 My name is Timothy Terrell. I'm an associate professor of economics at Wofford College in Spartanburg, South Carolina and an associated scholar with the Ludwig von Mises Institute and I would like to spend some time talking about entrepreneurship, which is one of those areas I think the mainstream neglects and the Austrian school gets right. It's one of those areas where we can distinguish ourselves from the other schools of thought. I think the entrepreneur is underappreciated. The Austrian school emphasizes the role of the entrepreneur who is a person who acts to resolve misallocations of resources in the face of an uncertain future. I have a copy of a more mainstream, well very mainstream, managerial economics textbook. It's gone through multiple editions. It would be well known to many people who are taking MBA classes and others who have at some point taken a managerial economics course. I was slipping through the book. It's very quantitative and what you might expect. It assumes all kinds of information that entrepreneurs don't actually have available to them. I flipped through the index the other day and I thought, well I'm going to see what the mainstream has to say about entrepreneurs as I'm preparing for this talk. The word entrepreneur does not even appear in the index of a managerial economics textbook where you would think the entrepreneur should be central to making business decisions, not even there. It's all, you know, here's how to calculate elasticity from a demand curve, which of course the manager of a business can't see the demand curve. They have to do trial and error to figure out what customers are willing to pay, what factor owners are willing to provide the factors for. So this is an area where even going back to maybe especially going back to Adam Smith in his well-known book, The Wealth of Nations, he's sometimes considered the father of modern economics. Well, Adam Smith neglected the entrepreneur. So this is an area where Austrians I think have something very valuable to contribute. So here's where we're going and you'll see these points on the outline that you have. I tacked on a little on number four and number five here. Just really more of an expansion of the last item on number three and so I figured it deserved an extra Roman numeral. So that's where we're going. First of all, we're going to start off with the observation that consumer demand determines what is produced. And I depict this as a kind of a cycle on my diagram that first you have the consumer that wants something. Maybe the consumer doesn't have a real specific idea of what they want and they they'll know it when they see it that kind of thing. So it's not like the consumer provides the blueprint and the entrepreneur then builds the product for the consumer. Sometimes the entrepreneur has to do some of that trial and error to figure out what the consumer really wanted. But then the entrepreneur after predicting what it is that the consumer wants then designs a production process to provide that that good for the consumer. And that means figuring out what kinds of labor, what kinds of capital, what kinds of technology are needed. And by the way the Austrian school does not treat capital or labor as some kind of homogenous lump. Capital is differentiated. There are all kinds of different types of capital and maybe the discussion later on the business cycle will mention the importance of that. So then the entrepreneur has to come up with the resources to carry out this production. The entrepreneur is not someone who simply observes oh it would be nice if consumers had X and then here's how X would be done or produced. This is about how the entrepreneur actually carries out these plans and takes a risk in doing so. Faces uncertainty. Okay so then the entrepreneur gathers these resources together over time, produces a product. Again this takes time and then receives whatever is left over after the consumer pays the entrepreneur for this final product. So the entrepreneur is paying the laborers, paying the the managers who are working on this project, paying the owners of raw materials, paying the providers of capital and so forth. And then if there's anything left over after receiving the revenues from this production process that's what the entrepreneur gets to keep. And then I say that this is a cycle because the entrepreneur has to then think well what did I do right and what did I do wrong? Where was it that I didn't quite get the product right that the consumer wanted and where could I make improvements? And so they then redesign the production process and meanwhile as I'll point out later the consumers preferences are always changing. The prices of labor, the prices of capital all these things are in constant flux. So the entrepreneur can't just set a production process and then forget it. This is a constant cycle of design, redesign, reevaluation, reassessment of what the consumer wants and what the available resources are. Mises in his book Profit and Loss, which I think is mentioned as your recommended reading for this talk, says that the entrepreneurs fail to produce in the cheapest and best possible way those commodities which the consumers are asking for most urgently, they suffer losses and are finally eliminated from their entrepreneurial position. Other men who know better how to serve the customers replace them. Now in Professor Engelhardt's talk before the brunch, he mentioned factor prices and the imputation of value to producer or production goods. And so I know that he discussed that briefly toward the end of his talk and this is where this ties into the concept of the entrepreneur. So it's a seamless transition really from discussing markets and prices to discussing the role of the entrepreneur. So the valuation of goods drives these input prices. So for example, the preference for diamonds might rise. Then that means the