CHAPTER 1 Entrepreneurs: The Essence of Enterprise
Sometime in 2001, shoppers began to see an odd sight: Kids in malls
would appear to walk a few steps and then strangely seem to glide on
their heels. A closer look revealed they were wearing “Heelys,” athletic
shoes with wheels in the heels. Heelys are the brainchild of Roger
Adams, who invented the shoes while taking time off with “a midlife
crisis.”1 Adams was a manager who was constantly on call and “totally
burned out,” and he was on vacation at Huntington Beach, California,
in 1998 when he saw kids going up and down the sidewalk on their
inline skates. Suddenly Adams had the idea for a combination shoe and
skate—a shoe that could roll on command when the wearer shifted
body weight. He cut up some Nike running shoes, put some skateboard
wheels in the back, and a prototype was born. Adams started his company
in December 2000, went public in 2006, and sold out his stock in
hours. In June 2007, Heelys, Inc., was worth $800 million and was number
one on BusinessWeek’s list of “Hot Growth Companies.”2 Just getting
to that point was a journey of its own: On his way to Texas to meet
with an investor, his car was rear-ended and caught fire. His prototype,
his business plan, and even his clothes were in that car. A short time
later, however, the son of a patent attorney showed Adams’s promo-
tional film to a friend, whose father was a venture capitalist.
Impressed, the father backed Heelys. The product had “arrived” when
former Los Angeles Lakers star Shaquille O’Neal ordered a pair of the
shoes in size 22 and R & B star Usher appeared in a music video wearing
a pair.
Business historians will look back at the introduction of Heelys and
ask why they were developed. While the answer may seem obvious to
some people (okay, some young people), historians often make the
obvious complex. For example, Adams claimed that he harkened back
to the fun of his childhood, but did he contrive the recollections of his
youth as a justification after the fact? Did vast, sweeping social forces
make 2000 “the right time” for such an invention? Did Adams perceive
great profits and leave other, unrelated work to create his product? In
short, does the economy operate from entrepreneurs upward or from
large invisible forces downward? And what is the role of success in creating,
and sustaining, business?
To understand how success and failure, birth and death are essential
to the entrepreneurial process, it is necessary to ask yet another set
of questions. What is it that entrepreneurs do? How do they differ from
managers who oversee an existing business? How do other people,
even others around the world who have no awareness of entrepreneurs’
efforts or specific businesses, benefit from entrepreneurs’ successes?
Perhaps more important, how do those same people benefit
from entrepreneurs’ failures?
This book, while tracing the history of American business from its
European origins to contemporary times, will examine these questions
through a focus on entrepreneurs. To a considerable extent, this book
is a celebration of entrepreneurs and entrepreneurship. We do not
intend to delve deeply into the contributions of labor or on the social
forces that shaped labor movements. Instead, the entrepreneur, and
those forces that directly affect entrepreneurs, will receive central
treatment. At the same time, defining entrepreneurship has proved
more difficult for economists and business historians than might
appear at first glance, and that definition has expanded or changed
over time. We have therefore chosen to examine the context in which
the concept of entrepreneurship appeared in a comprehensive framework.
It begins not with a businessman, but with a professor at the
University of Glasgow, Adam Smith.
ADAM SMITH, ECONOMICS, AND ENTREPRENEURSHIP
The essence of entrepreneurship is capitalism, an economic system
elaborated by Adam Smith in his famous book written in 1776, An
Inquiry into the Nature and Causes of the Wealth of Nations.3 Smith
did not invent the market system: He only laid out in a systematic form
an explanation of economic practices as old as time itself. But Smith is
worth examining in detail at this early point for two reasons. First, his
theory is as valid today as it was in 1776. Challengers still remain, but
increasingly they have retreated into debating the effects of capitalism
on spiritual grounds, where proof is impossible and faith is essential.
Second, Smith’s explanation of human behavior is particularly important
to the point of this book: entrepreneurs and their contributions.
Adam Smith explained economic wealth creation as a process of
making products or providing services with the goal of personal gain.
