April 19, 2020

“The real merit and honor of the entrepreneur is in bearing the risk of value, or wealth, creation activity, and thereby also bearing the risk of failure.”

From a “man of the church” one usually expects (besides friendly praise for the work of the entrepreneur) the admonition that entrepreneurs should not merely strive for profit, but always keep the common good in mind and be aware of their social responsibility. I do not intend to bother you with such platitudes, and I do not think that such a way of speaking is very illuminating. Successful entrepreneurs, in my opinion, contribute to the common good precisely by being more successful. Yet this is exactly what is almost entirely overlooked in today’s society, even by Christian social ethics.

The special task and responsibility of the entrepreneur is to act successfully in an entrepreneurial manner, and this means being innovative in a competitive environment and creating value. This creates and increases wealth for all social classes, and it is the entrepreneur’s specific contribution to the common good. I will now explain what I mean in a necessarily brief and thus somewhat concise way.

Note: On September 24, 2018, the Hauptstadtforum [Capital Forum] 2018, organized by the Association of Catholic Entrepreneurs (BKU) together with the Konrad-Adenauer-Stiftung (KAS), took place at the Academy of the KAS in Berlin. The topic was: “The Entrepreneur—His Image in Politics and Society, His Role in the Economy and His Task for Shaping the Future.” The opening presentation was given by Annegret Kramp-Karrenbauer, then Secretary General of the CDU, followed by a keynote lecture on the topic “Task and Responsibility of the Entrepreneur in Economy, State and Society” held by Prof. Martin Rhonheimer, President of the Austrian Institute, followed by a presentation by Dr. Carsten Linnemann MdB, Chairman of the CDU/CSU Association of Small and Medium-Sized Enterprises and Vice-Chairman of the CDU/CSU Parliamentary Group in the Bundestag. This was followed by a panel discussion with Carsten Linnemann, Martin Rhonheimer and the young entrepreneurs Daniel Heidrich, Dr. Christian Matschke (Board of Directors Berlin Chemie), Janina Mütze (Founder and co-owner of Civey). Richard Schütze (BKU) and Matthias Schäfer (KAS) were the moderators.

We document here the lecture of the President of the Austrian Institute, Prof. Martin Rhonheimer.

Capitalism—The Only Socially Minded Economic Structure, Because It Is the Only One That Creates Wealth

Free and innovative entrepreneurship is the backbone of the competitive, market economy. This is the only socially minded economy, because it is the only economy that creates general wealth. Ludwig Erhard rightly wrote that the socially beneficial aspect of the social market economy is competition and the benefits that result from this for the consumer—and that means for all people—and not the correction of market processes through redistribution and transfer payments. If everything gets better and cheaper all the time—and this has been the case for the better part of about two hundred years—then this is tantamount to a continuous increase in real wages, which means that we are all getting richer.

How does “prosperity” actually arise? Where does modern, historically unprecedented mass prosperity come from? It was not created by the welfare state. That is just a change in distribution, but nothing is created—in fact, oftentimes wealth is destroyed or growth is hindered in this way. Rather, it is entrepreneurship, exposed to constant competition, which creates wealth. It is the small and large entrepreneurs, it is the “evil” capitalists, investors, and the financial industry that accomplish this—on a global scale and for everyone, especially for the weakest members of society.

Capitalism Generates Mass Prosperity, Not Equality

However, capitalism and a competitive market economy do not create equality, indeed they may even increase socioeconomic inequality. This inequality—increasing capital accumulation—is both the cause and effect of successful innovation and thus of a steadily rising general standard of living. The effectiveness of this simple economic law is illustrated by the history of the last two hundred years. The increasing, often outraged focus on social inequality as the alleged problem, indeed as a scandal, springs from historical ignorance, economic misunderstanding, and all too often feeds on feelings of envy—and ultimately harms the weakest members of society most.

Without great concentrations of wealth and without the super-rich, there can be no mass prosperity.

The billions of dollars in assets of Bill Gates, Jeff Bezos, Warren Buffet, etc., on the one hand, and the ever-increasing standard of living, even of welfare recipients—indeed of hundreds of millions of people on this planet who only a short time ago lived in abject poverty—on the other hand, are only available as a package deal. The first does not exist without the second. Without great concentrations of wealth and without the super-rich, there can be no mass prosperity!

The high degree of prosperity of modern times, but also the increasing liberation of underdeveloped countries from poverty, came—and continues to come—exactly and exclusively where there is a market economy, free trade, and, as its backbone and driving force, free entrepreneurship. Such entrepreneurship now operates on the scale of global markets and is thus able to achieve unprecedented profits, as well as an equally large increase in prosperity for more and more people. Entrepreneurs are looking for something new, possess “visions,” anticipate consumer wishes, discover imbalances and opportunities for profitable business, and in doing so they drive technological innovation, bring about growth in labor productivity and, as a result, continuously increase prosperity. This process is now taking place on a global scale—and has been greatly accelerated by digitalization—wherever the forces of free enterprise are not hindered by a lack of the rule of law, a lack of property protection, trade barriers, political instability, corruption, and war.

