Economics 101

Why Our Entrepreneurs Are Wary

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Have entrepreneurs gone missing? Why would entrepreneurs be wary or reluctant to engage in entrepreneurship in today’s economic climate? The concept of trust is central to answering these questions.

Last week’s post explored the biblical basis for trust, examining how God’s law established a society of trust among the ancient Israelites. To engage in everyday transactions and to function effectively, we need the same basis of trust. Without it, entrepreneurship and innovation would become virtually impossible.

Entrepreneurs and Trust

The entrepreneurial process is fraught with risk and uncertainty. The entrepreneur, his family, investors, employees, lenders, and customers are all taking a risk. The process requires high levels of trust.

Introducing any more uncertainty to it may cause the entrepreneurial process to cease. All involved need to trust that the others will perform as promised, so that if everything goes right, there will be value created and rewards for the risk-taking.

In addition to the internal trust in the entrepreneurial process, external trust must exist. People need to trust that property will be protected, profits will not be confiscated, and, should they be necessary, courts will be unbiased. Francis Fukuyama wrote an entire book on the issue, appropriately entitled Trust: The Social Virtues and the Creation of Prosperity, where he concluded that high-trust societies have better economic performance.

America’s Distrust

Trust in a wide range of institutions is at or near all-time lows right now. Americans do not trust the mediagovernmentbusiness people, their churches, or the justice system. The list goes on. It says something significant when eight of the top ten most trusted people in America are celebrities while the president of the United States finishes in sixty-fifth place.

Corruption, scandal, cronyism and political favoritism have contributed significantly to the lack of trust people have. But the distrust extends beyond politics and government:

  • Most high school students cheat in school;
  • There are websites that facilitate marital infidelity;
  • Award winning journalism is plagiarized.

With so much trust being broken, what is the impact on entrepreneurship?

Impact on Entrepreneurs

According to a 2013 study reported by CNBC, fewer wealthy Americans are self-made these days:

Worldwide, 40 percent of millionaires (which is defined as those with investable assets of $1.5 million or more) cited a “business sale or profit” from their business as their source of wealth. Only a quarter of the millionaires cited inheritance as their wealth source. [But] In the U.S., only 21 percent of millionaires cited business sale or profit as their source of wealth.

Fewer Americans are earning their wealth from business activities. We are the worst performing region in this measure. There is nothing wrong with inherited wealth or high investment returns, but it is business formation that creates growth, jobs, and ultimately advancements in quality of life.

Low levels of trust are not the only factor to consider. Correlation is not causation. But levels of trust and honesty are very low. Rather than endanger their livelihoods, talented risk-takers are finding other things to do. That hurts all of us.

The solution is not a government or policy change. These may be useful, but only address the symptom. Until we re-establish a level of trust and return to an objective standard of right and wrong, we may stay in the economic doldrums.

A growing sense of moral relativism puts every economic actor on guard and causes resources to shift to protection, as I learned during my experience in Uganda. If circumstances make it acceptable to be dishonest at times, how do the other economic actors in the transaction know if the other party is being honest? The only rational action is to always use high levels of protection.

That can come in the form of hiring proxies, as I did in Uganda, bribery, detailed contracts for many transactions, or physical walls, fences, and alarm systems. These actions protect what exists, but they do not produce and create more wealth. A greater sense of morality and justice that is commonly accepted allows us to use fewer resources on protection and more on production.

We need a strong sense of morality, which comes from the pulpits, seminaries, and the actions of biblically-informed, character-driven individuals first. Then this must be disseminated to and adopted by the broader population. This will eventually start to be reflected on the political stump. Without a commonly-accepted sense of trust and honesty, economies slow and then stagnate.

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 17, 2013.

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