Causes of Wealth of People: Principle and Process of Entrepreneurism

By Zhao Yanchen

Based on ten years of study, ten years of entrepreneurial experience
and a further ten years of research, Zhao Yanchens Causes of Wealth
of People lays out a comprehensive theory of entrepreneurship while
at the same time serves as a practical guide for the entrepreneur.
First published in China in 2004, this new English edition is the first
translation of the book to ever be published. Analyzing all phases of
business from project selection through operation and sales, and
equally at home discussing the benefits and necessity of the free
market and the Tao of an enterprise, the book provides novel and
valuable insights on entrepreneurship from an Eastern philosophical
perspective.

• Language: English
• Publisher: Xlibris US
• Release date: May 21, 2013
• ISBN: 9781483624136

Zhao Yanchen

Mr. Zhao is a successful serial entrepreneur and not an academic. Indeed, one detects what might be interpreted as disdain for academics in the field of entrepreneurship. As I understand it, he simply feels that time would be better spent or invested obtaining practical, in the field, experience rather than in a classroom. Despite that attitude, Mr. Zhao has attempted to convert his practical experience into a lesson plan for entrepreneurs and wannabe entrepreneurs. If one can abide by the concept that reading a book is more like fieldwork than classroom work, then his lessons are somewhat like the meetings of other entrepreneurs who share their lessons learned in the field.

Book preview

PART ONE

THE WAVES OF THE CENTURY

The major trends of societal development influence every individual within society; the main stream of societal life determines every individual’s way of life. What is China’s trend for the new century?

Stepping across the threshold of the new century, people face many prophecies, some of which may well turn into mere jokes when we look back at the present one hundred years from now, much the same way we now look at the prophecies from one hundred years ago. However, what remains quite certain to us is that we are all still humans, that we still have our human nature, and that the market economy based on human nature remains the same. The natural eternity of human nature and the social eternity of the market economy reveal some basic contradictions—the factors that have been playing a crucial part in defining people’s social activities for generations.

It is exactly these contradictions that compose the main theme of societal life, which define the major trend of societal development—namely, private-sector large-scale entrepreneurial activities in the agricultural, industrial, service, scientific, and educational sectors, etc.

This will be the most significant social practice, the most universal form of societal life, and the most prominent social phenomenon of the century. It has been created and is ready to unleash its tremendous energy, with its momentum as strong as the surging tide of the Qiantang River. It is as necessary as the return to the ocean of a thousand streams and is the wave of the century, which will fundamentally transform China and impact human society.

CHAPTER 1

HUMAN NATURE PLUS THE MARKET DETERMINE THE ETERNAL THEME OF ENTREPRENEURSHIP

How do we increase individual wealth? This chapter illustrates that while the desire to pursue one’s own interests is a common nature shared by all, people tend to be entrepreneurial under a market economy. This is because the market economy makes it possible to increase wealth through entrepreneurial investment.

1. Human nature drives investment

What is human nature? The multidisciplinary, common conclusion is that the pursuit of self-interest is the starting and ending point for all human behavior and is the ultimate goal for human mental and physical activity. Then what are the interests? The classical explanation is the realization of the needs. It means to acquire and to satisfy one’s own needs. What are people’s needs? According to Maslow’s hierarchy of needs theory, needs, to different people, are demonstrated at different levels. There are basic survival needs, and there is the highest level of needs for realizing one’s own value. Therefore we may reach such a conclusion: the pursuit of satisfying one’s needs is human nature. This nature will not change with the turn of the century. Adam Smith said it best: The desire of bettering our condition… comes with us from the womb, and never leaves us till we go into the grave. In the whole interval that separates those two moments, there is scarce perhaps a single instant in which any man is so perfectly and completely satisfied with his situation as to be without any wish of alteration or improvement of any kind. But how to improve one’s situation? The most obvious and most common-sense way is to increase wealth.

The nature of satisfying one’s own needs cannot change; however, the means through which wealth is increased are closely tied to a society’s political and economic system. Different political and economic systems can produce differently oriented interests, which determine that the motives and goals of pursuing interests may have a variety of options. A good system is able to regulate people’s choices, leading to the growth of societal wealth, the improvement of people’s cultural qualities, the promotion of national strength, and the progression of civilization. The market economy is indeed such a system. On the contrary, the feudal political hierarchical system channeled the entire energy of increasing wealth toward the pursuit of political or governmental posts because having the title equaled achieving the wealth. People in such systems advocated the idea that academic excellence is the ladder to higher titles, whereas titles led to a hundred thousand silver coins. Such a feudal political hierarchical system provided the environment where people tended to dedicate their youths and even their entire lives and energies to the war of bureaucracy and fighting for the official posts to the extent of economic decline, political corruption, and almost the destruction of the whole nation.

