March 15, 2013 • No 309 | Archives | Search QL | Subscribe



The Ongoing Saga of State-Subsidized Entrepreneurship
by Harry Valentine

Entrepreneurs are people who develop ideas that offer some form of benefit to a community. Our early ancestors made tools that assisted them in their search for food. At that time, groups of men cooperated in using tools to hunt animals and to fish in order to feed a community. Entrepreneurial thinking produced the early waterwheels that drove stone wheels to help grind grain into flour. It produced a screw mechanism that was driven by a draft animal to raise water to higher elevation to assist in irrigation of crops.

It developed water-based transportation where a draft animal could walk along a riverbank while pulling heavy loads placed onto a floating raft. It developed oars and windblown sails with which to propel watercraft and allowed people who lived far apart to engage in peaceful trade. The history of entrepreneurship is one of innovative people usually working on their own and using whatever resources they had available to develop tools that multiply the productive effort of people working individually or in organized groups.

While one school of thought classifies entrepreneurs as being risk takers, another school of thought sees them as people who minimize risk as they develop something useful. Until very recent times, entrepreneurs mainly used their own resources to produce something that would reduce effort or increase the output of that productive effort. During the 19th century, other private people began to assist entrepreneurs in their creative and productive pursuits, by providing some form of private capital.

The innovative thinking and productive effort of privately funded entrepreneurs produced innovations that greatly increased the productive output of slaves, to the point of making slave ownership uneconomic. During the days of sail powered ships, one slave working a manually driven sewing machine could sew as much sail as 100 slaves working with needle and thread. On the cotton farms, two slaves working with a cotton gin could separate as much cotton from cotton plants as 50 slaves working by hand.

By the early 20th century, the technology that powered a major segment of the world economy was the result of innovative thinking by privately funded entrepreneurs. During the post WWII industrial rebuilding of Germany and Japan, private initiative achieved far more than state-funded economic programs. German Chancellor Ludwig Erhard allowed a free market to prevail, with spectacular results. In Japan, the ideas of industrial theorist W. Edwards Demming guided the development of major industries that were privately funded.

During the period following WWI, the governments of several countries began to entertain the idea of state-sponsored scientific research. The period that followed saw privately funded research competing with state-funded research in such areas as energy conversion and transportation technology. Over the short term, the products of state-funded research seemed to have gained a competitive edge in the marketplace, only to be eclipsed over the longer term by products that were the result of privately funded research. But such results did not deter state officials from allocating funds toward state-funded research and development.

Beginning during the early 1970s, Canadian officials offered government funding to companies that were willing to set up shop in economically depressed locations. There was an abundant of takers that remained in business until the government funding expired, producing a multitude of short-term successes with very little in the form of successful long-term results.


“During the period following WWI, the governments of several countries began to entertain the idea of state-sponsored scientific research. The period that followed saw privately funded research competing with state-funded research in such areas as energy conversion and transportation technology.”


Beginning during the mid to late-1980s, government officials initiated a new program to encourage people to start up and run their own businesses. Many colleges received funding to provide training to all comers who were interested in starting and running small businesses. The programs were similar to the business management training programs offered privately by companies like McDonald’s, at ‘Hamburger University,’ where most of the graduates actually went out to start and run successful fast food outlets. The state-funded program produced fewer people who started and ran businesses that lasted over the short term.

During the early 1990s, government officials in both the USA and Canada were impressed by the success of privately funded high-tech and dotcom businesses in the telecommunications, information processing and computer sectors. The then-head of the US Federal Reserve, Alan Greenspan, believed that he could manage the money markets so as to divert funding into the information and telecommunications sectors, to “create a perpetual economic boom.” He had been acquainted with several free-market economists and believed that he understood the dynamics that led to the stock market crash of 1929 and the Great Depression that followed.

Greenspan was convinced that he could accelerate the pace of development in the information and telecommunications sectors over the long term and without causing an economic downturn. Both the USA and Canada allocated massive amounts of state funding into the high-tech and dotcom sectors. There was a boom in state-funded high-tech and information sector entrepreneurial development. But state officials were unaware that the excess infusion of state funding also initiated a boom in malinvestment in the high-tech, telecommunications and dotcom sectors. The high-tech boom culminated in a meltdown that devastated that economic sector.

Over the past several years, governments have allocated massive amounts of funding to the renewable and green energy sector, with the intention of producing new employment opportunities. But much of the green tech sector depends on government subsidy while it produces only a miniscule fraction of total electrical power generation, and does so at elevated prices. Government officials still administer a program that provides state funding to interested entrepreneurs who are interested in starting small businesses, with people connected to the public sector serving as partners and as mentors.

At the present time, a few state-subsidized entrepreneurs are running businesses that appear to have been operating with some success over the short term. But it is the long-term result that matters. Most of the small businesses that have succeeded over the long term seem to have begun with private funding. During an earlier period of higher interest rates that may actually have reflected activity in an unfettered economy, people who provided the private funding scrutinized both the business plans and the personalities of the prospective entrepreneurs. Candidates had to measure up in both arenas.

Government officials who during an earlier era administered programs for then-US President Lyndon Johnson’s “Great War on Poverty” were under pressure to produce results. Over the short term, they produced results to suggest that the program was working. During this era, government officials may be under pressure to produce results over the short term. They may be willing to entertain entrepreneurial candidates whose business plans and/or personalities may not stand up to the scrutiny of private investors. But past experience has shown that government-funded programs only produce spectacular results over the short term and not over the long term.


Harry Valentine is a free-marketeer living in Eastern Ontario.


From the same author

University and College Graduates Seeking Professional Appointments
(no 308 – February 15, 2013)

Idle No More and the Destruction of Canada's First Nations
(no 307 – January 15, 2013)

Water Fluoridation and the Tyranny of Forcible Medication
(no 307 – January 15, 2013)

The Benefits of Private Initiative During Times of Emergency
(no 305 – November 15, 2012)

Governmental Undermining of Spirituality and Self-Reliance
(no 305 – November 15, 2012)



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