Entrepreneurial Value Creation: How Prosperity Is Created and the Common Good Is Promoted

In a capitalist economic system one can only get rich—in a respectable way—if one makes other people richer too. This is because companies are profitable, and they make profits precisely when they satisfy consumer demands. In this way, they improve people’s lives. They also create work that generates the wages and thus the purchasing power with which one can buy products and services, and which makes new investments and entrepreneurial initiatives profitable. This is the upward spiral of capitalist-entrepreneurial value creation, and this is the specific—and enormous—contribution of entrepreneurship to the common good. This contribution is as decisive and fundamental as the oft-mentioned branch on which one sits. That is why it is usually overlooked. When talking about social justice, many people only think about distribution but not about how value is created and, thus, how wealth is created. It arises solely through profit-oriented, creative, and innovative entrepreneurial activity. Acknowledging this is a fundamental requirement of justice.

Profit-oriented entrepreneurial activity is not based in the more or less good intentions of the entrepreneurs, but is aimed at the social good in a structural way.

To be socially minded is not merely having good intentions, but about solving social problems.  However, the greatest social problem of humankind was—and still is today in many, albeit fewer and fewer places on earth—mass poverty. It was not a consequence of the industrial capitalism of the 19th century, but an ever-present problem of humanity, which for the first time in history was solved by the capitalist market economy. Growing prosperity also meant access to the goods of education and culture for an ever-increasing number of people from all walks of life. Capital accumulation and technological innovation were the prerequisites for this. The luxury consumption of a narrow social elite thus became mass consumption in the course of a few generations—and, ladies and gentlemen, think about it: today’s luxury consumption will be tomorrow’s mass consumption!

The Entrepreneur Is All about Business—Therefore, He (or She) Must Think about People

Far be it from me to describe entrepreneurs and business leaders—or managers who think and act entrepreneurially—as particularly good or altruistic people. What they do with their income and personal wealth is not an issue here—some are primarily philanthropists, others are profit-oriented investors, which is very beneficial to society, while others consume their wealth.

What I maintain is that profit-oriented entrepreneurial activity is not based in the more or less good intentions of the entrepreneurs, but is aimed at the social good in a structural way. In order for entrepreneurs to serve the common good, it is basically enough that they act entrepreneurially, fairly, and successfully. In doing so, they do more than hand out alms: they also create wealth for others.

Of course, if you want to operate profitably, you have to think holistically and always consider the human factor and the social context in which it operates. This is part of a good business model. An enormously wealthy German industrialist once said to me: “If you want to be successful as an entrepreneur and become rich, you must first think of the people in your company and treat them well.” Precisely because Milton Friedman’s dictum “the business of business is business” hits the mark, customer satisfaction must also come first: otherwise no profitable business is possible in the long run. Profit and customer service are only two sides of the same coin! It is pointless to frame them as mutually opposed. My father worked in the fashion industry. I once asked him why he was so successful. He replied, “Because I knew what women liked.” Have you ever worn a foulard from Yves Saint Laurent—or from Hermes? Then you owe it to my father. It was his idea.

The market economy is the kind of economy in which the pursuit of profit, success, and wealth, the love of risk, of competition, indeed of rivalry, of the clever and the capable does not lead to destructive war but to technological innovation and benefits the society as a whole. In reality, free and creative entrepreneurial activity is the very cause and the constant backbone of our prosperity—a message that is difficult for politicians to accept. They prefer to see “the economy” as a problem, declaring themselves responsible for its solution.

Real Existing Capitalism—A Mixed System Full of False Incentives and Impediments to Growth

Precisely for this reason, the capitalism or market economy that actually exists today is a mixed system characterized by state interventions, political and fiscal interventions of all kinds, and corresponding misplaced incentives. It is anything but free, only to a limited extent truly competitive, and therefore it is also severely restricted in its wealth-creating dynamics. If there were more freedom and more incentives for entrepreneurial initiative and if entrepreneurial success really paid off from the outset thanks to low taxes, there would also be more prosperity for everyone.

In our real existing mixed system, entrepreneurs make only very limited decisions about the use of scarce resources, and the free command of privately owned means of production is extremely restricted. More important in our mixed system are the political decisions, constraints, and regulations of all kinds. This inevitably leads to lobbying, the temptation of business to influence political decisions, which favors the big players who can do this better and bring their powerful financial resources into play in an area—politics and legislation—where they should not really play a role. This makes the playing field uneven. Companies, even entire industries, can easily—at the expense of others—become parasites, beneficiaries and profiteers of policies, always at the expense of others. This is an injustice and is also inefficient.

