TCS Daily


The Exceptionally Entrepreneurial Society

By Arnold Kling - November 27, 2006 12:00 AM

"The movement that built the first national democracy was not triggered by an uprising of the masses; nor was it led by intellectual theorists. It was led by entrepreneurial men of means...In fact, starting a business develops precisely the traits that make democracy work. It requires independence, much effort, and self-discipline--but also the ability to work with others and the recognition that you can only succeed by serving the needs of others."
-- Carl J. Schramm, The Entrepreneurial Imperative, p. 161

This is the first of three essays on the theme of the significance of entrepreneurship in America. This essay looks at "American exceptionalism" with respect to entrepreneurship. The next essay will look at entrepreneurship and income inequality. The final essay will look at education and entrepreneurship.

Carl Schramm's thesis is that entrepreneurialism is as important to American culture as it is to our economic vibrancy. By the same token, in order to live in a congenial world, it is as important for the U.S. to export entrepreneurialism as it is to export democracy.

Compared to the United States, other developed countries, particularly in Continental Europe, put up more regulatory impediments to entrepreneurs, particularly the important subset of entrepreneurs that I will define below as change agents. In underdeveloped countries, regulatory impediments are compounded by crime and corruption, creating an environment even less conducive to entrepreneurship.

Defining Terms

The term "entrepreneur" has at least two connotations. The term could describe someone who launches a new enterprise. Alternatively, an entrepreneur could be defined as someone whose income is at risk in a business.

My preference is to require that a person satisfy both connotations in order to be called an entrepreneur. That is, my definition of an entrepreneur is someone who both launches a new enterprise and bears considerable risk and accountability relative to its success. To my way of thinking, an innovator who develops a new product within the safe confines of a university, a government agency, or an existing corporation is an intrepreneur, not an entrepreneur. Someone who has a very high degree of risk and accountability but who did not launch the business is a hired executive, not an entrepreneur.

An important subset of entrepreneurs (and of intrapreneurs) might be termed change agents. A change agent's new enterprise defies conventional wisdom and habits in some important way. Famous entrepreneurs, from Thomas Edison to Steven Jobs, are change agents. Change agents encounter resistance from people who are unwilling or unable to see the benefits of innovation, which explains why personal charisma and salesmanship can be important to their success.

Most entrepreneurs are not change agents. More typically, entrepreneurs own individual franchises, small retail stores, and just about anything else that you would find in a typical strip mall. These businesses require dedication, risk tolerance, and hard work to operate, but they do not depend on or attract change agents to launch them.

Amar Bhide, in his classic treatise, uses the term "promising start-ups" to describe businesses started by change agents and the term "marginal businesses" to describe the more routine entrepreneurial efforts. This terminological exercise may seem tiresome, but otherwise one can slip into using the term "entrepreneur" in multiple ways, depending on context.

Continental Europe

Edmund Phelps is the 2006 winner of the Nobel Prize in economics. Shortly after his award was announced, Phelps published an essay on how capitalism in the United States differs from the system in Continental Europe. Phelps wrote,

There are two economic systems in the West. Several nations -- including the U.S., Canada and the U.K. -- have a private-ownership system marked by great openness to the implementation of new commercial ideas coming from entrepreneurs, and by a pluralism of views among the financiers who select the ideas to nurture by providing the capital and incentives necessary for their development. Although much innovation comes from established companies, as in pharmaceuticals, much comes from start-ups, particularly the most novel innovations...

The other system -- in Western Continental Europe -- though also based on private ownership, has been modified by the introduction of institutions aimed at protecting the interests of "stakeholders" and "social partners." The system's institutions include big employer confederations, big unions and monopolistic banks.

In Continental Europe, large banks control the bulk of investment. The United States has a more vibrant stock market, many more banks, venture capital firms, and other financial channels.