price of diamonds is going to go up in the market because of shifting demand. And then that means that the wages of the diamond miners will rise. And this is something that people don't don't necessarily get when they think about economics and pricing and so forth. And it leads to some rather tragic results. I mean, for example, if someone from some child from the Girl Scouts comes to your front door and says, I'd like to sell you some cookies. Do you say, well, you'd be better off if I did not buy from you because I'm simply reinforcing child labor if I do this? Well, no, of course, you think, well, this person will be better off if I buy their product. Their wages will go up. Now, Girl Scouts aren't paid exactly for this kind of work. But the principle is the same that you're going to make this person better off if you demand more of their product, not less. And that's a misconception that many people have about markets. Another example would be basketball. There's a demand for high school basketball playing, which means that the price of tickets to NBA basketball games would go up. And that means that the wages of basketball players would then rise. Notice that this is not, you pay a lot for a ticket because NBA basketball players get paid a lot of money. It's the other way around. You're willing to pay a lot for a ticket. Therefore, the factors, the laborers, the basketball players are paid a lot because you want what they have to produce what they have to offer. All right. Another example would be, say the preference for internet delivered movies rises. So the demand for physical disc rental CD, CD, but DVD rental right falls. And then that means the returns to blockbuster shares fall. And ultimately, blockbuster went out of business, because consumer preference has changed. They thought, why should I get in the car and drive over to look at a limited selection in some store when I can just click on my remote control. And there's my movie. Part C says continual changes and there are continual changes in consumer preferences, technology and resource supplies. So as I said before, consumers are always changing their preferences. One year they want green tea and the next year they want kombucha with the probiotics or something in them. And then they want pomegranate juice and then they want something else. And so you see these constantly changing consumer preferences once one Christmas, it's tickle me Elmo and another Christmas, it's something else. But that's that's constantly being changed by the by the consumer and in the entrepreneurs got to keep up with us. I don't know if you're old enough to remember geo cities, but that was kind of a pre my space, you get to set up your own little corner of the internet. And then there was my space and then there was Facebook and then Pinterest and Instagram and I'm still trying to keep up with this with my own kids. The minute I think I figured out what social media there is popular where their age group they've moved on to something else. And so the entrepreneurs got to keep up with this constant, constant kaleidoscopic change. So people are constantly developing different ways of signaling their characteristics to friends and clients one year it's one way to do it and another year it's another way to do it. Electromechanical switches move to vacuum tubes to semiconductors to printed micro circuitry. So the technology is constantly changing to we go from cargo nets being lifted into holds of ships to containerized cargo, which was a very important invention for international trade. And this is the kind of thing that entrepreneurs have to think through. It's not just coming up with a new tech, like we think of maybe in Silicon Valley coming up with a new app or something, but it's a way of combining some of the existing technologies. For example, the fracking method of getting oil or gas out of the ground is a combination of three technologies. One is 3D underground imaging to figure out exactly where the oil bearing strata are underground deep underground, and then directional drilling so they don't have to just drill straight down but they can bend the pipe to go in a different direction. And then hydraulic fracturing where they set off little explosions to produce cracks in the rock and allow the oil and gas to escape. So this is a combination of different technologies to produce something that's that's very innovative apps for your smartphone. Just people constantly coming up with different ways to to figure out how to use GPS plus your cell phone data connection plus the mapping that's available and somebody comes up with Uber or another technology that is that is a combination of things that might have been around for quite a while. But then an entrepreneur thinks I know of a way to combine these things and generate something people will want or that he thinks people will want. So there are also shifts in resource availability. So relative price changes will affect the entrepreneurs decisions about how much and what kinds of labor to use how much and what kinds of capital to use and so forth. There are population changes, maybe with growing populations in other parts of the world. Entrepreneurs have to think about maybe making their product available with different language instructions or different kinds of techniques of appealing to an audience that might have a different culture than the one that they've been selling to in the past. Economic growth worldwide means that now of course your your coal, your oil, your gas, etc. are now being sold to different parts of the world because of economic growth there. Entrepreneurs are always having to take these changes into account. And of course, we can't ignore, sadly, the influence of government on entrepreneurial activity that there are there are new and different restrictions, variably enforced taxes, confiscation, etc. that entrepreneurs