The Entrepreneur: Recent Episodes
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The Entrepreneur includes works on the careers of particular businessmen, as well as studies of profit and innovation and the risky role of the entrepreneur.
Despite what many elites believe, AI can do many things, but it cannot successfully plan an economy. It lacks the intelligence of an entrepreneur.
Original Article: "AI Lacks the Entrepreneurial Intelligence to Plan an Economy"
Speculators are reviled in the media and by politicians and academics. Yet the speculators are the ones taking risks to ensure the rest of us can have more economic certainty.
Original Article: "Hail the Speculators! They Take the Necessary Economic Risks in Our Economy"
While rain at an outdoor concert is a nuisance for most attendees, a few entrepreneurs saw not "pennies from heaven," but dollars.
Original Article: "It’s Raining Entrepreneurship at a Taylor Swift Concert"
While many believe that technology is key to a growing economy, technology is useless without entrepreneurship, which develops uses for technology.
Original Article: "Technology Is Meaningless without Entrepreneurship"
Individualism, while condemned in some cultures, has helped make this country economically successful. Will the influx of immigrants from cultures that devalue individualism reverse that success?
Original Article: "Individualism in the US Has Helped Make It an Economic Success"
Calls for black consumers to "Buy Black" can be interpreted as socially divisive, but they are also a way to encourage black entrepreneurs in a free market.
Original Article: "The "Buy Black" Movement: Divisive or a Boon to Black Entrepreneurs?"
While Japan made some technological transfers to these places, prosperity came to them later, with the advent of free-market economies.
Original Article: "Was Japanese Colonialism the Engine of Later Prosperity for Korea and Taiwan? Probably Not"
Austrian economics is not dry theory. It helps us make sense of our world and shows that exchange and production have a place in our moral universe.
Original Article: "How to Teach Austrian Economics to the Neighbor Kids"
Both artists and athletes perform for others. When governments get involved it either is for subsidies or censorship. Neither is satisfactory.
Original Article: "The Economics of Arts and Culture"
Politicians like Elizabeth Warren and Alexandria Ocasio-Cortez are demanding that successful entrepreneurs be taxed into oblivion. The real parasites are the politicians who destroy wealth instead of creating it.
Original Article: "Who Are the Wealth Destroyers, Politicians or Billionaires?"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Austrian economics recognizes change as a constant and provides guidance for adapting to it and managing it. Change is changing for business — it’s faster and more fundamental in the digital age. Austrian economics can help even more as a result of its practical and realist approach to adaptation and continuous adjustment.
Knowledge CapsuleChange is changing.Change is a constant. You can think of the market in constant flux, as Mises did, You can think in terms of VUCA — volatility, uncertainty, complexity, and ambiguity. You can think of it in terms of complexity or of absolute uncertainty. However you tune your mind and your business processes, there are always going to be more things that can happen than you can predict or prepare for.
There are some ways to think better about ceaseless change, however. One is to bucket the major themes or corridors of change, to organize your thinking and make some judgments about where and how to act and adapt. By recognizing these multiple types of change, businesses will be better prepared for adaptive action.
Our E4B guest Phil Simon has studied change in the workplace and recently published a new book titled The Nine — about nine tectonic forces that are reshaping business and the workplace where we conduct business. He advises businesses to be alert to the changing nature of change in the digital age.
People are changing.The people you hire today and the people already working at your firm are not the same people as they were just a couple of years ago. They’ve been through a new, different and challenging experience of working through the Covid-19 pandemic, and they’ve been working with new technologies, in new places (i.e., working remotely) and they’ve been questioning how they relate to work, to their colleagues, and to the firm. Don’t expect them to be unchanged in their mindsets, attitudes, and work practices. The nature of the employment relationship is different today — less formal, less rigid, less standardized. Phil Simon uses the term “empowered employees” — employers must be empathic in understanding their new mental model as it relates to work.
