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Nobody becomes a millionaire working for another

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Nobody becomes a millionaire working for another

I created a divided house when I made the statement, “nobody gets to be a millionaire working for another” at a recent professorial luncheon at my university. There are those who reminded me that there are millionaire chief executive officers (CEOs) of companies.  Others thought I was urging people, including teachers/lecturers like themselves, to abandon wage employment as they posed a valid question – can all of us work for ourselves (be self-employed entrepreneurs)? Only a handful of colleagues agreed with my statement.

Well as a professor and therefore preacher of entrepreneurship I was only professing or is it preaching a doctrine of my profession. When you work for somebody else you will be rewarded with a salary but that somebody will keep profit as a reward.  I will return to the concept of profit shortly.  

My cousins the economists (you may also call them my un-identical twins) will tell you that there are four factors of production each earning a reward for participating in the process of production aka creating wealth. The four are land, capital, labour and entrepreneur.  Labour and entrepreneur are cousins or even twins  in the sense that they are both an aggregate of human physical and mental effort (or human productive activity) used in creation of goods and services (or economic gain) yet they are un-identical in the sense that labour earns a salary (wage) while entrepreneur earns a profit. Limitations to their rewards make them even more different as depicted in the table below.

Factor of production

Economic reward

Key limiting factor for reward received

Land

Rent

Supply and demand

Capital

Interest

Industry rates/government mandated rates

Labour

Wages/salary

Supply and demand legislation

Entrepreneur

Profit

Skill of entrepreneur

The partial message of the table is that when you sell your labour on the labour market where the buyer (employer) pays you a salary your earnings will be controlled by the supply and demand legislation. Economists may call it labour market forces. The story of Kenya’s teaching fraternity at all levels who are forever demanding for high wages (and they may not be the only ones on the continent) tells it all. Legislation has kept standing in the way of the teachers getting higher salaries despite the fact that they supply the labour market with the above named millionaire CEOs. Such teachers will never become millionaires. On the contrary, when you are an entrepreneur earning profit the limiting factor is your own innovative skills meaning you hold your destiny in your own hands. You got me right, your opportunity cost of wage employment is very high.

 I can feel someone saying that even entrepreneurs are limited by legislation such as taxation. Well, a true entrepreneur can avoid (not evade!!!) taxation. To an entrepreneur it is not the market forces dictating but it is his/her innovative powers at play. By definition innovators aka entrepreneurs generate improvements on existing situations (or indeed create new situations). Once improved the situation “stands out of the pack” and attracts custom attention effectively making the innovator a monopolist who may dictate prices (NOT THE MARKET FORCES!!!). The non-entrepreneurs may ape, imitate, duplicate or even attempt to also innovate but as they engage in a game of “catching up” the entrepreneur would have kept the pace of innovating and engaging in creative destruction i.e. destroying the past by replacing it with a better situation. This is sometimes called Schumpeter’s gale. J. A. Schumpeter is often referred to as the father of modern entrepreneurship. 

A newsflash appearing at www.businessinsider.com entitled, “You Will Never Get Really Rich Working For Someone Else” is backed by statistics in Inc, an American business magazine. The statistics are derived from an article entitled, “How the Rich Got Rich”.  

America’s 400 top rich people were examined on how they made their fortunes and the results were as follows:

  • Wages and salaries:  8.6%
  • Interest: 6.6%
  • Dividends: 13%
  • Partnerships and corporations:  19.9%
  • Capital gains: 45.8%

The author analyzed the given data and concluded that:

  • Working for a salary won't make you rich.
  • Neither will making only safe "income" investments.
  • Neither will investing only in large companies.
  • Owning a business or businesses, whether in part or partnership could not only build a solid wealth foundation but could someday generate a huge financial windfall.

So then what is the bottom line? You won't get rich without taking calculated (or entrepreneurial) risks, and you probably won't become obscenely wealthy working for anyone besides yourself.

The said author goes on to advise that, “Clearly, getting rich--in monetary terms--is the result of investing in yourself and others, taking risks, doing a lot of small things right... and then doing one big thing really, really right”.

So if you’ve gotten a great idea (and you needed one like yesterday!!!) for a business then make sure the profits are going in your pocket, not your boss’s. It is fairly risky to work for someone else. You could get laid off. Your boss could make a bad decision. You are better off in control of your own destiny. Of course you could become financially comfortable on a salary but not rich. These are not my own words. Trace them at www.moneyunder30.com/cant-get-rich-on a salary

Authors of The Millionaire Next Door Thomas Stanley and William Danko write, "Twenty percent of the affluent households in America are headed by retirees. Of the remaining 80 percent, more than two-thirds are headed by self-employed owners of businesses. In America, fewer than one in five households, or about 18 percent, is headed by a self-employed business owner or professional. But these self-employed people are four times more likely to be millionaires than those who work for others." (www.askmen.com/top_10/)

And now back to profit and back to my twin brothers the economists. Profit is defined by economists as total revenue minus total cost and formulated as:

Π= TR – TC .

 

Π is used to stand for profit because they use P for something else: price. Total revenue simply means the total amount of money that the firm receives from sales of its product or other sources. Total cost means the cost of all factors of production including labour. There is in economics the concept of profit maximization. Profit maximization occurs at the biggest gap between total revenue and total costs. Employers strive to maximize profits by reducing total costs and this affects the cost of factors of production including labour and therefore salaries. Allow me to demonstrate

This loaded formula has a number of tales to tell. For now let us limit ourselves to the fact that a wage or a salary is a cost. Every prudent producer (or employer) would like to minimize costs so as to maximize profits. Clearly therefore an employee is a minimization variable in the equation when the employer is the maximization variable. The employee is unlikely to get richer than the employer (holding all other things constant). Indeed should the salaries erode profits then the likely actions would be retrenchment, downsizing, right sizing and these actions do negatively affect the salaried. The worst is when the erosion leads to closure for here both the employer and the employee are affected adversely.  I hope the statement – nobody gets to be a millionaire working for another starts to make some sense. All it means is that it does not make a lot of economic sense for an employee to earn more than the employer. Of course I can still feel the question – can all of us become entrepreneurs/employers? Let that be a story for another day as well as the phrase – ALL ENTREPRENEURS ARE BUSINESS PEOPLE BUT NOT ALL BUSINESS PEOPLE ARE ENTREPRENEURS

Prof. Henry M. Bwisa

Professor of entrepreneurship at Jomo Kenyatta University of Agriculture and Technology (JKUAT). This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Last Updated ( Wednesday, 23 December 2015 18:33 )  

THOUGHT

Entrepreneurship is the practice of starting new organizations or revitalizing mature organizations, particularly new businesses generally in response to identified opportunities. Entrepreneurship is often a difficult undertaking, as a vast majority of new businesses fail.

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