have to take into consideration as well. So next, let's let's move to the role of the entrepreneur. In your notes, this would be part a on change, uncertainty and opportunity for gains. I've already described some ways in which the economy is in constant movement. It's not static. And importantly for the entrepreneur that this presents uncertainty. And it's that uncertainty that leads to the opportunity for profit. It's uncertainty about what is it that consumers are going to want a year from now, when I'm starting to put the resources into the pipeline to move into a final product over time. This is another emphasis of the Austrian schools, the passage of time. Mainstream tends to look at the production process as some sort of instantaneous manufacturing, you just plunk these things into a hopper and out immediately comes your product. And the passage of time is very important understanding the struggles that an entrepreneur has to deal with uncertainty over a long period of time. So the entrepreneur then has to anticipate changes in preferences. They can't just say, Well, this is what consumers want. And I'm going to provide it. They have to think what will consumers want down the road over time. They have to observe trends and patterns. They have to understand human psychology. They have to understand human tastes. And they have to be prepared to arrange resources right now, in a way in such a way that the product will be available at the right time for the consumer. So maybe the consumer doesn't want the product right now, but will want the product in a year or two years or five years, when the entrepreneur's pipeline spits out the final product at the end. That's what the entrepreneurs got to be thinking about. Not what do people necessarily want at this moment, but what will they want by the time the product is ready. So this means entrepreneurship really is something that involves a some people might call it an art of prediction, a combination of sometimes non quantifiable variables that you can't plug into some kind of equation to spit out some kind of optimal result. So an entrepreneur can't just say, Well, let me let me put together these 200 variables and this will spit out what I should produce. This is a very much more intuitive sometimes an intuitive process on the part of the entrepreneur. Mises says again, from the same source that I mentioned earlier, the business of the entrepreneur is not merely to experiment with new technological methods, but to select from the multitude of technologically feasible methods, those which are best fit to supply the public in the cheapest way with the things they are asking for most urgently, whether a new technological procedure is or is not fit for this purpose is to be provisionally decided by the entrepreneur and will be finally decided by the conduct of the buying public. Maybe 15, 16, 17 years ago, there was this initial burst of growth in the internet and everybody started to think, Well, what can I provide using the internet? And the I won't get into how the Federal Reserve sort of intervened in the process to distort entrepreneurial decision making. I'll leave that for one of our later talks, but people were coming up with things like I think there was an e groceries.com where you're going to be buying your groceries over the internet. Well, you know, it turned out that the entrepreneurs who who invested resources in this in this pursuit were wrong. That's not what consumers want. They want to be able to, you know, tap the cantaloupe and figure out whether it's right or not and buying this kind of thing over the internet, at least at that time with the existing technology wasn't wasn't something consumers really wanted. And so it was one of the casualties of that dot com bus, excuse me, bust in the in the late 90s. So entrepreneurs need to anticipate changes in technology and resources. And we need to keep in mind that this doesn't mean that a new technology is always best. Sometimes the new technology is not the most appropriate way to to engage in a particular production process. Sometimes the conventional technology, the one that's been around for several years is best. A government investment in new technologies is is something one of the talks in Mises University this this week mentioned at some length. I think Peter Klein spent some time on this earlier. And it's important to note that government investment in new technologies, this, you know, the space shuttle program or the space program in general and the supposed advantages of having all of this new technology emerge out of that program, that's missing something. That's not entrepreneurship in the sense that are in the in the way that's going to create a positive growth for the economy. Government investment in technologies as new and as bright and shiny as they might be is missing key information about whether that that new technology is economically the best thing to invest in. So entrepreneurs have to pay attention to profit and loss. But governments, if their costs run up, well, they just confiscate more from the taxpaying public, and they they proceed with the with the endeavor, whatever it is. They don't have to pay attention to profit and loss government by its nature is a kind of a non profit entity, although of a special kind that can use coercion instead of appealing to people for donations. So the opportunity cost of one innovation might be the loss of another innovation. So we we come up with something like trying to think about genuine government innervate innovation. There's a lot of things that have been suggested as as being the outcome of government activity. But let's say jet engines that's been suggested as an outcome of government investment in the military during and prior to World War Two. Okay, well, great. I mean, I jet engines are wonderful. But perhaps they were a poor investment at that time