 What I want to do is talk a little bit more explicitly about the role of the entrepreneur in this process and then add some remarks about government policies, institutions, and background conditions that make it possible for the entrepreneur to do the kinds of things that are necessary to create economic growth. So I'll be sort of revisiting some of the points that were made in the first two lectures and putting them in a slightly different context. Now, I really liked Mark's metaphor of baking the cake. You know, I don't know that I have his culinary expertise to be able to make cream frosting and tortillas and all of those things out of just a few simple ingredients. My only disappointment is that he did not show us more pictures of cake because who doesn't want to see pictures of cake? So I'm going to show you another picture of a cake. Now, check out this baby. This is pretty fancy compared to the rather pedestrian items that Mark was showing us. We got, let's see, one, two, three, four, five, six, seven, eight layers. And the frosting is pretty intricate. I don't know what's inside, but I imagine it's pretty special. And I'm going to want to take a guess at where this specific cake came from. Any cake enthusiasts in the crowd. I'm sure some of our online people know the Royal Wedding. That's exactly right. This is the cake from the wedding of Kate Middleton and Prince William. It's pretty fancy cake, as you can imagine. But, you know, as we already know from Mark's discussion, a cake like this with all the many ingredients that are involved, the very careful professional baking techniques and so forth, a cake like this doesn't just show up and probably neither you nor I in our kitchen with the ingredients and the tools that Mark was telling us about, could come up with this thing. Right. So of course, a cake like this doesn't just appear. It has to be created, whoops, created by somebody. In this case, this particular baker, her name is Fiona Cairns, and she produced the Royal Wedding cake. According to Fiona Cairns, she says, the whole cake was Kate's idea. She was she is a very creative person, and that's why it was so special. Kate apparently has some pretty strong ideas about cake. Kate Middleton gave Fiona Cairns a list of 17 different flowers that she hoped to see on the eight tiered cake, including Heather Lavender and something called Sweet Williams. Is that a flower as well as a lace sample from her wedding dress, which was incorporated into the cake's design? OK, now that is some pretty fancy production. Forget about fishing nets and rakes and tortillas. I mean, this is real production. Now, thinking about a cake like this and the person who created the cake helps us to understand that in a modern, complex, technologically advanced economy, producing goods and services for the future, creating capital goods that we can use to produce things for consumption can be pretty darn complicated. In other words, you know, there are probably lots of different cake designs that were considered. And once the baker and the princess agreed on what kind of a cake they wanted, there are probably many different ways you could make a cake like this. There are different combinations of ingredients. You know, these if you've ever seen one of those TV shows about wedding cakes, I mean, these things actually have some kind of an infrastructure. There's metal or plastic, you know, supports inside. You can't just make this out of flour. I mean, they'll just all sort of fall over. What designs did they use for that infrastructure? How are the different pieces layered on top of each other? How much time does it take? You know, which specific kind of flower and what kind of butter and which tools should one use to make the frosting and so on? In other words, just as we say, there are many different ways to make a mousetrap. There are lots and lots and lots of ways to make a super, super fancy cake. Now, how do you suppose Chef Cairns figured out how to do this? Do you think she just woke up one morning and said, gee, I want to be the baker for the royal wedding. I've never baked a cake before, but how hard can it be? And she sets off and there you go. No, of course not. I mean, this is obviously an experienced pastry chef, probably with some connections, right, presumably with a reputation. This is someone who has tried many different kinds of cakes in the past. Probably some of them were not all that good, right? You don't get to be the kind of chef who can produce something like this without a lot of practice and probably a lot of failed experiments in the kitchen that never saw the light of day and a good reputation in the community and so forth. So Chef Cairns here is an entrepreneur who is assembling the different components that go into this particular good, assembling them with great care and after long experience and choosing many, many different possible recipes. Right. Now, why would somebody like Fiona Cairns bother to do this? Let's let's assume to make the story more interesting that this is not the royal wedding where you get on TV and in magazines and fame and fortune. But suppose this is just a commercial pastry chef making cakes for weddings. Why would a chef bake a cake and offer it to a bride and groom for their fancy wedding to make money? Yeah, I mean, the chef wants to produce something and sell it to the market. Wants to make money from selling the cake. Now, remember, as was pointed out by Danny, producing a cake takes time, especially a cake like this, it takes time. And there are risks or uncertainties involved. It may not turn out any good. The chef may spend many, many hours working on it. Of course, refraining from consuming herself during that period and the end result might not be that good. But the reason that a commercial chef will do this is because she or he anticipates that the revenues received from selling the cake, the fee that the bride and groom or I guess the bride's parents, if it's a traditional wedding, will pay, is going to more than compensate the chef for the cost of the ingredients, the money outlays for all of the ingredients, plus the value of the chef's time rent in the on the building in which the kitchen is located or whatever other expenses