Principles of Economics

Chapter 12: Capitalism

“If historical experience could teach us anything, it would be that private property is inextricably linked with civilization.”
Ludwig von Mises

A market economy, as discussed in the previous chapter, is a social order in which individuals act economically in their self-interest to the benefit of all involved. All methods of individual economizing, labor, capital accumulation, technological innovation, trade, and modern power production, are performed voluntarily by individuals using monetary media to expand the scope of their production, and increase their material satisfaction significantly over what they could achieve individually. The extended monetary market economy is what allows for the emergence of capitalism, the system of private ownership of capital goods, where capital owners decide how to employ their capital, reaping the rewards from using it productively, and bearing the losses from using it unproductively.

In The End of Socialism and the Calculation Debate Revisited, Rothbard explains Mises’ criteria for what makes a market economy:

“One time, during Mises’s seminar at New York University, I asked him whether, considering the broad spectrum of economies from a purely free market economy to pure totalitarianism, he could single out one criterion according to which he could say that an economy was essentially “socialist” or whether it was a market economy. Somewhat to my surprise, he replied readily: ‘Yes, the key is whether the economy has a stock market.” That is, if the economy has a full-scale market in titles to land and capital goods. In short: Is the allocation of capital basically determined by the government or by private owners?”

For Mises and the Austrians, the presence of a stock market is an effective litmus test for capitalism, because it is the unmistakable mark of a free market in producer goods, open to all members of society, allowing the capital to be allocated to those who use it most productively. Publicly traded companies on stock markets will own a significant portion of a society's productive capital, available for anyone to buy and sell as they see fit. Any individual who thinks they can use capital goods more productively than their owner is able to purchase them by paying the going price for share ownership. Anyone can allocate their own savings to a production process they expect to be more beneficial than holding cash. Whoever succeeds in allocating their capital productively benefits by accruing profits, giving him the ability to command more capital resources. Whoever allocates their capital resources unproductively will suffer losses that make their ownership of capital an untenable and expensive mistake, encouraging him to sell his capital resources to those who are willing to pay a higher price because they expect to use it more productively. With a stock market and a free market in capital, there are no mechanisms to protect a capital owner who misuses their capital goods. They will either sell to those who use it better, or will continue to accumulate losses until their entire capital base is consumed. Either way, capital is always part of a process of reallocation into more productive and more capable hands. By definition, no privileges or mandates can override this inexorable march of more productive capital use in a free market system.

By basing the definition and explanation of capitalism within the context of human action, Austrian school economists provide the most comprehensive and coherent definition and treatment of capitalism--a powerful and practical analytical tool for understanding real world economic issues and the workings of a capitalist system. This stands in stark contrast to other schools' superficial treatment of the topic. Marxist economists think of capital as a force of evil allowing its owner to exploit and enslave other members of society, with little regard for the benefits it provides the workers in terms of increasing productivity, the cost incurred to own it in terms of opportunity cost, and the responsibilities and risks involved with it. Meanwhile, most mainstream modern economists think of capital as an aggregate quantity of a homogeneous self-perpetuating blob which is used for production. Neither treatment discusses the importance of private property for the growth of capital, and the importance of a free market in capital for allocating it to its most productive users. With the essential function of capital markets ignored, both schools of economics allow their followers to imagine capitalist economic production can be carried out even with a compromised system of private ownership and free exchange of the means of production which is its lifeblood. 

The value of capital goods is subjective to the individuals valuing them; it is not inherent or intrinsic. Whether something is a capital good or not is entirely the consequence of the judgment and action of the person in command of it. A computer used for playing games is a consumer good, but the same computer used for professional graphic design is a capital good. Without the ability to command capital goods for profit, there is little incentive for anyone to accumulate and maintain capital in the first place. Without the ability to trade capital for monetary gain there is no mechanism to ensure capital gets allocated in productive uses, and doesn't get monopolized by those who misuse and degrade it. Capital is not a lump of machines, but a mental construct that survives, like a living organism, in an ecosystem where it is constantly valued and traded by acting individuals. It thus makes little sense to speak of a societal capital stock outside of the ability of individuals to freely value and command these capital goods, use them in production, and benefit from their use. Capital outside of a market economy is like a fish taken out of water, a limp lifeless shell of its former vivid self.

