The Scope of Entrepreneurship

One of the earliest and best sociological treatises on modernization of a society is Sir Henry Sumner Maine's Ancient Law, published in 1861. It traces the main line of modernization as a trend "from status to contract". In underdeveloped societies man's experience and destiny are predetermined by ascribed statuses - his birth and other events beyond his control. Tribal Africa, caste-dominated India, as well as feudal Europe are thus described as status-dominated, i.e. underdeveloped societies. These ascribed statuses determine nearly all activities and affiliations, whether religious or secular, including occupational pursuit, business associates, mate, home, style of life, and power and influence in the larger community. The modernization of a society, according to Sir Henry, comes about as an ever increasing number of actions and life histories become dependent upon freely negotiated contracts rather than on predetermined statuses. In a developed society the individual himself can decide and negotiate his entry into a church, an occupation, a trade relation, a marriage, a neighborhood, a political body, etc. Modernization thus means lifting restriction imposed by status and opening opportunities for negotiating contracts. The history of the Northern Hemisphere from the time of the French and American revolutions is very much a history of the movement from status to contract. It was this movement that opened the gates for an entrepreneurship which no longer became dependent on royal privilege and permission. When the modern entrepreneur organizes production and approaches the market he enters into freely negotiated contracts with employees, suppliers, buyers, and shareholders. The right to contract is as essential to him as the air he breathes. At present the right to contract is no longer expanding, except, perhaps, for women. The remnants of the status society in terms of sex roles have been the last to go. It is interesting to note that at a time when this last area moves from status to contract, many other areas have moved from old-type contracts to new forms. A most important modification of contract in affluent societies has given voluntary associations the right to enter into agreements that are binding upon their members. The individual laborer and the individual employer have to abide by the contract made between the labor union and a federation of firms. Thus, some effective right to contract and to control one's own destiny has been taken from the individual and become vested in his organizations. Parallel trends, although less formal and codified, can be ascertained for farm groups, consumers' cooperatives, and other voluntary organizations. These groups also make enforceable contracts on behalf of their members. Sometimes the other party to the contract is an employer, sometimes it is the state itself, acting as cosponsor of a welfare program. An old-fashioned contract was achieved by shopping around for the best deal and by competitive bidding. Contracts made by large, powerful organizations acting on behalf of their members in collective bargaining cannot be of this nature. A situation in which the winner takes all and the loser gets nothing is impossible. Rewards reaped from organization contracts tend to be modest gains, and to be fairly equally distributed among all members, regardless of the merit and effort of the individual. This has proved discouraging to the innovators and entrepreneurs, who thrive on the prospect of truly big rewards. The impact of organizations equipped with these rights to collective contracts is considerable. To a very great extent a person's political influence and financial circumstances in today's affluent societies in Europe depend on what associations he belongs to. This new pattern, however, is not quite the same as the feudal one when a man's status as nobleman, farmer, or burgher determined his entire life. The movement from status to contract has not been reversed. Although strong forces make for collective and compulsory joining of the large organizations, the citizen is still free to leave them, something not true of the feudal estates. The main effect of unionization has been felt by the capitalists, not the entrepreneurs. Unions have tilted the balance of power between capital and labor in favor of labor. Taking an average year the

