Risk, reward and inequality

The entrepreneur is an unusual economic actor: integral to capitalism and admired on the right, he also enjoys a modicum of popularity on the anti-capitalist left, as a symbol of the small business struggling to compete with the reviled ‘Big business’. Jeremy Corbyn promised in 2015 that he would ‘stand up for small businesses, independent entrepreneurs, and the growing number of enterprises that want to cooperate and innovate for the public good’. Sure, caveating the promise with the subjective ‘public good’ allows a highly selective approach to who is a ‘good’ entrepreneur, but even Mr. Corbyn recognises the value entrepreneurial businesses bring to an economy. These are not just the ubiquitous ‘family businesses’ popular with the political class, but the innovators and inventors who shape the future – even a hardcore leftist can recognise that.

But the entrepreneur is more than an innovator, more than a hard worker, more than a dreamer: first and foremost, he is a risk taker. The Oxford English Dictionary defines the entrepreneur as ‘a person who sets up a business or businesses, taking on financial risks in the hope of profit’. Choosing to be an entrepreneur means accepting risk. It means foregoing spending now in return for the uncertain possibility of larger rewards in the future – in other words, entrepreneurs have high tolerance for risk and low time preference.

Choosing the alternative of salaried work means the security of a steady income but the foregoing of potentially larger rewards in the future, catering to the more risk-averse individual with a higher time preference.

Integral to entrepreneurial enterprise is wealth creation. The entrepreneur invests time and resources in innovation and capital stock, creating the means of production that allow for increasing productivity and higher wages for all. It is thanks to the entrepreneur that all of mankind advances. But wealth creation is not the only thing entrepreneurship entails. It is obvious that the concept of entrepreneurship implies inequality. The successful entrepreneur must expect bigger rewards than the salaried worker, or he would choose salaried work. Similarly, he must accept lower current income than the salaried worker, or everyone would be an entrepreneur in the hope of striking it rich. Inequality is integral to an entrepreneurial economy. One cannot have one without the other.

The political right readily accepts the inequality inherent in a successful capitalist economy, because they know that it is the catalyst for economic growth and material advancement for all. The left struggles with the concept. Though they can see the value the entrepreneur brings, they refuse to recognise that inequality is a driving force behind a dynamic economy. Despite his words, Jeremy Corbyn is not actually advancing the cause of entrepreneurship. He is using the image of the small business owner to clobber the reviled ‘Big Business’ without recognising the economic dynamics inherent in an entrepreneurial economy. What the left cannot and will not understand is the simple truth that economic inequality, not equality, is a hallmark of a successful economy.

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