Capital Markets

It is very common to hear laymen, politicians, and mainstream economists call various countries socialist or capitalist without a clear definition informing these designations. But Mises' criteria provides us a very powerful litmus test for understanding what is a capitalist economy and what is a socialist economy. 

An economy that has not developed a stock market is not a capitalist market economy, as it has not developed the level of economic specialization and the lengthening of capital structure of production necessary to develop a market for capital. An economy that has its stock market forcibly closed by government will be a socialist economy, as its capital is taken away from the realm of market competition and placed in the hands of bureaucrats who do not own it, cannot legitimately profit from it, and cannot perform economic calculation to decide the best production avenues and methods to utilize it. Mises' criterion allows us to distinguish economies into three categories: pre-capitalist, capitalist, and socialist. History for most countries of the world has been the positive development from pre-capitalism to capitalism, interrupted by calamitous forays into socialist devastation.

Russia's stock market was established by an edict of Peter the Great in the early 18th century, at which point Russia could be said to have developed from an agrarian pre-capitalist economy into a capitalist economy. The stock markets continued operation until the Bolshevik coup of 1917, at which point Russia became a socialist economic system. As the Bolshevik coup came to an end, the stock market resumed operations in 1991, returning the country to being a capitalist economy. The devastating impact of socialism on Russia coincided exactly with the years in which the stock market was shuttered. 

Germany provides another useful example of the power of Mises' criteria. Several exchange markets were founded as early as the 16th century in Hamburg, Frankfurt, and other German cities. In 1815, the Hamburg stock exchange began to offer trading in company stocks, arguably marking the development of Germany into a modern capitalist economy. Stock markets in Germany continued operating until the Adolf Hitler's National Socialist party came to power in 1933, when all companies were forced to join cartels, and their capital placed at the command of the Nazi regime. The Deutsche Börse Group describes this episode:

“With the Nazi takeover in 1933, overall economic policy was incorporated into the general government and war policy. Stock exchange supervision was taken away from the states and made the domain of the central government, with the number of stock exchanges reduced from 21 to 9. The Frankfurt stock exchange incorporated the Mannheim stock exchange in 1935. The merged institution was called the Rhine-Main Stock Exchange. Although the Frankfurt Stock Exchange continued to function as a ‘domestic stock exchange’, it had, in reality, no major function. Nazi economic controls constricted the development of the free market and stock market trading. By and large, potential capital assets were only supposed to benefit the war economy and could no longer be invested in larger bonds or shares.” ((History of the Frankfurt Stock Exchange))

After the defeat of the Nazi regime, the west of Germany became a capitalist economy as its stock markets returned to normal free market operation, while the east of the country remained a socialist economy with no functional stock markets, until German reunification in 1990. 

Poland also provides another instructive example. The first mercantile exchange in Poland was established in 1817, started trading company shares in the 1840s, and remained operational until 1915, when it was shut down due to the breakdown of the Polish economy in World War I. The stock market resumed operation in 1919, reinstating Poland as a capitalist economy, until 1939, when the Nazi-Soviet alliance jointly invaded the country and split it between German and Russian control. The defeat of the Nazis in 1945 placed the entirety of Poland under the control of the Soviets, without a stock market, descending into socialist poverty and dysfunction, until 1991, when the Polish socialist economic system collapsed and a free market economic system was reinstated.

In all three countries, the existence of the stock market is a perfect indicator of the economies transitioning between pre-capitalist, capitalist, and socialist methods of economic organization. It is no coincidence that the absence of the stock market in all countries coincided with poverty, war, and mass destruction of capital resources. The inevitable economic reasons for the failure of socialist economic organization will be discussed in the next chapter.

It is common today to hear politicians, particularly in America and third world countries, mention Scandinavian countries as examples of successful socialist regimes. But all Scandinavian countries have had an uninterrupted history of stock markets being open and operational for more than a century. Not once were their stock markets shut down or taken over by governments, meaning that capital allocation and ownership in all of these economies has always been directed by the preferences and actions of freely-acting individuals, and not the coercive commands of central government authority. Unlike the incoherent and emotional popular discussion of this topic, Mises provides the clear criteria for the litmus test of determining what a socialist economic system is. 