The workplace is changing.The workplace is no longer a physical space where people congregate to collaborate on work tasks, but a digital space of networked people, machines and software. New software and new machines are evolving all the time in this space, changing our relationship to it and to work. People are not going to go back to the office as the standard method of getting business done. If you want to have a physical space for people to meet in person, it must be reconfigured to support those business activities that can only be done in person, and not just as a standard structure of cubicles, offices and wiring. People must feel that there is more or better productivity to be enjoyed in the physical shared space than can be realized elsewhere.
The structure of work is changing.Phil’s book includes a section on fractions: the idea that firms no longer need full-time access to a necessary business skill — like finance and accounting — via contracting with individuals for 100% of their worktime. New organizational models are emerging that utilize fractional access to these skills as needed. There are fractional CFOs and CMOs and CTOs. There are highly qualified experts available via sharing platforms; they can be both the best at what they do and the best fit for your firm’s need, available for a percentage of their time, not all of it. This thinking about fractional talent and skill utilization is becoming a more integral part of organizational thinking.
Automation is universally available.Some level of automation is coming to every workplace. It’s approaching with greater speed and intensity today. It’s best to think of automation in terms of outcomes: what needs to get done and can it be done in a more automated fashion? What needs to be produced (Phil cites automated pizza making machines)? What processes are taking up people’s time (Phil cites automation in payment systems)? What jobs can be totally automated (e.g., driving trucks)? What departmental functions can be fully automated (like content moderation at Twitter)? All businesses should be reviewing all their activities at all these levels and asking where automation can eliminate waste, save time and release resources for greater productivity. Whether it’s as simple as calendaring software or as complex as robotic process automation, it’s right to examine every opportunity and find an automated solution.
A.I. Is going to help.The rapid adoption of ChatGPT has opened many eyes to the possibilities of getting smart assistance to change and improve the way work is done. ChatGPT can help develop content, make plans, find data, write code, make summaries of libraries of documents, and assist in many many more tasks — as exhibited by the many ChatGPT threads on twitter that are full of new ideas. The great breakthrough of ChatGPT lies in making available the vast majority of available knowledge on virtually all topics in a convenient, conversational way. Businesses are the results of their accumulated, shared and applied knowledge. ChatGPT and similar AI’s amplify knowledge and accelerate learning. Businesses that don’t utilize this availability will fall behind their competitors.
There will be new software environments.Software and platforms are two parts of the work environment that are changing fast. Whether we work on Zoom or Slack or Teams or Github or Salesforce, we continuously encounter new upgrades and functions as well as new alternatives. There is no alternative to earning the skills to utilize these tools to their greatest productive effect, and to keep our learning updated.
One economic function that is not improving amidst content change is trust. We can’t be sure, sometimes, about the other party we’re talking to or collaborating with, we can’t be sure of trusting data, we can’t be sure that our privacy and property rights are protected. Phil made the prediction that blockchain, as a secure record of all transactions and un-hackable repository of data and information, will play a bigger role in our business future as an arbiter of trust. For example, this may be where our individual health records might reside, which individuals would own, and which they could share and use for their own benefit in navigating the regulated opacity of the healthcare system.
Subjectivism and empathy will always play important roles.Phil made a reference to “unhealthy analytics”. His point was that we are now in a position to measure more and more human action and human behavior, but that measurement does not necessarily provide insight, and may even give rise to perverse incentives. For example, it’s possible to measure when employees checked in to the office and when they left, but it’s not equally possible to monitor their productivity or motivation. It’s possible to measure the number of hours they spend on Zoom, but a different problem to measure their remote contributions. Analytics have their place, but understanding and empathizing with employees, and carefully constructing their mental models in order to be able to appeal to them and stimulate them, remain subjective, emotionally-based skills which are still a critical component of management.
Steer into the skid.How do founders, owners, and managers deal with these changes? Phil’s expression is to steer into the skid. Reimagine work, embrace the powerful new technologies that are available, and be willing to experiment — perhaps in ways that others aren’t — to generate the active learning that moves organizations forward. It might be messy, and even feel chaotic, but it’s the right response to tectonic change. Expect some turbulence, while being open to infinite new possibilities.
