For all the folly and plain bad thinking at work in the world - all of which works to hinder wealth creation - there is one special breed of man who can offer us hope: that of the Entrepreneur.
Holding out for a hero
In our work today, we are constantly confronted with the struggle to determine who exactly it is who is prospering honestly and who only seems to be doing well.
The first, of course, might be a suitable man in whom to invest – assuming that the price for a participation in his endeavours is right and that he, or his current shareholders, needs our money in the first place.
In contrast, the second type – the apparent success story - is to be avoided at all costs, either because his boat is simply being borne higher (along with all the others on the river) on a rising tide of hot money - or because he is riding on the coat-tails of government interference in the free market.
In this latter case, he is unlikely to be adding any definable real value even while he still manages to retain his patrons’ support: all too often he is merely a kind of legalized pirate. Not infrequently, he is involved in outright corruption, to boot.
More to the point, we can never be wholly sure that he has a genuine underlying business, at all. Our risk is, therefore, that, if he falls out of favour with the incumbents - or they with the voters - he may be done for and, with him, our clients’ money, too.
In a curious historical coincidence, we find that there was a personification of this difference nearly three hundred years ago, right at the point where the modern age of finance began.
For, in the Paris of the 1720s, there took place a duel – a contest of both wills and intellects - between a man who represented the destructive influences of an inflationism wedded to government intervention, and his antagonist, who exemplified the constructive energies of individual acumen and worthy self-reliance.
The former was John Law; a man who can lay a justifiable claim to being the father of modern central banking, even though his Banque Royale was neither the first such institution, nor was it long to survive Law’s eventual disgrace.
To avoid further preamble, Law – a Scots émigré, a fugitive from English justice, and a truly legendary gambler – persuaded himself that through a programme of issuing bank notes he could regenerate a French economy wracked with debt and default, the bitter legacy of the dead Sun King’s vainglory.
The initial issues of Law’s notes were fully convertible upon demand into gold coin and so were, assuredly, a blessing. This was because early 18th century France was a place where crime and dishonesty meant the transport of money was fraught with danger and where – more importantly - the quality of the coinage in use was so degraded that it was widely distrusted.
Thus, the nation’s gold was being hoarded instead of being freely circulated and trade was languishing for want of a genuine medium through which to conduct it.
Law’s banknotes made up for that lack and, at first, they even traded at a premium to the old, clipped and adulterated coinage which they came to replace.
Law, however, had more grandiose ideas than to restrict his bank to this least objectionable of functions. Among them, was a scheme to supplant reserves of gold specie with titles to the much more widely available land, its relative profusion so allowing him to “provide greater liquidity to the market”, as we might say today.
Austrians would recognize that the attempt to promote trade by increasing the supply of money was enough of an error, but Law turned out to be much more than just a proto-Alan Greenspan: he was also part Long Term Capital Management rocket scientist and part Russian oligarch.
Without going into all the complexities of what is an oft-told tale1 , Law was so flushed with his own early success, that he soon mixed his initially sound banking activities up with a more ambitious project to restructure the whole of the French state’s creaking finances.
Here, he used – in modern financial parlance - a debt-for-equity swap, based upon the privatization proceeds of an IPO in a national champion, monopoly industry, complete with an exotic flavour of emerging markets about it.
This was the notorious Compagnie des Indes.
Suffice to say that, soon, a horrendous outbreak of financial speculation had occurred, both fuelled by and feeding fuel to a rapid and ultimately disastrous hyperinflation – a pathology replicated, moreover (with a more blatantly fraudulent intent) by a well-connected group of insiders, led by John Blunt, at the South Sea company, on the other side of the Channel, in England.
It is highly revealing that the modern age, in fact, views Law not so much as a charlatan, but as a sound theorist who sadly besmirched his reputation by succumbing to political pressure, despite his own best instincts.
Informed opinion further draws the conclusion that the application of his methods today is eminently sound policy, albeit to be undertaken in a much more prudent manner under the aegis of our supposedly more sage manipulators of the nation’s money.
What Law’s present day apologists signally fail to note, of course, is that the true lesson to be drawn from this little morality tale is the one dealing with the power, rather than with the economic, relationships involved.
This is, namely, that the crucial, practical flaw of Law’s “System” – whatever could be argued were its underlying, theoretical merits - is precisely that it could be so readily corrupted by the state and that even a giant like Law could find himself so swiftly and helplessly caught in the swirling currents of a maelstrom, to the ruin of all concerned.
It is a testimony to the nature of the times that this was the era which first coined the term “millionaires” – Old Money France’s snooty epithet for the brash, new class of stock market winners – and “bubble” – the contemptuous phrase applied to the rash of start-ups which flooded the London market as inflation fever took hold of England, too.
But what is not so well known is that this was also the time when the phrase “entrepreneur” was first used; the term appearing in a posthumously published work written by a man who first collaborated with Law, then exploited the situation created by him, and finally fell irrevocably out with him.
We are talking of the Irish-born financier, Richard Cantillon.
In this, his dull-sounding “Essay on the Nature of Trade in General“2 , Cantillon, in fact, set out a masterly and anachronistically modern treatment of economics, markets, and politics.
This included much in the field of monetary thinking that was not to be rivalled - especially in regard to that aforementioned political context - for a good century or more after his untimely death at the hands of his thieving servants, a crime which robbed us of his genius while he was still only in his late forties.