Capitalism is entrepreneurial, not managerial

The importance of the private ownership of the means of production to the economic system derives from, and illustrates, Mises' explanation of capitalism as an entrepreneurial system, as opposed to a managerial system, a subtle confusion which is the root of all attempts to override the market economy and replace it with central planning. In a capitalist economy, the division of labor comes to the process of investment itself, separating the act of investment into three distinct roles: the capitalist, the entrepreneur, and the manager. The process of investment begins with the capitalist, who chooses to defer consumption of economic resources, and instead save them in order to later invest them. The lowering of time preference to allow for saving is the first step of investment, and in a modern capitalist economy, the investor can place their money in the financial markets to be allocated to various lines of production and businesses. The investor could allocate the money himself, or he could provide it to a professional investor who allocates the capital into different economic uses. The function of allocating that capital is the entrepreneurial function of markets. After the money is allocated to different businesses, it is the role of the managers of these businesses to use it for the production of final goods and services. With the separation of ownership, allocation, and management, the capitalist system can channel large amounts of capital from savers across society who can specialize in their own jobs and not think about capital allocation or its management. 

As important as the function of the manager is, it is distinct from the function of the capitalist who provides the capital, and the entrepreneur who allocates it, even if these roles may overlap in the same individual in certain contexts. The entrepreneur is what brings economic calculation to capital markets, allowing for the rational and productive utilization of the capital stock. A free market in capital goods forces each capital owner to either use it productively or lose it to those who can. The function of financial markets, and their myriad financial instruments, is to channel wealth from those who are willing to risk their savings, the capitalists, to entrepreneurs who exercise their judgment in how to allocate the capital to achieve the highest productivity. The entrepreneurs in turn entrust the investment to professional managers who are specialized in putting capital and labor to productive work. 

The function of the entrepreneur in a market economy is to decide on the allocation of capital to different lines of production and different industries. The entrepreneur decides which products to produce and which lines of production need to be inaugurated, expanded, contracted, or shut down. With these foundations laid, the entrepreneur entrusts the manager to supervise the day-to-day operation of these production processes. The manager is not the one responsible for dedicating capital to production processes, merely managing it once it has been allocated. As Mises put it:

“Those who confuse entrepreneurship and management close their eyes to the economic problem. … The capitalist system is not a managerial system; it is an entrepreneurial system.”

For academics and scholars who have never engaged in entrepreneurship (or work on the market) this distinction is not obvious, which results in their belief that private ownership of capital can be curtailed with no effect on the production process, as the workers and managers can capably handle the entire production process, the capitalists don't contribute anything, and the entrepreneur is an inconsequential detail in their models. 

But in the real world, the action of management and labor are determined and dictated by entrepreneurial allocation of capital. The correct costs and benefits of actions cannot be calculated unless the capital goods involved were owned by someone who can use them in any way they like. Having all options available for the owner allows the owner to choose the option that serves society best, which would generate the most profit for him. Without ownership and full command over capital goods, entailing reaping profits and suffering losses, there is no scope for rational calculation of profit and loss.

Profit and Loss

Entrepreneurs speculate on production processes being profitable, and employ the factors of production (labor, capital, and land) to them. They incur the upfront costs and collect the revenues. The use of money as a medium of exchange means it constitutes one half of every economic transaction in a market economy, which allows it to serve as a tool for entrepreneurs calculating profits and losses, by denominating all their costs and revenues in the same medium of exchange. When entrepreneurs calculate that their incomes in one line of business exceed their expenditures, they realize they are making a profit. This profit implies that the market valuation for all revenues received by the entrepreneur exceeds the market valuation for all the expenditures he spent on inputs into the production process. The subjective valuations placed by other market participants on the outputs of the production process are larger than those placed on the inputs. By turning a profit, the entrepreneur is serving society. He productively converts labor, land, capital and raw materials into finished products which society values more, and for that, he is rewarded with profits, allowing him to engage in more entrepreneurial allocation.

In the case where the entrepreneur's income is smaller than his expenditure, he is making a loss, because the prevalent market price of his inputs exceeds the price of his outputs. The entrepreneur is converting scarce valuable resources into less valuable final goods, thus impoverishing the society around him. For that, he suffers a loss which reduces the capital available to him, and incentivizes him to change his methods of production, shift to another line of business, or to stop being an entrepreneur. The scorecard in the game of capitalism is the entrepreneur's own wealth and prosperity, and without this very personal skin in the game, there can be no rational calculation of the best uses for capital, and no market process constantly ensuring capital is managed by the most capable. 

