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Entrepreneurship 101: The Malefic Strangers And Their Evil Net

A business in your neighborhood fails. What and whom do you blame? Some blame poor management, poor products, poor marketing, or poor customer service. Others blame the entrepreneur’s recklessness, ignorance, greed, or undercapitalization. Still others blame the predatory dog-eat-dog character of the competitive marketplace – corporations devouring one another, especially during economic downturns.

The truth is that every company ultimately dies. Why? The metaphysics of failure is simple: Everything that issues from the perishable is perishable; and everything that has a beginning has an end.¹ This is the incontrovertible fate of all human enterprise. According to this logic, of Gnostic origin, not even the greatest companies can be spared.

The entrepreneur is an optimist. He must be, if he wants to create wealth. To succeed he must know how to compete, grow his business, and survive. His dream weaves liberty, independence, adventure, conquest, and riches. His intention is always clear: The capitalist rose must bloom.

Unfortunately, the entrepreneur seldom reflects upon the dark side of business life -- the tribulations and ultimate death of his enterprise. Why should he? For answers, I consulted the philosophical-religious sources. These offer the deepest insights into money matters.

But who are these "strangers"? I will unconceal their identity for you, but first, allow me a detour.

In Ethics, Aristotle wrote: "[T]hose who follow illiberal occupations, like . . . moneylenders who make small loans at a high rate of interest; for all these receive more than is right, and not from the right source. Their common characteristic is obviously their sordid avarice . . ."⁶ [my emphasis].

In The Wealth of Nations, Adam Smith wrote that landlords "like all other men, love to reap where they never sowed"⁷; that industry benefits the rich and powerful⁸; that merchants and manufacturers extort legislation in support of "their own absurd and oppressive monopolies."⁹ "When the law does not enforce the performance of contracts, it puts all borrowers nearly upon the same footing with bankrupts or people of doubtful credit . . . The uncertainty of recovering his money makes the lender exact the same usurious interest which is usually required from bankrupts."¹⁰

Joseph Schumpeter was a minister of finance in Austria and a Harvard professor. In Capitalism, Socialism and Democracy, he wrote: "The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and 'expropriates' its owners, but in the end it also ousts the entrepreneur . . . "¹¹ [my emphasis].

The "strangers" are thus usurious, avaricious, oppressive beings. They masquerade as meritorious moneylenders, merchants, manufacturers, landlords, bureaucrats. They may be strangers to you, if you are a new entrepreneur or a new investor, but not to the marketplace -- or to mammon, its deity.

During recessions, moneylenders can destabilize small and midsized firms with ease.

As I discussed in my earlier works¹², the chain of causality of the boom/bust cycle is simple – unfortunetaly, its motivation is cleverly concealed from the masses.

There are many species of boom/bust cycles. I will focus here on two: the first drives the economy or an economic sector, the other the stock market. The stock market cycle is usually nested in the economic cycle. All boom/bust cycles have four phases with the following essential characteristics:

The entrepreneur must guard against two potential threats: "bank-induced risks"¹³ and "creative destruction."¹⁴

The clearest empirical evidence of bank-induced risks comes from Japan.

Suspension of credit accounted for 91.6% of all business failures in Japan during the period between 1980 and 1990.¹⁵ More distressing, Japanese statistics for 1979 indicates that 23% of the liquidations involved yakuza (gangsters).¹⁶

The most damning evidence of creative destruction comes from the United States and Canada. According to Schumpeter, the duration of the business cycle is about 9.5 years.¹⁷ Bankruptcy statistics for the most recent 10-year period for which we have data reveals the extent of the economic and psychic damage.

During the period from 1988 through 1997, the U.S. suffered 737,548 business failures.¹⁸ The number of U.S. non-business bankruptcy filings was 8,600,376.¹⁹ Canada, for the same period, registered 117,508 business bankruptcies and 559,955 consumer bankruptcies.²⁰ North America has become an economic war zone.

The historicity of the boom/bust cycle is always the same. The first-time entrepreneur cannot see around his corner.²¹ So sly "strangers" hide their traps accordingly -- around his corner. The assault on the entrepreneur's interests comes as a startling bolt-from-the-blue strike. And the perpetrators cover up their plunder with denial, denial, and more denial.

The lesson for the entrepreneur is clear: Before you write a business plan, before you raise capital, before you borrow, before you budget a single dollar, find all you can about the "strangers" – and how they can misappropriate, devour, or destroy what you want to create.