It is a truism that entrepreneurs do not actually like competition. If politicians help them to eliminate it, they will gladly accept the offer. Every entrepreneur would prefer to be a monopolist. As Adam Smith remarked at the end of the 18th century: As soon as a few entrepreneurs get together, they start making plans to eliminate competition.

Positions of economic power that come about solely because of legal privilege or regulation are harmful. The same applies to industrial policy: it is a form of nationalism and distorts competition.

As long as a company’s monopoly position is based solely on the fact that it is better than its competitors, its market power is not a problem. This market power is conferred on it by the consumer: an almost democratic process. It becomes problematic when one tries to secure this position by means of politics, regulations, subsidies, etc.—often with social or, in the age of globalization, nationalistic arguments (European nationalism is also a thing). But any sort of political protection, including subsidies and “job saving,” is at the expense of other industries which, because they have been more profitable, do not need state aid, or at the expense of poorer countries, which we thereby bar from access to our markets. That too is an injustice.

Positions of economic power that come about solely because of legal privilege or regulation are harmful. The same applies to industrial policy: it is a form of nationalism and distorts competition. The state is a miserable and socially harmful entrepreneur, because it can finance inefficiency and losses with tax money. Dense networks of regulation, in turn, create business models that impair the market in its ability to generate innovation and they deprive consumers of their rights. They reduce value creation and make it impossible for all levels of society to increase in wealth.

The Evil of Lobbying and that of Combining Big Government and Big Business

For ethical reasons alone, entrepreneurs should refrain from accepting privileges from the state that play the generally applicable rules of society in their favor. In the name of entrepreneurial ethics and a sense of honor, they should demand that economic policy makers be content to create the best possible legal conditions for the free market: clear and equal rules for everyone—and politicians should have the courage and wisdom to confine themselves essentially to this. This is the only way to eliminate what Americans call crony capitalism—the evil of the intertwining of politics and business, the unfortunate marriage of big government and big business. Only in this way can the market and competition develop their full wealth-creating power.

The real merit and honor of the entrepreneur is that of bearing the risk of value-creating (and thus generally wealth-creating) activity, and thus bearing the risk of failure. The true entrepreneur, unlike the employee, is not contractually entitled to remuneration for his work. He lives on the economic success of his actions—ultimately from the success of his company. This is a constant challenge, the benefits of which are felt by society as a whole, and it is therefore a challenge that deserves the appropriate moral, social and financial recognition. If entrepreneurs—and this includes investors, but also entrepreneurially minded and successful managers—are rewarded for this with great personal wealth, then it is only fair. The more people they reach with their products on globalized markets, the higher their profits. Complaining about the resulting social inequality usually stems from ignorance, or is simply hypocrisy.

A Wealth Tax? Socio-Political Foolishness at the Expense of the Weakest in Society

We know that successful entrepreneurs—and top managers—are precisely the ones who have come to wealth, and who are likely to invest their wealth profitably and use it for the benefit of the community. To tax these rich proportionately higher, with the intention of helping the lowest income groups in society, is enormous political stupidity. As is well known, Ludwig Erhard believed that the best social policy is a good economic policy. Not long ago, Sweden abolished all property and inheritance taxes in order to continue financing its welfare state, thereby bringing its rich back into the country, and it has since become one of the developed countries with the highest degree of wealth inequality. It is to be hoped that in other countries too—I shall not name names—socially committed and socially responsible circles, as well as church circles, would finally realize that an entrepreneur-friendly economic and financial policy benefits the weakest members of society in a very special way and is therefore the best and most sustainable social policy. Moreover, instead of burdening future generations with a mountain of debt, such a policy enriches them.

Of course, among entrepreneurs there are also bad apples. The scandal-hungry wealthy and the media pounce on them. However, most entrepreneurs or “capitalists” are decent, resourceful, capable, and immensely effective benefactors of society—otherwise they disappear from the market. Their (mostly) hard work is the cause of the prosperity of the broad masses—even on a global scale. Not only does society in general fail to sufficiently recognize this, but so does Catholic social ethics. The latter still places entrepreneurs under general suspicion, sees them only as potentially unjust or even exploitative employers, but not as wealth-creating creators, and recognizes their achievements only to the extent that they are, as they say, “working for the common good”—as if they did not do so simply by being successful entrepreneurs.

Translation from the German original Aufgabe und Verantwortung des Unternehmers bestehen darin, unternehmerisch erfolgreich zu handeln by Thomas an Kira Howes.