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Yes, Capitalists Are Brave Risk Takers

I saw this post by Chris Dillow (via Mark Thoma) making the argument that capitalists aren’t really brave entrepreneurial risk takers. Dillow is referencing the recent failure of City Link, a British courier company.  In the Dillow piece, he asks “who bears risk?” and goes on to argue that owners aren’t really the primary risk takers in a business leading to two very broad general conclusions:

First, it means that the idea that capitalists are brave entrepreneurs who deserve big rewards for taking risk is just rubbish. As Olivier Fournout has shown, the idea of managers as heroes is an ideological construct which serves to legitimate power and rent-seeking.

Secondly, it suggests that ownership might in some cases lie in the wrong hands. Common sense tells us that those who have most skin in the game should have the biggest say simply because they have the biggest incentive to ensure that the firm succeeds. As Oliver Hart – who’s hardly a raving lefty – says: “a party with an important investment or important human capital should have ownership rights.” This is yet another case for worker ownership.

Dillow bases these conclusions on the idea that “Most decent-sized businesses represent only a small fraction of a diversified portfolio for their capitalist owners.”  The only problem is that Dillow totally misrepresents the capitalist class. In the USA, as of 2010, there were 28 MILLION small businesses, and 18,500 firms with 500+ employees.  “Decent sized” businesses do not represent most business ownership. Even worse, 8 out of 10 small businesses fail within 18 months. The number of firms that ever grow to be a “decent size” are needles in our economic haystack.

This matters because Dillow’s demonization of capitalism is framing people’s perception of what it means to be a “capitalist”.  Capitalists are not comprised solely of billionaire’s and private equity firm owners who often do things that hurt little people (as appears to be the case in the City Link situation). More likely, capitalists are your next door neighbor struggling to start a small business or the small business owner barely making ends meet in an unusually difficult uphill battle.  And yes, these people are “brave entrepreneurs who deserve big rewards for taking risks”.

This sort of demonization of capitalism has become popular in recent years.  But I fear that these misrepresentations are often used as political tools where they’re not needed. One doesn’t need to demonize all capitalists to argue for government spending or “redistribution”. In fact, one just needs to understand that capitalism, if left to its own devices, can lead to inequality and monopolization because, that is the natural state of capitalism (to monopolize profits). Demonizing capitalists doesn’t move the discussion forward. And misrepresenting actually hurts your argument by discrediting it.