Additional ResourcesThe Nine: The Tectonic Forces Reshaping the Workplace by Phil Simon: Mises.org/E4B_215_Book
PhilSimon.com — Expertise on workplace collaboration and technology
Phil Simon on LinkedIn: Mises.org/E4B_215_LinkedIn
Entrepreneurship is well-defined in economics, and well-recognized as the engine that drives economic growth. That means people enjoying greater well-being, including but not limited to material prosperity. But economic growth can be uneven. Some countries, some regions, and even some firms do not generate the same levels of economic growth as others. How do we understand this variability? We look for what holds entrepreneurship back.
Knowledge CapsuleEconomic development can be a self-reinforcing cycle of continuous improvement in people’s circumstances.Greater material prosperity is a valid and worthwhile goal for economic development. But, says Shawn Ritenour, economic development goes beyond that goal: it delivers a greater variety of goods and services that individuals and businesses can use as means to achieve their own diverse ends. The production of this greater variety requires entrepreneurship in the creation of new ideas and the pursuit of new value, and it generates new entrepreneurship by supplying a greater variety of resources to work with in those pursuits.
To generate this cycle, an enabling environment is required — one that acts as a catalyst for entrepreneurship.Economic development is a multifaceted process in which several forms of human action combine in a system for economic prosperity. It’s not instructive to try to isolate financial capital or capital goods or technology or even human capital, and culture and social institutions can’t be ignored. These sources of prosperity must work together in an orderly fashion to generate the necessary synthesis.
The vital role is that of the entrepreneur.The entrepreneur is the one who undertakes production, the one who combines resources to produce a product that meets customers’ needs and enables those customers in their own economic pursuits. Entrepreneurs kick off the cycle. Firms and organizations can act entrepreneurially, but it’s fundamental to understand that individuals — sometimes working in teams or committees — are the ones behind entrepreneurial decision-making. The entrepreneur is not necessarily a single person, but entrepreneurship is always a human action.
How do we get entrepreneurship started?Entrepreneurship requires customer knowledge, technical knowledge and financial capital. Customer knowledge includes the empathic understanding of what’s needed for customers to be able to better meet their own needs. In the context of economic development, this knowledge is probably widely available to private entrepreneurs, but it may not be available to governments, whose understanding is distorted by predispositions to develop specific industries or subsidize specific economic sectors, or towards a particular technology. For these reasons, there can be no “entrepreneurial state”. Individuals with their own ideas and their own private property will provide the energy o break economic inertia.
Technical knowledge defines a sufficient understanding of the technology and technological resources to deliver the desired new value to the customer. In under-developed economies, this technical knowledge may be thin, so reinforcing the technical knowledge of entrepreneurs is appropriate, through education, injections of new technology, training, mentoring, or other forms of knowledge transfer.
With the right understanding of customer needs and the command of the right technology, the entrepreneurs involved in the development state will always need financial capital, because production takes time to organize before cash flows in to the firm from customers. In development contexts, entrepreneurs often will not have savings of their own, and there may not be an appropriate institutional infrastructure of local banks and lenders and investors.
Therefore, customer knowledge, technical knowledge and financial capital combine to provide the foundation for entrepreneurial leadership and growth. They’re integrated: it’s important for the sources of financial capital to understand and appreciate the nature of the customer and technical knowledge that is being deployed. Typically, this takes the form of venture capital or private equity.
Education is another important element in the institutional environment for entrepreneurship.Entrepreneurship as a skill or capability can not be taught — it requires a special orientation that’s more developed in some individuals and firms than others. But principles, process and tools can be taught, and experienced entrepreneurs and businesspeople who have developed market savvy can share knowledge that they have acquired. Communicating the entrepreneurial mindset and methods in all stages of education will help to create and promote an entrepreneurial community that’s supportive of economic development.
One aspect of learning is to understand the entrepreneurial ethic of sacrifice, that it takes a lot of time and effort and expenditures and extended commitment before business success can be achieved. There’s more hard work than there is magic.
Institutional elements such as property rights and sound money are important components of entrepreneurial development.Property rights and sound money may sound like abstract concepts, but they are extremely influential in economic development processes. Property rights mean that entrepreneurs can assemble and go to market with their own resources in whatever way they prefer. Sound money means that entrepreneurs can anticipate a return from their productive activities that’s not eroded away by inflation, and they’re not led into miscalculation by monetary manipulation (e.g., unanticipated escalation of future borrowing costs).
