SOURCE: Reuben L. Norman Jr. Georgia State University, 1998
Figure 1.0 Kondratieff CycleAn economy is defined by two tiers; one comprised of older and/or larger and declining enterprises, the second a creative tier enabled by an enterprise society; one that nurtures entrepreneurship.
Existing businesses provide services and supplies to meet consumer and industrial demand. A family needs new shoes; a factory needs a new lathe, an institution requires an updated computer program. The degree to which these transactions take place is a reflection of the perceived state of the economy. If consumers are confident about their future, they buy shoes, perhaps more than one or two pairs. If the business believes a good market for its products is assured, it invests in more tooling and capital equipment to meet sales projections. If an institution anticipates growth it will improve operations to meet the needs of its constituency. In each case there is a forecast of future demand and individuals move to deal with the needs that might arise in the future. The mechanism at work is an endogenous, base line demand. Under static conditions the demand may level off and, excluding inflationary factors, maintain a somewhat balanced economy.
At work in the economy are five factors, land, capital, labour, entrepreneurship and knowledge. Under steady state conditions the first three are intrinsically at work since they are basic to the system. But growth is dependent on at least two additional factors, the creative inputs of the entrepreneur and the use and application of knowledge.
The heart of the economic process is the productive ability to provide goods and services in response to demand. Consumption is not a powering force of the economy; only production in response to demand is. But too there is a commensurate, equal anticipation of paying for the received benefits, which when retained within an economy serves to fuel the productive mechanism and enhance the economic output. Export of capital to satisfy consumption is a negative force within an economy.1 Nations may encourage the import of goods and services to politically satisfy a desire for lower priced goods. In the long run this, as with transfer pricing, removes capital from the system and restricts a nation's ability to sustain its own economy.
In this respect then economic activity is based on expectations and anticipations of demand, including trends that may be emerging or are already at work in the system. When these are satisfied with domestic productive means the economy is strengthened, reinforced and sustained.
Government can have an influence on the economy. Government cannot create an economy. Its real effect during static periods is usually only in respect to timing. Basic demand does not change in the short term. Government can "hurry-up" consumer spending or encourage business expansion with incentives and promises. But over the business cycle this action temporarily shifts demand around and any subsequent decline becomes that much more steep later on, or growth is less dramatic. However, if there are compelling trends that encourage growth and an increase in spending and business activity, then these can be 'ridden' as one would ride a wave in surfing.
A supportive environment and an enterprising community powered the Japanese economic "miracle"; its decline was a reflection of the business cycle and a fundamental absence of individual creativity. That nation's initial growth was launched on an efficient duplication of desired products, with technical improvements occurring in the manufacturing process. Its growth was not sustainable however since it lacked the culture that encouraged creativity within and external to the business organization in response to change.
The successful rebirth of most of the republics of the former Soviet Union is credited to a nurturing climate and enterprising people where individual initiative was encouraged and succored by the system once the oppressive yoke of a totalitarian regime was removed.2 The states that still founder are those that do not have a democratic culture or a history of free enterprise. Until they are able to foster and nurture an enterprise society they will experience many years of autocratic, institutional capitalism, the antithesis of an entrepreneurial economy.
By encouraging the population to exercise its creative drive, government can then truly assist in promoting economic growth. One such trend is the expansion of market opportunities on a global scale. Free trade and expanded trade agreements are the order of the day and access to markets, when truly multilateral and equitable insofar as employment content, and other factors, can be beneficial and stimulating.
When expectations and trends are positive, then basic demand increases and considered governmental intervention can be positive and effective.
The engine of an economy is fueled by demand for goods and services. In a steady state condition the demand is presumed equal to consumption and usage, notwithstanding the effect of market forces imposed on it by entrepreneurs and corporations.
But when change is introduced it has an effect on demand. When a new technology, for example, is introduced to the system then change occurs and new enterprise is created that increases economic activity. Or when a demand shift occurs in the population or new global opportunities arise, the economy has an opportunity to 'rev' up. Thus technology spurs economic growth. Global opportunities prompt expansion when products are domestically sourced. Growing populations fuel increased consumption and growth. The Silicon Valley phenomenon confirms the effect, as does the shift from an industrial age to an information age. Add to this the shift in population demand from a youth market to a "gray" market and the potential in demand becomes very important.
Three factors affect long-term economic growth:
Notwithstanding the economic fuel of a system, the direction that it proceeds along is determined by business leaders and, to a lesser extent, by governments. It takes people and an organization in some form to identify change and act accordingly to exploit it or avoid it. Governments do not manage an economy even as nations do not engage in trade. In both cases the events are directed by individuals in organizations who have or acquire a vision about the changes taking place and subsequently take charge of the direction. But the emphasis is on the cooperative individual.3
Historically most large organizations have been, and remain, slow to adapt or respond to change; the larger the bureaucracy — the smaller the response to change; the greater the decision-making hierarchy the slower the response to change. And most large enterprises are not creative; one half of all conventional inventions were developed by small firms and individuals and ninety-five percent of all radical inventions were discovered by individuals and small firms.4 Bell Labs may have invented the transistor, but individuals, entrepreneurs, developed the technology that exploited the science of the semi-conductor and created Silicon Valley.
