In his seminal treatise on Economics, Human Action, Ludwig von Mises writes:
“The market is supreme. The market alone puts the whole social system in order and provides it with a sense of meaning. The market is not a place, a thing, or a collective entity. The market is a process.”
To claim that the market is a process is to imply continual movement and change within the market system. However, this change has to come from somewhere. Mises tells us that this change, the force behind the process of the market, derives itself from the entrepreneur:
“The driving force behind the market process is provided neither by the consumers nor by the owners of the means of production — land, labor, and capital goods — but by the promoting and speculating entrepreneurs…Profit seeking speculation is the driving force of the market as it is the driving force of production.”
The market is constantly in flux. Its natural state is one of continuous change. The agent of this change is the entrepreneur. In order for goods and services to be produced, there must be the productive factors of land, labor, and capital combined and organized together. However, these factors do not come together to produce goods in and of themselves. They have no inherent direction that magnetizes them magically together into products ready to be sold to consumers. In order for these factors to coalesce into valuable goods and services, they must be brought under the direction and control of the entrepreneur. All production decisions, every good that is produced, all services supplied, are ultimately a product of the entrepreneur and his decision-making.
The entrepreneur does not act blindly, however. He has a goal in mind. His goal is to utilize his productive factors in the most profitable method possible. In order to do this, he must provide the most valuable goods in the eyes of the consumers at the lowest costs possible. The success or failure of his attempts to achieve this profit are never certain. The tastes and whims of the consumers are open to change at any moment, and past profits are never a guarantee of future profits. If the entrepreneur is successful in his goal of achieving profit, he will receive an increase in his funds and be vindicated in his production decisions. If he fails, he will receive less funds in return than he put into the production process, and his production decisions will be revealed as a failure. He must reconsider the goods and services that he is providing and try anew to provide value to the consumers he serves.
This pursuit of profit, these continual attempts to appease the desires of the consumers, it what motivates the actions of the entrepreneurs, and as a consequence, the perennially moving process of the market. The production decisions made by entrepreneurs in making new goods, attempting new designs, and testing new markets are all in the pursuit of satisfying the consumer.
This market process will move along smoothly as long as it is free and unhampered. Unfortunately, governments do not always see fit to allow the market to operate without their intervention. At an increasing rate, the governments of the world have deciding to interfere with markets and prevent them from functioning in their natural progression. The primary method of conducting this interference is through the institution of regulation. The purpose of regulation is for the state to place rules and restrictions on particular actions taken in the economic realm. The particular actions regulated may be almost anything imaginable. The price of a good may be regulated so that it may not rise above or fall below a certain amount; one may not be able to see a particular good at all without the government’s permission to do so, and so forth.
Regulation, while possibly noble in its intentions, can have a profoundly corrosive effect on the market economy. While increasing costs of business and generally increasing inefficiency, it can fundamentally change the operations of the market. One such effect is the arrival of entrepreneurial stagnation. An industry beset with entrepreneurial stagnation no longer looks constantly improve and progress, as would be the case in the free market economy, but are content to continue in the ways set by the past. The competition and innovation of the market is replaced with a dreary sense of mediocrity. The inherently destructive nature of entrepreneurship, the destroying of old businesses and goods for what is newer and better, falls away completely.
How does regulation have this effect on industry? All regulation necessarily inhibits competition and entry into the regulated industry, either directly or indirectly. One way that it can do so directly is through a licensing system, where only firms approved by the state may produce goods and services in that market. Inevitably, this system of state approval for producers will damper competition in that industry, as the existence of a licensing system will reduce the quantity of those interested in producing in this field, as well as the fact that not every license applicant will be approved (If they were, there would be no point in the license!). The restriction of entrants can be made explicit as well, where only a set number of licenses will be approved every year, ensuring that the field will only grow at a set rate.
The indirect effects on competition take place as a result of the negative secondary effects of regulation. When the operation of a firm in an industry becomes regulated, there is always costs associated with complying with the regulation. Similar to the effects of licensing, the prospects of having to comply with regulation ensures that the costs of entering the regulated industry are higher than other comparable industries without the regulation. Consequently, fewer entrepreneurs will enter the industry and competition is reduced. Another barrier that regulation indirectly erects against competition is the uncertainty that comes along with complying with the regulatory code. For companies that already exist, they are aware and familiar with their business models, and will understand much more intuitively how to deal with and comply with any potential regulation. For any potential newcomers looking to enter the industry, they do not have this knowledge. They are relatively less knowledgeable on how to comply with this regulation, and how to build a successful business in line with it. This is a knowledge barrier, which goes to further prevent new entrants into the field and cripple the regulated industries prospects for competition.