In Continental Europe, large established firms have access to funds from the large banks, but newer enterprises have a much more difficult time raising money. In the United States, the more competitive financial system gives more opportunity for entrepreneurs to raise start-up capital. As Barry Eichengreen put it,

Bank-based financial systems had been singularly effective at mobilizing resources for investment by existing enterprises using known technologies, but they were less conducive to growth in a period of heightened technological uncertainty.

-- (For more on Eichengreen's work, see Tyler Cowen.)

In Continental Europe, labor market regulations serve to keep small businesses small and to ossify the work forces at larger companies. In the United States, it is much easier for new businesses to expand and for old businesses to shed unnecessary workers.

European government policies sacrifice economic dynamism to other goals. For example, Joseph H. Golec and John A. Vernon recently wrote,

EU countries closely regulate pharmaceutical prices whereas the U.S. does not...In 1986, EU pharmaceutical R&D exceeded U.S. R&D by about 24 percent, but by 2004, EU R&D trailed U.S. R&D by about 15 percent. During these 19 years, U.S. R&D spending grew at a real annual compound rate of 8.8 percent, while EU R&D spending grew at a real 5.4 percent rate. Results show that EU consumers enjoyed much lower pharmaceutical price inflation, however, at a cost of 46 fewer new medicines introduced by EU firms and 1680 fewer EU research jobs.

Continental Europe is set up to preserve large public sectors, large banks, and large corporations. For individuals, the promise is stable jobs, a stable business environment, and collective sharing of the costs of unemployment, retirement, and health care. For the economy as a whole, however, the result is stagnation, inefficiency, and a burden on the working population to support the unproductive sector that is becoming increasingly unsustainable.

Over time, Europeans with entrepreneurial inclinations will be increasingly tempted to emigrate to the United States or other countries in the Anglosphere. Among the remaining Europeans, political support for welfare-state policies will solidify, even as the economic viability of those policies slips further.

Crime and Corruption

An entrepreneurial culture can emerge only in a setting where private property enjoys protection. When government fails to prevent crime, or when government corruption and expropriation serve the same functions as crime, the price for entrepreneurs is steep. A recent New York Times story summarized research done by a number of international agencies on the cost of crime in Latin America.

Years of rampant violent crime is not only robbing Latin America of significant private investment, but in some cases is stealing up to 8 percent from national economic growth, economists and World Bank officials say.

..."You have money spent on guarding stuff rather than making stuff," said Michael Hood, Latin America economist for Barclays Capital. "There's a large population standing around in blue blazers rather than engaged in more productive activities."

Much of the cost of government corruption is inflicted on start-up businesses. The World Bank and Canada's Fraser Institute have both documented the difficulties of doing business in many underdeveloped countries.

The Ethics of Growth, Once Again

Four years ago on TCS, I wrote that a nation's prosperity depends on three ethics: a work ethic, a public service ethic, and a learning ethic. The work ethic means that people believe that those who are willing to work deserve more rewards than those who are not. A public service ethic means that government officials are expected to protect private property, not to extort it. And a learning ethic means that people expect to learn, innovate, and adapt, rather than to resist change.

In the underdeveloped world, the work ethic and the public service ethic have not flourished. Instead, crime and corruption sap the economy, and entrepreneurship is particularly frustrated.

Continental Europe does not suffer such severe problems with the work ethic and the public service ethic. However, an important part of the learning ethic is taking advantage of the decentralized, trial-and-error process of entrepreneurial success and failure. The Continental European system attempts to replace the learning of decentralized markets with bureaucratic planning. Individual change agents have little access to capital and less opportunity to earn large individual rewards.

Ultimately, Europe's corporatist, bureaucratic model impedes learning and retards innovation. With its barriers to entrepreneurship, which are particularly discouraging to change agents, European economic growth has lagged behind during the last two decades of rapid technological change.