The market economy and bureaucracy are incompatible with each other. When we consider the different regions in China over the past thirty years of the country’s reform and opening up to the outside world, we see a strong negative correlation between economic development and bureaucracy (i.e., the stronger the market economy in a region, the weaker the bureaucracy, and vice versa). In the intertwining relationship between the two, the permeation of the market economy plays a dominating role in that the development of the market economy is bound to fundamentally change people’s value orientations, guiding their pursuit of self-interest toward the market and entrepreneurial behavior. For anyone with a normal psychological development, a sound personality, and an ability to think rationally, the most important choice is to realize self-benefit and satisfy his various needs through entrepreneurship.

2. The market pulls investment forward

All the great achievements we see in China today are courtesy of the ever-evolving market economy. We, like most other peoples on the planet, have returned to the natural route of the market economy. Its rationality, eternity, and unfailing vitality stem from the environment it creates for the satisfaction of individual needs. Everyone in a market economy has the right to make full use of their resources, along with freedom of choice and the right to life and development. At the same time, the market economy regulates the combination of individual interest and societal interest—that is, the premise of satisfying the individual needs is to create a certain demand for the society. Therefore, every effort involved in satisfying the individual needs also promotes the overall societal development. The market economy is the perpetual motion machine for economic development and social progress and an irreplaceable economic system for the combination of individual and societal interests.

The combination of individual and societal interests is the combination of human nature and the system. At their intersection, how are these interests connected? Usually it is through entrepreneurial investment. Anyone, even if merely to make a living, would try his or her best to increase income using part of their existing property. The laws of the market economy make it possible for entrepreneurs to make a profit through entrepreneurial investment. Entrepreneurship becomes a port where the individual and society combine, a way to motivate and utilize an individual’s total wisdom and potential. Meanwhile, it is also a channel for society to pay back the individual contribution. Entrepreneurialism, like the links connecting locomotive cars, connects the individual with society and propels the economic train to roar forward. In a market economy, especially one supported by a legal system, A man must be perfectly crazy who, where there is tolerable security, does not employ all the stock which he commands. Who said he must be perfectly crazy? It was the Englishman named Adam Smith.

3. Wealth depends on investment

Your family’s chickens lay one hundred eggs per year. You ate fifty of them—consumed. The remaining fifty are used to hatch more chickens—invested. The situation for a family and for a nation is the same, where part of the produce is used for investment in order to increase wealth. Therefore, part of the current wealth has to be set aside for expanding production in order to increase wealth. This expansion is investment. The amount of investment generally determines the increased scale of production and, furthermore, the increased volume of final product, as well as the level that societal life is elevated. In short, investment determines economic growth for either a family or a society.

The economic sector where government directly invests is relatively stable and limited in a nation that adopts a market economy, which is obviously determined by the limited government role in a market economy. The main body of investment in a market economy can only be private wealth, private equity capital, professional financial capital, or other forms of capital based on private wealth. In this way, every single individual forms the main body of investment. As Adam Smith pointed out, The uniform, constant, and uninterrupted effort of every man to better his condition, the principle from which public and national, as well as private opulence is originally derived, is frequently powerful enough to maintain the natural progress of things toward improvement.

CHAPTER 2

THREE MAJOR CONTRADICTIONS DETERMINE THE MAIN TREND OF ENTREPRENEURIAL INVESTMENT

Understanding the major trends of societal development is a prerequisite for selecting individual development goals. Forewarned is forearmed, which here means that being able to foresee and follow the major trends lays a good foundation for success. The direction of societal development is continually constrained by various contradictions, big contradictions, which are those big problems, big difficulties, and big risks that are widespread and long term. Discovering these kinds of contradictions is equivalent to knowing the trends. Since these kinds of contradictions must be faced and solved no matter what, the methods, processes, and consequences of the solutions forge the major future trends. Therefore, it is the contradiction that defines the trend. So what kinds of major contradictions do we face? How do they define the future development trends?

1. The inevitable trend of the free labor group

Today, China is experiencing a tremendous and unprecedented evolution. People have summarized this evolution from a variety of perspectives: a planned economy evolving into a market economy, a closed nation evolving into an open nation, from rule of man to rule of law, from identity society to contractual society, etc. The most fundamental and influential evolution, among all others, is the emergence of the free labor group, which is ever increasing. This presents not only the largest change of all changes but also the most prominent phenomenon of all phenomena. It will impact the entire society—every aspect of politics, economics, culture, and education.