The restrictions on competition that regulation inherently brings about are crucial to understand, as it is within these restrictions on competition that the environment for entrepreneurial stagnation can begin to fester and grow. Whenever competition is hampered through institutional barriers, such as regulation, this always serves to benefit larger firms at the expense of smaller firms. This is because of the costs associated with complying with regulation, as we mentioned above. Larger companies are much more able to absorb these costs, whereas smaller firms are not. If the costs of complying with this regulation are high enough, then the burden imposed on these smaller firms will be too onerous, and they will begin to go out of business, either closing up shop or being bought out by larger firms, creating a situation where the market share of an industry is dominated by several large firms. This is a snowball effect of sorts, where the larger businesses become larger, and able to buy out their competition, which expands their business even more. Thus, a situation where expansive or complex regulation is imposed, big business will tend to profit and expand as a result.
Consequently, the implementation of extensive and burdensome regulation, enough to affect the bottom line of firms, can result in a market where several large firms will largely dominate. What kind of incentive structure does this kind of market create? Under a laissez-faire system, firms must stay competitive or they will be surpassed by more efficient entrepreneurs. A failure to innovate and progress will result in a failure to generate profit. However, once there are regulatory walls that can directly and indirectly protect large firms from outside competition and the entry of new entrepreneurs, the natural market incentive to innovate starts to disappear. This is not to say that all the firms will collude with one another, as such naked corruption will draw the ire of the general public. Instead, these firms will all recognize that they no longer need to be continually worried about their place in the market, and will begin to relax and settle into their current positions. Their drive to make better and cheaper products, while still present to some degree, will be considerably more dull than on the unhampered market.
This is the state of entrepreneurial stagnation. Several large firms, directly and indirectly protected by regulatory barriers, becoming increasingly lethargic and unwilling to push themselves into producing better and cheaper goods and services. Market improvements are not gone altogether, but are no longer desperately sought-after by entrepreneurs as they were on the open market. After all, the status quo is quite comfortable for everyone involved, and no one should see any reason to shake it up.
It should also be noted that stagnation is not a binary situation. This economic ailment has varying degrees of manifestation, and is not always as visible as one might expect. Implementation of substantive regulation will create some degree of stagnation in the market entrepreneurs, but it did not always be to an acute degree. If the regulation imposed on an industry is moderate, then it is quite possible that many small businesses will still operate profitably. However, the barriers still serve to benefit big business, as they still help to keep any potential newcomers out, limiting the potential threats to their market share. Just as regulation comes in degrees, the entrepreneurial stagnation that accompanies it will also come in degrees as well.
What effects will the onset of entrepreneurial stagnation have on an industry? One of the most noticeable we have already mentioned repeatedly: the lack of innovation. Because of the of any threat to their position, firms have little reason to continually look for ways to improve their products. New technologies and innovations will be incorporated over time, but the rate of change in terms of products in industries experiencing entrepreneurial stagnation will always be lower than in freer industries.
Another noticeable effect is on the prices of goods in these industries. On the free market, the tendency is for prices always to fall. As capital increases and new production methods are adopted, the costs of production of goods will fall. As this process continues, prices will consistently fall for consumers. Not so for industries in stagnation. Similar to innovation in products, there is greatly diminished incentive for companies in these industries to compete on their prices.
Stagnation has effects on both the labor and capital employed in that industry as well. Under natural market conditions, entrepreneurs have to offer competitive wages, or else their labor will be attracted to other lines of employment. Even if businesses try to keep wages down, the profit potential will attract new entrepreneurs into the market, increasing the demand for labor and driving wages back to an equilibrium. However, in an industry experiencing entrepreneurial stagnation, this market mechanism no longer operates as effectively. Given the barriers to entry, there is no longer a constant pressure to keep wages at the marginal product of the worker’s labor. Thus, if the productivity of the worker increases over time, as often happens on markets, then there will not be the corresponding increase in wages that we would expect to see. Rather, wages will lag behind their natural rate, or will not rise at all. Thus, workers suffer under stagnation as well, as their wages will be lower than on the free market.