Removing obstacles to entrepreneurship is the best economic development policy.Traditional approaches to economic development favor centrally planned initiatives, government spending, and policies in the form of subsidies or special incentives. They’re not typically market-based approaches. But the right approach is the opposite of policy-making. Instead of trying to design and add new structures, development should be focused on the removal of barriers — on identifying what’s getting in the way of nurturing a rich and robust entrepreneurial culture, and focusing on the removal of those obstacles. Leave the entrepreneurs to identify the specific products and services and businesses that can flourish, and to attract the investment capital that will support those businesses, without the need for “policy”.
Additional ResourcesThe Economics of Prosperity: Rethinking Economic Growth And Development by Shawn Ritenour: Mises.org/E4B_214_Book1
The Economics Of Prosperity (Edward Elgar): Mises.org/E4B_214_Book2
Shawn Ritenour at Mises.org/Ritenour
Shawn Ritenour at Grove City College: Mises.org/E4B_214_Profile
Part II: Market, Chapter 5: Production and Entrepreneurship
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
Conclusion: Action and Interaction, How to Think about the Economy: A Primer.
Narrated by John Quattrucci.
Part III: Intervention, Chapter 8: Monetary Intervention
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
Part II: Market, Chapter 6: Value, Money, and Price
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
Part II: Market, Chapter 4: A Process, Not a Factory
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
Part I: Economics, Chapter 1: What Economics Is
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
Part I: Economics, Chapter 2: Economic Theory
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
How to Think about the Economy was written to accomplish something big: economic literacy. It is intentionally kept very short to be inviting rather than intimidating. You will gain a life-changing understanding of how the economy works in practically no time.
Narrated by John Quattrucci.
Download the complete audiobook (12 MP3 files) in one ZIP file here. This audiobook is also available on Soundcloud and via RSS.Purchase the Audiobook on Audible/Amazon, or paperback at the Mises Store.
Part III: Intervention, Chapter 9: Regulatory Intervention
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
Part II: Market, Chapter 7: Economic Calculation
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
Part I: Economics, Chapter 3: How to Do Economics
How to Think about the Economy: A Primer. Narrated by John Quattrucci.
Market research is a tool for gathering data about customers and consumers that businesses hope will lead to insights about their behaviors and preferences that can be translated into innovation, better service and better business performance. As with any dynamic system, it has changed over time, and the effects of entropy have begun to show themselves in invalid techniques, invalid data, and invalid conclusions. And as with virtually all business systems, the coming of the digital age provides businesses with the opportunity to review, revise and improve exiting practice and existing thinking.
Knowledge CapsuleTraditional models of market research are losing validity.The Economics For Business approach to market research leans to the qualitative, such as one-on-one conversations with customers and detailed ethnography whereby businesses can observe customer behavior directly. The market research industry grew up favoring quantitative research at scale for its own reasons: that’s where the money is. Sharekh Shaikh points out that a $USD 70 billion industry was built largely on large scale panels — recruited audiences adding up to hundreds or thousands of individuals, to whom the market research industry could launch survey questions (“data gathering instruments”), generating large amounts of response data for quantitative analysis and numerical reporting.
Customers of these research reports use the output for decision support. Consideration of launching, or of purchasing and installing, a software suite or platform costing millions of dollars can be justified with the results of a survey costs tens of thousands of dollars or low six-figures.
One of the planks supporting the value proposition of market research panels is the difficulty of recruiting qualified respondents, such as CIO’s or CTO’s for an enterprise software survey. Panel operators’ revenues reflect their claims to solve this problem, but Sharekh Shaikh tells us that the reliability of their claim has eroded. Panels now may include inaccurately identified respondents (wrong title or role, for example, because the respondent has changed jobs or roles), or even fraud (responses provided by others than the supposed respondent, including bots). The data from the panels is no longer as valid as it once was, and its decision-support quality no longer as high.
This general decline in the quality and reliability of traditional research is taking place in many categories, not just tech — consumer package goods, entertainment, fashion, and any industry that uses these methods.