The free labor group first emerged from the stratification of social classes. This stratification began in the early 1980s, gradually expanding in scale and becoming very intense and universal at the turn of the century. Following a bitter struggle for survival, like a flood, waves of farm laborers migrated from the land—black, yellow, and red land—to the cities. There were also nearly fifty million city workers who became unemployed due to economic restructuring and reform of state-owned enterprises. As significant as this number is, it is only the beginning, as larger scale stratification is still in progress. As grim as this situation is, these people comprise only a small portion of the free labor group.

The largest source of the free labor group is the newborn population. From a historical perspective, social class stratification is simply a momentary phenomenon. Speaking of this stratification in regard to the whole entity in memory when the memory no longer exists in the overall memory, when this new generation becomes the main body of society and is no longer connected with the past whole entity, there will no longer be any so-called stratification. Therefore, stratification is relative to the past social class, past social status, and past stability of society. Likewise, when we look into the future, say thirty or fifty years from now, the great stratification so named by current sociologists will be considered merely an interim phenomenon. As time goes by, the individuals split from the whole entity disappear, replaced by an endless supply of new laborers—the millions of new college graduates and tens of millions of employable young people.

The impact of stratification on history is mainly an ideological one. Stratification, as a phenomenon, eventually disappears; however, it has a profound and long-lasting impact on the ideological revolution, which is soon inherited by the new generation. Many concepts, such as the working unit, absolute superior authority, lifetime employment, and social status, which have impacted the Chinese people for more than half a century, will gradually, along with the stratification, subside and eventually become part of the written history. This will give rise, instead, to a new set of concepts; these being the sense of urgency for survival; the sense of independence for autonomy, self-reliance, and self-empowerment; the sense of aligning individual abilities with societal needs; the sense of freedom to choose your goals; the sense of responsibility for the consequences of choices; the sense of development generated from the thirst for wealth; the sense of learning to enhance and improve oneself; the sense of resources to accumulate essential elements for one to control; the sense of equality to handle interpersonal relations according to interest-based relationships and rational principles; as well as the sense of competition and opportunity, etc. Stratification influences people’s ideology, which in turn promotes social progress. In this sense, stratification resembles Friedrich Engels’s summary of the history of world civilization as the movement from identity to contract. His core idea is that the acquisition of wealth no longer relies on birth identity and status but from the hard work of the free labor group under legal, commercial, and economic principles.

How to solve the employment problem faced by these free laborers? The contradiction between the already stratified and ever-growing free labor group and their employment is so widespread, severe, and prolonged—where is the way out? Shall we rely on the reform of state-owned enterprises? This is such an ancient topic that my mouth hurts from talking about it. However, the facts show that any reform without addressing the system of property rights has no way out. State-owned enterprises that are based on the ambiguous ownership of assets cannot survive without monopoly rights and blood transfusions from the government, their withering tendency being irreversible—with the exception of that limited number of state-owned enterprises that require government monopoly and have successfully undergone modern enterprise system reform. In the coming period, state-owned enterprises will not only be unable to absorb but also, on the contrary, continue to be the creators of the free labor.

Shall we rely on The Third Wave defined by Alvin Toffler? Some people advocate this idea—to bypass agriculture and industry and enter the third wave to achieve the high jump style development? Let the nine hundred million farmers get onto the computer, go online, and explore gene technology?—I am afraid not! If information technology is not based upon the three pillars of industry, what is the use of all that information? Putting aside to what extent the third wave drives economic development, one thing remains clear—it absorbs very limited unemployment. What else shall we rely on? Shall we suggest that people play in the currency markets or play in the stock market? None of these address the core contradiction, the main solution of which is entrepreneurial investment in the industries, leading to expansion of employment and to increased total wealth.

The great existence of the free labor group determined the inevitable trend of entrepreneurial investment. What defines this sure path of entrepreneurial investment for the free labor? Among all the factors, one stands out—it is the great existence of the free labor group, which is facing the problems of both survival and development, both of which naturally induce conscious entrepreneurial thoughts. Within the free labor group, there is a large number of the elite who are deemed to be successful in their entrepreneurial endeavors. The establishment of the market economic system and the recognized economic status of the private sector provide the free labor group with the basic social conditions for carrying out entrepreneurial activities. Moreover, with the employment problem for these free laborers being the constant topic for any government, as well as an important starting and ending point for government and statutory policies, the government naturally realizes at the same time that the fundamental solution to the problem comes from entrepreneurial investment by the private sector. Hence, the government is bound to make every effort to create an environment that encourages and supports the development of entrepreneurial investment by the free laborers (e.g., laws to protect private wealth, policies, and measures for promoting entrepreneurship and even government funding and subsidies).

