Economics 101

Have The Entrepreneurs Gone Missing?

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In my previous posts, I detailed the necessary conditions and attributes a successful entrepreneur must possess. I have focused on the individual, because it is the visionary willing to go against the grain that makes the difference when it comes to entrepreneurship.

While there is no easy way to fit entrepreneurship into the equations that dominate today’s economics, at least since Joseph Schumpeter’s 1911 work, The Theory of Economic Development, we have known that entrepreneurs drive economic growth. They are the risk-takers, willing to hire new workers and experiment with new things.

When it comes to economic growth and recovering from a downturn, entrepreneurs lead the way. But our current recovery is weak to non-existent, as this report from the Bureau of Economic Analysis shows.

Have entrepreneurs gone missing?

Maybe. In answering this question, there are some possible connections between trust, entrepreneurship, and economic growth that we need to consider.

In this two-part investigation, we’ll first explore what the Bible says about the value of trust and character. Our next article will dive into what that means for entrepreneurship.

The Bible on Trust

The Bible shows us that trust is a bedrock principle for a flourishing society.

We see the need for trust as well as some institutional safeguards in the books of Moses. Before the Israelites entered the Promised Land and established a new nation, God provided a guide for living and governing themselves.

Deuteronomy is a Suzerain treaty, not unlike others we have from the ancient mid-east, where the stronger power and the weaker power laid out terms, responsibilities, and expectations for each other. Similar instructions can be found in the other four books of the Pentateuch as well. If these principles were held, it would lead to more trust.

  • The first expectation and obligation to trust is for man to trust in God (Deut. 4:5-245:6-106:16-258:1).
  • After that, we have a number commands dealing with human interaction and trust designed to make the Jewish nation function well. For a society to work, there had to be trust in daily transactions.
  • We also see a command not to move property boundaries (Deut. 27:17). If a man is not safe in his property, then he is less likely to invest in it, whether that involves using it or purchasing it. Trust is required for long-term economic growth.
  •  Judges and courts were established and judges were commanded to be impartial and not accept bribes and to follow justice alone (Deut. 16:18-20). For society to flourish, there has to be trust that laws will be fairly enforced and adjudicated.

Israel is a special nation in history, and not all that was told to them applies to other nations. However, the basics of how an economy operates are universal. Trust is vital in daily transactions, both in long-term planning and in dispute settlement.

The Value of Trust

An orderly society operates on trust. We enter contracts, engage in commerce, lend and borrow, and buy and sell largely based on trust. We trust other parties to do as they promise, and they trust us to do the same.

For example, when I go to the gas station, I put a piece of plastic in a machine, and it dispenses fuel.  I drive off without ever talking to another person, signing a piece of paper, or handing over currency.

In this simple, everyday transaction, there are several levels of trust at work:

  • I trust the gas is not contaminated.
  • The station trusts the credit card company will pay the bill.
  • The credit card company trusts that I will pay their bill.

There are solutions should something in this chain of events fail, but lawyers and courts are expensive and time-consuming. Can you imagine how difficult life would be if we needed contracts every time we made a purchase?

Trust only truly exists organically through common culture. Specifically, it arises through a generally-accepted understanding among people that lying, cheating, and stealing are morally wrong. Institutions emerge from this culture of re-enforcing the accepted behavior, so we get laws against cheating and courts that punish cheaters. We cannot have the courts and laws first and expect the people to change.

If you have ever traveled to a culture where lying and cheating are ways of life, you know how uneasy you feel and how difficult it can be to function. There is always a sense that you are getting ripped off.

In Uganda, they have what they call a skin tax. Since it is easy to tell if one is a local or not, merchants charge non-locals more than locals. To avoid this, a non-local may hire a local to be his proxy for purchasing and negotiations.

This increases the transaction costs and time spent shopping. It is one small example of distrust slowing down economic activity, as well as diverting resources into protection and away from production.

Next week we’ll examine what trust means for entrepreneurship and economic activity.

Editor’s Note: On “Flashback Friday,” we take a look at some of IFWE’s former posts that are worth revisiting. This post was previously published on July 11, 2013.

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