Caveat emptor is not enough. Replace it with Nietzsche’s admonition: "The market-place is full of solemn buffoons . . . They want blood from you in all innocence, their bloodless souls thirst for blood . . . Flee my friend . . ."²²

The laws of the marketplace are not like the laws of physics. For example, Hegel’s two states of being, being-for-self and being-for-another²³ have no analogs in physics.

In physics, electrons cannot dominate other electrons, deceive them, reduce them to servitude, or sell them. There is no vanity, lust, avarice, greed, or malice in physics. Physics deals with degrees of freedom, not with free will (at least not yet).

In the marketplace, a desperate mother can sell her children. Unscrupulous businessmen can sell contaminated animal feed, infected animals, or infected meat products (the recent spread of mad cow disease and foot-and-mouth disease in Europe has successfully destabilized Europe’s agricultural infrastructure). Clever brokers, at otherwise meritorious institutions, can manipulate stock prices. A media giant can peddle a writer’s work on the Internet for money without compensating the writer. A software monopolist can disable operating system features to destabilize his competitors, etc.

But legislation, like the laws of physics, has its own supralaws -- laws that govern laws. The primal supralaw of legislation is what perpetuates the Darwinistic net advantages of lordship over bondage. Thus, laws favor: the state over citizens; big corporations over small firms; lenders over borrowers, franchisers over franchisees; landlords over tenants; producers over consumers; HMOs over patients; employers over employees, etc.²⁴

The corroborating evidence of bias in the legislation and in the judicial system is overwhelming. In a study of outcomes of litigation in the United States, covering the period from 1870 through 1970, Stanton Wheeler et al. found that the net advantage of landlords over tenants was +19.2%, and of creditors over debtors, +9.4%.²⁵ The authors also found that the net advantage of big business was +6.4% and that of business proprietors was –5.4%.²⁶ 

The situation in Canada was much worse. According to Peter McCormick, the net litigation advantage of big business (banks, insurance companies, and major corporations) was +21.1%; of small and midsized enterprises, -4.8%; and of individuals, -7.2%.²⁷

It is not surprising that the probability of ruin of small firms in North America should be so great.

Justice (fairness) requires that people have "approximately equal power."²⁸ Today, the chasm in the powers and advantages of transnationals and small firms – and of universal banks and entrepreneurs -- is beyond the comprehension of most people.

There is a monstrous asymmetry in the advantages, powers, and jurisdictions of firms. The distribution of power in the marketplace is flagrantly biased – it favors the rich and powerful, it favors lenders over borrowers.

Large corporations lobby and buy access to legislators. They benefit from quantity discounts, economies of scale, tax credits, tax cuts, political favors, government subsidies, media coverage, negative option billing rights, police protection, litigation advantages, etc. Small corporations get the crumbs.

So what can you as entrepreneur do? Here are a few suggestions:

1. Become self-sufficient and autonomous – develop an aversion to debt.
2. Review the law, including the following Acts: The Truth in Lending Act; The Equal Credit Opportunity Act; The Fair Credit Reporting Act; The Fair Credit Billing Act; The Fair Debt Collection Practices Act; The Consumer Leasing Act; The Credit Repair Organizations Act; The Gramm-Leach-Bliley Act; and The Home Ownership and Equity Protection Act.
3. Become familiar with litigation – its techniques, costs, duration, and most likely outcomes.

4. Review the business news headlines for the last recession (use the Internet or visit your local library). Know and understand the history of the business cycle – discover its tricks, illusions, superstitions, and deceit. Know when, how, and why bankers are likely to freeze, reduce, or call operating loans. Then prepare for the coming recession.

5. Understand the practices and procedures of the marketplace. Minimize your risks. Before signing any agreement, know what can lurk around your corner.

6. Organize with like-minded people a political movement to eliminate the net advantages of lenders over borrowers in the constitution and in the law.

7. Most important, prepare a self-defense strategy and a plan for safeguarding the economic safety, security, and survival of you family.

References

15 Arthur J. Alexander. Managing Financial Distress in Japan’s Business World. Japan Economic Institute Report, 25, July 2, 1999, http://www.jei.org/Archive/JEIR99/9925f.html. (Business Failures in Japan by Statute and Process, 1980-98; cited sources: Teikoku Databank, Ltd. and Federation of Bankers’ Associations of Japan, for "suspension of bank credit.")