The entrepreneurs
When customers off all classes can spend freely on goods and services offered by large cohorts – swarms – of entrepreneurial golden age. China in the Song dynasty and the preceding Tang dynasty was such golden age. But there have been many other.
Entrepreneurship creates a dynamic within societies, amplifying the tension between change and regulatory constraint.
Entrepreneurship’s impact on how we live has always been enormous, so ubiquitous and profound that we usually take it for granted.
Entrepreneurship’s impact was profound but not always good.
Society’s capacity to anticipate and mitigate the unintended consequences of entrepreneurial innovations become clear as we look to the past.
Entrepreneurship affects what we can and cannot do more than any other facer of society, certainly more than governments and organized religions.
Entrepreneurship, throughout time and place, has delivered us almost all that we feel makes life livable, if not enjoyable.
Some argue that it is essential for entrepreneurs to move fast and break things, even to flaunt currently existing laws, which, after all, can’t be expected to anticipate and allow for major innovations.
Entrepreneurs can be defined as individuals who:
- Are self-directed in their actions.
- Are innovative in ways that create perceived value within their local culture.
- Entice others to offer them something of value in return for delivering their innovation.
Our time-invariant definition of “entrepreneurs” provides us a filter we can then use to identify the specific mechanism that stimulates entrepreneurs to appear in significant numbers in almost all social groups. I call it “entrepreneurial swarming”. It also explains why and how entrepreneurs – as a group – are so innovative. I call this manifestation of entrepreneurial swarming the “entrepreneurial innovation cycle” (EIC).
Emergence
Helmut and Erika Simon from Nuremberg found Otzi, the so-called Iceman, in the Alps in September 1991.
Otzi’s tools, clothing, and medicines made up a sophisticated and complimentary set of items. How did he get all the individual items? Primarily he traded for them. Traded with entrepreneurs.
Entrepreneurs existed long before Otzi.
Bronislaw Malinowski researched Trobriand Islanders from the western Pacific. He cataloged seven distinct forms of trade practiced in the archipelago. A group that is isolated, and whom members are dependent on one another, cannot remain cooperative unless it has rituals, myths, and taboos that prescribe how and when materials, goods, and services can be shared or exchanged.
Understanding the nature of entrepreneurship requires an understanding of when and how individuals have acted to maintain a balance between benefiting themselves and benefits others.
Few other examples of entrepreneurial practices are bead-producing people of Wadi Jilad or Cabezo Jure cooper-tool-making factory.
Heqanakht is one of the earliest entrepreneurs we know by name. he lived in ancient Egypt. Even in centrally controlled societies like Egypt, entrepreneurs have appeared as far back as history goes to fill a population’s unmet wants and needs.
Uruk in Mesopotamia was known for the system of using entrepreneurs to direct and control long-distance trade between city-states.
The Indus Valley civilization also had a thriving entrepreneurial culture.
Zidong was the first entrepreneur to be mentioned in Chinese literature. Profit and good fortune were synonyms in ancient China.
Societies do not require entrepreneurs to exist, nor do entrepreneurs coerce rulers of city-states or kingdoms to let them operate – their legitimacy comes from satisfying desires that rulers cannot.
The Core of Entrepreneurship
Sima Qian wrote a compete history of China in the early Han dynasty. He believed that entrepreneurs played a critical role in creating the empire’s great wealth.
Profit-seekers also fascinated Socrates. He greatly respected some entrepreneurs.
The word “entrepreneurs” was first used by Richard Cantillon in his 1730 seminal treatise on economics, Essay on the Nature of Commerce in General.
Three main schools of thoughts on who counts as entrepreneurs:
- One who starts and runs their own company.
- One is about how an entrepreneur think or acts. Someone who is effective at building systems or processes with very few resources. Risk-takers.
- The third one revolves around hero definition. Someone with special abilities to facilitate creative destruction.
Schumpeter wrote about creative destruction as the essential fact about capitalism. The term was coined by Werner Sombart.
Humans are social animals. Entrepreneurs, on the other hand, act individually in their creation of value.
Entrepreneurs must do something their local culture considers valuable – valuable enough to want to trade with them.
Innovation is different from invention. Invention is the demonstration of a new and creative way of accomplishing a task. Innovation occurs when some group (it doesn’t have to be big) adopts the product or activity as better than anything they’ve known before.
