The Virtues of the Market: Come on entrepreneur, you keep the world running

ECONOMICS LESSONS. Luigino Bruni: apology for the true motors of development

Come on entrepreneur, you keep the world running

He is the protagonist of economic development. With his ideas and courage, he breaks through stagnant situations and makes the system dynamic. We will never be grateful enough…

By Luigino Bruni

Published in the weekly Vita, October 29, 2010 

When the market functions correctly, it is a place in which innovation and human creativity are favored and awarded. Market competition (which we already spoke about in the previous installments of this series) can be, and if we want to understand it in its truest nature, should be seen as a race to innovate. Those who innovate grow and live, while those who do not innovate remain behind and leave the economic and civil game. 

The author who has most caught this virtuous dynamic of the market (the capacity to innovate is undoubtedly a virtue, because it is an expression of arête, of excellence) is the Austrian economist J.A. Schumpeter. In 1911, he published a book called Theory of Economic Development, a classic economic theory text of the 20th century, which I still recommend today to anyone interested in good reading on economic and social theory. In that book, Schumpeter masterfully describes the dynamic of the market as a “run” between innovators and imitators.

To explain the nature and role of innovation, Schumpeter draws upon a model where the starting point is the “stationary state”, the situation in which businesses only carry out routine activities and the economic system perfectly replicates itself over time, without there being creation of true wealth.

Economic development then beings when an entrepreneur breaks from the stationary state by introducing innovation, which can be a technical invention, a new organizational formula, the creation of new products or new markets, which on average reduce costs and makes it possible for the business to create new wealth. 

The entrepreneur-innovator is the protagonist of economic development, as he creates real added value and makes the social system dynamic. The innovator is then followed by a “swarm” of imitators attracted by that created added value, just as bees are attracted by nectar.  When they enter into those sectors that verify the innovation, they cause the market price of that given product to decrease, to the point that all the profit generated by the innovation is entirely absorbed. The economy and society return to the stationary state until a new innovation restarts the cycle of economic development. Therefore, for Schumpeter, profit has a transitory nature, as it subsists as long as there is innovation, in that time lapse between the initial innovation and the imitation.

What does this century-old theory still have to tell us today? Above all, it reminds us that the truest nature of the entrepreneur and the entrepreneurial function is the capacity to innovate.

The entrepreneur is not a profit-seeker: profit is only a signal that innovation is present. When the entrepreneur (including the social entrepreneur) complains because he is imitated, his vocation is already in crisis. He must be reminded that imitation also plays an important role, as it makes sure that derivative advantages that come from an innovation do not remain in the innovating business alone but are spread to the entire society (for example, through the reduction of market prices, which increases collective well-being).

Imitation is important and plays a role in the common good: the positive way to respond to imitation is to start the race again, continuing to innovate. This is particularly important in this era of globalization, where the innovation-imitation dynamic is very fast and global. Even today, as one-hundred years ago, the answer to living and growing is not complaining or turning to protectionist measures. Rather, it lies in a new start and new investment in the art of innovation. 

Besides, this theory of innovation tells us that when an entrepreneur stops innovating, he dies as an entrepreneur (perhaps transforming himself into a spectator), and so blocks the run or the innovation-imitation relay race, which is the true virtuous dynamic that pushes society ahead, not only the economy.

One of the profound reasons for the current crisis was the progressive transformation of many entrepreneurs and speculators, which took place in the past decades following the financial boom.

The entrepreneur-innovator, compared to the speculator, thanks to his vocation, sees the world as a dynamic place that can be changed. He doesn’t simply think of increasing his own piece of a given “pie”. He creates new “pies”, welcomes new opportunities, looks ahead and not beside him in search of rivals to battle so that he can hoard the pie.

From 4th century civil humanism to the industrial districts of Made in Italy, from artisan-artists to social cooperatives, Italy has been capable of economic and civil development when cultural and institutional conditions have allowed people to cultivate the virtue of creativity and innovation. Instead, we have stopped growing as a country when what prevails is the logic of whimpering, of seeking and maintaining substantial incomes, when we’ve looked at the other as a rival to fight against and not as a partner to grow with. 

Thirdly, the law of the market as a mechanism that awards innovation places the accent on people and not so much on capital, finance or technology. Innovation is first of all a matter of vision, of a different outlook on things and on the world, and therefore a matter of people that see reality differently.

And, in fact, in the 1940s, Schumpeter himself foresaw that the passage of innovation from persons to research offices and development of large businesses would have changed the nature of capitalism. It would cause capitalism to lose contact with the personal dimension – the only one that can really innovate.

And still today, after decades of getting drunk over what’s “big” and anonymous, we’re realizing that the businesses that are able to grow and be leaders in the globalized economy are, more and more, those where there is one or more persons capable of seeing reality differently, capable of innovation. The only true key to innovation and every economic value is people’s intelligence (that is, knowing how to “read and see within” things), as an Italian economist even older than Schumpeter said. I’m referring to Carlo Cattaneo from Milan, who, in the mid 19th century, wrote one of the most beautiful and humanistic theses on economic action, in which he reminds us that the virtue of innovation is founded on an even more radical virtue (because more universal): creativity. “There is not job or capital that does not begin with an act of intelligence,” he said, “Before every job, before all capital…it’s the intelligence that begins the work and stamps the character of wealth into it for the first time.”

Finally, the dynamic, the run, the virtuous relay race of innovation-imitation is greater than just the economic environment. This gives us a beautiful and original key to understanding not only the market but also the civil history of peoples. When societies and markets favor people who innovate, when these people do not lament but delight in being imitated, when even institutions universalize these innovations, then common living and the market work, and they are beautiful places in which to live.  

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