For most people, gain means material gain. It must be remembered that
in the eighteenth century, most people had so little that material gain
often meant survival for yourself and your family. In that context, aside
from those dedicated individuals on the planet entirely motivated by
religious, ideological, or artistic factors (Mother Teresa or Tibetan
monks come to mind), people operate to a substantial degree out of
concern for material gain. Even for Mother Teresa or Tibetan monks,
Smith’s “rational self-interest” could be a motivation. After all, if you
are absolutely certain that there are rewards to come in heaven or in
the next life, wouldn’t a few more “good deeds” be worked into your
schedule? (Of course, in some poor countries, becoming a monk can be
a path to a better material life, too.) Certainly some individuals crave
power instead of wealth, but usually the trappings of power include
most material goods, including houses, transportation, food, and personal
assistants. Other people want fame, but fame, too, usually produces
wealth as a by-product, making it difficult to separate a desire for
one from the other. Whatever the case, a good rule of thumb for life is
that when people say they are “not in it for themselves,” watch out!
They are in it precisely “for themselves.” Smith understood that rational
self-interest was the most important motivating force in the world
under normal conditions. More important to Smith, he observed that
society as a whole benefited and improved materially as individuals
pursued self-interest.
Critics of capitalism have viewed this as a paradox: How can society
thrive if the key economic tenet is self-interest? Perhaps it cannot;
but Smith never equated self-interest with selfishness. Instead, he saw
capitalism as a moral system. Smith was a man consumed by moral
questions. His previous book, A Theory of Moral Sentiments (1764),
established his view that self-interest was a guide for empathetic
humans who could not know what was best for others, because they
did not have access to “the big picture.” The market system, or prices,
ensured that individuals, each person acting according to this internal
mechanism, would behave in a way that would ensure the outcome
best for all. Although Smith sought to explain the overall functioning of
the economy—really, as a capstone to his broader discussion of morality—
he did so through analysis of individual markets and examples.
Thus his famous quotation: “It is not from the benevolence of the
butcher, the brewer, or the baker that we can expect our dinner, but
from their regard to their own interest.”4 People are “encouraged” to
serve others in a market system. Because he already had written extensively
on morality, Smith assumed that the reader already would have
grasped the spiritual elements of his economic theory. Thus, the references
in Wealth of Nations to “self-interest” were intended to describe
an element of human psychology that ensured people would respond
to the needs of others.
Smith thus began his investigation with the “natural wants” of people,
and noted that the range of human wants made people dependent
on the labor of others. This resulted in a division of labor that made
capitalism especially vibrant. Any person, he theorized, could perform
almost any labor to one degree or another. As he put it, “By nature a
philosopher is not in genius and disposition half so different from a
street porter, as is a mastiff from a greyhound.”5 However “no one ever
saw a dog make a fair and deliberate exchange with another dog,” in
spite of the obvious advantages the above-mentioned dogs might have
in joining their resources to increase their consumption possibilities.6
To Smith, then, it did not seem logical for every person to try to do
everything (farm, build, philosophize, and so on), but rather to specialize
in what the person did best, to maximize the return, allowing others
to do those tasks they did better. This resulted in more total production,
but also made people dependent on others. Self-interest was what
made people pay attention to the desires of others and ensured that
that dependency could not be ignored.
But while division of labor was a key element in capitalism, Smith’s
theory consisted of far more. He observed that self-interest created
competition between people, either to produce goods and supply services
on one side of the equation, or to acquire goods and services on
the other. Human nature meant that people thought highly of themselves,
regardless of religious training or government suasion.
Individuals therefore tended to ask for as much payment as possible for
their own labor and sought to purchase goods made by others for as little
as possible. Or, in Smith’s vernacular, “sell dear, buy cheap.” Smith
realized, however, that everyone could not “sell dear” and “buy cheap”
simultaneously. This observance eventually led to exploration of the
role of the entrepreneur. Instead of pursuing that concept, Smith went
on to explore the nature of value and price. Smith noted that because all
sellers wanted high prices and buyers wanted low prices, it caused competition
to appear, creating a market wherein all goods and services
would reach a specific price. Thus, he introduced the supply-and-demand
model now considered so essential to economic understanding.
