HOW ENTREPRENEURS IMPACT AN ECONOMY?
Throughout history we have experienced different economic systems of varied influence and importance. We have seen the clear failure of Soviet Communism, ending definitely in 1991, along with South American Socialism which still persists nowadays in nations such as Cuba or Venezuela, causing enormous misery and hunger in their societies. Interventionist policies have been much more relevant since the Bretton Woods agreement in 1944, lasting up to 1971, when President Nixon decided to get the US out of the gold standard and adopt a freely-adjusted exchange rate system. Leaving aside all the different economic systems that have prevailed around the world, since 1980, and with the aid of politicians as Ronald Reagan or Margaret Thatcher, the Washington Consensus was established, advocating for free market economics and the preservation of essential rights such as the right to property or the freedom of negotiation and establishment of contracts. The predominance of free market economics has been clear since the 80s, as depicted by Robert Skidelsky in his book Keynes, the return of the Master, which I had the opportunity to read during the summer. While Communism and Soviet Socialism can just sustain themselves through coercion and violence from the government, free market economics are totally dependent on one factor: entrepreneurship. That’s the main reason why nowadays the Occidental world is so dependent on entrepreneurs and the innovative processes they are involved in. Because entrepreneurs are the economy, and the economy are entrepreneurs.
First of all, wealth creation is a basic need for any economic system, as it fosters prosperity and socioeconomic development, bringing benefits for all, and reducing poverty rates by widening the volume of available opportunities for poor people in the market. Entrepreneurs are essential in this process, which they lead incessantly. Entrepreneurs are in charge of establishing business entities, by investing their own resources and capital, which many times is not available at first hand, and consequently needs to be attracted. This can be done in several ways, as emitting debt, through corporate bonds or doing an IPO (Initial Public Offering); in which they emit equity instead. This process allows the creation of new investment opportunities for citizens, as equity of newly launched firms normally tends to be undervalued, and represents a good investing opportunity, according to Benjamin Graham theories of value investing. In the majority of cases, on the other hand, this debt is obtained through loans from banks, which even though at first sight don’t seem to affect the economy enormously, they have a big real impact on citizens as well. If the volume of entrepreneurs increases and the demand for credit is expanded at the same time, banks will have greater capital requirements, which they will cover through a greater attraction of deposits by raising rates offered to customers of financial entities, consequently generating wealth for the middle-class citizen, which tends to have the vast majority of their savings in banks accounts.
The previously mentioned facts demonstrate how entrepreneurs and the process of establishing a new firm or creating a new product, tends to mobilize wealth, allowing people to benefit from the success of enterprises and newly established businesses. Entrepreneurship helps to create pools of capital around new firms, contributing to present and future economic development.
If asked, any citizen will claim that his or her main and most important economic goal is job creation and the reduction of unemployment. Why? Because having a job permits everybody to have financial security, develop a personal project; as building up a family, and even enjoying to a larger extent their free time. Well, contrary to what Socialists may agree, the solution for job creation is not government intervention, but incentivizing entrepreneurship by facilitating means and a secure and profitable environment in which to develop new business ideas. The engine for job creation is entrepreneurship, as it is not a mere coincidence that some countries with the highest GDP per capita and lowest unemployment rates (of 3% or less), as is the case of the USA and Singapore, are also the nations with highest rates of innovation and entrepreneurship. One more entrepreneur means one less job seeker in the economy, providing consequently employment for multiple other job seekers, or employees. By establishing a new business you’ll need people to cover certain workplaces, and if that business functions well and generates new business opportunities, it will need to expand its productive capacity through greater investment in human capital, which will translate directly into lower unemployment rates and higher mean wages.
Following a similar trend, other of nowadays main economic concerns is inequality between regions, due to different rates of economic growth and big development gaps, which governments have tried to shrink throughout the last half century, without any success at all. Less developed countries and backward regions normally tend to offer lower production costs as cheaper raw materials or lower wages, which allows entrepreneurs to hire more workers or buy larger volumes of components while maintaining their costs of production under control. Consequently, the development of new businesses in these areas leads to greater social development, as for example, greater infrastructure will be build, as central authorities will receive larger tax revenues by an enlargement of the taxable base, which will be used to improve services such as health and education (ameliorating human capital) or improving the business atmosphere, all of them attracting more foreign capital. This fact implies how through greater business development, electricity, water, roads and schools will be provided to the local population. As stated in the previous paragraph, the creation of new jobs in these regions will help to revitalize consumption, lifting up these economies over the poverty threshold.
Equally, when making reference to economic growth, we should be aware that one of the main components of GDP is the balance of payments, which is composed of exports and imports (X-M), so one way to revitalize economic growth will be to increase exponentially the volume of exports of a region or nation in the international market. This objective can only be attained by developing new competitive advantages which are unique for that country and which makes it more competitive in an international scale, and entrepreneurship plays an essential role in terms of competitiveness. Any new business with potential future growth will be willing to export and increase its influence on foreign markets, which will contribute to economic development, as new technologies and innovative goods will be distributed globally, displacing old goods and companies which are involved in costly processes out of the market, which adheres to David Ricardo’s theory of “creative destruction”, explaining how entrepreneurship fosters innovation and displaces old and inefficient firms out of the market, benefiting consumers by increasing the VFM (Value For Money) they obtain in their purchases.
Finally, and overall, involving all the previously mentioned reasons of why entrepreneurship is essential for any economy, it stands above all how entrepreneurship boosts the standard of living of citizens and communities. Apart from creating jobs and increasing the disposable income and aggregate wages of societies, as has been mentioned before, entrepreneurs innovate and develop new goods and services, which consequently improve the quality of life of citizens in the mean and long term. Just turn your head around and think how many goods and services that nowadays you use daily didn’t exist 20 or 30 years before. With the answer to that question, you’ll discover why entrepreneurs are essential for any economy around the world.