During President Obama’s much-criticized “you didn’t build that” speech last month in Roanoke, Va., his main point seemed to be that if you are successful in business you didn’t do it alone. He apparently wanted to point out that government, at the very least, gave the businessperson a helping hand and, in fact, might be ultimately responsible for his or her success. In other words, “Come on, successful businessman, give credit where credit is due.”
An aspect of Obama’s statement that hasn’t gotten the attention that the “you didn’t build that” comment did is his remarks about people who work hard and who are smart. Two comments stand out. Directing his comments toward successful businesspeople, Obama stated first that “You think you’ve been successful because you work hard; a lot of people work hard” followed by “I’m always struck by people who think, well, it must be because I was just so smart. There are a lot of smart people out there.”
In fact, he was undeniably right. There are a lot of hard-working, smart people who have not been successful in business — or possibly anything else. I have known many smart and talented musicians, for example, who practiced their instruments four to five hours a day for years and never made it to Carnegie Hall. In fact, they have struggled just to make ends meet.
Since roads and infrastructure are universally available to all, they can hardly explain why some are more successful than others. While working hard and being smart may be important ingredients when it comes to success in business, these are not the essential prerequisites. And the fact that President Obama doesn’t understand what these prerequisites are goes a long way toward explaining why his economic policies are not succeeding.
The two most important ingredients for success in business are entrepreneurial insight and the willingness to take serious risks. These are innate qualities in a person and are not observable or measurable.
Before a potential businessman puts any money or effort into a new business or product line, he has to have some feel for whether what he is considering is something consumers will actually purchase from him at a price that will more than cover his costs, i.e., generate a profit. This is the essence of entrepreneurial insight. Those who, for whatever reason, possess better insight in this regard will have a better chance of succeeding, i.e., being profitable.
The landscape is littered with failed businesses and business models where what were first considered to be accurate insights about consumer wants and costs of production proved to be a mirage. And since all perceived entrepreneurial insights are ultimately guesses about the way events will unfold in the future, and the future is always uncertain, to pursue those guesses is usually extremely risky. Unless the potential entrepreneur is willing to take those risks, hard work and smarts are meaningless. This is what separates people who work hard at their jobs and are intelligent from the person who is successful in business. Such success will never materialize unless these two personal characteristics are present.
Obama’s profound ignorance of the nature of business influences his entire perception of economic growth and what causes it. Lately, as part of his campaign rhetoric, he has taken to claiming that economies grow, not from the top down — a complete misrepresentation of those who support across-the-board income and capital gains tax cuts — but from the middle out. Economic growth apparently starts with the middle class.
This entire class-based framework of analysis is false. Economic growth occurs from the entrepreneur/risk taker forward. It is about individual initiative, not economic class distinctions. The reason why tax cuts aid this process is that they allow these entrepreneurs and risk takers to reap a greater proportion of the rewards from their efforts, thereby encouraging the growth-enhancing activities that generate those rewards.
Obama’s tax and regulatory policies, including and especially Obamacare and new environmental regulations, are having the opposite effect, raising the costs of entrepreneurial activity and reducing the rewards. Until tax and regulatory policy trends of the last four years are reversed and entrepreneurs and risk takers are put at the center of our understanding of what generates economic growth, the economy will not, and in fact cannot, recover.
Roy Cordato (@RoyCordato) is Vice President for Research and Resident Scholar at the John Locke Foundation.