America's Natural Allies

If the United States is exceptional because of our entrepreneurial culture, then our natural allies may not be in Continental Europe, in spite of its democratic governments and high levels of economic development. China seems more dynamic than Europe, but I would argue that China's government-controlled financial system ultimately is not compatible with American-style entrepreneurship. Instead, we may have more in common with other nations of the Anglosphere, as well as such entrepreneurial outposts as India, Israel, and Singapore.

For the half century following World War II, the United States focused on democracy as the cornerstone of foreign policy. Democratic nations were our allies, and promoting democracy abroad was a top priority. However, it may be that American exceptionalism mostly reflects entrepreneurship. In that case, we have less in common with European social democracy than we thought previously. And, if our goal is to have more countries that look like America, then having them adopt a democratic political system may not be necessary and will certainly not be sufficient. Instead, our primary focus should be on fostering an entrepreneurial economic system. As Nobel Laureate Phelps put it,

I conclude that capitalism is justified -- normally by the expectable benefits to the lowest-paid workers but, failing that, by the injustice of depriving entrepreneurial types (as well as other creative people) of opportunities for their self-expression.

Arnold Kling is an adjunct scholar with the Cato Institute. His most recent book is Crisis of Abundance: Re-thinking How We Pay for Health Care.


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45 Comments

cultural evolution - - - - -
The medieval class system, with rigid class ranks ranging from serfdom thru the aristocracy yet haunts and stunts european enterprise. Americans rejected this class system, but its ghost haunts us still. Class warriors looove the terms "working class" and the "managerial class" along with privileged burearcracy, politicians and judges (the snooty "public service" classes). Not to mention the annoying MSM chattering classes.

The terms employee and employer smack of peon and patrone. But, the system is evolving. More and more self-employment is being created, at all levels. More and more businesses rely on "contract" help for everything from janitorial services to technical expertise and even management, rather than assume the old employer-employee roles, to get things done. The household survey measure of employment incresingly exceeds the official employment statistics, which measures the officially reported number of hirees of existing businesses. This virtuous trend is leading to a majority of workers being in business for, and responsible for, themselves, a very healthy trend socially as well as economically. Some happy day 'employee' may be an archaic term, like serf.

Safety in serfdom
One intentionally overlooked benefit of serfdom is the sense of safety it provides serfs. Due to legal restrictions on his movement, occupation, and almost every other aspect of his life, a serf knew what his future would most likely hold. And while that future couldn't improve, it wouldn't fall below any other serf's, either, given the obligations his superiors owed him.

Of course, societies that prevent the free exploitation of human capital by the people who own it develop painfully slowly because probability consigns their Einsteins, Edisons, Gates and Kamprads (IKEA's founder) to serfdom and very rarely to the nobility - the class with the freedom but not the incentive to exploit genius.

Modernly, Europeans have tried to implement this same serf-like sense of safety and social stability for the masses via the welfare state. And while they've succeeded providing security and social stability, they've payed dearly for it by preventing the owners of human capital from exploiting it. This is why Sweden - the vanguard of continental welfare statism - hasn't seen any new Kamprads, Ericssons or Nobels since it went whole hog for welfare statism 50 years ago.

For about 20 years now, welfare statist continental Europe has been sagging under the weight of the unfunded obligations providing its safety and social stability, and the ruinous costs arising from this malaise are becomming much clearer to all. Yet I believe the folks here, who have never really lived in a capitalist society and whose attitudes are mostly negative towards entrepreneurs, have a very high tolerance for the costs of security, just as Americans have a very high tolerance for the costs of freedom.

So why does TCS support illegal immigrants from Mexico?
If TCS is going to support illegal immigration, why not support those who are entrepreneurs instead of serfs?

Or champion legislation to remove restrictions on immigration for entrepreneurs?

Aid teaches corruption
Bravo, Arnold -- entrepreneurs are indeed needed, of both main defitions (start business and income at risk).

However, you might also mention the difference between the very successful Grameen Bank support for individual entrepreneuers, vs the World Bank aid "failures" (never honestly identified as such) and UN / UNDP junk of aid.