Entrepreneurial innovation is usually incremental and often has nothing to do with a recent invention.
For entrepreneurs to keep delivering desirable products and live off their self-directed actions, they must reliably receive something more valuable in return.
Once an entrepreneur personally benefits from performing a skill, those nearby notice. Some of them inevitably try to perform the same skill and deliver a similar product.
Schumpeter called this effect an “entrepreneurial swarm”. Swarms form for almost every innovation that generates large amounts of value. Swarms persist through generations of incremental waves of innovation until new innovations completely capture the former’s value-creating potential.
Entrepreneurial swarming drives innovation. EIC.
The nature of entrepreneurial swarming, with the EIC’s requirement that swarm members continuously augment their skills, results in a highly impactful naturally occurring cycle of innovations. The EIC is the force that underpins much of the growth in the standard of living and well-being the world has enjoyed.
Innovations always have consequences because innovation requires change.
Entrepreneurs take risks that no established business entity or government can.
The dynamic between entrepreneurial innovation and social, religious, and political attempts to control it runs through all civilizations and all times.
Outsiders
The study of the past is inherently biased toward the politically, economically, and socially powerful. Elites have long compensated people to record their success, something commoners could never afford to do.
Outsiders are essential participants in entrepreneurial swarms. Outsider entrepreneurs are often the most resourceful, innovative, and ambitious members of the entrepreneurial swarms. Outsiders must simultaneously stand out and fit in.
The Greek model – women prevented from publicly selling their wares but privately practicing valuable skills as long as their products were offered indirectly to strangers – has been a common starting point for female entrepreneurs in both Western and non-Western cultures.
Some slaves in ancient Athens, despite not being able to own property, faced fewer entrepreneurial constraints than female citizens.
For millennia, personal services have been socially unacceptable ways to make a living and therefore have been ceded to outsider entrepreneurs.
Establishing personal service, craft, or trading businesses avoided by members of the middle class represents a time-tested strategy for poor and highly constrained outsiders to become self-directed and wealthy. This strategy, however, has one major and unavoidable flaw. When the success of outsiders challenges the prosperity or social position of the privileged, reprisals ensue.
Durham in North Carolina is enclave for Black workers and entrepreneurs who immigrated into a region that was completely rural. Washington Duke and his son John Buchanan Duke created American Tobacco. They were white. But John Merrick a black guy earning some additional money as barber, was cutting the hair of W. Duke, and he gave him an idea to create insurance company. North Carolina Mutual Life Insurance Company. Together with some partners, they also created bank and real estate companies. They were more concern with benefits for community over individual wealth accumulation.
Similar is with the Cuban community of Miami, the Irish neighborhoods of New York, old world Jewish ghettos and Chinese enclaves in Southeast Asia.
It is one thing to start a business doing what nobody wants to do. It’s another thing to start a business nobody else dares to do.
Madame Tussaud’s story is similar to that of many outsider entrepreneurs who created and then ran their business in ways considered socially stigmatizing or too demanding.
Fuel to Fire
Highly specialized entrepreneurs that accelerate the pace of swarms are today called venture capitalists.
Resources are invested in scaling supply, demand, or simplicity. They can yield big returns.
Amur-Ištar Lived in Assur in Upper Mesopotamia around 1900 BC. He run an enterprise in which 14 people invest. Business with limited partners were called naruqqum.
The business of tax farming – privately collecting taxes on behalf of rulers and government – had existed as far back as ancient Mesopotamia.
Medieval Chinese law also enabled investors to sell their “share” of the profit without dissolving an enterprise. These firms were called ho-pen.
The English ventures used the joint-stock structure pioneered by the Russia Company and sought royal charters and trading monopolies. The Dutch mostly used partnership without official charters or monopoly privileges. The swarming Dutch and English maritime entrepreneurs kept track of one another’s successes and failures.
The Dutch East Indies company showed that the general public represented a good source of funds for joint-stock startup.
By the end of the seventeenth century, English entrepreneurs had figured out how to form joint-stock companies without Parliament’s permission. Key to this shift was a swarm of entrepreneurs that formed to facilitate the buying and selling of shares in joint-stock companies. In England they were called “jobbers”, a term for someone who “purchases and resells”. They congregated across the street, what became known as Exchange Alley.
