Two Mindsets: Entrepreneurial and Bureaucratic
What I write here is an extension of Ludwig von Mises's little book, Bureaucracy.
We do not know the future with much precision. Therefore, everyone is to some extent an entrepreneur. An entrepreneur is a person who buys low and sells high. He forecasts the future, devises a plan to deal with the future, and then implements the plan. Each of us does this every day, and each of us does this throughout his life.
Yet there are varying degrees of the entrepreneurial mindset. We hear of the great entrepreneurs, such as Thomas Edison and Henry Ford, who systematically implement revolutionary new ways of accomplishing things. We do not hear about the vastly larger number of people who attempted to do this, and then failed. We hear only of the major successes, and a few spectacular failures.
Most people lack the entrepreneurial spirit. A handful of people possess it at a very young age. Virtually all formal education, meaning classroom education, is conducted by salaried bureaucrats. They are in jobs that require almost no entrepreneurship, and they are in cultures that generally discourage entrepreneurship. They have had very little experience with entrepreneurship. They do not understand it, and a large number of them are hostile to it, especially at the collegiate level in the social sciences.
So, from the day that a young person enters the classroom at perhaps the age of five or six until he earns his Ph.D. at the age of 25 or 30, he performs in terms of a system of sanctions that inherently discourages entrepreneurship. It rewards conformity to specialized exercises, such as taking examinations, writing term papers, and answering questions verbally in a discussion setting. Formal education is formal. It is structured. It is structured in terms of a limited number of questions, an acceptable set of practices to answer these questions, and a highly limited range of answers that are considered acceptable.
THE SALARY
I suppose the fundamental difference between the entrepreneurial person and the non-entrepreneurial person is the commitment to a salary. The entrepreneur knows that he must invest time and money in a plan whose outcome is at best statistically predictable. Generally, however, it is not statistically predictable. It is uncertain. All of his efforts may be wasted entirely. He may have a spectacular failure. He may have a failure with other people's money. This much is sure: the failure will be visible to others. So will any major success.
The salaried person wants to know what he must invest in terms of time, what he must produce in terms of measurable output, and what he will be paid if he produces this output. He does not aim at the supreme performance; he aims at the middle, so that he has some degree of latitude on the downside, should he not perform very well. He still will keep his job.
What he wants is predictability in a world of uncertainty. He is willing to transfer to others the burden of dealing with uncertainty, so long as he receives a guaranteed payment with respect to conventional performance. He has a deadline. He has some kind of a budget, generally one involving time. If he performs within a fairly wide range of standards, he will be paid when he completes the project, and he will be paid a specific amount of money.
In contrast, the entrepreneur does not know exactly when the deadline is. That is because he does not know what his competition is doing. He does not know what it is going to cost him in terms of time and money, because he does not know exactly when he is going to deliver the prototype, followed by the production model. He does not know how customers are going to respond to his offer. For him, a salary may be a pleasant peripheral aspect of his life, but the heart of what he is doing cannot be salaried, because no one knows what customers are going to do in response to a particular offer.
There are people who thrive in such circumstances. They want to perform well, they want to make a lot of money, they want to gain influence, and they want to gain a reputation for innovation. They are willing to risk the loss of time, money, and reputation in order to achieve their goals. Their tolerance for uncertainty is much higher than it is for the average performer. The average performer wants a predictable salary to be paid for predictable performance. Predictability is basic to his life's goals. Unpredictability is a major hindrance to his life's goals, as he conceives these goals.
The salaried person is not willing to commit time and especially money to any project whose outcome is inherently unpredictable. No matter how much spare time he has after work, he hesitates to invest time in any project that is not inherently predictable. He may take a second job, with a second salary, in order to secure sufficient income to achieve his goals. But he is not willing to invest unpaid time and especially his savings in order to achieve his goals. He is vastly more afraid of loss that he is desirous of gain. He understands that great gain is possible only by committing to inherently unpredictable projects, and he is willing to forgo great gain in order to avoid investing in such projects.
AGE
The younger a person is, the more entrepreneurial he should be. This is because he has time to recover from a project that goes belly-up. He is long on time, even though he is short on money. He can always make more money, because he has a lot of time. Over time, for most people, the risk-reward ratio moves against entrepreneurship in favor of predictability. Yet even here, there are some men who are so committed to achieving great things and gaining a reputation for having done so, that they are willing to risk all of their money late in life, in order to pursue some new venture.
Everyone should know about his toleration for uncertainty. We pay insurance premiums to avoid statistically predictable risk, but there is no comparable payment for entrepreneurship. That is because there is no statistical way to avoid failure in entrepreneurial ventures. These ventures are unique.
A person whose first question is how much salary is he going to get, is not going to be rich unless he inherits a lot of money. The mindset which asks how much predictable payment will be provided for what range of performance is inherently the salaried mindset. The salaried mindset limits a person to moderate gains. If performance is predictable, and if rewards for performance are predictable, we are dealing with a setting that is inherently bureaucratic. The more predictable the outcome, and the more predictable the rewards, the more bureaucratic the standards and the enforcement of these standards. Bureaucracy is basic to all civil government. Everything is predictable. Sanctions are on the books. Projects have deadlines, but nobody really enforces them. Entrepreneurs do not flourish in such settings.
The safest thing to invest in a short-run project is time. It is not safe to invest time in a very long-range project, because the risk-reward ratio moves against time in favor of money as we age. So, the younger we are, the more we should be willing to invest time in projects whose outcomes are inherently uncertain.
The justification for investing time in old age is that the individual has greater perspective and greater monetary capital because of a lifetime of thrift and hard work. But such people are usually unlikely candidates for making major breakthroughs in established procedures. They have spent their lives conforming themselves to written procedures and conventional assessments of productivity. They spent their lives as bureaucrats. It is difficult for bureaucrats to become entrepreneurs late in life. Necessity is the mother of invention. It can be done, especially when someone looks at his retirement income, and concludes that he should have saved more. He has to make up for lost time. Making up for lost time is always riskier, meaning always burdened with greater uncertainty. But very few people perceive this in time. They wait until they are old, then they are afraid to pick up the burdens of uncertainty.
This is why entrepreneurship should be developed at an early age. This is why the Ron Paul Curriculum has scheduled courses in business. The habits of entrepreneurship should be developed early in life.