Such aid wants to fight poverty AND fight wealth creation incentive differences. It's no wonder aid fails to support wealth creation.

Worse, the aid cash does provide an incentive for gov't and all those who work with the non-local aid folk to be corrupt. It's no wonder that aid recepient cultures become more corrupt faster than they develop successful economies.

Aid agencies should be judged on how many private sector jobs they've help create.

Bushism
President Bush and Reagan before him were famous for being able to crystalyze complicated arguments into catchy treasures of folk wisdom. The Bush version of the present post goes like this: "The trouble with the French is that they have no work for 'entraprenuer'."

The Fall of the American Empire
“…we have less in common with European social democracy than we thought previously.”

Many in the US believe the European “Welfare State” is the preferred political system. They believe that security and economic equality should be valued more than liberty and economic innovation. Creeping socialism is a long term, persistent trend in the US…the consequence of which will be the stagnation and eventual decline of American civilization. Many is the US today are quite content with 3% GDP growth, as opposed to aspiring for say 10% growth based on innovation and productivity. Eventually we may be satisfied with 1% growth, as Germany and France are today.

For prosperity to be optimized, the Federal Government must focus its efforts on a legal infrastructure that encourages innovation and growth. In addition, free trade agreements should be negotiated with all countries who think similarly. If America fails to lead the cause of liberty and innovation, others (such as China, India, etc…) will take the lead. In this century economic vitality will determine global leadership. If America chooses NOT to lead, its superpower status will be gone within a couple of decades. Of course, the fall of the “American Empire” is the goal of many outside and inside of America. Hopefully the American people understand what the choices are, and that it is THEY (through their economic and political choices) who will ultimately decide.

dangerous illusions - - - - -
Right. Thanks. This coerced safety seems to be an irresistably delicious poison. Oldeurope is a demoralized goner, as a result. Russia is hurtling toward demographic extinction, with Oldeurope close behind. Blending socialism and atheism makes a lethal cocktail.

work ethic
I disagree with you that the EU suffers from a lack of respect for the work ethic.

It is the position of most liberals, especially the brand that infect the EU, that people deserve an income, regardless of whether they work or not. They also regard large incomes, regardless of the amount of work behind that income, as a crime against humanity that is to be punished by having most of that income taken by the govt, to be given to those who don't want to work.

Just so
But, in Switzerland, a person does have the ability to break the mold if they wish to. The aren't automatically locked into that position. 90% of the time that is the way it works, but there are those who challenge the system successfully.

Moving in & out of Entrpreneurship
Countries are not fixed at a certain level of entrpreneurial freedom. India used to be almost soviet in its level of import controls & some other matters. Yet India's elite culture was in turn an extreme version of Britain's bureaucracy - British social reformers used to have India as a playground. Hong Kong, however also derived much of a culture that makes the US seem economicly statist from a differently minded social reformer. Ireland in 1989 turned to economic freedom with astonishing success. Estonia is currently doing the same.

The lethal cocktail's key ingredient: Materialism
When one gets to the point where he realizes that money is neither the solution to all problems or their cause, then one realizes that socialism is even more materialistic than capitalism. But there are things in life more important than money for men whose spiritual and social development empower them to embrace what can't be forced or bought, things like charity, volunteering, community leadership and generally spreading goodwill and fellow-feeling among those he comes into contact with every day.

So to me, what's most tragic about socialism isn't that it inhibits the economic exploitation of human capital. Rather, socialism inhibits the development of those things in the human spirit and society that are more valuable than money and that no set of welfare state programs can duplicate no matter how much of the economy they absorb.

Wow!
LG just can't resist turning every issue into a Bush issue. And he ruins the joke, too (it's "word" not "work").

-Bob

Absolutely right

Results From Accurate Definition of 'Human'
The Founders, including Mr. Jefferson, supplied the a priori definition of the human creature, which made an entrepreneurial society possible.

The causal process did not begin with 'business' or economics but a premise in the human as 'made in God's image,' which made extensions of politics, government, business,and education successfully possible.

