Successful Entrepreneurs Can Harm the Free Market

Entrepreneurship is an essential element for a society’s enduring prosperity. Entrepreneurs, who lead the expansion of private capital investment, promote production and saving, and bring about greater social wealth, clearly often serve as the vanguard of a free-market economy and a liberal society.

Accordingly, many liberals praise entrepreneurs and entrepreneurship. Through her novel *Atlas Shrugged*, which depicts a world in which entrepreneurs go on strike, novelist Ayn Rand pointed out the greatness of entrepreneurship as well as the problems of government and of citizens imbued with anti-business sentiment. In the case of liberals active in Korea, they generally admire the pioneering spirit and capabilities of the first-generation entrepreneurs who successfully ran companies such as Samsung, Hyundai, LG, and POSCO during the period of rapid development and led our country into the ranks of the world’s top 10 economies.

Of course, it is true to some extent that thanks to the efforts of those first-generation entrepreneurs, our country achieved this much success in the 20th century despite obstruction from anti-market dictatorial regimes. This is because economic development is always accomplished only through the expansion of productive private capital investment and saving, while government always serves only to destroy the economy. The uncomfortable truth, however, is that first-generation entrepreneurs did not always operate purely within a market economy, nor did they build large conglomerates solely through their own abilities. Korea’s chaebol conglomerates clearly expanded the capital they needed by using government power to exploit small and medium-sized enterprises and the property of the people.

A series of anti-market forces that seized the state through military power selected certain firms that colluded with them and granted them benefits and subsidies unavailable to other firms. The chosen companies, too, secured their advantage by bribing and lobbying the dictatorship, revising laws and regulations in directions favorable to themselves, or pressuring rival firms, thereby creating conditions that would not have been possible in a normal free market. As this “government-chaebol collusive relationship” became semi-permanently entrenched, firms were able to continue inefficient investment while maintaining market dominance under government protection, and the government, for its part, was able to prolong the life of the regime.

Some scholars explain this as a kind of economic miracle resulting from “government-business cooperation” and “concentration of economic power.” However, according to Austrian economics, which today explains the market economy with the strictest and most consistent logic, government intervention in the economy always creates malinvestment or else is entirely unproductive and merely wastes assets. Moreover, government intervention in market competition distorts the course of the economy in ways consumers do not prefer, ultimately bringing about declines in productivity and quality of life.

In other words, government intervention in the economy, across all times and places, “always and everywhere” produces only negative results. If so, our country’s growth was, simply put, a matter of good luck. Because private society continued to generate enough strength to offset the inefficiencies produced by the powerful statist collusion between government and chaebol, Korea was able to achieve quantitative growth far surpassing that of similar states in the same period; it did not grow because of the capabilities of the government or of the chaebol conglomerates colluding with it.

To borrow the terminology of Austrian economist Murray Rothbard, our economy is not the result of “economic growth” but of “coerced growth.” In an economy, quantitative aspects matter, but qualitative aspects matter as well. Korea is now suffering the side effects of qualitative development failing to keep pace as a result of forced quantitative growth. Quantitatively, Korea has an economy ranked among the world’s top 10. This means that our available capital and labor are relatively above the world average. Yet we are unable to use that quantitative abundance efficiently, which is, of course, an inevitable result of the state-directed economic system formed by past dictatorial regimes and chaebol conglomerates. The labor market is highly rigid, and as the wage gap between small and large firms, as well as the quality-of-life gap between regular and non-regular workers, has become extreme, voluntary unemployment among the young continues. Because sustainable survival in the market is in effect impossible unless one is a large corporation, the reality Korea now faces is a quasi-rationing, quasi-socialist economic system in which nearly all small and medium-sized enterprises survive on government subsidies.

Some forces in our society ignore these bleak aspects created by statism and focus only on the visible results of quantitative growth. They praise only certain capabilities of the first-generation entrepreneurs who colluded with the government, or they criticize the pessimism of young people who point out structural social problems, responding: “We are this materially abundant in quantitative terms, so what on earth is the problem? It is the poverty and destitution of your spirit that make you unhappy. ‘Hell Joseon’ is a fiction.” But in light of the Austrian explanation above, such an attitude can be seen as, at the very least, inconsistent with the free market and the liberalism that supports it. The qualitative inefficiency of the Korean economy is extremely serious, and one of the causes that produced it cannot but be identified as the first-generation entrepreneurs.

Entrepreneurs always seek the highest profit at the lowest cost. For such entrepreneurs, colluding with the government is a very attractive option. Competing fairly in the market and gaining an advantage over others requires extreme effort and investment. But what is government, or the state? It is a kind of monopoly institution that monopolizes law and force within a given territory. Despite certain institutional constraints, government or the state is always the most dominant institution in any society. Becoming close to a government that possesses such powerful authority and using its power is clearly highly desirable from the entrepreneur’s perspective. This is because it takes less investment and yields greater results to seduce the government and use its power to crush competitors than to compete in the market.

So long as government intervention in the market economy exists, entrepreneurship will always be tempted. Entrepreneurship that succumbs to that temptation does not serve the market economy but instead serves the government and the state, harming the market economy. As we reflect not only on the positive legacy left to us by the first-generation entrepreneurs but also on the negative and uncomfortable truths, we need to consider what institutional improvements are necessary if entrepreneurship is to produce beneficial effects for the market economy going forward.

This remark by Professor Yongduk Jeon, one of the consistent defenders of the free market, clearly offers insight into the direction in which we should improve our institutions: “Korea achieved economic growth despite state-led export-oriented industrialization. In other words, although state-led industrialization caused much inefficiency and waste of resources (through business fluctuations and the like), private capital investment, saving, workers’ long hours of labor input, high levels of education (which is the investment of capital at the individual level), and the entrepreneurial spirit of businesspeople (investment in semiconductors, investment in shipbuilding, etc.), all of which greatly exceeded those costs, brought about a high rate of economic growth.”

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Original title: 성공한 기업가는 자유시장에 해악을 가져올 수 있다

Author: Kyeong-hun Kim

Date: 2020-03-13

Source: https://www.cfe.org/bbs/bbsDetail.php?cid=free_opinion&pn=15&idx=22475