The discussion of scarcity in the early chapters of the book is essential to understanding why economic calculation can only work in the context of private property rights. Unless the person making the allocation has to make real choices involving trade-offs between different options over scarce resources, they will not be able to consider the true costs involved. Capitalism works precisely because the stakes are always high for participants:

“one cannot play speculation and investment. The speculators and investors expose their own wealth, their own destiny. This fact makes them responsible to the consumers, the ultimate bosses of the capitalist economy. If one relieves them of this responsibility, one deprives them of their very character.”

This is the process of economic calculation, and it is the essential role of the entrepreneur. One of Mises' most enduring and significant contributions is the explication of the central role of the process of calculation in a capitalist economy.

The economic calculation problem

When discussing the resounding failure of socialist economic systems, most laymen and modern economists will attribute these failures to the problem of incentives. Under a system where property rights are curtailed, and payment is determined by central planners, there is little financial incentive to excel in work. There is also little incentive to take on the least pleasant and hardest jobs. If living standards were to be equal, why would anyone want to collect garbage, or spend decades training to become a brain surgeon? Why work at all if the government guarantees everyone a decent living? While this is indeed a problem for socialist economic systems, it is not the fundamental economic problem of socialism. Most socialist regimes have found a satisfactory answer to the incentive problem through violence: if you refused to take out the trash, or follow strict orders, you could get killed or sent to labor camps. The incentive to avoid death is arguably more pressing and motivating for humans than the incentive to get rich. Accounts of the collapse of socialist economies show that the problem was not absenteeism. The inmates at the gulags had no choice but to turn up, and other workers generally turned up to their regular jobs in fear of being sent to the gulags. Yet socialist regimes still failed.

Mises goes even further, arguing that even if the socialists had succeeded in building a society composed entirely of the fabled new socialist man, who was utterly selfless in their dedication to the cause, socialism would still fail. As Rothbard explains:

“What exactly would those planners tell this army to do? How would they know what products to order their eager slaves to produce, at what stage of production, how much of the product at each stage, what techniques or raw materials to use in that production and how much of each, and where specifically to locate all this production? How would they know their costs, or what process of production is or is not efficient?”

In his analysis of socialism in 1922, when most economists were taken by this popular new idea sweeping the globe, Mises correctly identified the Achilles heel of socialist economic systems as the inability to perform calculations to allocate capital goods without private property rights in these goods. There is no rational way for ascertaining how to allocate resources without property, prices, and a market for entrepreneurs and consumers to conduct economic calculation. To quote Rothbard:

“Mises demonstrated that, in any economy more complex than the Crusoe or primitive family level, the socialist planning board would simply not know what to do, or how to answer any of these vital questions. Developing the momentous concept of calculation, Mises pointed out that the planning board could not answer these questions because socialism would lack the indispensable tool that private entrepreneurs use to appraise and calculate: the existence of a market in the means of production, a market that brings about money prices based on genuine profit-seeking exchanges by private owners of these means of production. Since the very essence of socialism is collective ownership of the means of production, the planning board would not be able to plan, or to make any sort of rational economic decisions. Its decisions would necessarily be completely arbitrary and chaotic, and therefore the existence of a socialist planned economy is literally “impossible”. “
Mises concludes that, in the socialist economy “in place of the economy of the ‘anarchic’ method of production, recourse will be had to the senseless output of an absurd apparatus. The wheels will turn, but will run to no effect.”

How can planners know if the steel is better used in cars or trains? If there is no market for cars or trains, they are assigned by the government to citizens, and we have no mechanism of ascertaining how much citizens value them. On what basis should a central planner decide on the allocation? Under a market system, consumers buy cars and train tickets, based on their preference for the two, and private producers of cars and trains receive money that allows them to bid on capital goods. The highest bidder will be the capitalist who can use the resources most productively. The steel goes where it is needed the most.

Several socialist economists (if you'll excuse the oxymoron) accepted Mises' critique and reformulated their economic systems in ways that they thought would address it. They would move beyond the silly faith that expropriating capital owners would produce infinite goods, enough to allow everyone to take all that they need. They would also move beyond hilariously nonsensical ideas of an economy operating without money or prices, or one where prices are expressed according to the labor theory of value. Instead, clueless socialists like Oskar Lange, Abba Lerner and Fred Taylor argued that a socialist central planning board would order managers to assign prices to goods, observe the reactions of buyers and use trial and error to arrive at proper prices in the same way capitalists would: they would react to a surplus by lowering the price, while reacting to a shortage by raising prices. With this seemingly clever trick, socialist central planners could implement what they saw as the only important part of the market economy, and ensure the operation of their socialist plans. 