Whether you define environments for goldfish, or canaries, puppy dogs or humans, you had best define the creatures accurately before erecting their environments - econ or otherwise. Too often too many politicos place puppies in water-bowls, canaries in back-yards, and gold-fish in cages - and wonder why socialistic national systems will not work for humans.

"Each individual human being possesses a unique, highly
developed, and sensitive perception of variety. Thus
aware, man is endowed with a natural capability for enact-
ing internal mental and external physical selectivity.
Quantitative and qualitative choice-making thus lends
itself as the superior basis of an active intelligence.

"Human is earth's Choicemaker. His title describes
his definitive and typifying characteristic. Recall
that his other features are but vehicles of experi-
ence intent on the development of perceptive
awareness and the following acts of decision and
choice. Note that the products of man cannot define
him for they are the fruit of the discerning choice-
making process and include the cognition of self,
the utility of experience, the development of value-
measuring systems and language, and the accultur-
ation of civilization.

"The arts and the sciences of man, as with his habits,
customs, and traditions, are the creative harvest of
his perceptive and selective powers. Creativity, the
creative process, is a choice-making process. His
articles, constructs, and commodities, however
marvelous to behold, deserve neither awe nor idol-
atry, for man, not his contrivance, is earth's own
highest expression of the creative process.

"Human is earth's Choicemaker. The sublime and
significant act of choosing is, itself, the Archimedean
fulcrum upon which man levers and redirects the
forces of cause and effect to an elected level of qual-
ity and diversity. Further, it orients him toward a
natural environmental opportunity, freedom, and
bestows earth's title, The Choicemaker, on his
singular and plural brow.

"Human is earth's Choicemaker. Psalm 25:12 He is by
nature and nature's God a creature of Choice - and of
Criteria. Psalm 119:30,173 His unique and definitive
characteristic is, and of Right ought to be, the natural
foundation of his environments, institutions, and re-
spectful relations to his fellow-man. Thus, he is orien-
ted to a Freedom whose roots are in the Order of the
universe."

- from The HUMAN PARADIGM

semper fidelis






Don't trust the french they have no word for entrepreneure!
This is up there as one of the silliest ever posted on this site. Pat yourselves on the back your doing such a fine job even if you say sos yourselves. Sad realy.

from serfs to entrepreneurs
My bet would be that a lot of Hispanic immigrants are on a path that will go from serfdom to entrepreneurship. According to an article in March by Linda Chavez, the U.S. census bureau found that Hispanics were opening businesses at a rate that was triple the national average. That seems suspiciously high to me, but other data are consistent with a high rate of upward economic mobility among Hispanic immigrants.

Then TCS should support open borders,
making all immigration legal and allow any entrepreneur into the USA.

I favor this option as long as the federal government does not require any kind of welfare for non-citizens.

Nothing succeeds quite like failure...
We should not be too impatient for the rest of the world to catch on to which features (of what works for us) should be put to work for them. It has only been something less than a generation since the major Communist experiments in the Soviet Union and in Mainland China failed and turned toward their own "market economy" forms of financial capitalism.

The EU has (perhaps) not suffered enough to give up on the more socialist inclinations of their democratic governments. The French Communist Party was actually in power over there in the very recent past.

On the other hand, all is not perfect here in the US either. Some of our municipal governments have gone bankrupt within memory. But they worked it out.

Let's talk about ventures. When our entrepreneurs risk everything, as we say, some of their perfectly good projects fail because the resulting businesses simply run out of cash before the model is worked out. And some perfectly terrible businesses continue because the owners do not run out of cash (for a variety of reasons). Financial skills (or rich relatives) are only part of the entrepreneurial paradigm.

Intrepreneurial ventures (those projects incubated inside a company) shouldn't normally fail for a lack of cash. However, when they do succeed the company itself is the owner. Indeed, many large entities try to engender entrepreneurial spirit in their Research and Development teams. This is because there do seem to be some terrific opportunities out there in the world that only entrepreneurs are able to discover and bring to life.

