Tuesday, December 9, 2014

Is Poverty a Barrier to Entrepreneurship?

By Robert Wenzel

Professor Walter Block has some very nice things to say about me in a recent email (SEE: George Selgin's Deep Dark Past) and I agree with him that we are on the same page on 99% of issues with regard to economics and also the nature of society. However, I must disagree with him on yet another point as a result of his ranking of our disagreements, in his email.

Dr. Block writes:
We may disagree in IP and Rand (pure entrepreneurship is a very minor point), but we agree on 99.9% of everything else in political economy, I'm pretty sure.
I believe our differences on pure entrepreneurship is the most significant, followed in distant second place is our differing view on IP. I consider the topic of Rand Paul to be about a mere fly in the ointment.

For me, our differing views on entrepreneurship is of utmost significance because it has major policy implications.

I hold the view advanced by Israel Kirzner (especially in his book Competition and Entrepreneurship) that an entrepreneur does not have to own capital to be an entrepreneur. To be sure he needs to know where to find capital (borrow funds, raise equity funds etc.) but he himself does not need to have any personal capital to put into a venture.

At the recent Circle Rothbard here in San Francisco, that Dr. Block attended, the topic of entrepreneurship came up and Dr. Block raised the question, "But without capital how can an entrepreneur face loss?"

This question, however, I believe proves the opposite of what Dr. Block intended. His point indicates that it is the capital provider that faces profit or loss, not the entrepreneur qua entrepreneur.

Admittedly, it is difficult to picture a real entrepreneurial event where an entrepreneur does not employ some capital (perhaps a cell phone) and some labor (talking a deal) but these can be extremely minimal and, in the sense of a theoretical category, an entrepreneurial event can be separated into three parts. entrepreneurship, labor and capital.

Why is the nature of what entrepreneurship so important?

Because, if Kirzner is correct that capital ownership is not required for entrepreneurship, and I believe he is correct, it pokes a huge hole in those who advocate that the poor need special assistance so that they have the same opportunities as the rich, If capital is not a requirement of being an entrepreneur, than the opportunities for entrepreneurship exist just as well for the poor person as the wealthy person. In other words, poverty is not a barrier to entrepreneurship and the ability to build wealth.

I find it very interesting that those who are most distant from the money raising world seem to have the most difficulty grasping this possibility of the pure entrepreneur with no capital of his own.  The concept seems to be accepted most quickly by those in the money raising world, probably because every day they see investment bankers, deal makers, hedge fund managers etc, who structure deals without putting up any capital but have the potential for massive gains.

Indeed, the former chairman of Citibank, Walter Wriston, once said that an investment banker is someone who manages to get between the wall and the wall paper. And that is pretty much the truth.

The great tragedy is that, outside of greater Wall Street, few understand the nature of this pure entrepreneurship and thus scream and yell at the disadvantages the poor have. The only real disadvantage the poor have is in believing that they are screwed from birth and, thus, they don't develop any alertness to entrepreneurial opportunities.

Kirzner's development, of the theoretical foundation of what an entrepreneur is , shines a light on exactly why there is no poverty barrier to entrepreneurship.

There are only two living economists, who I believe deserve the Nobel Prize. One is Dr. Block, particularly for his book Defending the Undefendable and Kirzner for his insights on entrepreneurship. Both their contributions are game changers, if they contributions were understood by the masses.

 Robert Wenzel is Editor & Publisher at EconomicPolicyJournal.com and at Target Liberty. He is also author of The Fed Flunks: My Speech at the New York Federal Reserve Bank. Follow him on twitter:@wenzeleconomics


  1. You can sell a good to someone that you do not own.
    Short selling, retail store catalog sales, examples abound.

    If I can sell without owning capital, I can financially take
    part in a risk without capital.

  2. Mistaken before, you need equity to sell short.
    In some situations, someone can collect cash without cash of their own
    and sell an item he does not own.

  3. I fully agree with you, Bob (and Prof. Kirzner) that entrepreneurs (who identify a business opportunity then go out and raise the labor and capital to pursue it) do not necessarily need much money to get an opportunity underway.

    I worked for 17 years in the medical device field, and served as CFO of three venture capital-backed start-ups. In all three cases, the founders/entrepreneurs (two engineers and a physician) worked on their ideas after working hours at their nine-to-five job, building prototypes and sketching out preliminary business plans. Next, they searched and found seed funding from well-heeled folks, which allowed them to quit their day jobs and concentrate on getting their prototypes working, along with hiring consultants to better flesh out their business plans and filing a provisional or regular patent application. With those milestones under their belt, they were then ready for their Series A round of financing, which came from the well-known Silicon Valley venture capital firms that specialized in funding early-stage medical devices.