Lange, a Polish socialist economist and friend of Joseph Stalin who was at the forefront of the destruction of Poland's economy with his harebrained schemes even wrote of the debt of gratitude the future socialist utopia would owe Mises, for being the only person to draw their attention to the most critical aspects of a market economy, which their childish model has ignored.

“Socialists have certainly good reason to be grateful to Professor Mises, the great advocatus diaboli of their cause. For it was his powerful challenge that forced socialists to recognize the importance of an adequate system of economic accounting … the merit of having caused the socialists to approach this problem systematically belongs entirely to Professor Mises.”

The socialist detachment from reality was so severe Lange suggested building a statue of Mises in the Central Planning Board of the successful socialist state! Yet unfortunately the socialists had not learned Mises' lessons properly, or they would not have been so comically sure of their impending success. The socialist central planners' managers were not entrepreneurs. They did not have secure property in the goods which they managed, and they could not calculate the profits and losses associated with different lines of production. Even if they did have a market for consumer goods, the government would maintain ownership of capital goods, as that is the definition of socialism. Rational economic calculation cannot happen based purely on a market in final goods. Capitalists need to bid for capital competitively for its most productive uses to emerge, rewarding the successful capitalists and entrepreneurs with more capital, and punishing the unsuccessful with less capital. If all capital is owned by one entity, and it assigns it without the guide of market prices and calculations of profit and loss, capital cannot be allocated rationally. As Mises concluded:

“But the characteristic mark of the socialist system is that the producers’ goods are controlled by one agency only in whose name the director acts, that they are neither bought nor sold, and that there are no prices for them. Thus there cannot be any question of comparing input and output by the methods of arithmetic.”

Socialists have attempted various other tweaks to their system to address the fatal flaw Mises identified. One such choice involved using consumer surveys to understand what consumers would want, so as to inform the decisions of the planners. But survey questions in the abstract can in no way substitute for market decisions based on real world prices and scarcity. When asked for their choice of cars, most people will ask for Ferraris, Lamborghinis, and the most expensive car makers. Yet in the real world, the vast majority of people make do with Toyotas, Hondas, Kias, and the affordable options that meet their needs within their budget constraints. With no concept of opportunity cost, people demand Ferraris and Lamborghinis, but when opportunity cost is real, they spend hours carefully examining the differences between various Hondas and Toyotas.

The notion that market allocation can be arrived at by having managers treat the capital under their command as if it was their property and having consumers express their preferences in a survey is a notion so absurd it only serves to communicate the utter lack of comprehension of what a market economy is and how it functions. Economic decisions are only made in the context of scarcity, when each decision will carry with it a real cost and benefit that the decision-maker will experience in the real world. Without property, opportunity cost and real life consequences, socialist pretend-markets bear no reality to the real thing. As Mises put it:

“What these neo socialists suggest is really paradoxical. They want to abolish private control of the means of production, market exchange, market prices, and competition. But at the same time they want to organize the socialist utopia in such a way that people could act as if these things were still present. They want people to play the market as children play war, railroad, or school. They do not comprehend how such childish play differs from the real thing it tries to imitate.”

Modern economics & calculation

The idea that central planners could conduct economic calculation without private property is also untenable when one understands the dynamic and ever-changing nature of a market economy. The allocation of resources and capital for production is not a one-off decision which central planners need to get right once and then have their economy run on auto-pilot. The world is dynamic and ever-changing, and entrepreneurs are constantly discovering new ways of creating products, and consumers are constantly discovering new preferences for new products. The world is constantly changing, and uncertainty is ever-present. The capitalist entrepreneur is the most important actor in the economic system, as he stakes his own property on his ability to anticipate changes correctly. He is the force that affects change and creates economic reality. Modern economics' general equilibrium models are essentially worthless because they cannot accommodate a role for the entrepreneur, the one who shapes and creates economic reality. It takes economic reality as it is, ignoring how it came about, allowing no room for the process that will inevitably change it.