The digital revolution brings new opportunities for change, including in traditional market research.It’s unusual to think of digitization as increasing human contact, but in research it’s the case. Sharekh’s research platform, CleverX, has effectively removed the intermediary, the market research panel operator and market research respondent recruitment agency, from the equation, so that the firm requiring research can be connected directly with the respondent with the desired experience and user perspective.
Respondents sign up to a place on the platform by supplying their personal data, career profiles, qualifications, credentials and experience. Their incentives include their desire to participate in and contribute to industry developments, as well as the compensation offered. By learning the questions that are being asked, the professionals who sign up to be respondents can gain insight into the developments that are being pursued in their industry. Being a panel member is career and professional advancement.
The firm seeking to gather data can identify their respondents and assemble their own panel, using their own criteria and specified profiles, and building a direct relationship with their respondents and customers. Moreover, they can use any data collection tool they prefer, whether that is a technical tool such as Survey Monkey, or direct one-one-one conversations on Zoom or Microsoft Teams, digital focus groups, or any other format. By integrating with calendar software, research interviews with CXO’s can be organized and calendarized. These powerful toolsets result in higher quality research being completed up to 10X faster.
Digital technology also facilitates video interviewing, so that researchers can talk directly with respondents, and develop a relationship with them. The video interviewing can be asynchronous: given a query, respondents can video-record their responses whenever convenient, TikTok-style. AI can add enhancements such as sentiment analysis, body language and facial expression interpretation.
The distinction between quantitative and qualitative research disappears and we realize qualitative data at scale.
Market research can become continuous monitoring in the adaptive entrepreneurial system.The reality of markets today is high-speed continuous change. Market research as a tool has always been at a disadvantage in delivering snapshot that take time to process, by which time the market has moved on. Now, with digital techniques, continuous monitoring is possible. Sharekh mentioned several applications:
Customer understanding of digital developments: as platforms and systems evolve, customers may not be able to keep up with the technology, or may not be taking advantage of new feature. Digital research techniques can monitor and measure customer understanding dynamically, and point to gaps in their comprehension.Dynamic product development: as developers move a product towards market, digital research techniques can expose potential customers to the development path, and help developers to integrate real-time findings.Monitoring changing lifestyles and mental models: since digital research technologies can provide a continuing connection with customers, it can measure not only their responses to queries, but also their behaviors, attitudes and thinking in general. It’s possible to develop profiles and personas and segmentations into which innovative ideas can be inserted to simulate reactions and acceptance.CleverX represents exactly the kind of knowledge recombination that can result in revolutionary change across an entire industry.A core concept in entrepreneurship is the combining of existing knowledge in new ways for new solutions. Sharekh Shaikh combines his software engineering knowledge with knowledge of the market research space and knowledge of the dissatisfaction of end users with the available research tools. His newly-launched company, CleverX, is a fast-growing new entrant in the research space as a result of providing a totally new service: the facilitation of a direct connection between researcher and respondent with digital intermediation in place of previous-generation tools. The experience for the customer is better data, at faster speeds, gathered more conveniently and faster, and, consequently, of greater use in development and innovation processes.
Additional ResourcesCleverX.com
Sharekh Shaikh on LinkedIn: Mises.org/E4B_213_LinkedIn
Peter Drucker famously identified the only two value-generating functions of the firm as innovation and marketing. We propose to differentiate brand building (or branding) from marketing, especially in this digital age. Brands are the vehicle for framing, establishing, nurturing and enhancing relationships with customers. In the digital age, marketing has become mechanized and mathematicised; it’s about numbers more than about human values and emotional bonding. Graceann Bennett is a branding expert who has devoted her career and her research agenda to furthering the science of brand building.
Knowledge CapsuleBrands are assets that drive customer value and business revenue, and they’re more valuable than ever in the digital age.Our Economics For Business entrepreneurial method emphasizes the facilitation of value for customers — it is customers who create value through their experiences, and the role of entrepreneurship is to facilitate those valuable experiences. Brands are platforms for value facilitation and conduits for value delivery. In the economic system where assets are value drivers, brands are high-capacity intangible assets. They can be developed and nurtured through various types of economic investment, with a high return on that investment because of the closeness to the customer that they can embody. The investment can be creative and intellectual and is not necessarily limited by budgets and financial resources.
