Free Markets Need Principled Entrepreneurs

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Growing discontent with economic conditions, even in the midst of unprecedented prosperity, is palpable in developed nations. There is a sense that even with healthy GDPs, the middle class is stagnating and our major cities are declining. We are frustrated by the dishonesty, exclusion, poverty, environmental degradation and social decline we see in our own communities and eager to make a change.

Because decline has happened gradually, citizens of Western nations may still think of the current system as unregulated free markets, but the reality is that cronyism and corruption abound. Lobbying, over-regulation, unnecessary licensing, and other processes are routinely used to stifle free competition and shut new-­comers out of the market. This market distortion hurts us all, but it especially affects the poor by excluding them from prosperity. It makes a zero-sum game out of what could be a win-win system. Freedom, competition and access are being lost. Yet, too often pundits blame the “free” market.

It is noble to want to do better. In blaming free ­markets, however, we are misdiagnosing the problem and stand to destroy the most effective engine of ­human prosperity and flourishing ever devised.

Markets bring dignity

Over the last 30 years, my career has taken me from all over Europe, to the United States and the developing world. I have experienced the highs and lows of the free economy, a good share of corruption and cronyism. While frankly acknowledging its potential for abuse, I still remain a champion of free and competitive markets. Not only does the free market deliver prosperity, it offers people the freedom necessary to pursue the goods of the human spirit, thus finding deep meaning and dignity in their everyday work and relationships.

The market cannot function in isolation, however, but must be supported by the rule of law, viz by robust legal institutions which don’t play favorites and keep the playing field level. Liberty and free markets also rely on a healthy civic culture that fosters habits of mind, such as honesty, goodwill, community spirit, and a sense of fair play. It is not the freedom of markets that we need fear, but rather the loss of market freedom as the decay of our legal and civic spheres gives rise to crony capitalism, which in turn is causing economic stagnation and breaking down societal trust. People and markets thrive in a climate of hope and trust. Nothing crushes both faster than cronyism, which creates a ­multi-tier system of justice and the dispiriting feeling that the deck is hopelessly stacked.

I was born in Lucerne, Switzerland, and, after a stint in the Swiss Guard, arrived in the US at the age of ­twenty-two. A college there gave me a scholarship even though I could not speak proper English. Later, I worked in Boston as an unpaid intern at an early internet startup – though I knew nothing about computer software. I was eager to learn, and helped bridge the personal computer to the internet, bring speech recognition to the market, and make website content easier to manage. I rose quickly through the ranks, admiring a system that encouraged and rewarded my hard work, spirit of ­service, and risk tolerance. I grew personally, gained ­experience and friends, mastered new practical skills, and learned to shoulder responsibility. I point this out because it’s a mistake to evaluate what people gain from markets solely in material terms.

«This is just how business is done»

But I’m under no illusion that people always use their freedom well. Simply having freedom in the market creates a just society. I lost millions of dollars when one of the companies I helped build was defrauded in a bad sale. When I asked one of the fraudsters how he could do this to us, he looked me right in the eye and said, “It’s nothing personal. This is just how business is done.” The memory still freezes my blood, and the experience left me questioning the legitimacy of the market economy. Was the market, the world of entrepreneurship, exactly what its critics said: a kind of wild West, where the rich and powerful did what they liked with no regard for justice or the less well-connected?

Deeply stung by what had happened to me, my first instinct was to seek refuge in a highly regulated system. I thought that government intervention could prevent such a thing ever happening again and provide more fairness for all. However, I have many friends who fled socialism and speaking to them about their experiences dampened my view of central planning. Then, in the early 90’s, business travel brought me to several of the former Soviet states and I saw firsthand the desperation, poverty and deadened spirits the state-run economy created.

«Nothing enervates a company culture faster
than high ideals in the mission statement
and their violation in the boardroom.»

As I continued to seek answers, I agreed to lead a business strategy company and spun it out as an in­dependent company focusing on emerging markets. We researched and worked with private companies in places like Brazil, Jamaica, Macedonia, Serbia, Rwanda, Viet Nam, and Afghanistan. This experience gave me a window into key differences between developed and emerging economies and peoples. It opened my eyes to the cronyism that has corrupted the most affluent economies, and the dampening effect this has on economic development and human hope. It also showed me that free markets require legal as well as cultural support in order to function properly.

This soul-searching and study renewed my confidence in and commitment to the market economy. It is the system that best supports human flourishing and freedom, harnesses ingenuity, and more reliably serves the common good than any known alternative. This goodness, however, is the function of something deeper than business strategy or regulation. The market will only be as good and as free as the institutions and ­people that undergird it.

The “friend” who told me that defrauding my colleagues and me of our company was “just business” was deeply wrong. But I can understand why he thought so, given the way we portray business in popular culture and train future leaders in business schools. Even the current passion for business to “give back” implies that something has been unjustly taken away. Business schools teach strategy and tactics, but not the “why” of business and its potential contribution to the creation of stable family and community structures and public trust.

At the core of this issue is our culture’s perception of the deeper purpose of business and the economy. If we don’t start teaching that the best business leaders build for the long term and are conscientious, ethical, and capable of self-restraint, we’ll continue asking for trouble.

Corruption is a human temptation

The critics of capitalism sometimes speak as if dishonesty and greed appeared only in free economies – as if socialist and under-developed economies were not rife with corruption and avarice. The truth is that cronyism and corruption are human temptations, and our highly developed Western legal institutions will not save us if we degrade them by our own corruption. It requires a healthy culture to foster citizens who can readily resist such temptations.