Providing practical assistance to individual entrepreneurial investment. The government should make the attainment of full employment to be the core national long-term strategy, the execution of which should be based on mobilizing individual initiative. The government should directly and firmly grasp this root of economic development. Grasping this root involves providing convenient, favorable, and practical assistance to those starting their own businesses. If we set aside 10 percent of GDP to support young entrepreneurs, then even if only 10 percent of ventures succeed, from the perspective of long-term and comprehensive impact, this is a much more cost-effective solution than expanding government welfare programs.

2. The fundamental solution for increasing domestic demand

A book written by an American said that the moment a parrot learns how to say supply and demand, the parrot qualifies to be an economist. This not only points out the frequency with which the phrase supply and demand is used by economists but also shows the impact these two terms have had on the interpretation of economic events and the formulation of economic policy.

Using common sense to understand supply and demand. Common sense tells us that supply and demand are eternal and identical. They are eternal in the sense that the contradiction between supply and demand is a phenomenon in a market economy. Total supply exceeding total demand is a typical phenomenon, such as an ongoing 5 percent unemployment rate. They are identical in the way that they relate to one another, supply and demand being interdependent, with each defining and creating the other. These standpoints have been thoroughly explained by classical economists. Then why do we need to reiterate them here? It is because many interpretations, thoughts, policies, and measures have violated common sense, perhaps due to ignorance of common sense or neglecting common sense during innovation; in short, separation from common sense. For instance, stubbornly treating insufficient demand and unemployment as a temporary phenomenon and as a consequence of economic reform and industrial restructuring makes the error of interpreting the eternal problem from a temporary viewpoint. What’s worse is isolating demand and supply from each other, looking at the demand alone simply from demand’s angle and focusing on people’s wallets alone to look for ways to squeeze out, press out, or lure out more spending. This viewpoint forgets that the most important factor defining expenditure is the income level closely associated with the supply. Without having stable income or expected income, savings cannot be used for consumption. In conclusion, an increase in consumer demand will not come about without an increase of the majority’s income.

The focus on increasing consumer demand can only be based on the increase of income. The mutually defining and mutually transforming relationship between supply and demand can be simply illustrated with the following chain:

Individual demand -> total societal demand -> price change -> investment incentive -> individual income -> individual demand ->

Since this chain is circular, it can be broken by any of the above links. If we start with the individual demand, the sum defines the total societal demand. Lowered individual demand leads to lowered total societal demand, which lowers the general price points, which lowers investment incentives, which lowers the individual income level. Lower individual income defines the lower individual demand. This creates a downward spiral. Which link shall we start with to stop this downward spiral? Let’s look at this chain from the opposite direction, where individual demand is defined by individual income, which is defined by investment decision, which is then defined by… As we can see, the way to solve the problem must utilize certain external forces to break this cycle. At this time, we should think about fiscal revenue and foreign currency reserves that are lying asleep in banks. These can be consumed but more importantly can be transformed into investments because the only external force that impacts the spiral is the industrial investment, which also increases the total value sum of the chain, widely increases the employment, increases the majority’s income, expands the demand, stops the downward spiral, and eventually plays a positive influence on the equilibrium between total supply and total demand.

The fundamental solution for increasing income is to increase industrial investment. Industrial investment is the unity of increased supply and demand within consumption. Any investment in the industry increases the consumption of consumer goods as it increases the consumption of production material. While writing this, I happened to come across these remarks by a famous economist: Investment demand helps form economic growth capacity. If only the investment demand is increased, it might increase the economic growth potential. However, it will not enter the ultimate consumption stage. What we need to initiate is the consumption demand. This all means that investment may increase economic growth, but it will not have any effect on the consumption of the means of subsistence. Therefore, stimulating consumption demand has nothing to do with investment.

Is there any investment that is only about purchasing equipment and raw materials without paying employees’ salaries? Are all the investors like the general contractor who failed to pay the workers their salaries and ran away? Any investment will certainly create the need for labor, which is to create demand for consumer goods through salary. Is this not common sense? Furthermore, we can even say that any industrial investment will ultimately be transformed into demand for consumer goods because the demanded production materials include salary. To further pursue this line of thought, all wealth on earth except natural resources is salary. To be precise, investment, besides directly creating demand for consumer goods through the demand for production materials followed by a series of intermediate links, ultimately becomes demand for consumer goods. Any economic growth itself is a growth of consumption demand. How could we separate consumption demand from economic growth, especially how could we separate investment from consumption demand and require some other motivation to invest? I have never heard of any country, any times, or any discipline that denies this fact of economic life: investment creates income and income creates demand.