Brands hold emotional and relational value, often communicated through symbols and codes.Brands have meaning for customers, and the meaning is differentiated — customers prefer one brand over another. Brands fit into their lives and connect to them emotionally - they can trust brands, rely on brands, and even love brands. Brands express the essential humanism of economics - the entrepreneurial ethic of improving others’ lives. They represent an understanding of human yearnings. They help people who are striving to be the best version of themselves. They’re a great tool for entrepreneurs.
Brands often communicate via symbols and codes: advertising, logos, package design, social media, and sales presentations. These are important, but they’re not the essence of branding. That role is reserved for the emotional connections that brands make with customers, engendering trusted relationships.
In the digital age, marketing has lost the art of branding.Brand building is an art, an engagement with customers on a psychological and philosophical plane, enhanced by creativity, design, expressive language and visualization. In the digital age, marketing is headed in a different direction. Marketing has become mathematicised. Digital marketing is all about the numbers: audience reach and likes and engagement metrics defined as clicks and views. It’s the mechanics of the engagement funnel, of clicks leading to conversions. Graceann Bennett called this approach “the attention economy rather than the emotional economy”.
Even worse, marketers are antagonizing customers with an interrupt-and-annoy approach of increasingly invasive pop-ups and intrusions and uninvited invitations in e-mail and text. Annoyingly intrusive marketing can further decay into creepiness as consumers receive offers for goods and services algorithmically triggered by their search history and e-mail conversations or voice requests to Siri or Alexa that they might not have realized were quite as available to marketers as they are.
Branding creates customer relationships through emotion and psychology.The mathematical, mechanical approach is exactly the opposite of the human approach of brand building. Branding aspires to a relationship with customers, a creative relationship of innovation and renewal that continuously improve customers’ expectations of what’s possible and their anticipation of satisfactions to come from brand usage and branded services. Entrepreneurial brand owners seek to understand the needs and wants of customers, and what they find disappointing in current experiences, with a view to making their experiences and their lives better. A lot of this initiative takes place in the realm of psychology, getting inside customers’ minds to understand their preferences and why they hold them, and their choices and why they make them.
Brandowning firms examine themselves critically to ensure that they are authentic in serving customers’ emotional and psychic needs.Graceann Bennett employs Jungian archetype analysis to clarify and channel brand approaches to customer relationships, emphasizing what’s authentic in the brand’s character and orientation that aligns best with customer psychology. While the first stage of the entrepreneurial method is a deep understanding of the customer and their needs so as to define and scale a potential market, it’s also appropriate in the solutions design stage for the brand owner to look inward to define the persona for the brand. To establish trust and build a relationship, a brand must inspire confidence on the customer’s part, and to do so must establish authenticity: when claiming to deliver a benefit and facilitate a valuable experience, the brand claims must be consistent with the brand character, the brand heritage and the brand history. A brand can’t claim to be something it’s never been before, or claim a meaning and a purpose that it has never before exhibited. It can add features and polish and update its attributes, but it can’t depart entirely from its historical, observed orientation. Brand relaunches and repositionings risk losing connection with the customer if they are not credible.
Brands should search not for novelty in presenting themselves, but depth, clarity and simplicity in establishing brand character.Ethnography is the best research technique to develop empathic engagement between brands and customers.
Ethnography is mingling with customers, talking to them, listening intently, and observing their actions and behaviors. This kind of interactive contact with customers should be primary - the analysis of digital clicks and views and followers and even purchase behavior can’t deliver the same rich emotional and psychic consumer understanding and insight. In the digital age, we’ve abandoned the art of mingling, and that’s a difference between branding and marketing.
Additional ResourcesGraceannBennett.com
Playbook Studio: Playbook.Studio
Graceann Bennett on LinkedIn: Mises.org/E4B_212_LinkedIn
The Murray N. Rothbard Memorial Lecture, sponsored by Steven and Cassandra Torello.