Among his many startling and original insights, Cantillon signally drew attention to the essential characteristics of the kind of man the Austrians apotheosize as the driving force of all material progress, writing:
“The circulation and exchange of goods and merchandise as well as their production are carried on in Europe by Entrepreneurs - and at a risk.” (Emphasis mine)
“All the Inhabitants of a State… can be divided into two classes, Entrepreneurs and Hired people; and that all the Entrepreneurs are, as it were, on unfixed wages and the others on wages fixed (so long as they receive them), though their functions and ranks may be very unequal. The General who has his pay, the Courtier his pension, and the Domestic servant who has wages all fall into this last class.”
“All the rest are Entrepreneurs, whether they set up with a capital to conduct their enterprise, or are Entrepreneurs of their own labour without capital, and they may be regarded as living at uncertainty.”(Ditto)
“All these Entrepreneurs become consumers and customers, one in regard to the other; the Draper of the Wine Merchant and vice versa. They proportion themselves in a State to the Customers or consumption.” (Ditto)
“If there are too many Hatters in a City or in a street for the number of people who buy hats there, some who are least patronised must become bankrupt: if they be too few, it will be a profitable Enterprise which will encourage new Hatters to open shops there - and so it is that the Entrepreneurs of all kinds adjust themselves to risks in a State. “ (Again)
What Cantillon is telling us in these passages is that the Entrepreneur – the man who lives by his wits, by making an estimate of what the customer demands, of how much it will cost to provide, of what price the traffic will bear and, therefore, of what profit there is to be had – is the man who is at the very heart of economic life.
It is the entrepreneur’s talent for what we can call productive speculation – rather than for the idle, financial kind, that glorified form of gambling, to which we tend now to confine our use of the word – which is what comprises the mechanism by which the market itself functions, by which “the circulation and exchange of goods and merchandise as well as their production are carried on.”
More than this, the entrepreneurs are the agents of a society’s material advance.
They make progress through discovery; they are naturally weeded out, good from bad, by the market process itself; and, best of all, the reach of the profitable is subsequently reinforced at the expense of the unprofitable, who therefore cannot continue indefinitely to misallocate scarce resources. (”They proportion themselves… to the Customers…. [They] adjust themselves to risks “).
Clearly, this last is nothing we can ever expect the state to encompass.
Here, bureaucracy is usually self-perpetuating and – as the case of bodies as diverse as NASA and the CIA have amply illustrated these past few years – screw-ups are not punished, but instead are rewarded with an even bigger serving of the poor tax-payers’ pie.
Fifty years after Cantillon, Adam Smith struck an optimistic note3 , opining that the forces of good can usually be relied upon to prevail:
“The uniform, constant, and uninterrupted effort of every man to better his condition . . . is frequently powerful enough to maintain the natural progress of things toward improvement, in spite of the extravagance of government, and of the greatest errors of administration.”
But it is a question of more than just “every man” beating back predators and promoters, and of foiling the spoliation of crooks and congressmen.
What Cantillon explains is that we really should be seeking a remedy for the damage done by funny money and by government heavy-handedness by appealing to one particular kind of man above all others – to the Entrepreneur - to the man living at risk; the man making a living by serving his customers better than his competitors can.
Men now retired to seek a well-deserved ease - but who were themselves successful entrepreneurs in the days of their youth and strength - should be rightly proud to recognize their own portraits hanging in this 300-year old Hall of Fame.
But what they should also never fail to reflect upon is that their own wealth, once earned, can only be preserved by employing it in the same fashion as that in which it was first won – by entrusting it (with the aid of conscientious intermediaries, perhaps) to other entrepreneurs; to younger, still eager men who, like they once did, live “at risk”, but only by “adjusting themselves” continually to those risks.
That way neither the John Laws of the modern world, nor the greedy Regents who support them, will be able to destroy the life’s work to which that accumulated wealth bears testimony.
As for Law himself, he died, alone and disgraced, and was buried in a pauper’s grave.
Just before he fell, he summoned Cantillon – who was threatening the “System” by converting his profits to cash and taking them out of both market and bank--to attend upon him forthwith.
There, Baron von Grimm relates4 , Law imperiously told the Irishman:
“If we were in England, we would have to negotiate with one another and come to some arrangement; in France, however, as you know, I can say to you that you will spend the night in the Bastille if you don’t give me your word that you will have left the Kingdom within twice twenty-four hours.”
Cantillon mulled this over for a moment replied:
“Very well, I shall not go, but shall help your system to success.”
In fact, knowing this summary treatment signalled Law’s desperation and that the end of the mania was at hand, Grimm’s version has it that what Cantillon did next was immediately to lend all his existing holdings of stock out to the exchange brokers.
Cashing in the paper money he received in lieu of his securities, he redeemed it for gold once more and then promptly quit the country with it, to watch the unfolding collapse – and Law’s final discomfort - in ease and safety.
Cantillon may have died prematurely, but, unlike Law the Inflationist, Law the Politician – finally, Law the Destitute - he also left a substantial monetary legacy to his surviving family, as well as an illuminating intellectual one to his posterity at large.
For Cantillon, you see, was nothing, if not an Entrepreneur!
