. The ones who succeed by means of creating value that hitherto had not existed will, in many cases, become rich and thereby "exacerbate" inequality in Africa, just as the rise of entrepreneurial capitalism in China and India have created a new class of wealthy entrepreneurs and "exacerbated" inequality in those places.

The entire academic focus on inequality is an atavistic throwback to the time when we lived in a tribe of 150 and if you got more of today's kill, then I got less. Our biology is geared to zero-sum interactions in which we must each struggle with the other to get our share. But entrepreneurial capitalism is a stunning example of a non-zero-sum game. All of the wealth created since 1800 was created out of the minds of human beings. Almost everyone on earth is better off now than their ancestors were two hundred years ago.

When Blau writes, in 2006, "It was not uncommon not so long ago for social scientists to speak of 'progress.' We are now wiser" [3], I wonder what planet she is living on. Once one understands the phenomenon of entrepreneurial value creation, then the world becomes an optimistic world of abundance for all, rather than a grim world of fighting and struggle. As the poet Frederick Turner has noted, the best solution for all of our problems is to "Make Everybody Rich." Since Adam Smith, we have known more or less how to do so: Let entrepreneurs, through the system of natural liberty, create value. Once Blau understands this, she will be part of the solution, and no longer part of the problem.

Michael Strong is the CEO and Chief Visionary Officer of Freedom Lights Our World, a non-profit devoted to entrepreneurial solutions to world problems, and the lead author of Be the Solution: How Entrepreneurs and Conscious Capitalists Can Solve All the World's Problems.

[1] Judith Blau, Social Contracts and Economic Markets, pg. 126

[2] William Easterly, "Freedom vs. Collectivism in Foreign Aid," Economic Freedom of the World Annual Report 2006, Chapter Two, pg. 37, http://www.freetheworld.com/2006/2EFW2006ch2.pdf

[3] Judith R. Blau, Keri E. Iyall Smith, Public Sociologies Reader, pg. xxi.