American Entrepreneur

The Fascinating Stories of the People Who Defined Business in the United States

 American Entrepreneur

Authors: Larry Schweikart, Ph.D., Lynne Pierson Doti, Ph.D.
Pub Date: September 2009
Print Edition: $29.95
Print ISBN: 9780814438596
Page Count: 544
Format: Paper or Softback
Edition: Paperback edition
e-Book ISBN: 9780814414125

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Excerpt

CHAPTER 1 Entrepreneurs: The Essence of Enterprise

Sometime in 2001, shoppers began to see an odd sight: Kids in malls

would appear to walk a few steps and then strangely seem to glide on

their heels. A closer look revealed they were wearing “Heelys,” athletic

shoes with wheels in the heels. Heelys are the brainchild of Roger

Adams, who invented the shoes while taking time off with “a midlife

crisis.”1 Adams was a manager who was constantly on call and “totally

burned out,” and he was on vacation at Huntington Beach, California,

in 1998 when he saw kids going up and down the sidewalk on their

inline skates. Suddenly Adams had the idea for a combination shoe and

skate—a shoe that could roll on command when the wearer shifted

body weight. He cut up some Nike running shoes, put some skateboard

wheels in the back, and a prototype was born. Adams started his company

in December 2000, went public in 2006, and sold out his stock in

hours. In June 2007, Heelys, Inc., was worth $800 million and was number

one on BusinessWeek’s list of “Hot Growth Companies.”2 Just getting

to that point was a journey of its own: On his way to Texas to meet

with an investor, his car was rear-ended and caught fire. His prototype,

his business plan, and even his clothes were in that car. A short time

later, however, the son of a patent attorney showed Adams’s promo-

tional film to a friend, whose father was a venture capitalist.

Impressed, the father backed Heelys. The product had “arrived” when

former Los Angeles Lakers star Shaquille O’Neal ordered a pair of the

shoes in size 22 and R & B star Usher appeared in a music video wearing

a pair.

Business historians will look back at the introduction of Heelys and

ask why they were developed. While the answer may seem obvious to

some people (okay, some young people), historians often make the

obvious complex. For example, Adams claimed that he harkened back

to the fun of his childhood, but did he contrive the recollections of his

youth as a justification after the fact? Did vast, sweeping social forces

make 2000 “the right time” for such an invention? Did Adams perceive

great profits and leave other, unrelated work to create his product? In

short, does the economy operate from entrepreneurs upward or from

large invisible forces downward? And what is the role of success in creating,

and sustaining, business?

To understand how success and failure, birth and death are essential

to the entrepreneurial process, it is necessary to ask yet another set

of questions. What is it that entrepreneurs do? How do they differ from

managers who oversee an existing business? How do other people,

even others around the world who have no awareness of entrepreneurs’

efforts or specific businesses, benefit from entrepreneurs’ successes?

Perhaps more important, how do those same people benefit

from entrepreneurs’ failures?

This book, while tracing the history of American business from its

European origins to contemporary times, will examine these questions

through a focus on entrepreneurs. To a considerable extent, this book

is a celebration of entrepreneurs and entrepreneurship. We do not

intend to delve deeply into the contributions of labor or on the social

forces that shaped labor movements. Instead, the entrepreneur, and

those forces that directly affect entrepreneurs, will receive central

treatment. At the same time, defining entrepreneurship has proved

more difficult for economists and business historians than might

appear at first glance, and that definition has expanded or changed

over time. We have therefore chosen to examine the context in which

the concept of entrepreneurship appeared in a comprehensive framework.

It begins not with a businessman, but with a professor at the

University of Glasgow, Adam Smith.

ADAM SMITH, ECONOMICS, AND ENTREPRENEURSHIP

The essence of entrepreneurship is capitalism, an economic system

elaborated by Adam Smith in his famous book written in 1776, An

Inquiry into the Nature and Causes of the Wealth of Nations.3 Smith

did not invent the market system: He only laid out in a systematic form

an explanation of economic practices as old as time itself. But Smith is

worth examining in detail at this early point for two reasons. First, his

theory is as valid today as it was in 1776. Challengers still remain, but

increasingly they have retreated into debating the effects of capitalism

on spiritual grounds, where proof is impossible and faith is essential.

Second, Smith’s explanation of human behavior is particularly important

to the point of this book: entrepreneurs and their contributions.

