Small business entrepreneurs exist in a hostile environment in today’s global economy because large multinational companies exert political influence to prevent competition by forming monopolies and oligopolies. These companies want to preserve the wealth they have created. Entrepreneurs want to create new wealth by introducing new goods and services, innovating new means of production, creating new markets, or developing new sources of supply (Baumol, 1990).
Joseph Schumpeter argued the role of the entrepreneur is to create and when the rules change inhibiting that role “creative destruction” causes socialism (Schumpeter, 1975). Socialism happens when bureaucratic managers overtake imaginative entrepreneurs to benefit corrupt society. Ingenious entrepreneurs, however, will resurface to restore capitalism (Long, 1983). Baumol (1990) explained the conditions during these periods as productive, unproductive, and destructive. In other words, as the rules of the game change, conditions conducive to entrepreneurship change.
Baumol offered a historical analysis showing how conditions for entrepreneurship change and result in either productive, unproductive, or destructive climates for entrepreneurship. During unproductive and destructive periods, slave conditions exist for workers because companies do not value them as much as during more productive periods. Corruption causes meager conditions for workers because of a lack of incentive to create. Governments engage in warfare as an alternative way to find economic gain. Arbitrary taxation takes away individual freedoms and incentives conducive to new creations. Baumol showed history confirms these conditions exist in unproductive and destructive periods (Baumol, 1990).
Monopolies and oligopolies are one of the main causes of “creative destruction” and leave a void in addressing social issues normally carried out by small business entrepreneurs (Baumol, 1990). Entrepreneurs channel actions to other areas during periods of “creative destruction” because of a lack of incentives to create. The rules of the game have to change to restore productive entrepreneurship.
Baumol, Litan, and Schramm (2007) offered several ideas for how the rules of the game need to change to promote entrepreneurship and restore capitalistic conditions. Some of the ideas Baumol et al. noted include enforcing antitrust laws, welcoming new trade and investments, improving education, favoring democratic conditions, and fostering laws conducive to growth and prosperity.
In my practice, I work differently because I stress how important entrepreneurship is to the economy. Most consultants focus on profit building, but I focus on how critical entrepreneurship is to the economy and to enjoy the entrepreneurial experience. The one area I would change about how most consultants handle their role is to encourage entrepreneurs to learn from small failures. Entrepreneurs should not worry about failing. The biggest problem I see is fear of failure and not working through the harsh conditions.
I encourage entrepreneurs to try new initiatives to overcome hard times and not worry about what anyone else thinks. Entrepreneurs do better when they are persistent and try alternative approaches.
Please leave a comment on how you respond to failure and handle difficult times. How do you deal with the rules of the game during hard times? Would you like to learn more?
Baumol, W. J. (1990). Entrepreneurship: Productive, unproductive, and destructive. Journal of Political Economy, 98(5), 893-921. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=9103252727&site=bsi-live
Baumol, W. J., Litan, R. E., & Schramm, C. J. (2007). Good capitalism, bad capitalism and economics of growth and prosperity. New Haven, Conn. and London: Yale University Press.
Long, W. (1983). The meaning of entrepreneurship. American Journal of Small Business, 8(2), 47-56. Retrieved from http://search.ebscohost.com/login.aspx?direct=true&db=bth&AN=5749899&site=ehost-live
Schumpeter, J. A. (Ed.). (1975). Creative destruction from capitalism, socialism and democracy. New York: Harper.