because we could have used the resources to invest in something else. Maybe a better example would be the atomic bomb program, which did give us some useful peace peace time technologies like nuclear power and so forth. But it was this was an immensely expensive process. It was consuming some huge fraction of the electricity generated in the United States to run these these devices that purified uranium and plutonium. It was as a fraction of GDP. It was enormous. What else could we have done with those resources? Government didn't have to pay attention to the need for profitability. Again, they could simply coerce the resources out of the population if they if they wanted more. So it lacked that feedback that entrepreneurs depend upon. So entrepreneurs finally need to use judgment and appraisal. They have to use judgment and appraising the current and the likely future values of resources and other inputs and the envisioned final products. It's not enough to figure out how much electricity or labor or some piece of machinery is going to cost now. They have to think since this production process is going to take time, what's that labor going to cost me when I'm halfway through my production process? Is that machine going to develop a higher opportunity cost down the road that I have to think about now? It's a constant barrage of new variables that have to be taken into consideration. All right, so profit is a residual gain, as I said earlier, after the factors of production are paid. So we have all these factors, not homogenous, like some schools of thought tend to tend to suggest, not just a lump of capital and a lump of a lump of labor, but widely varying qualities and types of labor and capital. That's the real world we live in. We don't have some kind of schmoo like lump of capital that we put into this this kind of hopper. But we do combine the entrepreneur combines these factors in a production process that then generates an output. While that production process is going on, this entrepreneur has to keep paying the wages and the interest to the capital owners and the prices to the owners of the raw materials that they're using all along the production process. They're plugging in all of this money. And then at the end, they get a final product and they hope that the consumers actually willing to pay enough for this final product to compensate the entrepreneur for everything the entrepreneur has put out in this production process and hopefully even leave a residual for that entrepreneur. And the residual is what you get when you take the revenues and subtract all those payments to the factors. That's the residual. If it's positive, then the entrepreneur has made a profit. If it's negative, the entrepreneur has lost resources and if they keep running losses, they'll eventually go bankrupt, which is a useful process, by the way. Bankruptcy is the process of moving resources from entrepreneurs who have not correctly predicted what people want to entrepreneurs who do correctly predict what people want. So when government tries to get in the way of a bankruptcy process and says, oh, we need to bail this entrepreneur out, what they're actually doing is they're stifling the process that allows resources to go to their most valuable uses. Ultimately, it even hurts the laborers who are involved in these processes, who are then being guided by entrepreneurs who are not using resources efficiently. Now Karl Marx said that capital begets profit. That's not true. Capital by itself is an inert object. You have to combine capital with the creative action of the entrepreneur to generate profit. The more profit there is for entrepreneurs, it does not mean there's less for laborers. Revenues are not fixed. It may be that by paying workers more, you get more productivity and the entrepreneur can enjoy higher residual. So there's not some kind of fixed pie out of which you have to take the entrepreneur's payment, resource payments, laborer payments. That's not the way it works even though a lot of people think of payment to workers as somehow taking away from the profit to entrepreneurs. The pie can vary in size depending on how efficient the entrepreneur is. We also sometimes make the mistake of thinking that profit is, since we call it a residual, that sounds a lot like some kind of unnecessary leftover. Well that's not true. Profit is key. It is essential to the production process. Herbert Hoover back in the beginning of the Great Depression thought, well what we need to do is we need to keep wages propped up and allow entrepreneurs to take a hit to profit. Because he thought, well if we, profit is kind of this disposable thing, we don't have to have it anyway, so the key thing is to give spending power to the workers. Well that changes things fundamentally in the economy. Profit's not a disposable unnecessary thing. It's a signal for one. You see an entrepreneur making a big profit that suggests, well maybe that entrepreneur has lit on to something valuable, a valuable reorganization of the production process. Maybe that's something worth copying. And more resources go in that direction. If you tax profits or if you otherwise penalize that entrepreneur, you're dampening that signal that's telling people move resources over that direction. Also you're incentivizing entrepreneurial activity. Remember that entrepreneur is facing uncertainty. You don't have profit, you don't give the entrepreneur any incentive to take on that risk of loss. I mentioned bankruptcy already, I won't go through that here, but MISA says profit and loss are generated by success and or failure in adjusting the course of production activities to the most urgent demand of the consumers. And there's a simple rule of thumb to tell entrepreneurs from non-entrepreneurs. The entrepreneurs are those on whom the incidence of losses on the capital employed falls. And let's talk about