might be involved in making a cake. So producing something for the market and offering it for sale when the technology is rather complicated involves quite a lot of uncertainty. The entrepreneur invests, the entrepreneur has expenditures in the present. To buy factors of production that the entrepreneur will then combine and maybe recombine over time as the experiment is performed to produce a good or service which can be sold to the market, hopefully not with certainty, but hopefully in exchange for receipts that more than cover the expenditures plus the time interest and so forth. And that residual what's left over if you're successful, if the entrepreneurial venture turns out the way the entrepreneur anticipates is called profit. Right? Profit is the money that you have left over after you've produced and sold to the market. Would it be wrong somehow for this chef entrepreneur to have some money left over once the cake is baked? I don't think any of us would would see that as being wrong. Right? If the government were to say, no, you can't make any profit from cakes. You can give your cakes away as gifts, but we will not allow you to keep any money from the production and sale of cakes. We'll tax it all away at 100 percent. What do you suppose that would do to the incentives of commercial chefs? Is somebody going to put the time and effort into making something like this without any anticipation of return other than goodwill? Probably not. Some would as gifts, but most would not. OK. What if the government takes half of the net proceeds, the net receipts from baking cakes? Well, I mean, people would still make them, but there would be a reduced incentive to do so. OK. So let's talk about the role of the entrepreneur more specifically in this kind of process. Words like entrepreneur, entrepreneurship, entrepreneurial are, you know, we use these words a lot. We hear them every day. People write about them. Lots of scholars and politicians and intellectuals and practitioners will say that entrepreneurship is important. We need entrepreneurship in the economy. Let's have more entrepreneurship. But what do they mean exactly? It turns out that in contemporary language, what most people mean by entrepreneurship is small business. An entrepreneur is a person who starts a small business or a person who owns a small business. So that's sort of the conventional way in which we use that term. I would characterize it this way in this conventional use. Entrepreneurship is sort of an outcome or a kind of phenomenon. It's something that you can see, something that you can observe, something that you can count. So if the city of Auburn, Alabama has a lot of small businesses and another city, say Tuscaloosa, Alabama, has very few small businesses, some people would say, well, Auburn is more entrepreneurial than Tuscaloosa. Or you might look at the percent of the workforce in a particular community or industry or society and say, how many people are self-employed? How many people own their own businesses, run their own businesses? That gives you a measure of how entrepreneurial a society is. You know, sometimes if you're filling out a census form, it might ask, what is your occupation? Teacher, lawyer, doctor, truck driver, entrepreneur, accountant, athlete, what they mean by entrepreneur there is simply a small business owner. Yeah, small business is extremely important in the economy. Right? Small businesses create valuable goods and services. That we need to that we want to encourage. But of course, medium-sized and large businesses can do these things as well. But think for just a moment, especially you parents out there, I have a 16 year old. He wasn't able to make it this morning to the seminar. I think he said something about having to hear these lectures every day over the dinner table, but like most 16 year old boys, he eats a lot. Seems like he eats constantly and sometimes I'll be at home, you know, quietly minding my own business in my study and I'll hear, you know, dad, there's nothing to eat in the house. Come make me something. You need to go to the store and buy me something. And I'll often respond, look, I'm busy. Go look around, look in the cabinets, you know, you can find some different stuff, you can figure it out, be entrepreneurial about it, please. And what I mean when I say be entrepreneurial, I don't mean start a business today. Right. What I mean is go find, you know, there's bread in this cabinet and there's probably some peanut butter over here. And if you actually put some effort into it, you could make yourself a sandwich. So we often use that kind of language, right? And here we mean being entrepreneurial or engaging in entrepreneurship as kind of a mindset or a kind of behavior, right? A way of acting or a way of thinking like exercising creativity, boldness, imagination, showing initiative, right? There's some more technical concepts of entrepreneurship that one finds in the economics literature, such as alertness to opportunities for gain, a concept popularized by an Austrian economist named Israel Kersner. Innovation in the general sense of introducing novelty, new goods and services, new ways of producing, a theory developed by another economist, Joseph Schumpeter, or the notion of entrepreneurship expounded by the American economist Frank Knight and the Austrian economist Ludwig von Mises, after whom this institute is named and other less famous economists like like Peter Klein, describes entrepreneurship as decision making under uncertainty, specifically the kind of decision making that Danny talked about, as did Mark, the decision to make the net in anticipation of being able to catch more fish in the future where there's uncertainty involved. It may or may not work. It may or may not be successful. Mises says the term entrepreneur as used by economic theory means acting man seen exclusively from the aspect of the uncertainty inherent in every human action. So in the real world, we don't know for certain if our investments will pay off. Somebody has got to bear that uncertainty. Someone has got to exercise the initiative to arrange the factors of production in particular combinations to produce consumer goods that will be valuable. Sometimes it will