Dragon's Den Meets Adam Smith

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Appeared in the Huffington Post

Each week, millions of Canadians learn about the trials and tribulations of entrepreneurship while being entertained by one of the country's most successful television shows, CBC's Dragon's Den. Each week, entrepreneurs pitch their ideas and companies to successful Canadian businesspeople in the hopes of securing both financing and proven, strategic partners.

The show has pulled back the curtain on finance and entrepreneurship to help Canadians better understand how difficult it is to build and grow a business to the point where people are interested in investing. This adds to the commercial success of the show since it provides a tangible benefit to Canadian society to better understand the difficulties of entrepreneurship.

There is, however, a downside to the program that could easily overwhelm this benefit, which is that Canadians will assume the private business interests on display in the show are the same as how markets work more generally. Simply put, too many people confuse the interests of business with markets.

In one episode, for instance, former Dragon Robert Herjavic applauded a playground equipment manufacturer for using government-imposed regulations to block foreign competition. This allowed the entrepreneur to enjoy a near monopoly and the higher profits monopolists enjoy.

Herjavic as well as the other Dragons saw monopoly profits as good and were unsurprisingly interested in the company. Remember, the Dragons are motivated to secure investment in profitable businesses or ideas with substantial promise so that they can benefit financially from their investment and the risk it entails. They are not concerned with competition and general welfare.

There is nothing wrong with this pursuit and indeed as Adam Smith taught in his most famous work The Wealth of Nations, such pursuits can benefit society enormously. The problem - and what viewers need to understand - is that when businesses use the power of the state to enhance their competitiveness it benefits the business, its employees, and its investors but hurts everyone else. That's because the gains of the business are not generated by creating a better product, lowering the price, or otherwise innovating to out-compete other firms but by getting the government to restrict competition. The result of such special treatment is higher prices, lower quality, and/or less choice for consumers.

A more important insight from Smith, however, and one lost on the most visible of the Dragons, Kevin O'Leary, is the very nature of markets. O'Leary has created an entire persona around a sort of modern-day Gordon Gekko (for those under 30, Google the 1980s movie Wall Street). O'Leary is fond of and famous for employing phrases like 'it's all about the money,' 'people only care about money,' and 'money makes the world go round.'

To put it mildly, this is a superficial, even one-dimensional understanding of markets. O'Leary's principal failure is that he perpetuates a superficial, greedy caricature that feeds into too many people's instinctive views of businesspeople and investors. In doing so, he reinforces a false sense of what a market-oriented society means.

Market-oriented economies rely on voluntary exchange between millions of people to decide how best to allocate investment capital, labour effort, people's ingenuity, and even our aspirations. Such societies still need governments, and indeed any successful society needs a certain level of government. Such societies are also characterized by extraordinary generosity in the form of charitable giving, volunteerism, community involvement, and what Smith termed empathy.

Consider the wonderful ad by the U.S. insurance company Liberty Mutual Insurance, which shows individuals helping others for no apparent reason, except that as the ad continues, it illustrates how those beneficial acts are reciprocal. In other words, people do them not only because they're 'morally right' in the words of Smith, but because they create the type of society in which others will do the same for us. In other words, such beneficial acts will be returned to us. Things like opening the door, holding an elevator, putting a quarter in someone's parking meter, etc. all seem like small, meaningless acts but actually contribute to the very nature and fabric of society.

O'Leary's weekly paeans to the power of the buck fly in the face of Smith's concept of a market-based society and the richness it entails, which exceeds the narrow profit-driven motives that O'Leary portrays as the driving motive for all human behaviour. The success of Dragon's Den should be applauded but Canadians need to understand the difference between narrow business interests and broader markets.

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