Entrepreneurs-Agents of Renewal

Small business has a significant role in the economy. Owners and entrepreneurs create jobs, provide goods and services, and serve special niches that help round out our economic vitality. The health and well-being of small businesses is a critical element of our culture.

Let’s discuss this in more detail. This blog is a little “academic” to drive home the importance of entrepreneurs and small businesses to our economic progress.

Without the renewal that entrepreneurs and small businesses provide, economic stagnation will eventually result.

Capitalism provides the incentives for entrepreneurs and small businesses to bring about this renewal process.

Capitalism provides opportunity to pursue self interest

Back in the 1700s, the industrial revolution fueled the rise of capitalism and the eventual demise of European feudal systems.  The key driver was machine technology that transformed the way society functioned from transportation, to agricultural production, to consumable and hard goods production, etc.  

Fortuitously, Adam Smith recognized that underpinning the freedom to pursue one’s self-interest in a capitalistic system overall delivers the best possible social outcomes through his concept of “an invisible hand.”

A main ingredient for a productive society is also having rules of law that facilitate interactions within the economic and societal eco-system.  These rules need to fit the evolution of economic entities.

When entities like Standard Oil grew so enormous to have monopoly power on petroleum markets then anti-trust rules were enacted.  Boundaries were put on this economic freedom.

Facts of Life

Now living systems including economic entities follow S shape curves where there is a slower early learning period followed by steep growth which eventually slows and ultimately takes a downturn and dies. 

What happens in economic entities causing them to die or be absorbed into another entity?

One reason is the natural competitive process that occurs in a capitalistic system.  Another reason results from the also natural bureaucratic growth where over time entities shift their focus to internal structures becoming more rigid in their ideas rather than learning the evolving dynamics in the external market landscape.

Capitalism creates renewal through entrepreneurship

We often hear of Adam Smith’s invisible hand, but the other characteristic that makes capitalism such a strong economic system was described by Joseph Schumpeter “Theory of Economic Development.” 

In short, he believed that entrepreneurs introduce new products and services revitalizing markets and enabling continuing growth, in Schumpeter vernacular “creative destruction.”

Thus, entrepreneurs disrupt through innovation the “circular flow” of entrenched bureaucratic entities following their routines. Schumpeter was a product of the great depression and the massive economic downturn.

He felt that ultimately capitalism would self-destruct as the political strata become dominated by those undermining the capitalistic framework of renewal.  His view was that socialism would be the ultimate successor.

Pace of change is accelerating

My view is that Schumpeter did not recognize that the pace of change would continue to increase.  The information revolution is just another form of the industrial revolution where technology revolutionizes information to being both global and individual at the same time. 

This has also enabled a discontinuity in the delivery of goods through the Amazon’s of this world. The nanotech or bio-tech revolution through advances in technology is making the change much more chaotic.  We find the very foundations of our beliefs in how the world works being reworked. 

Dominant entities are moving up the S curve much more rapidly as change accelerates the dominance shifts with the emergence of new concepts and technologies.  In the information revolution, IBM was the early dominant player. Their foray was more in the industrial form with its emphasis on hardware. They were dethroned by the software side through Microsoft. who has now lost its preeminence to Google and its follow-ons that have shifted the focus of information power and flow directly to the consumer.

The accelerating and chaotic pace of change will only enhance the renewal process under capitalism. On occasion, there will need to be interventions with tools such as anti-trust should the dominance of some entities become too great in their marketplace. 

This dominance can occur quite quickly and political systems which are more bureaucratic will have difficulty in adjusting.  Nevertheless, the ongoing technological developments will transform the dynamics over time.

Socialism stifles renewal

With socialism, the means of production, distribution, and exchange are owned or highly regulated by the community (i.e. government) not by private individuals. This spreads the economic wealth through political intervention and further enhances the bureaucratic nature of the political and economic systems stifling the renewal process. 

Back to S shape curves, the capitalistic system relies on building new S shape curves to be overlaid on top of the current S extending the economic and societal growth. Socialism largely relies on the condition of the current S curve when implemented which leads to much faster stagnation.

Helping entrepreneurs succeed

This is a backdrop to the importance of the entrepreneur within a capitalistic system that drives our economic growth.  Here in the United States, small business added almost 2 million new jobs in 2018. 

At that time there were about 30 million small businesses accounting for not quite half the private employment of the United States.  Small businesses truly are the economic engine of our economy of this the largest economy in the world.

Thus, a fundamental question is how can we help small businesses accelerate their growth and avoid a premature death on their S curve? In this world of accelerating change, understanding the growth stages of a small business is exceedingly helpful for the entrepreneur hoping to become a successful enterprise.

If I have your interest, come back to future blogs that describe my four-stage growth model.  It should add greatly to your understanding of the key elements in the different stages of growth for small businesses.

Lane Sloan

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