All businesses are composed of Operations, Marketing and Finance. Entrepreneurs typically innovate within only one of these disciplines and then they try to create sustainable, competitive efforts regarding the other two.

For example, an engineer might come up with a superior design and have the resources for a "proof of concept" prototype. So he knows it works. But to make a business out of this idea the entrepreneur must find the money for his first production run. He then needs to sell those goods and turn that inventory back into money in order to continue. Actual profits are often subordinated to cash flow in the interest of raw survival.

Alternatively, a professional salesman may want to open his own store and he might have the money to lease retail space. However, the entrepreneur must find goods to sell and he needs to turn his inventory over fast enough to pay his rent, his payroll and his vendors. Or he will not be able to continue.

Finally, an entrepreneur might have lots of money to invest but he still needs a product and a way to market it profitably or he should simply leave his funds in T-Bills.

All the factors to create a successful venture (new products, eager markets and investment capital) exist simultaneously, but independently, in the business world, all the time. Great general managers should be able to assemble profitable entities by bringing these elements together.

There is no magic here. It should be a matter of hard work. If a venture does not become sustainable then (by definition) something must be missing or not performing up to the mark. One or more of the pieces: operations, marketing, finance or management.

Consider this: A large enough partnership of independent players might agree to bring their own (world-class competitive) productive resources together to launch almost any business, without involving outside parties. The principal players could own a controlling interest and the general partnership itself would hold a minority stake. This form of entrepreneurial capitalism should be unstoppable.

Social (handshake) capitalism among long term partners with many related deals might be superior (better, faster and more profitable) when competing with traditional financial capitalists who often deal with and rely on strangers.

Perhaps European entrepreneurs (they seem more tribal) will skip over American style ventures, with our rugged individualism, and go straight into something like this that works better!

A simple American obstacle to Entrepreneurship
This is a no-brainer. A conservative friend of mine was constantly going on about the virtues of entrepreneurship. So I asked him: "what's stopping you?". He admitted that he had a problem. His wife had a a serious heart condition. There was no way he could quit his job and embark on a course as a self-employed entrepreneur, for the simple reason that the cost of health insurance for his family would be completely out of reach. This is a counterpoint to the usual obstacles to entrepreneurship cited by critics of the European system. In this case, universal health insurance is a definite plus.

I fully agree with argument of essay
Though citizen of U.S.are entrepreneurial, U.S. government is anti entrepreneurial. Government fourgn policy is always anti democracy, other wise government not support to Pakishan and other dectators. and pull the lag of democract countries.

Entrepreneurial
However, Communist China is doing a good job converting Wal Mart into the single USA business that can cause the US stock mark to drop over 100 points in one single day? Yes, this monster giant like the Sherman March trough the South, killing thousand upon thousand of family business who came about by that entrepreneur American system that in truth was once, and now America's materialism is selling out to China. Just about anything Wal Mart and all the giants sell is made in China. Yes, the nation that has no use for the Christ Child, and yet smiles from ear to ear as Americans cannot have a happy Christmas without the trinkets, and gadgets China invents. Yes, the personal storage now sprouting like weeds all over America build by other than entrepreneurs, but giants, to store much made in Communist China. I have spoken nothing but what is truth!

A little more on entrepreneurial
Yes, I forgot to point out that Communist China in the meantime is becoming the most tremendous and dangerous military threat to the USA. Yes, America's floating dollar is the actual financer to such danger for America.

No Subject
"On the other hand, all is not perfect here in the US either. Some of our municipal governments have gone bankrupt within memory. But they worked it out."

Nothing wrong with going bankrupt. Bankruptcy is possibly the most important benefit of capitalism. A private enterprise that fails goes bankrupt, a government one gets a bigger budget.