In addition to labor, capital is also affected by stagnation. These effects are two-fold: effects in the present, and effects echoing into the future. Capital is diverted in the present, as existing capital goods are not allocated as efficiently in current production as would be the case under free competition. Firms in stagnation will also be less willing to explore more efficient methods of organizing capital, as exploring these potential improvements requires an exercise of the entrepreneurial spirit that industries in stagnation are now crucially deficient in. These present effects can be clearly seen, but the unseen effects on the future are even more pernicious. Entrepreneurs no longer prioritize innovation and improvement, and their capital investments will reflect this shift in disposition. As a result, the quantity and type of capital investments will be altered from, and inferior to, the investments that would be made by entrepreneurs under natural market conditions. Because of this, the growth of this industry extrapolated into the future will be relatively hindered in relation to its potential growth. The lax mind and will of the stagnant entrepreneur fail to allocate capital optimally, and the productive growth of the industry suffers accordingly.
Thus far, we have spoken of entrepreneurial stagnation as being relegated to one or several industries. When this fate befalls these sectors, the effects are certainly felt by the consumers of those products, but this stagnation can have much greater economy-wide effects. This occurs when heavy regulation is not restricted to just a handful of businesses, but is implemented in the majority of the economy. Just as regulation in a single industry can lead to stagnation in the goods and services that industry produces, regulation in the economy as a whole will lead to entrepreneurial stagnation many different sectors of the economy. Instead of entrepreneurs being diverted away from the singular regulated industries, the entrepreneurial spirit is not awakened in the first place in a highly regulated economy. All of the consequences we have enumerated regarding the dangers of stagnation are now applied to the entire economy as a whole. Innovation in many sectors is stifled; many different goods and services fail to replicate the innovation that free competition brings; capital is relatively inefficient and labor suffers from poor market conditions.
Moreover, once stagnation has infected large areas of the economy, there are inevitable cultural effects as well. The lack of consistent and visible progress in much of the economic system, combined with the effects that entrepreneurial stagnation has on workers, can lead to a general sense of cultural stagnation as well. When the economy is running smoothy and living standards are rising, the culture of the community surrounding the economy will likely reflect these feelings of optimism about the future. This optimism can manifest itself in many varied and different ways, including art, music, politics, television, humor, and the overall sense of national identity and trajectory. Entrepreneurial stagnation takes that optimism and puts it in the dirt. No longer are there high expectations about the future. These positive sentiments are replaced with blanket indifference and pessimism, and subsequent feelings of ambivalence in the community around the economy, or even a reactionary desire to remove the market system altogether. Culture is linked to economics, and an economy in the throes of entrepreneurial stagnation will inevitably have its impact felt the culture, almost certainly for the worse.
We have spent quite a bit of space describing all of the malicious effects of entrepreneurial stagnation. Its arrival on the market brings only a blunting of the innovation of the market, and potentially wide-spread effects on society at large. How then, can it be avoided? How can we prevent stagnation from taking hold, or remove from our economy once it has? The solution is as simple as it is difficult to implement: dismantle the state’s regulatory interference with the market. It is simple in that all that is necessary to prevent the onset of entrepreneurial stagnation is to strike down the state’s regulations. Once that has been accomplished, the natural flows of the market will reassert themselves automatically over time. It is quite difficult to implement because of the powerful special interest groups that benefit from the existence of this regulation. The big businesses and crony capitalists have no desire to see their protective regulation removed and expose themselves to the cruel and unmerciful test of the market. They are perfectly comfortable where they are, and have no qualms with keeping the status quo. In pursuit of these interests, they will lobby against any attempts to remove restrictions on their industries. Simple, yet undoubtedly difficult.
On a more fundamental level, the cure for the coercive regulation of the state is the free workings of the market. All of the pernicious consequences of stagnation and complacency in the entrepreneurs can be remedied as soon as we turn back to the unhampered market economy. Stagnation is anathema to true economic progress. As we have seen, there is no divide between the economic and cultural. To accept entrepreneurial stagnation is to accept stagnation in culture and even that of society at large. To reject these fetters on human development is not optional, but a necessity. Without this rejection, one will experience the fate of all fallen human empires: a loss of strength, slow decline, and inglorious descent into the annals of history.