1970s in the affluent societies we find that the ratio of what labor receives from the listed corporations to what capital gets is about 100 dollars to 4 dollars. And to get the figure 4 dollars for the capitalists we have to add both dividends and retained earnings. If enacted, the Dutch proposals of Vermogenaanwasdelning and the Swedish proposals of lntagarfond will tilt this balance further toward labor. A major consequence of the welfare state has been to preserve the individual's ambitions and motivation at times when adversity strikes. Since the state steps in with a helping hand in crises - whether they are related to the individual's work situation, family, or health - he is not easily pushed into a despair or fatalism. Contrary to conservative ideology, there is much individual competition and ambition to achieve and get ahead in the welfare states. The change is this: competitors do not have to face the roughest consequences of their losses. A system has evolved in the advanced welfare states according to which one can still make both small and big gains, but one can make only small losses. The Swedish pension reform enacted in the late 1950s is indicative of the principles of the welfare state: each citizen is guaranteed an annual old age pension amounting to some 60 per cent of his average earnings during the ten best paid years of his employment. In the same way health benefits are tied to earnings. Motivation is high, then, to improve earnings. By retiring from the labor market a Swede may lose some income, to be sure, but never more than 40 per cent of what he earned in his best years. A floor of another kind is represented by the large number of positions, both in government and industry, that have tenure contracts. In these positions one's job is secure but promotion is dependent upon performance. Both these examples indicate a curious mixture of status and contract: a man's status is insured as in a feudal society, but he can compete for better contracts as in the developed society. This kind of "insured contract" is very characteristic of the affluent welfare state. A society based on insured contracts is not of itself hostile to entrepreneurship and its ambitions and rewards. The welfare politicians who set up the insured contracts do a job that is important and necessary and for which the entrepreneurs usually lack both skill and inclination. The welfare politicians redistribute the enormous wealth generated by enterprise so that life in all segments and corners of society becomes more bearable. The wealth generated by entrepreneurship finances the modern welfare state. The first generations of entrepreneurs in the industrial age tried to handle the redistribution function themselves. They contributed generously to churches and welfare causes agencies often set up by or run by their wives and daughters. This system of private charity did a great deal of good but proved grossly inadequate for the needs of a society in which more and more people left self- sufficient farms and became urban dwellers and workers in an entrepreneurial economy. Thus the welfare politicians entered the scene. It is worth stressing that entrepreneurship and social welfare in the affluent societies represent a sensible division of labor. The two are quite compatible, a fact that has been confirmed over and over again since the welfare concept was first enacted in Bismarck's Germany. The conflicts that do occur between entrepreneurs and welfare politicians come about when the latter use a flat rate of dole unrelated to performance in the labor market which kills motivation to work, instead of insured contracts. And, of course, when politicians impose a level of taxation that threatens to kill the goose that lays the golden egg. The most stupid thing politicians in the affluent society can do is to strangle the entrepreneurs to slow death by taxes. In sum, the scope of entrepreneurship has been broadened by the trend from status to contract, and has not been seriously affected either by the modified contracts involved in unionization or by welfare politics. The threats come rather from two other sources: the decline in profit- based activities and the increased use of majority rule in place of entrepreneurial judgment. If we, like the proverbial man from Mars, look at the big organizational structures on this earth we quickly discover that they fall into two classes:

(1) those that get their resources from taxation, (2) those that get their resources from profits. This is a great divide in the man-made landscape. The future life of our planet depends very much on the balance between these two types of organizations. Roughly, they correspond to government and business. (But the correspondence is not entirely precise in all countries since there are government agencies that live on fees for the goods and services they provide and there are corporations with such a monopoly status that their prices are a kind of taxes.) Opinion polls in the 1970s tell a story of declining confidence in government. In the United States this has been interpreted as a reflection of Vietnam and Watergate. But the same declining confidence in government is found in the other affluent countries of North America and Europe. (This trend, however, is not matched by an increased confidence in business.) There is reason to believe that the expansion of tax-based activities is near its peak in the Western countries. An extrapolation of current trends would make British, Dutch and Swedish taxes 100 per cent of GNP within some 30 or 40 years. If we look at how decisions are made and justified in the big structures of today we find another great divide: (1) decisions resulting from negotiations and justified by contracts, (2) decisions resulting from voting and justified by majority rule. In the first instance a single person or group may enter a contract with many others and the contract is valid in spite of the fact that there are few on one side and many on the other. When majority rule applies, the will of the many decides over the few. An increasing number of decisions in the affluent countries are nowadays based on the majority principle, and the contractual principle is loosing ground, except perhaps for insured contracts. For example, in large organizations the employees are many and the employers few. There used to be and still is a straightforward hiring contract between employer and employee. However, we find increasing demands that varieties of majority rule and codetermination shall apply also in situations previously covered by contracts. In the name of majority rule, the labor unions act as if they held the places of work as fiefs. Trends in legislation in several countries regarding codetermination and union rights often support such claims. Majority rule is a great achievement when applied to tax-based activities. No taxation without representation in the legislature, and no rule against the legislative majority. Such is the essence of political democracy and it should be honored and defended. But should majority rule also apply in profit-based organizations? Here we must pause, and thoughtful men will reflect that there are obvious limits. The entrepreneurs and innovators thrive in a contractual society, and feel ill at ease if decisions about their life and work are made by a vote. Business decisions by majority rule also tend to be slow, cautious, and defensive, a far cry from the assertive risk-taking of the entrepreneurial spirit. To replace entrepreneurial judgments with majority decisions may drain business of dynamic qualities. For wherever majority rule applies the entrepreneurs tend to became outvoted by majorities of non-entrepreneurs. The entrepreneurial spirit, then, cannot perform its catalyzing role between labor and capital. To adopt the socialist solution and make labor the owner of capital is no remedy in this dilemma. For labor in the role of wage-earner normally gets the upper hand over labor in the role of guardian of capital.

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