The invisible sources of entrepreneurship

Michael J. Miller contends that certain criteria must be in place for entrepreneurs to take a risk and start a new business. They require specific institutional and cultural foundations, without which they don’t emerge. We take these criteria for granted in the West, but in developing countries the foundation for business to flourish is weak .  . . . 

Dr. Michael Miller

There is great enthusiasm for entrepreneurship these days. There are social entrepreneurs, intellectual entrepreneurs, educational entrepreneurs and even intra-preneurs (entrepreneurs within their own companies).

Entrepreneurs like Steve Jobs and Bill Gates are held up as model citizens. Magazines like Entrepreneur and Fast Company highlight a culture of entrepreneurship. President Obama even has an initiative dedicated to promoting it. In short, entrepreneurs are cool.

This is a generally a good development, yet I fear a superficial one. While there are dangers to some current images of the entrepreneur as a radical individual beyond good and evil like those portrayed in the film The Social Network, entrepreneurs do play an essential role in society and it’s good that we celebrate them. What is often lacking, however, is a requisite appreciation of the moral and institutional foundations that allow for a culture of entrepreneurship to develop.

Entrepreneurs don’t just pop out of nowhere. Nor are they a type of superman that transcends the culture around them. Rather they require specific institutional and cultural foundations, without which they don’t emerge. Look for example at the poor countries throughout the developing world. As Peruvian economist Hernando de Soto has noted, the developing world “is teeming with entrepreneurs.” So why do these countries remain so poor? It’s not as if the people lack an entrepreneurial spirit. What they lack are the foundations that allow them to develop their entrepreneurial capacity and convert them into successful, wealth-creating businesses.

Entrepreneurs take risks, they see opportunities that others do not, and they turn those opportunities into businesses. It’s perhaps counterintuitive, but this risk-taking actually requires stable social foundations. Entrepreneurs need to know that ground is solid before they risk a jump. These foundations include rule of law, clear private property rights, freedom of association, free exchange, and strong families and communities that encourage a culture of trust. In the West, we take these foundations for granted, like fish do water. But without them entrepreneurship would dry up. Let’s look at a couple of them.

Private property. Clear private property rights are essential for entrepreneurship. In some parts of the developing world over 50% of the land has no clear title. Without title people are reticent to make any improvements because their work could be taken from them. Without title they cannot use their land as collateral for a loan to start a business. Imagine how much entrepreneurship we would see in the U.S. if we weren’t sure who owned the land our business was on. Do you think we’d invest a lot of money into developing it? The Catholic Church has always stressed the importance of private property rights — and for more than economic reasons. In his defense of private property in Rerum Novarum, Pope Leo XIII stressed the important role property plays in allowing families the space to live out their freedom and responsibilities.

Rule of law. Rule of law is the opposite of the rule of men. It means that there are clear, transparent rules under which everyone operates. How many entrepreneurs would take the risk to start a new venture if they couldn’t be sure that the contracts would be enforced in a fair manner? Again, predictability and justice are prerequisites for risk-taking.

Free association. In his defense of the new mendicant orders, St. Thomas Aquinas argued in 1256 that freedom of association was a natural right. Leo XIII relied on this for his defense of unions in Rerum Novarum, and it applies to businesses, universities and other voluntary associations that make up civil society. When the rules and regulations make it difficult to start or maintain a business, it undermines both freedom and entrepreneurship. There is a high correlation between economic freedom and prosperity.

Free exchange. When people have the freedom to buy and sell in a market (assuming it is not something morally evil of course), it creates incentives for entrepreneurs to build businesses. When markets are restricted, it’s usually the largest companies with the biggest influence that lobby the government to protect their industries and keep out competition. This not only stifles small- and medium-sized businesses, it hurts the poor who lack political and economic influence.

Culture of trust. Market economies that enable entrepreneurs to take risks and flourish do not long succeed if built upon the radical individualist type of entrepreneur portrayed in The Social Network. Sustainable market economies require deep levels of trust and honesty, otherwise transaction costs increase and entrepreneurship decreases. This culture of trust and human virtues that underlie it are not created by the market economy itself. They are developed in strong families, a rich religious and moral culture, and a vibrant civil society.

These are the foundations of entrepreneurship. Business people need to lead by understanding, explaining and defending them. Entrepreneurship is part of the American spirit — it’s in our blood, but it won’t last without the institutional and spiritual capital that gives it life.

Michael Matheson Miller is a research fellow and director of media at the Acton Institute. He is currently leading PovertyCure, an international network of organizations which promotes enterprise solutions to poverty rooted in a Christian understanding of the human person.