The American economy has had the fastest and most dramatic development of all the world's major economies. Four hundred years ago, the economic output of the area that became the United States was negligible by world standards. Yet only 250 years later, the U.S. economy had become the largest in the world, surpassing all other countries, including those that had a head start of thousands of years, such as China and Britain. And since that milestone in the mid-1800s, the U.S. economy has grown by about 50 times, remaining well ahead of economies such as Japan and Germany that at times appeared to be closing the gap.
This is too long and consistent a record to be a matter of happenstance. Nor can it be explained, as some have suggested, by the fact that the United States has had a rich endowment of natural resources. Americans have made good use of what nature has provided--the deep topsoil of Iowa, for example--but large areas of the West (witness Wyoming) do not receive enough rain to grow anything other than sagebrush. And the areas that Americans have now made useful are comparable newcomers. For thousands of years they lay idle, because people did not know how to put them to work. These resources became productive only within the broader pattern of human energy and ingenuity that was driving the entire economy.
The critical factor that explains America's exceptional growth is human creativity. The only force that could have enabled people to find productive uses for resources that had previously lain idle is knowledge. And knowledge has to be created by people--people known, in this role, as entrepreneurs. Entrepreneurs are the specialists who focus on innovation, developing new products and services and expanding the supply of resources that people can use to produce more of what they value.
Much of this effort is incremental and thus not obvious, but it can cumulate into huge increases over time. Innovation is seldom a Eureka experience in which the new product appears full blown. More typically, success requires the entrepreneur to work through several iterations in an effort to smooth out the multiple connections that innovations almost always require. All these steps require numerous trials, and the output at each point along the way has to be adjusted to other components in the process. In fact, the organization that will deliver the new product or service may itself have to be reshaped. The automobile, for example, required gas pumps, service hoists, and the stores, each of which dictated new retail outlets.
Everyone assumes that entrepreneurs are motivated by money, and of course the prospect of making money does provide an important incentive. But other motives are also important. Innovators also enjoy creating productive solutions that provide better services for others. They enjoy solving problems and creating new organizations, within which they and their associates often establish something akin to family relationships. Interests of this sort help to explain the large amount of successful innovation that occurs in nonprofit firms, the arts, and other sectors where participants do not expect to earn much income, even in return for important advances.
The motivation of entrepreneurs is often misjudged in another respect as well. One familiar characterization of entrepreneurs is that they are risk takers--people who thrive on big projects and uncertain outcomes that most folks cannot stomach. But it is a mistake to view entrepreneurs as flat-out gamblers who just throw the dice. Most entrepreneurs assume no more risk in launching their initiatives than an average person does in the course of everyday routines.
This point becomes clear when we look closely at how entrepreneurs work. Risk is a result of what you know and control. Most of us would consider jumping out of an airplane in flight to be very risky, but skydivers who understand parachutes and jump procedures consider the activity fun--they pay to do it. …