Entrepreneurs under socialism

One of Americans’ great strengths is our entrepreneurial spirit.  Polls show that a higher percentage of Americans than of any other advanced country dream of owning their own businesses.  But a survey by the U.S. Small Business Administration shows that the percentage of Americans who actually start new businesses is less than for Canadians, Danes, Norwegians and Swiss.

U.S. government policy for the past 30 years has been aimed at encouraging business growth by cutting the marginal tax rate, which is the top tax rate, the tax rate on the next dollar earned.  The idea is that the less a business owner has to pay in taxes on additional profits, the more incentive the owner has to start and grow the business.

Along with this is the shrinking of the social safety net.  Owners of financial assets are supposed to be more productive because they have a greater incentive of gain.  Wage earners are supposed to be more productive because they have a greater incentive of fear.

But what if it doesn’t work that way?  What if, as the RSA Animate video suggests, other things were more important?

When I reported on business for the Rochester (NY) Democrat and Chronicle, the successful entrepreneurs I interviewed didn’t fit that pattern.  The typical story was somebody working for a large corporation had a good idea, couldn’t get anybody in the corporation to pursue it, and so decided to pursue it on their own.  These entrepreneurs wanted to get rich, of course.  Who doesn’t?  But the main thing was to achieve their goal.

Inc. magazine this month ran an excellent article about business start-ups in Norway. It began with a profile of Wiggo Dalmo, a high school graduate and mining equipment machanic, who got tired of working for a large company and started a successful business of his own, Momek, which now has 150 employees and $144 million in annual revenue.  He is taxed more heavily than he would be in the United States, but, according to Inc., he doesn’t mind.

“The tax system is good—it’s fair … What we’re doing when we are paying taxes is buying a product. So the question isn’t how you pay for the product; it’s the quality of the product.” Dalmo likes the government’s services, and he believes that he is paying a fair price.

Modern capitalism is possible because entrepreneurs and investors are cushioned from the worst consequences of failure. With bankruptcy laws, entrepreneurs can only lose what they have.  With limited liability corporations, investors can only lose what they put in.  Without these cushions, anybody who started a business, or even invested in a business, would be in jeopardy, when the business failed, of a debt burden they could never pay off in their lifetimes.  The consequences of failure are spread over society.  Arguably this is unfair, but by reducing fear of failure, it makes possible a dynamic, growing society.

In a welfare state such as Norway, there is more cushioning of risk.  Entrepreneurs have even less reason to fear failure than in the United States.  No matter what happens, they and their families will have access to medical care, their children will have access to a good education and their retirement income will be above the poverty level.

In today’s United States, in the name of free enterprise, risk is imposed on people who don’t want it.  Millions of Americans worry about whether their jobs will be terminated or reduced to part-time, whether their health insurance will continue (maybe the Affordable Care Act will change this, maybe not) or whether their pensions or savings will still be there when they retired.

It takes a lot of nerve for people to jeopardize what security they have by quitting their jobs and starting a business.

“The three things we as Americans worry about—education, retirement, and medical expenses—are things that Norwegians don’t worry about,” says Zoltan J. Acs, a professor at George Mason University and the chief economist for the Small Business Administration’s Office of Advocacy.

Acs thinks the recession in the U.S. has intensified this disparity and is part of the reason America has slipped in the past few years. When the U.S. economy is booming, the absence of guaranteed health care isn’t a big concern for aspiring founders, but with unemployment near double digits, would-be entrepreneurs are more cautious. “When the middle class is shrinking, the pool of entrepreneurs is shrinking,” says Acs.

Another important aspect of the Norwegian welfare state is that employees don’t live in fear of being laid off, as they do in the United States, and employers can’t afford to treat labor as a commodity.

Dalmo’s staff may consist mostly of mechanics and machinists, but he treats them like Google engineers. Momek employs a chef who prepares lunch for the staff every day. The company throws a blowout annual party—the tab last year was more than $100,000. Dalmo supplements the standard government health plan with a $330-per-employee-per-year private insurance plan that buys employees treatment in private hospitals if a doctor isn’t immediately available in a public one. These benefits have kept turnover rates at Momek below 2 percent …

But it takes more than perks to keep a worker motivated in Norway. In a country with low unemployment and generous unemployment benefits, a worker’s threat to quit is more credible than it is in the United States, giving workers more leverage over employers. … “You have to be a much more democratic manager,” says Bjørn Holte, founder and CEO of bMenu, an Oslo-based start-up that makes mobile versions of websites. Holte pays himself $125,000 a year. His lowest-paid employee makes more than $60,000. “You can’t just treat them like machines,” he says. “If you do, they’ll be gone.”

The Inc. article notes that Norway has weathered the recession better than the United States has.  From 2006 through 2009, the Norwegian economy grew nearly 3 percent; during the same period, the U.S. economy grew less than 1/10th of 1 percent.

Click on In Norway, Start-ups Say Ja to Socialism for the full Inc. article.

Click on Comparing Tax Rates in the U.S. and Norway and Comparing Labor Costs in Norway and New York for details.

The psychologist David C. McClelland, in his 1961 book, The Achieving Society, wrote that successful societies depend on having a large percentage of people with a high “need for achievement,” as distinguished from a high “need for affiliation” or “need for power.”  He distinguished the need for achievement from the desire for gain.  His book is still in print.

click to view

McClelland contrasted achievement-motivated people with gamblers, and dispelled a common pre-conception that … ‘achievement-motivated’ people are big risk takers. On the contrary – typically, achievement-motivated individuals set goals which they can influence with their effort and ability, and as such the goal is considered to be achievable. This determined results-driven approach is almost invariably present in the character make-up of all successful business people and entrepreneurs.

McClelland suggested other characteristics and attitudes of achievement-motivated people:

1. Achievement is more important than material or financial reward.

2. Achieving the aim or task gives greater personal satisfaction than receiving praise or recognition.

3. Financial reward is regarded as a measurement of success, not an end in itself.

4. Security is not prime motivator, nor is status.

5. Feedback is essential, because it enables measurement of success, not for reasons of praise or recognition (the implication here is that feedback must be reliable, quantifiable and factual).

6. Achievement-motivated people constantly seek improvements and ways of doing things better.

7. Achievement-motivated people will logically favor jobs and responsibilities that naturally satisfy their needs, i.e., offer flexibility and opportunity to set and achieve goals, e.g., sales and business management, and entrepreneurial roles.

Click on david mcclelland achievment motivation needs theory for details.

Here is an entrepreneurs’ view of their motivation.

Business owners do not normally work for money either. They work for the enjoyment of their competitive skill, in the context of a life where competing skillfully makes sense. The money they earn supports this way of life. The same is true of their businesses. One might think that they view their businesses as nothing more than machines to produce profits, since they do closely monitor their accounts to keep tabs on those profits.

But this way of thinking replaces the point of the machine’s activity with a diagnostic test of how well it is performing. Normally, one senses whether one is performing skillfully. A basketball player does not need to count baskets to know whether the team as a whole is in flow. Saying that the point of business is to produce profit is like saying that the whole point of playing basketball is to make as many baskets as possible. One could make many more baskets by having no opponent.

The game and styles of playing the game are what matter because they produce identities people care about. Likewise, a business develops an identity by providing a product or a service to people. To do that it needs capital, and it needs to make a profit, but no more than it needs to have competent employees or customers or any other thing that enables production to take place. None of this is the goal of the activity.

The goal is to kick ass.

Click on The goal of business for background on this statement.

On a different but related topic, click on Explaining France for a right-of-center U.S. economist’s explanation of why the French economy does so well in the light of high taxes and an extensive welfare state.

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