Should entrepreneurs want to make money or a difference?

By Tim Worstall , written on April 28, 2014

From The News Desk

We economist types are routinely derided for being obsessed with money -- for knowing the price of everything and the value of nothing. I plead guilty but not for the reasons you might think. For what we're really saying is that making money is the evidence that you're making a difference. At least, making money as an entrepreneur is. There are method, like rent-seeking, which do bring the cash rolling in but do so by screwing things up for everyone else rather than adding to the pleasures of their lives.

Chris Klundt, of StudyBlue, has something of a moan over at VentureBeat:

The more we prioritize scotch, yoga classes, and lots of cash, the easier it is to forget that we came here to make a difference in the world. If you’re 22 and everything’s handed to you on a platter, are you really motivated to remedy the ills of the average American in “flyover” country? Would you really commit to working on a tough societal problem when you could build a disappearing-selfie app in 48 hours and sell it for a few million?

Entrepreneurship shouldn’t be a get-rich-quick scheme. We should apply ourselves to things that are uplifting — education, healthcare, whatever enables us to be our better selves — rather than to things that just entertain us or make life moderately less uncomfortable. That means peering outside our privileged bubble and thinking longer-term than our current culture of quick gratification has conditioned us to. Rather than engaging in the compensation arms race, let’s refocus on what really matters.... If what is important to you is that those problems in flyover country get solved then by all means concentrate on trying to solve those problems. However, those with the economists' secret decoder ring will point out that earning a few million here and there is the evidence that you are in fact solving a real human problem.

For there's a couple of foundational things that economists tend to believe. The first being that utility functions differ. The precise package of desires and wants that make up each individual human being is different. Sure, there are some commonalities: pretty much all of us like sex (although there are the asexual) pretty much all of us like bacon (but see vegetarians and vegans) and so on. But the 300 million people of the US desire at least 300 million different packages of all of the delights that the world does and might have to offer. I, like just about everyone who writes for a living, would be bereft in a world without beer but enough Americans thought that was such a spiffing idea that you actually voted to bring in Prohibition. Utility functions do differ.

The second foundational belief is in revealed preferences. This is that you shouldn't pay all that much attention to what people say, or how they vote. If you really want to know those utility functions then you need to watch what people do. As with Prohibition, maybe it did get voted in but tens of millions immediately started going to speakeasies.

Using just these two concepts we can now work out whether we are in fact solving real world problems with our entrepreneurial efforts. For if people start throwing money, or perhaps even just attention, at our products then we must be, by the revealed preferences of those users, be offering something that offers them utility. It might be that you or I don't think that a disappearing-selfie app offers the world much value but there are tens of millions of users out there who disagree. I can't see the point of Facebook but at least a billion people disagree with me and who on Earth is it that finds utility in Simon Cowell? But for all of these things we have direct evidence that some human need is being served by them.

Klundt is right in that the simple pursuit of money isn't quite the point of it all. But that people are willing to offer it to you for a product or service means that they themselves value what you're offering. Thus the very success of a product means that a real world human problem is being addressed. However absurd the thought may be that WhatsApp is "worth" $19 billion, that half a billion people use it shows that, well, half a billion people value it.

[illustration by Brad Jonas for Pando]