The pilots of an economy have two characterizations. They are captains of industry who may be said to sail huge liners across wide oceans, or entrepreneurs who fly through time and space into new dimensions of economic development.
An enterprise economy is one that encourages the exploitation of technologies, emerging trends and global situations. At the centre of the process is the entrepreneur. An economy has its genesis in the demand in the system, latent and otherwise. But there is little significant growth in the economy until change is responded to by an individual who seeks to satisfy the created demand. To boost an economy one must encourage two activities. The first is to create access to markets and an environment in which the flow of information, the play of market forces and the satisfaction of business goals are relatively unrestricted. Red tape, political manipulations, excessive taxation and other impediments serve to drag on the enterprise process.
The second activity, and most important, is to encourage entrepreneurship in the community. Recent experiments and newly applied, practical models have established the effectiveness and the efficacy of the entrepreneur in a less than stellar economy.5 Individuals do make a difference.
Creative entrepreneurs working in an encouraged environment can power significant increases in an economy.
Israel Kirzner, noted entrepreneurial economist,6 argues that an economy is subject to market forces and does not necessarily respond to supply side economics. As noted earlier, the principle drivers of an economy are the demand expectations of a population, augmented by trend shifts, changes in technology and global market access, all being exploited by an entrepreneurial class. In the first case it appears that established and often larger, firms satisfy this basic demand. In the second case, new firms and responsive, creative elements in existing firms perceive new opportunities in the market and through new methods and technologies initiate new enterprises to exploit those opportunities.
Thus there is a dynamic at work that adds motion to the function of an economy. Companies are seen to proceed through a life cycle from birth to decline.7 New firms are born of new technologies or opportunities. They rise in strength and power in response to market forces and soon reach a position of maturity at which point competitive forces impose on them the need to improve productivity, to become efficient and to reduce costs. The ensuing programs to cut costs may include heavy capital expenditures for new processes and equipment, but ultimately expresses itself in the decline of the numbers employed in the firm. The downsizing in America during the latter part of the 20th century eliminated over fifty million permanent jobs.8
The compensating activity, born from the technologies of the Information Age, biology, electronics, medicine and nanotechnology to name a few, compensated the prior losses as declining industries cut costs and improved productivity. These new, innovative companies redefined the economy and created a new class of labour, the knowledge worker.
Larger enterprises, particularly those with commodity type products are able to globalize their reach and become even larger, at least for a period of time. The expansion of soft drink, fast-food chains, and other consumer goods is a mark of the effort to extend the life of products about to reach their mortality. Unless innovation is applied to these items, thus increasing their value, they will in time decline.
What transpires then is a continuous process of innovation and improvement to products and services in response to competitive pressures and market demand. New firms or divisions in existing firms create new products to meet demand, they progress through a life cycle to a point of maturity, they may be recycled for a time, and they decline. In most instances the growth of the economy is based on new venture formation.
A general model can then be expressed as a reflection of these factor events. Firstly, as demand is stimulated by access to expanding markets, for example, which leads to aggregate increases in incomes, there is a multiplicative effect that improves economic activity. The results of increased revenue can be immediate, depending on unused capacity in the system. The anticipation of future improvements is heightened, but this too may not have a direct result. Rather there is a time lag between the realization of revenue at the till and the increase in activity of the means of production which then creates wealth.
The impact of new technology can be more immediate. In this case the means of production and certain consumers are compelled to apply new technologies as an investment in the future. Under these conditions the effect goes directly to the means of production and stimulation takes place. Finally, in responding to these changes the individual, the entrepreneur, increases his activity through new venture formations, financial investments, production9 and increases in employment. These factors then combine to establish an appraisal of the growth economy as follows:
Change in Economic Output or Economic Velocity, (V):
ΔVe =ƒ(ΔDi*ΔPi), ΔT, ΔE)
Di = demand for new goods in region i, including global markets
Pi = purchase-ready population in region i, including markets
T = Technology, knowledge
E = Entrepreneurial activity
The effect can then be included in a general model whereby the economic condition of the state can be described as:
€= GNP [1 + Ve]
In the static economy the demand remains comparatively constant or at least as much as incomes will allow. The demand factors then remain consistent or begin to decline due to a reduction of aggregate incomes which, in combination with a diminishment of entrepreneurial activity leads to a decrease in the value of change in economic activity, Ve, signifying declining economic activity.
Now, given the repositioning of large enterprises to cost reductions and operations that stress productivity, the short-term effect is a decreased or at least static GNP with declining employment. Without the offset of dynamic entrepreneurial activity, through technology or expanded market opportunities, the economic contracts and declines. In the period 1969-1976 large companies created less than 20% of the employment in America, for example. In 1980-1997 during a period of extreme downsizing large corporations eliminated 5 million jobs in the US. But in the same period new venture startups created 34 million jobs. Thus in time, without offset of significant entrepreneurial turbulence as Joseph Schumpeter would have it, total market demand would decrease, aggregate incomes decline and a recessionary cycle would begin.