People started to refer to startups as “bubbles” because of their ability to form and grow quickly.
The Scotsman John Law adamantly believed other countries could be even more financially innovative than England. Law believed that a government issuing notes worth as much as four times the gold on hand would still leave noteholders with the sense that their notes were as good as gold. Law was one of the first to understand the relationship between credit and banking reserves.
Law understood reserve deposits and credit, but he did not understand investing in value creation. Law’s failure scared the Continent’s economic ministers and investors. Much of Europe remained skeptical of entrepreneurship through the twentieth century.
In US the Brons were a large, established New England whaling and merchant family. One of them joined created Brown & Almy partnership, they left the organizing part to Samuel Slater who had experience from England, and they signed an investment contract. From this point, all elements are in place for the emergence of what we now think of as our contemporary forms of entrepreneurship.
Entrepreneur Versus Entrepreneur
U.S. was built by entrepreneurs.
The most successful of America’s first home-grown generation of entrepreneurs was Cornelius Vanderbilt, Jr.. In his view, entrepreneurs -using the limited liability afforded to corporations as shields for the consequences of their aggressive moves – were far more effective at curbing other entrepreneurs than any law could ever be.
Vanderbilt’s strategy favors the entrepreneur with the largest cash reserves, not necessarily the largest corporation.
Almost two generations younger than Vanderbilt, John D. Rockefeller was a great admirer of the Commodore. Oil was a major new entrepreneurial opportunity at the time.
In January 1872, just five years after the Commodore’s blockade, Rockefeller implemented a new strategy for keeping competitors at bay and under control: consolidation. A new era of unbridled, winner-take-all entrepreneurial competition had begun.
It was the entrepreneurial financer J.P. Morgan who demonstrated how, by dominating finance, he could create strategies that dominated even winner takes all, provided entrepreneurs left the scene.
In 1901, Morgan convinced Andrew Carnegie to sell him Carnegie Steel Works. He created U.S.Steel, the first company to be worth more than 1 billion USD. He similarly consolidated Edison’s companies and merge them with Thomas-Houston Electric Company to form General Electrics.
He demonstrated to investors that financiers rather than individual entrepreneurs could create larger and more profitable corporations in an era when no market was safe from Vanderbilt-like competition applied in a Rockefeller-like winner-take-all fashion.
Even though the attention and support of governments shifted away from entrepreneurs, entrepreneurship still dominated growth in smaller, less aggressive, less capital-intensive, regional, niche, or bedrock businesses.
Sales and leadership became very important for entrepreneurship. Think about IBM capturing dominant position on the market even if UNIVAC had better product. Or the story about William Shockley, who first created transistor, but it was Fairchild Semiconductor and Intel who capitalize on this technology, companies set up by people from Shockley company that left due to bad management.
Venture capitalist competed to finance experienced entrepreneurs with the boldest idea.
Netscape story showed that growth became the primary valuation metric.
Scaling Supply
Entrepreneurs with unique and highly desirable skills have always been under pressure to produce more. This keen desire to scale up the supply of a product induces these ambitious entrepreneurs to innovate.
The most successful entrepreneur James Drax did not invent anything himself. Instead, he imitated others at large scale and with more control. By 1645, he owned the largest, most efficient, and lowest-cost producer of the most desired product on the planet: sugar.
Drax-inspired process control and organizational structure have been essential to scaling output ever since.
The scale of Drax’s operations was complex enough to require the first-ever three-tiered business management hierarchy.
Everybody noticed the scale of sugar production – and wealth generation – particularly entrepreneurs in other swarms.
Grimes Graves is an eerie place to visit. It was a neolithic flint factory. Since neolithic times, entrepreneurs have scaled up their supply by devising an efficient system and then repeating it.
In Assur the entire community focused on developing donkey caravan technologies and techniques to improve their trading advantages and increase trade.
For at least the past four thousand years, entrepreneurs have scaled by forming communities of specialists, each independently developing or implementing methods to improve the overall prosperity of the community. Whether on Barbados, in Renaissance Florence, or in Silicon Valley, when the community is largely governed by the specialists who live there, they operate at a distinct regional advantage.