In the developed nations we are quick to shake our heads at the corruption that often impedes third-world nations: bribery, nepotism, extortion. We are less keen to police or even see our own corruption: not only pollution and exploitation, but artificial distortion of markets, rent-seeking, and the cronyist collusion between government regulators and businesses that locks out the very newcomers we say we wish to lift out of poverty. The political structures and laws that we put in place make genuine inclusion impossible.

Even our efforts to “fight” poverty are infested with this cronyist mentality. Rich Western countries tell the poor Global South what they must do to earn their aid and create prosperity. Freedom and entrepreneurship are usually not on that menu – especially if it would mean granting access to our own markets. Yet when entrepreneurs in emerging markets are given the freedom to create, they generate lasting prosperity in their communities.

My friend Iqbal Quadir, founder of Grameenphone, helped me see this. While cell phones are practically ubiquitous now, thirty years ago they were not. His is a classic example of how entrepreneurs in a market economy anticipate new possibilities and help bring these about.

Quadir’s strategy was to connect hundreds of thousands of previously excluded low-income people to the global economy by putting simple cell phones in their hands. Grameenphone is a great free-market success story. It swelled the per-capita income and the GDP of Bangladesh. It also opened new markets for Telenor, the Norwegian telephone company. This is the kind of “win-win” solution the free market uniquely can make possible because it affords freedom to entrepreneurs and their communities to act on their ideas.

Our usual approach to “helping” the poor through economic development is very different. In emerging markets, most development experts are suspicious of entrepreneurs like Quadir and condescending about the abilities of people in poor nations. They prefer “managing poverty” to unleashing the power of free actors in a free market. This is perhaps the worst manifestation of Western cronyism: our approach to the developing world is supposed to help the poor but actually profits from their poverty.

Still, corruption is inevitable. I was once asked to pay a bribe to close a sale with a major national European telephone provider. It was, I was told, “standard procedure.” However, after a long and difficult discussion our team just couldn’t live with the bribe. We were so proud of our technology that we felt violated and ­refused to “pay to play.” That particular sale was lost, but we still eventually became the market leader. This gave me hope that overall, the market is still free enough to allow the best products to win eventually.

«In emerging markets, most development experts
are suspicious of entrepreneurs like Quadir and
condescending about the abilities of people in
poor nations.»

Why can we not tell more stories of entrepreneurs and business people upholding and celebrating competition and fair play, even at the cost of personal short-term benefit? Think of Bill Gates saving Apple from ­going out of business, or the founder of the US food company Chobani Yogurt giving his employees 10 percent of the company to keep the ownership structure productive and employees focused. A mentor of mine, Art ­Ciocca of The Wine Group, abolished sales commissions and incentives. Instead, he created a plan for each person in the company to benefit from joint success. And, of course, there is the Elsener family at Victorinox who avoided layoffs during the greatest crisis in their company by subcontracting their workers out and making up for the salary difference if the temporary work didn’t match what they made at Victorinox. The company came back stronger than ever and had the most productive and loyal employees.

The five pillars of Principled Entrepreneurship

Those kinds of stories, at least as common as the tales of corruption and cronyism, deserve more of our attention and praise. The question I wrestled with was: How do we create a system that gets the best of the free market and prosperity for billions of people without descending into the temptation of cronyism?

«Every person in a company is a creator
to be treated as such, rather than as
a mere means to an end.»

I think a good start is to practice and teach Principled Entrepreneurship. The freedom in free markets is an issue of the heart. Sound laws and policies are essential and foster trust when they treat rich and poor alike. But no law or policy will ever be able to fully compel the kind of fair play and goodwill that a healthy culture ­creates. Culture is formed in families, schools, churches, communities and associations. The business community can do its part in creating a positive culture by teaching and achieving all that it is capable of. In my book “The Art of Principled Entrepreneurship”, I define five pillars that help foster companies that create long-term, sustainable value and eschew rent-seeking and cronyism:

1. The Economy Exists for People, Not People for the Economy: The essence of business is captured in the phrase “How may I help you?” By asking customers this classic question, a good business puts the human person at its center. It adds value for its customers and does so profitably through the work of its team. That is its raison d’être. Business must create goods which are truly good and services which truly serve.

2. To Work Is to Create; to Create Is to Be Human: Creativity is not the sole provenance of the artist or musician. Invention, ingenuity, cheerful service and creating profitable solutions to customer needs are overlooked forms of human creativity. Work has the potential to make us more human. Every person in a company is a creator to be treated as such, rather than as a mere means to an end.

3. Culture Eats Strategy for Breakfast: Culture is what we do when no one is looking, when virtue signaling is over and the “real” work begins. There is nothing more important to the long-term success of a company than a strong, sustainable culture. But beware: your cultural values aren’t printed in your mission statement. They’re what you actually do. Nothing enervates a company ­culture faster than high ideals in the mission statement and their violation in the boardroom.

4. Principled Entrepreneurs Always Seek to Create Win-Win Solutions: As the Grameenphone example shows, the economy is not a zero-sum game. In a free market, the lasting path to prosperity requires considering long-term self-interest. Principled Entrepreneurs thrive on fair and open competition and win-win relationships, giving everyone access to opportunity and ­allowing for different outcomes that promote the common good.

5. Always Think Like an Entrepreneur: “Entrepreneurship” is a mindset more than a role. Principled ­Entrepreneurs exist at all levels of a company and in every type of organization. What sets them apart is that they are always creators, not harvesters. Harvesters are short-term thinkers who focus on anything that will make them look good or make them money now. Creators have the mindset of constant improvement. They create successful product portfolios and brands that stand for superior value.

Free markets are part of an ecosystem. They depend symbiotically on free institutions and free, ethical people who recognize the human person as the center of the economy. A culture that conveys to each generation anew that investing in persons is the only opportunity that yields infinite returns.