point C in your outline there, says the difference between the profit and the rate of interest. Now interest is the exchange rate between present and future goods. We all value goods now more than the same good later, other things being equal. That's interest, that's not profit. Even though the mainstream will say well you're getting more for your product today than you put in at the beginning and all of that difference they would say is profit, not so. Okay, part of that difference between what the entrepreneur gets at the end in revenues and what the entrepreneur put in in payments to factors at the beginning, part of that is interest. Because you're having to persuade the resource owners to give up goods now and wait to get payment of interest later. Entrepreneurs may also wear other hats for the firm. They may, especially if you're looking at very small firms, you may have an entrepreneur doing all the accounting or doing the hiring and firing and some of that is something that you might trust to a manager who's paid a wage. We would call those entrepreneurial quasi wages. They're not the same thing as profit. Finally, let me mention briefly in this section profit and disequilibrium. MISA says that profit and loss are ever present features only on account of the fact that ceaseless change in the economic data makes again and again new discrepancies and consequently the need for new adjustments originates. Now some of these needed adjustments may be very large. It may be that there's a giant gap between the way resources are used and the way they could be used to provide with consumers with a better cheaper product. Well, large discrepancies if they're noticed and acted upon by entrepreneurs mean perhaps large profits. You tax those and you're reducing the ability of the entrepreneur or the incentive for the entrepreneur to resolve those large gaps and so you're left with that persistent inefficiency. MISA says taxing profits is tantamount to taxing success in best serving the public. One example of this would be the 1920 transportation act which taxed half of all the profits to railroads that were considered excessive and then put those into a fund out of which they subsidized the less successful or less efficient railroads. This is penalizing the efficient and subsidizing the inefficient. No wonder railroads ended up becoming inefficient by the by the middle of the 20th century. I need to to spend a minute or two on this ERE idea, the evenly rotating economy. Now this is a fictional construct created by MISA's in which there's no uncertainty about the future. Now he did this to try to establish the difference between between interest and profit. Interest remembers the payment that you make to a capital owner for giving up those resources for a period of time. Profit is that residual that the entrepreneur receives but in the ERE and that evenly rotating economy where there's no uncertainty at all, there's no entrepreneurship, there can be none and there's no profit. We don't think that's really the way the world is, but it's a way of establishing that distinction between capital interest and profits to entrepreneurs. So who's an entrepreneur? I'll close with this. Capitalists will are those who are providing an advance to the owners of factors that by factors I mean labor and capital and and and so forth, raw materials, in exchange for taking control of those long enough to produce a final product. The capitalist receives more from the consumers than their payments to the factor owners and that difference is interest. And again because there's no uncertainty in the ERE that's the only thing you see is interest, no profit. Bob Murphy's just come out with this wonderful book, Choice, which is a distillation of a lot of the ideas in in human action by Mises and he says in in that book that capitalists who lend money to a business venture may be contractually guaranteed a certain percentage return, regardless of the success of the company, but they know that if the company fails badly enough it may default on its loan and repay only pennies on the dollar. So in that sense the capitalist may be acting also entrepreneurially, being aware that they may suffer a loss of their loan if the entrepreneur who's guiding this process fails. So entrepreneurship is much broader than we sometimes think of it as being. In fact all of us to some extent act entrepreneurially. You are an entrepreneur, whether you recognize it or not. Every individual is making decisions now to prepare himself or herself for the future, an uncertain future. Richard Cantagone in 1755, and we think might be a picture of him, asked Mark Thornton more about that, but he says entrepreneurs work for uncertain wages and everybody else for certain wages until they have them, although their functions in their rank are very disproportionate. He says the general who has a salary, the courtier or servant who has a pension, the domestic who has wages are in the latter class. All others are entrepreneurs. He says even beggars and robbers are entrepreneurs of this class. So to sum up entrepreneurs are uncertainty bearers in an economy full of constant change. The entrepreneur's boss is the consumer and consumer demand is what that entrepreneur's got to keep an eye on all the time. Profits result from accurately predicting the future, desires of the consumer, resource availability, technology, and competitive conditions, and then they have to act on those predictions. They receive the residual after all the factors are paid. If you tax those profits you get ultimately less consumer satisfaction. Losses result from poor entrepreneurial judgment and again all of us act entrepreneurially in some way. You can't reduce economics to a set of equations or actuarial tables. The information the entrepreneur acts on is often tacit. It's not in quantitative form. Thank you very much for your attention.