The English manufacturer Matthew Boulton designed and built a steam-powered machine that could stamp one coin per second. Boulton wasn’t just a man of his times; he created his times. He reached out to Watt and together they created a steam-powered presses. Entrepreneurs now saw a machine that could perform several steps: load, stamp, unload.
Railroads were much more complicated businesses than anything the world had seen at the time. Louis McLane and Benjamin Latrobe formalized the railroad’s organizational and reporting structures, splitting it along operational and financial lines.
Carnegies learned the benefits of good organizational structure by working at railroad company. His vertically integrated hierarchy, with daily and sometimes hourly reporting, became the model for ambitious entrepreneurs who sought to maintain control of the companies they had founded.
Scaling Demand
There is only so much a human being actually needs for survival: food, water, shelter, and a few articles of clothing for protection from the elements. On the other hand, there is no end of things we might want – given proper nudge.
The problem you’re trying to solve is that people have everything they think they need. The solution? Convince them they want something they didn’t know they wanted.
Scaling demand may be an artificial endeavor, but it is often a profitable one.
Josiah Wedgwood was probably one of the first master of creating demand. He used his opportunity to create more demand after Queen Charlotte bought his new glaze that used cobalt to achieve an eye-catching bluish white that was brighter and lighter.
Some of the first entrepreneurs accumulated their wealth by securing what I call “objects of astonishment” from distant lands too remote to be conquered. Scaling demand through objects of astonishment became trickier with urbanization. Because objects of astonishment elevate status, they spur demand. But status doesn’t last.
Hospitality proved a breakthrough idea for getting people of all kinds to spend money on something they did not need. Having more food to sell spurred Chinese entrepreneurs to innovate ways to get customers to buy more food and drink.
Coffee merchants, to scale demand for the growing supply, opened comfortable and convenient coffeehouses where men could meet and relax.
Hospitality is about people catering to the desires of others for the purpose of associating a product or service with strong positive feelings.
Joseph Pulitzer and William Randolph Hearst introduced newspapers that were more accessible for ordinary people. Public relationship sprang up. Edward Bernays was one of the pioneers. He coined the term.
The latest surge of demand creation has been spurred by a corresponding abundance of computing power.
Scaling Simplicity
Entrepreneurs love to scale.
Throughout time we find entrepreneurs starting to wonder: is scale worth the trouble? Making scale easier to manage has been an opportunity for other entrepreneurs throughout history. Making it easier for other entrepreneurs to scale supply and demand can be thought of as scaling simplicity. This is the third major driver of entrepreneurial innovation.
Over time, entrepreneurs developed machines. They became more complex. Their complexity changed into an opportunity as entrepreneurs figured out how to make machines think for themselves. One of those entrepreneurs are Joseph Marie Charles, called Jacquard. He learned from Jacques de Vaucanson. Jacquard used punch cards to store and implement detailed process steps.
Entrepreneurs developed products and services to simplify the tasks of other entrepreneurs in ancient times, in Rome in Song’s China. One example were banks. They helped simplifying the trust and support long distance trade.
Champagne was a place where merchants started to have yearly events where they meet with their goods. Supported by Count Henry of Champagne liberal thinking.
Arabic numerals were introduced to Europe by Fibonacci of Pisa around 1202. They enable creation of double-entry accounting.
Captain James Ritty created Ritty’s Incorruptible Cashier to help salon owners at the end of 19th century. John Patterson created National Cash Register Company and improve sales practices.
In 1888, Alexander Dey invented a clock that recorded time and created a company with his brother to produce clocks that noted when employees started and finished work.
Herman Hollerith invented machine that simplified the counting of large numbers of people.
IBM was created out of merger of all of the above-mentioned companies.
Ken Olsen and Harlan Andersen created DEC in 1957. DEC introduced their line of computers called PDP.
Semiconductor swarms had already emerged before Olsen and Andersen. Robert Noyce and Gordon Moore created Intel in 1968.
A second swarm formed around designing and selling software to simplify running businesses. MRP was software for manufacturing resource planning.
The next step in swarming are companies utilizing AI and ML.
Scaling consequences
Entrepreneurs continuously confront impediments to scaling.
Slaving per se is not an entrepreneurial construct, but the scale of slavery is. Entrepreneurial initiative scaled slavery to new and unprecedented levels.