The real problem is that when a business is big enough or has political clout governments tend to bail it out. For example when the Japanese property bubble burst the government protected the banks, which have been technicly bankrupt fot 2 decades & as a result the Japanese economy which had been growing at 10% has flatlined ever since.

Too bad entrepreneurship cannot be applied to health care
With such a regulated market for 'sick' care in the USA, the opposite of 'sick' care is actively discouraged.

Application of free markets to health care would emphasize prevention and not just treatments with drugs and surgury.

Why it won't happen
The entire structure of healthcare is devoted to distorting normal market forces in order to assure a steady supply of capital into the sector.

Doctors and other providers do not want to be in the business of collecting on account and their professional associations function as cartels far more than they serve the public against malfeasance. Trial lawyers have turned medicine into a lucrative source of income. Medical eqipment suppliers are set up to supply new equipment almost without regard to cost, because through insurance everybody pays, but no one does. The government is controlling a huge portion of the economy through its intervention in the market, as a reegulator, provider and financer of healthcare.

We seemed doomed to break under the weight of healthcare, education, the bar and government. All are industries of near total inattention to market forces and total attention to the political process.




Serfs and Their Government
"We seemed doomed to break under the weight of healthcare, education, the bar and government. All are industries of near total inattention to market forces and total attention to the political process."

Federal policy regarding healthcare, education, the bar and other selected industries has historically intended to serve the general welfare. But the actual consequences differ dramatically from the intent. These policies have significantly distorted market forces in these industries...to the point that the policies are a failure overall.

The solution is a complete rewrite of all legislation impacting healthcare, education and the bar (especially tort issues). There is no constitutional justification for the US government to control or grant preferences to members of any industry. The policies of the past are the birth and childhood of socialist-statist government...and must be corrected before even more harm is done.

It is better (and natural) to live free, uncertain and insecure, than to exist within the certainty of serfdom.

Let's talk about Japan...
Neil,

Of course, bankruptcy would not be the most important benefit of capitalism. Capitalism describes the process of assembling productive resources under a management team to process raw materials into finished goods. This can be done by common agreement (handshake capitalism), at the point of a sword (military capitalism) or with contracts (financial capitalism).

Contracts allow financial capitalists to manage materials and resources that they would not otherwise hold title to or control of. Specific performance requires some future consideration (payment) and therein lies the risk. The promise to pay might be breached. If the original tender cannot be reversed and specific performance is impossible, then a judge might need to sort out the matter.

The bankrupt party did benefit at the expense of his creditor. And that benefit may have been converted into assets not mentioned as collateral in the original agreement but with value nevertheless. Such assets might be liquidated and some tender made in settlement of the debt. A bankruptcy judgement is handed down and life goes on.

The most important benefit of capitalism is the creation of wealth by converting the factors of production into finished goods of higher value. Bankruptcy occurs when things don't work out as planned due to incompetence or fraud.

But, let's talk about Japan. Coming out of World War II the (Central) Bank of Japan encouraged the Japanese Banking System to finance the rebuilding of their nation. The yen was pegged to the dollar and the Central Bank accumulated immense reserves. Especially of dollar denominated US Treasury securities. The yen quickly matured into a "hard currency", floated after 1971 and appreciated substantially against the dollar after 1985.

During decades of rapid industrial growth the Japanese economy experienced significant inflation that could not be sustained with exports (after 1985) earning relatively weak dollars. Japanese banks kept their corporate clients afloat but domestic prices were simply too high relative to the value of the yen in the rest of the world. Corporate defaults and the deflation of real estate collateral crushed banks. Deflation collapsed the asset side of everyone's balance sheets and personal portfolios while leaving nominal liabilies on the books at face value resulting in corporate losses across the board. Banks were slow to write off and dump their inventories of foreclosed real estate and they were forced to carry their corporate clients with zero interest rate loans. They are just now coming out of it.

Japan got into trouble because the US wanted to weaken the dollar in 1985. This made our exports cheaper and sent fewer of our dollars to Japan because imports priced in yen became too expensive and imports priced in dollars really hurt Japanese exporters.

