Why Capitalism and Entrepreneurship are Declining | A Small Business Perspective
Let’s start with the basics and build from there. At the very basic level, capitalism is an economic system in which a country’s trade and industry are controlled by private owners for profit. Whereas socialism puts control in the hands of the state (government) with a goal of providing for the common good.
These ideals of profit vs common good seem to be in constant tension in our society. Sometimes a sole pursuit of profit can lead to abuses. A few examples of abuses include deceptive marketing practices, a total disregard for team members’ well-being, price gouging and a disregard for the community & environment. On the other hand, the incentive of profit can lead to wonderful innovations, job creation, efficient operations and taxes to support government services.
From an accounting standpoint, we understand that business profit equals revenues minus expenses. Capitalists seek to maximize profits by increasing revenues and decreasing expenses. Do individuals seek to maximize profits also? Adam Smith, most noted for authoring The Wealth of Nations, also wrote The Theory of Moral Sentiments. One interesting theory is that, as human beings, we are driven by self-interests, but also have empathy towards others. As with the tension between capitalism and socialism, we have tension between self-interests and empathy towards others.
This self-interest leads individuals to desire goods and services at the lowest price possible, including free. Much like the capitalist-business owner seeks to decrease expenses, so do individuals. Individuals also look to increase their revenues through a raise in pay, unionization, labor strikes or seeking a job that pays more. Even those that work for non-profits seek increased revenues for themselves. From the self-interest standpoint, most all of us are capitalists.
Empathy for Others
We all have some level of empathy for others. This is shown in both individual and business giving to worthy social organizations and taxes to support government programs. What is interesting is that this giving comes partly from the profits generated by businesses and individuals. In this way, capitalism helps to support the common good. The tension is usually around how much of an individual’s or businesses’ profits should be given. If too much is mandated to be given, then the incentive of innovation, risk, personal growth and profit decreases.
As another example of the tension between self-interest-profit and empathy, consider the plight of a mom & pop retail establishment. Perhaps their business was wiped out by a mega retailer. While we have empathy for this small business, we choose the lower prices offered by the larger businesses. Our self-interests have trumped our empathy.
Why Capitalism and Entrepreneurship are in Decline
With those thoughts as our foundation, let’s consider possible reasons for a decline in capitalism and entrepreneurship. According to this article from Inc Magazine, there are a few possible reasons. I will focus on a few and give possible solutions.
The Effect of Large Established Businesses and Access to Capital
We should applaud these large businesses for their growth. However, their dominance can snuff out smaller businesses. This concentration can lead to lower levels of small business creation, growth and innovation. The larger businesses have been known to use the data and ideas of smaller businesses in an unethical manner. Further, when a large business uses a small business as a supplier, they often pay in terms of 90 to 120 days. This practice takes capital away from the small business.
To see this effect on cash flow, please view this one-minute video.
Being more ethical and paying in a timely manner would help smaller businesses survive, grow and innovate. The money trapped in smaller businesses’ accounts receivable could help solve the “access to capital” issue. Larger businesses need to stop using smaller businesses as a source of short-term financing.
Risk and Innovation
According to the article, risk avoidance is an issue. In fact, the article states “while technology is young people’s oxygen, risk may be their carbon monoxide”. All must understand that risk is a part of capitalism and entrepreneurship. Proper planning and research can greatly increase the chances of success.
Smaller businesses should think creatively and provide new products and services. In terms of marketing, think outside the box of large social media companies and search engines. Those companies offer marketing pathways, but other techniques may also be beneficial.
We should each have an honest look at our self-interest vs empathy tension. Perhaps we can search a little deeper for products and services. You never know. You may find a valuable innovation offered by a smaller business that may become a larger business someday.
We should each consider using some of our profits to support worthy social causes and support our communities.
Smaller businesses and entrepreneurship are a major part of capitalism. Their decline will leave our markets in the hands of a few in private industry and the government. This will lead to less competition, innovation and capitalism.