Part 3 – The Importance of Entrepreneurs to the Creation of Wealth
There are two ways to succeed in business, either to rise through the ranks of a large company or to become an entrepreneur. Working for others offers the advantages that somebody else assumes the company’s entrepreneural risk and provides you with benefits, like paid vacation time and health insurance.
Becoming an entrepreneur is risker but more exciting. Owning your own business allows you to reap its profits or to fail. As an entrepreneur you don’t receive benefits, such as paid vacation, day care, a company car or health insurance. You have to provide them for yourself. But you gain the freedom to make your own decisions, opportunity and possible wealth, so the trade off can be worth the effort. Part of your due diligence before taking on the challenge of starting your own business should be to study successful entrepreneurs to learn the process.
Economists have identified five factors of production that seem to contribute to wealth:
- Land/natural resources. Land and other natural resources are used to make homes, cars and other products.
- Labor/workers. People have always been an important resource in producing goods and services, but many people are now being replaced by technology.
- Capital. This includes machines, tools, buildings, and whatever else is used in the production of goods. It might not include money; money is used to buy factors of production but is not always considered a factor in and of itself.
- Entrepreneurship. All the resources in the world have little value unless entrepreneurs are willing to take the risk of starting businesses to use those resources.
- Knowledge. Information technology has revolutioned businesses, making it possible to quickly determine wants and needs and to respond with the desired goods and services.
Traditionally business and economics textbooks emphasized only the first four factors, but the late management expert and business consultant Peter Drucker said the most important factor of production in our economy is and will always be knowledge.
When we compare the factors of production in rich and poor countries, we find that land is not the critical element for wealth creation; numerous poor countries have plenty of land and natural resources. Nor is labor. Most poor countries have plenty of laborers who need to find work to make a contribution, thus they need entrepreneurs to create jobs for them. In addition capital, such as machinery and tools, is now fairly easy for companies to find in world markets, so capital is not the missing ingredient either. In fact, capital is not productive without entrepreneurs to put it to use.
What makes countries rich is a combination of entrepreneurship with the effective use of knowledge. Entrepreneurs use the knowledge they have learned in order to grow their businesses and increase wealth. The business environment either encourages or discourages entrepreneurship, which helps explain why some states and cities in this country grow rich while others remain relatively poor.