Adam Smith explained economic wealth creation as a process of

making products or providing services with the goal of personal gain.

For most people, gain means material gain. It must be remembered that

in the eighteenth century, most people had so little that material gain

often meant survival for yourself and your family. In that context, aside

from those dedicated individuals on the planet entirely motivated by

religious, ideological, or artistic factors (Mother Teresa or Tibetan

monks come to mind), people operate to a substantial degree out of

concern for material gain. Even for Mother Teresa or Tibetan monks,

Smith’s “rational self-interest” could be a motivation. After all, if you

are absolutely certain that there are rewards to come in heaven or in

the next life, wouldn’t a few more “good deeds” be worked into your

schedule? (Of course, in some poor countries, becoming a monk can be

a path to a better material life, too.) Certainly some individuals crave

power instead of wealth, but usually the trappings of power include

most material goods, including houses, transportation, food, and personal

assistants. Other people want fame, but fame, too, usually produces

wealth as a by-product, making it difficult to separate a desire for

one from the other. Whatever the case, a good rule of thumb for life is

that when people say they are “not in it for themselves,” watch out!

They are in it precisely “for themselves.” Smith understood that rational

self-interest was the most important motivating force in the world

under normal conditions. More important to Smith, he observed that

society as a whole benefited and improved materially as individuals

pursued self-interest.

Critics of capitalism have viewed this as a paradox: How can society

thrive if the key economic tenet is self-interest? Perhaps it cannot;

but Smith never equated self-interest with selfishness. Instead, he saw

capitalism as a moral system. Smith was a man consumed by moral

questions. His previous book, A Theory of Moral Sentiments (1764),

established his view that self-interest was a guide for empathetic

humans who could not know what was best for others, because they

did not have access to “the big picture.” The market system, or prices,

ensured that individuals, each person acting according to this internal

mechanism, would behave in a way that would ensure the outcome

best for all. Although Smith sought to explain the overall functioning of

the economy—really, as a capstone to his broader discussion of morality—

he did so through analysis of individual markets and examples.

Thus his famous quotation: “It is not from the benevolence of the

butcher, the brewer, or the baker that we can expect our dinner, but

from their regard to their own interest.”4 People are “encouraged” to

serve others in a market system. Because he already had written extensively

on morality, Smith assumed that the reader already would have

grasped the spiritual elements of his economic theory. Thus, the references

in Wealth of Nations to “self-interest” were intended to describe

an element of human psychology that ensured people would respond

to the needs of others.

Smith thus began his investigation with the “natural wants” of people,

and noted that the range of human wants made people dependent

on the labor of others. This resulted in a division of labor that made

capitalism especially vibrant. Any person, he theorized, could perform

almost any labor to one degree or another. As he put it, “By nature a

philosopher is not in genius and disposition half so different from a

street porter, as is a mastiff from a greyhound.”5 However “no one ever

saw a dog make a fair and deliberate exchange with another dog,” in

spite of the obvious advantages the above-mentioned dogs might have

in joining their resources to increase their consumption possibilities.6

To Smith, then, it did not seem logical for every person to try to do

everything (farm, build, philosophize, and so on), but rather to specialize

in what the person did best, to maximize the return, allowing others

to do those tasks they did better. This resulted in more total production,

but also made people dependent on others. Self-interest was what

made people pay attention to the desires of others and ensured that

that dependency could not be ignored.

But while division of labor was a key element in capitalism, Smith’s

theory consisted of far more. He observed that self-interest created

competition between people, either to produce goods and supply services

on one side of the equation, or to acquire goods and services on

the other. Human nature meant that people thought highly of themselves,

regardless of religious training or government suasion.

Individuals therefore tended to ask for as much payment as possible for

their own labor and sought to purchase goods made by others for as little

as possible. Or, in Smith’s vernacular, “sell dear, buy cheap.” Smith

realized, however, that everyone could not “sell dear” and “buy cheap”

simultaneously. This observance eventually led to exploration of the

role of the entrepreneur. Instead of pursuing that concept, Smith went

on to explore the nature of value and price. Smith noted that because all

sellers wanted high prices and buyers wanted low prices, it caused competition

to appear, creating a market wherein all goods and services

would reach a specific price. Thus, he introduced the supply-and-demand

model now considered so essential to economic understanding.

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