We tried to do that same thing recently to China. Shame on us. They did not go for it. Good for them.





Bankruptcy
"The most important benefit of capitalism is the creation of wealth by converting the factors of production into finished goods of higher value"

This is what any system does. Stalin converted low value iron ore into T34 tanks in sufficient quantity to defeat Germany. The problem was that by the late 60s the outdated portion of the Soviet economy (by then most of it) could not go bankrupt & eventually the entire society did.

As regards Japan we basicly agree about what happened. I think that had the protected corporations & some banks been allowed to fold, probably allowing western banks into the country, the liabilities would have been shaken out & after a short but tough recession growth would have proceeded. Although Japanese manufacturing was known for its efficiency office workers were less productive than western ones.

the death of spiritual society
You can't make this stuff up:

"Under a tough new Fairfax County policy, residents can no longer donate food prepared in their homes or a church kitchen — be it a tuna casserole, sandwiches or even a batch of cookies — unless the kitchen is approved by the county, health officials said yesterday.

They said the crackdown on home-cooked meals is aimed at preventing food poisoning among homeless people."


From the The Corner on National Review

failures
In order for the best companies to succeed, the also rans have to go out of business. This happens in capitalism. In socialism and communism, the failures are protected.

I don't remember who came up with the phrase "creative destruction", but it describes capitalism perfectly.

All economic systems take raw materials and turn them into finished consumer goods. The genius of capitalism is that it allows those with the best ideas to drive out of business those who can't or won't adapt.

making a negative into a plus
While universal health insurance might have enabled your friend to go it on his own, it would harm the other 99.9999999% of us.

The Soviet tax base could not compete...
Neil,

The Soviet could only sustainably extract the thin profits of its own GDP because there was no private property and no private income for them to tax. There were no portfolios of personal wealth and no banking system with a hard currency to provide liquidity. The American government beat them by generating more tax revenues than the entire Soviet economy. It is astounding they lasted as long as they did.

The Soviets put 30% of their GDP into military spending. They sucked all the wealth they created (and much more) out of their economy and they had nothing to use as working capital. Their consumer economy was devoted to black market goods and their underground economy was healthier than their State-owned businesses.

You cannot go bankrupt when no one owns anything. What do you liquidate and who do you pay off against who's debt? The concept of bankruptcy would have been meaningless under the Soviet system.

The Japanese did the appropriate things under the circumstances but it certainly took them longer than it should the next time someone must go through this drill. Deflation is very punishing. Of course, we forced them into this precipitous correction by serving our own economic interests in 1985. The Japanese are very capable, very competitive and very tough. They are working hard to even the score.

I agree
I agree 100%.

Excellent point
It is a excellent point

Point?
What is the point?

Issue
The issue here is they ARE seeking welfare and clogging the health systems. I have no problems with legal immigration by individuals who seek economic freedom and success.

The issue with immigration is two fold. One, we need to know who is entering our nation from a security perspective. Second, we need to insure they are here to be productive.

I think these requirements are consistent with our ideals and a free society. My concern with the border is violent gang members, terrorists and people seeking a free ride.

Passports and background checks
and a system to monitor all who enter would allow the government to know who is here.

And I would advocate a screening process on the border. Health and criminal background checks.

And no FEDERAL welfare. States can do what they want.

Government is a jealous god ...
who doesn't like ordinary people crowding in on its "good Samaratin" M.O. Just imagine the horror of a government limited to doing only what it's good at and leaving the rest to us.

besides killing people, what is govt good at?
...

Stopping less organised people (gangsters/bandits) killing people
This is the reason why after bloody civil wars you often end up with people putting up with the lesser evil of arbitary dictatorship.

They do that, by killing those doing the killing.
Or at least threatening to if they don't surrender.

wasting money, scuttling economies, reducing men to servitude, and crushing the human spirit ...
And I'm just getting started.

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