Recorded at the 2023 Austrian Economics Research Conference hosted at the Mises Institute in Auburn, Alabama, March 16–18, 2023.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
The Ludwig von Mises Memorial Lecture, sponsored by Yousif Almoayyed.
Recorded at the 2023 Austrian Economics Research Conference hosted at the Mises Institute in Auburn, Alabama, March 16–18, 2023.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
It’s time to re-imagine how entrepreneurs bring their innovative value propositions to market at the appropriate scale to meet the important needs of millions of people. The new way of thinking is for entrepreneurs to focus all their energy on designing, refining and strengthening the value proposition, and then plugging in to a network of resources assembled by others so that customers enjoy the full realization of the value experience the entrepreneurial has designed. Jeff Grogg of JPG Resources joined Economics For Business to describe how this works in the CPG food and beverage industry.
Knowledge CapsuleStarting From A New Value Proposition.The entrepreneurial journey — whether starting a new company or launching or improving a brand or launching and managing a new corporate innovation initiative or even a new division or internal venture — starts with a value innovation goal. An entrepreneurial team or an entrepreneurial organization conceives of a new experience for customers that they’ll value highly enough to warrant the firm’s investment in new capabilities. The team tests the market appeal and commercial power of the value proposition to greatest extent they can. They get ready to go to market at scale — to produce, package, ship, distribute, sell and take payments, and then to respond to marketplace results with more volume, or broader distribution, or maybe some tweaks to some aspects of the execution of the value proposition.
Traditionally, once the launch decision is made, the firm maps out the value chain and assembles the enabling resources — manufacturing capacity for products, service backrooms and infrastructure for services, supply chain components, business partnerships and their associated contracts, marketing and sales capabilities, distribution, warehousing and retail access.
What if this part — the resource assembly part — were already done? The risks and constraints of making a new business out of a new value proposition would be greatly reduced.
Jeff Grogg and his platform firm have built new business infrastructure so that entrepreneurs don’t need to.Jeff describes his company, JPG Resources, as a business builder. His focus is on food and beverage businesses in the CPG category. The company build businesses so that entrepreneurs don’t have to. To be clear, the entrepreneurial teams focus on the customer and customer empathy and understanding, identifying a unique value that meets meaningful needs for a large number of people. That’s the critical step in the generation of new economic value.
The next step is typically building the supply chain from formulation and recipe development for scale, to manufacturing and packaging, shipping and distribution, and designing the management processes and hiring the people and drawing up the contracts for smooth continuous scale operations. That’s extremely hard work, and fraught with risk. The phrase “starting a business” can sound intimidating for that reason.
JPG Resources can absorb and take on and solve all those challenges and potential problems, and free the entrepreneurs to concentrate on customer value design and the last mile of marketing and sales.
The new entrepreneurial production structure can apply at all scales.JPG Resources has helped pre-market start-ups with initial product development and culinary research, has provided infrastructure for growth for maturing companies, has helped mid-size companies expand beyond their current scope, and has helped big companies enter new areas beyond their existing comfort zones. The new “plug-in” production structure operates at all stages and all scales and all along the value chain.
JPG Resources can provide manufacturing or train manufacturers from start up through expansion. The can help with food science, create new processes, manage contracting, identify and mitigate risk factors and arrange insurance. They can organize supply chain redundancy (efficient redundancy through back-ups, not wasteful redundancy through duplicates) and build resilience for clients. A virtual supply chain is superior to — and more flexible than - the self-assembled version.
The new entrepreneurial production structure is a network without boundaries.The very term “supply chain” reflects linear thinking — links joined together in sequence. Systems thinking is non-linear. The JPG Resources infrastructure is an ecosystem using connective logic, connecting the necessary components, people, knowledge and flows for the desired outcome, and reconnecting as needed when the environment or the market changes. The network is not bounded — there are always external or partner services that are currently outside the network that can be brought in through new connections. All are conceptually aligned, and all the relationships and contracts are win-win. The experience of JPG Resources in designing, assembling and integrating supply chains and production networks means that they’ve seen both sides of contractual relationships and service partnerships under all conceivable circumstances and can make sure all the agreements work - and expand the value space - for all parties.