Mesopotamian entrepreneurs invented the secured commercial loan around 2300 BC. If people could not return it, they can work for paying it off.
Deforestation is a classic unintended consequence of entrepreneurial swarming.
Societies rarely hold entrepreneurs accountable for the unintended consequences of their actions. Even when entrepreneurs knowingly cause harm to some, societies are reluctant to hold them accountable.
All the most impactful entrepreneurs in history have found success with their innovations through trial and error, almost never by theorizing or scholarship, which means that consequences are rarely considered.
All successful entrepreneurs intend to change society. And unless required to do so, they never ask permission.
Attempts at Control
Sovereigns fantasize that entrepreneurs should behave according to their wishes and expectations, rules, and laws. As we’ve seen, this is often not the case.
In 81 BC the thirteen-year-old Chinese Emperor Zhan invited smart people to talk about the role of entrepreneurs in Chinese society. Both sides agree on the need for a central government and taxes.
In most countries today the debate narrows down to incremental changes in tax rates.
Communism was about control of the capital rather than with all entrepreneurs.
It was already Hammurabi that put control of entrepreneurs in his laws.
Rome was introducing responsibility of sellers to tell buyers about potentially know defects of the products. They also introduced potential for return goods if defects were not known – the genesis of warranty.
Religions are an independent cultural force in society’s attempts to control entrepreneurs.
Hindu epics together teach how four aspects of human behavior proscribe the future:
- Dharma – the ways of moral living.
- Artha – actions to create value, wealth, or profit.
- Kama – pursuit of pleasure and happiness.
- Moshka – the bliss attained by renouncing earthly constraints.
Vaishya is the Hindu term for those who pursue wealth for the community and is close in meaning to entrepreneurship in both its social and commercial contexts.
Some Islamic religious leaders and jurists have labeled any activities, products, and services that were not established when Mohamed was alive as forbidden.
Marx developed a socioeconomic theory in which entrepreneurs were no longer needed.
Rulers have an almost perfect record of not being able to control their entrepreneurial swarms. The ineffectiveness of rules aimed at entrepreneurs has three components:
- Rarely do rulers take the time to understand the motivations that drive individuals leading entrepreneurial swarms.
- Rulers are unable to act completely dispassionately.
- Rarely do the powers that be invite entrepreneurs to suggest how best to control their fellow entrepreneurs.
Value Beyond Money
Many entrepreneurs trade the goods they deliver for more than money: control, security, status, knowledge, pleasure, and so on.
Entrepreneurs are often thankful for help they receive from external forces in achieving their success.
Entrepreneurs in most culture felt that well-being was the responsibility of the government and sometimes also organized religion. They concentrated on adding value by creating profit and paying taxes.
Thomas Coram created the first philanthropy. Coram’s enterprise used a new business model. The users of the product or service weren’t its customers: wealthy donors were.
Some have coined the term “social entrepreneurship” to describe for-profit models that improve the well-being of the disadvantage.
Carnegie’s solution to the unintended entrepreneurial consequences of inequality was to use his accumulated profits to mitigate what he had indirectly helped to exacerbate.
The Possibilities of Our Entrepreneurial Future
Entrepreneurial innovation has ever-increasing impact. Our freedom is both increased and restricted because entrepreneurs chose what to create and deliver. Political leaders interfere with entrepreneurs only when the unintended adverse consequences of their efforts rile the citizenry. The fundamental outputs of entrepreneurial swarms are innovation and scale.
Entrepreneurs innovate around constraints.
Taxes are rarely an effective method for biasing the behavior of a swarm. On the other hand, tangible incentives and subsidies can shift the direction of entrepreneurial swarms and the focus of EICs.
Technologies that make existing products vastly cheaper to produce, or vastly easier to use, or vastly more reliable, are quickly adopted and spur innovations.
- We need education about good entrepreneurship.
- We should expect entrepreneurs to be open about potential unintended consequences of their products or services.
- We would all benefit if the hidden innovation tax were made explicit.
- We would all benefit from national or international role models in entrepreneurship.
- If government would offer incentives for developing new solutions to mitigate unintended consequences, we would all benefit.
We need to expect all entrepreneurs to care about the consequences of their actions, no matter how ambitious they are.
