In contrast to Marx’s automaton capitalist or (Alfred) Marshall’s owner-engineer, the entrepreneur distinguished himself by a willingness to “destroy old patterns of thought and action” and redeploy existing resources in new ways.  Innovation meant overcoming obstacles, inertia, and resistance.  Exceptional abilities and exceptional men were required.  “Carrying out a new plan and acting accordingly to a customary one are things as different as making a road and walking along it,”  Schumpeter wrote.

His entrepreneurs are motivated less by the love of money than by a dynastic urge- “the drive and will to found a private empire,” as well as the urge to dominate, fight and earning other’s respect.  Finally there was “the joy of creating, getting things done, or simply exercising one’s energy and ingenuity.”  While Marx had cast the bourgeois as a parasite whose activities would ultimately destroy society, Schumpeter took up and developed Friedereich von Wieser’s notion that “growth was the result of the heroic intervention of individual men who appear  as leaders toward new economic shores.”… Though many did not realize great fortunes, entrepreneurs did more to eliminate poverty than any government or charity.

Despite his energy, vision, and domineering nature, the entrepreneur could thrive only in certain environments.  Property rights, free trade, and stable currencies were all important, but the key to his survival was cheap and abundant credit…. True the financial sector’s peculiar dependence on confidence and trust made it vulnerable to panics and crashes…. What distinguished successful economies was not the absence of crisis and slumps, but, as Irving Fisher also stressed, the fact that they more than made up lost ground during investment booms.

The highest rates in the world were found in the poorest countries.

From Grand Pursuit-  The Story of Economic Genius by Sylvia Nasar

HKO comments:

While our financial markets are villainized, not without some justification after the recent crash, we would be very shortsighted to underestimate the importance of our financial markets in growing our economy and creating new jobs.

Companies and investors hardly need more bureaucrats looking over their shoulders trying to guess what they are doing right or wrong. They need room to maneuver so they can adjust or change their strategies as quickly as possible whenever there is new information about what is happening to demand, competition and credit. Nothing is more dangerous than going too far in the search for safety, because that may lead to regulations that block the best paths of action in a crisis.

From “Financial Fiasco” by Johan Norberg

Obama is now pressuring the banks to make loans to stimulate the economy.  Yet again we have the government creating a crisis and then blaming the private sector.

The banks are in the business if making loans. They should not be encouraged to make reckless loans; that is what fomented the crisis to begin with.  Fannie Mae and government pressure to extend housing loans to unqualified buyers was the core cause of the melt down.

Businesses are not growing and expanding because they cannot get loans, but because they cannot make money.  Part of this is because of gross over building in the construction market, largely as a result of misguided Federal policy. Largely it is because of the uncertainty from the pending Union Card Check Bill, Cap and Trade, and the pending health care reform.

Tax increases, the expiration of the Bush tax cuts, threatened increases in the estate tax, and higher capital gains taxes are all major job killers.  None of this is the fault of the banks.

The destruction in home values which was a common source of collateral for many small business loans,  is a result of government policy.

Businesses do not borrow unless they perceive the risk environment to be favorable.  Every step to take more of the profits makes the incentive to take a risk and create a job less favorable.  If the president wants to know why unemployment is still high and business growth is so slow he doesn’t need a meeting with the banking industry, he needs a mirror.

There are a few indisputable changes in our economy.

Credit is tightening. Generally this is good because  lending standards, whether to individuals to buy homes, or to real estate developers or other businesses, were way too lax.  Marginal businesses will have much tougher standards to meet to renew credit lines.

Income statements have deteriorated.  Especially if you are in a commodity business like steel, lumber or fuel, you have experienced the opposite of gouging as you sell your goods for less than you paid while your unit sales have dropped and desperate competitors sell at any price they can get to keep the doors open another week. You have probably experienced several consecutive months of losses.

Banks have a further problem lending to businesses with consecutive months of losses. But here is where a real potential problem awaits. We have a record deficit in a peacetime that will likely lead to inflation.  The only reason it has not yet is because unemployment, uncertainty, and credit tightening has reduced the velocity or the speed of money circulating.  Said differently, everyone is sitting on their cash, even with low returns. Therefore this cash is not chasing and inflating the prices of the goods in the economy.

If the flood waters don’t recede the levee will eventually break.  This vast horde of cash will eventually enter the economy and a likely recipient will be industrial commodities.  Housing and real estate wounds are still too fresh and the banks will not quickly pour their funds into that hole, although banks are noted for very short memories.

Stocks have a very clear value mechanism. If earning are poor and money pours into the stock market then the price earnings multiple elevates to a level when it is clearly overvalued.  After the dot.com bust and the housing bust, pedestrian investors are still gun shy of the stock market.

But commodities have no clear valuation ceiling.  Is gold overvalued at $1000 even if that is double its value of a few years ago?  Is scrap fairly valued at $300 a ton or $600 a ton?  Who knows?  Is the proper price of gas $2.19 a gallon or $6.00 a gallon?  There is no PE ratio to quickly determine if commodity prices are overvalued.

Inflation gets us used to higher prices. And we must compete with global economies for these commodities.

When inflation reignites industrial commodity prices, as I think it will, those who inventory and sell those commodities will be caught in a cash squeeze.  They will need cash to cover the higher cost of replenishing inventory at a time when credit is sharply reduced.  Many of these companies have been able to survive the recession with crappy income statements because of the cash they generated from their balance sheets as inventory and receivable costs dropped.

When this reverses they will experience a liquidity squeeze that will threaten all but the strong. If you sell these people on credit start watching them like a hawk. When inflation rebounds it will focus in industrial commodities and many in that field will be in trouble.