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A Fundamental Misunderstanding of Free Enterprise

Today, in The Guardian, columnist Zoe Williams repeats an idea often advanced by progressives, that entrepreneurial activity is dependent on the action of others, especially “government,” and that therefore socialism built the iPad. This is contrasted with the idea of human innovation being the result of individual inspiration, which she describes variously as the credo of Thatcher, Reagan, McCloskey, or free markets in general. In doing so, Williams fails the ideological Turing Test; she has fundamentally misunderstood free enterprise economics.

Williams sum up the “free market” view this way: “Society prospers not through cooperation, but when it allows its stars to get on and shine, bringing light to the rest of us troglodytes (who, by the way, could all use a little more gratitude).”

Cooperation, however, is central to how free markets operate, particularly in innovation. Indeed, it is at the core of defining entrepreneurialism. Joseph Schumpeter, one of the great explainers of free enterprise, put it this way in The Theory of Economic Development (1934):

The introduction [of new products] is achieved by founding new businesses, whether for production or for employment or for both. What have the individuals under consideration contributed to this? Only the will and the action; not the concrete goods, for they bought these – either from others or from themselves; not the purchasing power with which they bought, for they borrowed this – from others or, if we also take account of acquisition in earlier periods, from themselves. And what have they done? They have not accumulated any kind of good, they have created no original means of production, but have employed existing means of production differently, and more appropriately, more advantageously. They have ‘carried out new combinations’. They are entrepreneurs. And their profit, the surplus, to which no liability corresponds, is an entrepreneurial profit.

Schumpeter was and is not alone. The free market literature, popular and academic, is full of reiterations of this central point. See here, here, and here, for example. As Steve Horwitz says in the first of those links:

Markets are the most extensive and profound process of human cooperation we have ever discovered.  The way to ensure that such cooperation continues peacefully and with mutual benefit is to allow people to try (and fail!) through the market to provide what others want and to keep the wealth they thereby earn, and to face the consequences of failure.  Free markets are human cooperation; government redistribution is not cooperation, it is coercion.  The justification for the wealth earned in the market is not that people do it alone.  It is instead that allowing people to become wealthy by selling what others want to buy is the best way to ensure peaceful social cooperation and to improve the lives of the least well off.

Williams goes on to repeat the canard that we would not have the iPad were it not for presence of a government research agency called DARPA. I’ll tackle that peculiar ahistorical reasoning in a future column at The Freeman.