Modern mainstream economists have astonishingly managed to completely ignore Mises' critique of socialism, and to continue operating in the realm of Walrasian general equilibrium modeling of economic activity, a genre of literature that fits better in fiction shelves than it does in economics. Under this economic fictional framework, all economic data is known to all participants in the market, from tastes, to value scales, technologies, and available resources. There is a state of perfect competition between producers, and all managers have full knowledge of all prices. There are no entrepreneurs in the Misesian sense, only managers, and capital allocation is assumed given. In such a static and totally unrealistic world, modern find that economic central planning can work. Rather than a damning indictment of this entire approach to economics, somehow, economists find redemption for socialism in these entirely absurd models.

The general equilibrium is a mental construct abstracting from the real world to allow us to analyze it. It is purely theoretical. Of course calculation by a central planner can work in the general equilibrium theoretical model, that's what these models are made for. But that does not translate to calculation being possible in reality, as the real world is very different from theory. In attempting to project their irrelevant simplistic models on reality, modern economists are similar to a navigator who walks around a map in a second and concludes he could also walk around the territory in the map in the same time it takes him to walk around the map itself.

It is only by understanding the absurdity of Walrasian general equilibrium fetishism that one can understand the hilarious and scandalous track record of modern western economists in praising the economy of the Soviet Union. Paul Samuelson wrote the most popular economic textbook of the twentieth century, which has misled millions worldwide to believe in a socialist-Keynesian hodge-podge of confusion. The astonishing details can be found in "Soviet Growth and American Textbooks" a paper by David Levy and Sandra Peart. The authors Levy and Peart studied the different versions of Samuelson’s textbook to find him repeatedly presenting the Soviet economic model as being more conducive to economic growth, predicting in the fourth edition in 1961 that the Soviet Union’s economy would overtake that of the United States sometime between 1984 and 1997. These forecasts for Soviets overtaking the United States continued to be made with increasing confidence through seven editions of the textbook, until the eleventh edition in 1980, with varying estimates for when the overtaking would occur. In the thirteenth edition, published in 1989, which hit the desks of university students as the Soviet Union was beginning to unravel, Samuelson and his then-co-author William Nordhaus wrote:

“The Soviet economy is proof that, contrary to what many skeptics had earlier believed, a socialist command economy can function and even thrive.”

Nor was this confined to one textbook, as Levy and Peart show that such insights were common in the many editions of what is probably the second most popular economics textbook, McConnell’s Economics: Principles, Policies and Problems, as well as several other textbooks. Any student who learned economics in the postwar period in a university following an American curriculum (the majority of the world’s students) learned that the Soviet model is a more efficient way of organizing economic activity. Even after the collapse and utter failure of the Soviet Union, the same textbooks continued to be taught in the same universities, with the newer editions removing the grandiose proclamations about Soviet success, without questioning the rest of their economic worldview and methodological tools. ((This paragraph draws heavily on the text of The Bitcoin Standard, page 159.))

The effects of entrepreneurial investment

The process of economic calculation in an entrepreneurial market economy has several important economic consequences. The most obvious and notable is that it increases the productivity of capital investments. Entrepreneurship brings the benefits of specialization and the division of labor to the process of capital allocation and use. It allows savers to become capitalists by delegating the entrepreneurial and managerial functions of capitalism to others, thus encouraging more saving and more investment, lowering interest rates. The increase in saving and investment results in an increase in the length of the processes of production, by making capital available for progressively longer periods. The increase in capital also results in a wider variety of goods available, and the constant invention of new goods and methods of production.

The competitive free market in the ownership of the factors of production will also lead to increased productivity by constantly rewarding the more successful entrepreneurs while punishing the less productive. Entrepreneurs profit from their entrepreneurship, but their profits are generally fleeting, as they are subject to competition from other entrepreneurs who can bid up the price of factors of production.

Capitalist entrepreneurship leads to sustained increases in real wages, as more capital and more efficient capital allocation increases the productivity of labor. While wages would increase in real terms, they are likely to decline in the long run in nominal terms, as increased production of all goods will likely result in a drop in their nominal prices, compared to money, which the market selects as a good that is hard to produce. 

Capitalists do not necessarily benefit from capital accumulation. There is always a risk of loss. And if there is a profit, the market will soon start to eat it away. The higher profits will inevitably accrue to the workers and landowners, whose wages and rents will continue to rise to match their increasing productivity. Entrepreneurship is not fun and games; it involves far more uncertainty than labor. It is entirely understandable that a large number of people prefer labor to entrepreneurship. Labor can be very rewarding, and involves far less risk.