succeed. Revenues will exceed costs with discounting, and the entrepreneur will reap a positive economic profit. Other times the entrepreneur will make a mistake. Consumers will not want to buy the finished product. The realized revenues will be lower than the initial outlays and the entrepreneur will earn a loss. So entrepreneurs are motivated to seek profits and avoid losses in the process of combining and recombining factors of production, capital goods, to produce consumer goods that make us all better off. You cannot have a capitalist market economy. You cannot have an advanced industrial economy without a class of entrepreneurs who are engaged in this kind of activity on a regular basis. Again, to quote from Mises, it is impossible to eliminate the entrepreneur from the picture of a market economy. To echo what Mark said, the various complementary factors of production, the butter, the eggs, the flour and so forth, cannot come together spontaneously. They need to be combined by the purpose of actions of men, efforts of men and women, aiming at certain ends and motivated by the urge to improve their state of satisfaction in eliminating the entrepreneur when eliminates the driving force of the whole market system. Now, what are some things that governments might do if not to eliminate the entrepreneur, at least to make it more difficult for the entrepreneur to do what the entrepreneur should do? Mark already talked a little bit about some different theories of economic growth, according to mainstream neoclassical economists, Keynesian economists and so on. But let me just jump to the conclusion, which is often associated with the economic study of institutions that things like property rights and the rule of law and so forth are essential for facilitating or enabling entrepreneurial activity. So let's take it for granted that good institutions like property rights, the rule of law, sound money and so forth, create the right climate in which entrepreneurs can try to earn profits and avoid losses. So once those good institutions are in place, does that mean an economy automatically grows? Well, let me show you an example of some what you might see as some potential entrepreneurial opportunities that have not yet been exploited. I don't know how well you can see these pictures. Anybody want to take a guess at where this picture was taken? It's not a sci-fi movie set. It's not this is not something created in Photoshop. It's not an alien landscape. Yeah, this is the burned out, dilapidated interior of a once famous theater in Detroit. So you guys know about Detroit, experiencing a number of economic problems. I saw this great slide show a couple of years ago, photographs of ruined buildings in Detroit. It looks like a third world country, doesn't it? Or it looks like an alien planet after some kind of cataclysm. Really beautiful, fancy buildings. That's the train station in Detroit. Here's an old hotel. Here's what was once a sort of a nightclub where Tommy Dorsey and other great jazz musicians and musicians played. Now, you might think, again, think about this from the point of view of an entrepreneur seeking to earn money. You might say, look at this beautiful structure. I mean, it needs a lot of work. But if you're the kind of person, you know, those TV shows, people who buy houses and flip them, you think somebody could flip this. Right. I could buy this pretty cheap. It's got beautiful stained glass and moldings. It's got a great history. It would cost some money to fix it up. But once I've fixed it up, I could sell this thing for a huge amount of money. Right. I could hold concerts here. We could have dinner parties here. I could make a killing purchasing this, presumably undervalued asset and transforming it into something of greater value. But. Nobody has done this. Why? This is Detroit. It's like a war zone in downtown Detroit. They say that construction crews can't operate without 24 hour armed guard because gangs will come and steal all the construction materials. If you succeeded in renovating this place, who would come to downtown Detroit to attend a concert or a fancy dinner? Right. So without the right institutional environment, the entrepreneur cannot convert undervalued assets into higher valued assets that generate benefits for consumers. OK. So to conclude, right? As Ludwig von Mises said, entrepreneurship as judgment, initiative, responsibility is the driving force of the market economy. This is not something that government can or should try to manipulate. What the government should do is provide property rights and free markets and then get out of the way and let entrepreneurs do what they do. I just want to make just a brief closing note about what governments have done, right? Some people think that if you think that entrepreneurship means small business or tech startups, then governments do sometimes try to micromanage these things through regular, through subsidies, tax policies. You know, everybody looks at Silicon Valley or you have a concentration of tech companies, lots of different industrial planners, state planners, government officials say, well, gosh, we want a Silicon Valley right here in Auburn, Alabama. How do we get one? What buttons do we push? What laws do we pass? What, you know, handouts do we give? And of course, the answer is you can't create the Silicon Valley like that from the top down, it comes from the bottom up. There are lots of attempts to encourage small business through targeted programs and special subsidies and privileges. But the empirical evidence is pretty clear that these don't work very well, especially in the developing world. And of course, not everybody wants to own a small business, right? Some people are happy to be employees of another entrepreneur. OK, so as Mark said, don't try to be a central planner. Governments should not try to create clusters of innovation and entrepreneurship. What they should do is allow an environment where people can choose what they want to do and how they want to do it. That means market freedom, free capital markets, free labor markets, sound money like the gold standard, no stimulus, no bailouts, no subsidies, just private property, the rule of law and competition. Thank you very much.