SOURCE: Reuben L. Norman Jr. Georgia State University, 1998
Figure 1.0 Kondratieff CycleIn a generalized sense the positive-negative acceleration induced in the model is seen to associate with the Kondratieff long cycle. In this model as new technology gains a footing and broadens the business base, the economy experiences an increased velocity and positive growth. The period 2000 to 2020 promises an accelerated period of technological growth, which is presumed to initiate a strong level of economic turbulence and commercialization.
St. Vincent and small economies suffer a shortage of fuel for their economies. In the agricultural era they subsisted on export of raw material, sugar, fruit, fish and resources such as bauxite. In the industrial era they continued to provide raw goods, augmented by tourism and travel. However, these aspects no longer provide sufficient fuel to power their economies and in many cases the trend is not positive
Consumers in the smaller nations continue to demand imported goods even though there is less National Income to counter the cost in terms of value added export opportunities. Commensurate with this trend is the fact that aggregate incomes may also decline, because of job elimination in moribund industries, as in the export of sugar and fruit crops plus the effect of employment inequity in traded goods, inducing a sharper decline in activity and a deeper recession. Thus the economic velocity of the economy is retarded and decline continues.
Nor does the heavy reliance on external sources of income from tourism or international banking expatiate economies except as short-term answers. Typically these activities are characterized by lower income opportunities for these nations with less commensurate revenue from taxation.
What smaller nations require is an access to entrepreneurial opportunity. Technology trends do promise certain prospects for growth as would access to expanded markets and demographic shifts. Unfortunately smaller economies lack a skilled technical and entrepreneurial class to exploit the trends. Nor do smaller economies have the larger market mass to support a critical productive base. Some promise does exit in certain import replacement programs. Macro-enterprises may be stimulated to satisfy basic demands in food goods, craft ware and apparel. But these will not be sufficient to improve a hard-pressed economy.
Economic improvement can emerge from two events for example, one long term and the other more immediate. In the long term the creation of a viable free trade market, promised by Caricom, would develop larger markets that would encourage larger sale manufacturing facilities for consumer goods.10 A rationalized agreement among members could produce an allocation of production facilities at strategic islands, St. Vincent included, that would be competitive and add to the economic wealth of the region. This provides a long-term environment for entrepreneurial activity.
On the shorter term there is immediate opportunity in exploiting North American trends in retirement and perhaps education. Millions of 'boomers' are beginning to retire and consider life style options. One typical area is that of providing retirement facilities in response to this trend. Affordable housing, for example aimed at attracting individuals with retirement incomes of $30,000 plus each year would create a pool of economic opportunity. Two thousand retiree families would provide employment in support services for upwards of two thousand individuals and more in home services, retail services and health care.
How then might Caribbean governments act to begin the stimulation of an economy at rest or one losing its position on the international market? The focus should be on providing access to markets, an enabling environment, with a free flow of information and individual incentives. Key among the following propositions is the aspect of dramatically reversing public attitude and overcoming cultural barriers to the entrepreneurial process. The following items serve as discursive propositions regarding an economy in search of positive transition.
- Proposition 1: Develop entrepreneurial education programs in schools, colleges and universities. Include Small business development centers and Venture Programs
- Proposition 2: Provide mandated enterprise & entrepreneurship awareness programs for governmental employees.
- Proposition 3: Conduct an active publicity program apprising the population of the importance of an enterprise society
- Proposition 4: An economy can be improved through the creation of opportunity analysis programs that identify market opportunities for entrepreneurs and small businesses. Individuals in Caribbean nations do not have access, nor in some cases the research qualifications, to initiate new venture development.
- Proposition 5: An economy can be improved where individuals have access to technologies that may be applied to local markets and trade areas. Development of technology transfer stations allowing entrepreneurs and businesses access to technology and encouragement to market commercialize these initiatives.
11- Proposition 6: Establish opportunity identification programs in Tourism that stimulate the creation of end destination products, value added experiences and extended stay packages.
- Proposition 7: Establish global opportunity identification programs to encourage export activities abroad for local producers.
- Proposition 8: Develop community based entrepreneurship development that would interface with the preceding programs and existing businesses to encourage the growth of entrepreneurial individuals.
CAPITALIST An individual who has acquired a significant or large amount of capital, or one who acts as an agent for one who is a capitalist; one who is motivated principally to preserve the financial status quo and to use their capital to generate more capital; typically assumes a corporate or big business position; an entrepreneur who has arrived.
CAPITALISM The system of institutions, enterprises, organizations, processes and government that respond to the purpose of the capitalist in preservation of assets, maximization of earnings, the avoidance of risk and the encouragement of a monopolistic position in the market.
ENTREPRENEUR The individual who creates an economic enterprise, system or agency that provides something of value to society; one who seeks independence, self-achievement, self direction and personal satisfaction from a created enterprise; one who creates something of value and establishes an economic component in society; the nouveau riche.
SMALL BUSINESS An established enterprise that satisfies particular market demand in society; a surviving business startup; a franchise; an enterprise that:
- is owner-operated.
- is not dominant in its field of operations,
- typically with sales under $5 million,
- includes home-based businesses, farmers, and fishers.
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© Ken Blawatt, 2003.
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