    In my experience, founders/entrepreneurs supplied the patentable product idea, preliminary-but-defensible business proposition, and initial energy and enthusiasm to get the enterprise underway on the shoestring seed financing. Later, with the institutional rounds of financing, other folks came onboard who supplied the functional expertise, e.g., engineering, clinical trial conduct, marketing, sales, production, administration. Rare was the founder/entrepreneur who still played an important role in the company at product launch, four-to-seven years later. Most, by that point, had been relegated to a role as 'idea person' in a side office.

    1. Yes, exactly my point. Unfortunately, unless you are near the fundraising it seems hard for most to understand that it can be done and is done.

  4. --" If capital is not a requirement of being an entrepreneur, than the opportunities for entrepreneurship exist just as well for the poor person as the wealthy person."--

    I believe that this is a universal truth when all other considerations remain equal. However, not all considerations are equal: people are not simply going to give you money if you don't *look* the part. Entrepreneurship is not only about finding opportunities, it is also about being able to sell *yourself*, which is why Entrepreneurship is an art, not a science.

    So, not everybody can be an entrepreneur. That does not mean, however, that one cannot get rich in participating in productive endeavors, either by investing or working hard with entrepreneurs to get a project off the ground - think the Woz working alongside Steve Jobs, for instance. As long as there is a Free Market (a concept that includes free flow of labor and capital) then the opportunities will be there for almost everybody.

  5. Well, I don't know how people will feel about this..but I'll put it out there...money printing/credit creation can be beneficial if you figure out how to leverage it.(not withstanding that it does hurt people who can't figure out a way to leverage it and are middle class or poor-so I'm against it philosophically)

    Back in 2002 I was able to get a 75% value line of credit attached to a small apartment my wife and I owned.

    It translated to $100K....I then used that as a down payment for 50% ownership in a $1 million dollar a year(in sales) company...I bought the balance in 06', had a few failures that almost put me out of business several times...but now 11 years later it's running pretty well and I half know what I'm doing.

    In my opinion, there were two major factors in getting the loan for the down payment(the 50% owner took paper back for the balance):

    1. The conditions were such that banks were shoveling money to people for the flimsiest of reasons, and I had good credit and a small asset on paper.

    2. The branch bank lending officer was a younger female around my age at the time and I'm pretty sure she was attracted to me, her line approval was maxed at the $100k she awarded me after a short interview.

    Now, getting business brokers to take me seriously after I secured the line of credit was a whole nother' matter and way more difficult...but that's a different story.

    Btw, I came from nothing...and I mean nothing. I spent part of my youth in low income housing. But I have always worked hard and had success(prior to buying a business, that was initially a big slap down)

    When I secured the line of credit I had no idea what I was doing, I just walked into my bank branch and sat down with the young women and asked for money after chit chatting for a bit, and she gave it to me...lol...I literally told her I was considering buying a business with it but had no firm plan at the time.

    When I bought the business I didn't know how to really understand a balance sheet, nor did an accountant I hired to try to prevent me from making a mistake as I was buying it. The broker was a total scoundrel too.

    I just jumped right in at a fairly young age and lost my ass but somehow still survived. I knew close to nothing at first in terms of running a business. I had other skill sets that have now helped me succeed, but it's been a trial by fire and an education you can't buy anywhere that I've paid for quite dearly in many ways.

    1. It's an ill wind...
      You done good, and I appreciate your frankness..

  6. I'm surely missing something from Block's argument (which I've not seen) as entrepreneurs are millions in number with many starting with very little, most failing within 5 years (so I've read), and many staying small, 1 or 2 man businesses, but quite a few turning the founders into millionaires.

    Ya don't need capital to start a small business: (1) Many are started on a shoestring & built by living cheap & accumulating money – this was even being done by Chinese peasants moving from mud huts to “slave wages” in sweat shops, (2) There are many people, the ones I know all successful businessmen themselves, who enjoy helping others start businesses – On such man had a sign behind his desk reading “Make Me An Offer I Can't Refuse,” & (3) There are Venture Capitalists looking for opportunities to fund start-ups.

    This is so obvious and so everywhere, whatever was Block talking about? There must be more to it.