The crux of the problem and the solution of expanding investment lay in the financial system. How can we turn bank savings into industrial investment and further create demand? This is the crux of the problem. Shall we depend on people buying stocks? This could have been a route, but currently and for a long time where state-owned enterprises are the main bodies of public companies, investment in stocks not only cannot increase income from drawing dividends to expand demand but also cannot increase employment through expanding the production scale of state-owned public companies, which further increase common people’s income. Shall we rely on banks? State-owned banks are also state-owned enterprises. Even up through the current time, the banks are still not the kind of enterprises that know how to manage currency products. The problem of transferring savings to investment is one of credibility because state-owned banks do not have the ability to manage currency and loans. The origin of such problems is that their targets for receiving the loans are simply state-owned enterprises themselves. State-owned enterprises and state-owned banks are not two independent entities but are like two sons of the same father. What are the solutions for transferring savings into investment? One is to depend on the proactive fiscal policy of the Chinese government. The second is to establish privately owned banks and financial institutions. The third is to conduct ownership reform of state-owned banks. The most direct way is to establish entrepreneurial funds.

3. The must-take road to create entrepreneurs

The third major contradiction that determines the general trend of entrepreneurial investment lies between the historical revival mission of the Chinese nation and the low number and quality of entrepreneurs.

The existence of the contradiction. The Chinese people are facing the historical opportunity of a great revival, and generations to follow will be shouldering the historical mission of this great revival. The Chinese people have given plenty of attention to this point and come to a consensus. The foundation of a strong and prosperous nation is its economy, which is comprised of enterprises, the soul and core of which are the entrepreneurs.

The entrepreneurs are the major force for achieving the nation’s great revival; they are, however, our scarcest resources. These two issues, historical mission and the shortage of entrepreneurs, together create a contradiction. The long-term interaction of these contradictory issues will inevitably lead to the continuation and expansion of entrepreneurial investment.

The role of the entrepreneur. The shortage of entrepreneurs is an indisputable fact. Looking at the things around us, which is our own invention? Among all the high-end products, do we hold the intellectual property rights to any of them? How many standards do we grasp during international trade? Among the top five hundred enterprises in the world, how many of them are from China? Among the ranks of internationally known entrepreneurs, how many Chinese names appear? The shortage is a serious reality. How serious is it? Between development and decline, which direction are we heading? Can we succeed while facing increasingly fierce international competition? Can we gradually solve the enormous contradiction between population and employment? Can we continue to expand domestic demand without relying on exports? In short, can we grasp this thousand-year opportunity (China began its decline in the Song Dynasty) to revive our nation? It depends on the number and quality of our entrepreneurs.

How can the entrepreneur be so important? There are two obvious reasons. First, the competition among nations is actually the competition of political systems and comprehensive strengths. This type of competition usually takes place in an environment of international peaceful development. Behind this competition lies the competition of entrepreneurial courage and wisdom. Second, the decision-making role played by human beings reflects the importance of the talent; and among all the talent or human resources, the most dynamic are the entrepreneurs. They are situated at the core position of all the human capital and play a leading and dominant role, which includes the combining of human resources in a creative way.

The must-take road to create entrepreneurs. Facing the great historical mission of rejuvenating our nation, we need tens of thousands of entrepreneurs. Where will these entrepreneurs come from? Shall we depend on education at the schools? That would be excellent if our schools could educate entrepreneurs, for if that were the case, we could employ the scale of mass production to generate hundreds of thousands of entrepreneurs every year. The schools are useful for teaching the ability to think and providing fundamental training in the sciences, engineering, and the humanities. However, they are useless for training entrepreneurs. Why? You can use many different words to describe entrepreneurs, but there is no better word than the most essential word: creativity. This is precisely the helpless part of the school education. The activities of an enterprise are primarily comprised of real-life practice. Facing the market filled with numerous strong foes and life-and-death competition, we need excellent kung fu and real kung fu. This kung fu comes from practice, and nothing can replace the training process. Any problems within an enterprise are always concrete and unique, and there are always multiple options for any corporate proposals. Therefore, resolving any issues requires creativity. Without creativity, no decisions will be made. Without creativity, no enterprise can survive. Without creativity, there of course will be no