The new entrepreneurial production structure is an acceleration and strengthening of knowledge-building proficiency.In episode #199, we identified knowledge-building proficiency as the key to value creation capacity. By partnering with infrastructure building firms like JPG Resources (and Gembah from episode #210), entrepreneurs can benefit from sharing the knowledge that these forms have already accumulated over multiple projects and product and business launches and growth initiatives. Jeff’s company is only too happy to share this knowledge, and doing so can help entrepreneurs avoid what he calls “self-harm” — making mistakes that could be avoided with the relevant prior knowledge.
Experience is harder to share. Jeff’s staff have hundreds of thousands of hours of experience, and, while entrepreneurs can’t live what they’ve lived, they can certainly benefit from experiential learning.
The error avoidance inherent in knowledge and experience sharing can be invaluable to entrepreneurs.
Individual freedom and choice still apply, in a more flexible capital structure.Entrepreneurs can choose as much or as little of the available pre-built infrastructure as they choose. They can focus on their own strengths and supplement where they know they need to. They can make their own connections in the ecosystem and their own adjustments as circumstances dictate.
The new entrepreneurial infrastructure does not imply a reduction in entrepreneurial initiative, but a boost, an acceleration, an expansion of value creation potential. It enables the entrepreneur to concentrate on value facilitation rather than on building a supply chain.
The capital structure for value creation in the economy as a whole becomes more flexible, flows more freely and can throw off the shackles of bureaucracy and regulatory compliance. The entrepreneur can pass on the burdens of HR and finance and legal and many more functions that are peripheral to — and sometimes impediments to - value creation and concentrate on the value task alone.
This suite of organizational and capital innovation points to a structure of more firms, better firms, and faster and more significant value creation, with fewer economic resources devoted to value-extracting bureaucracy.
Additional ResourcesJPGResources.com
Jeff Grogg on LinkedIn: Mises.org/E4B_211_LinkedIn
In our technocratic age, it is easy to dismiss the latest technological developments as an avenue toward freedom, but some of them still bode well for markets.
Original Article: "Artificial Intelligence Can Serve Entrepreneurs and Markets"
This Audio Mises Wire is generously sponsored by Christopher Condon.
People are innovative—if government doesn't get in the way. Entrepreneurs in developing countries find alternatives for people cut off from commercial banking services.
Original Article: "Poor People in Developing Countries Find Alternatives to Commercial Banking"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Entrepreneurship and innovation are the keys to economic growth and higher standards of living. The USA has long enjoyed leadership status on these dimensions — people see the USA as the land of entrepreneurs and the source of new ideas and advances in business. Is the reputation still deserved? Or is it being eclipsed as part of the general decline in standards and capabilities that we observe? Lipton Matthews is a global economic and geo-political analyst who brings deep knowledge and expertise to address our concerns.
Knowledge CapsuleBorrowing a framework from the Global Innovation Index published by the World Intellectual Property Organization, we can examine the state of entrepreneurship and innovation in the US relative to both other countries and its own history, under the headings of institutions, human capital and research, infrastructure, market sophistication and business sophistication.
Institutions: The private sector institutions of the USA continue to excel for entrepreneurship and innovation.When we think of American institutions for the encouragement of entrepreneurship and innovation, we must examine private sector institutions, not those of government. Ordinary people in civil society build the institutions that promote innovation. Private scientific research is robust in responding to market signals of consumer and business needs. Financial institutions such as venture capital and angel investors support innovative development. Policymakers mistakenly believe they can conjure up a creative economy by fiat, but they’re wrong. It’s private institutions that support and cultivate innovation. Even if the public sector tries to encroach, the private sector maintains its innovative edge.
Professor Sam Gregg warned us recently that the United States of today more closely resembles a European social democracy than many Americans are willing to admit, but Lipton Matthews is confident that America is still winning the entrepreneurship contests because the forces of democratic socialism can’t overpower the higher-energy force of the private sector drive for creative innovation in return for market reward.
Human capital and research: The ability to execute overcomes any shortcomings in education.If we look through the declinist lens, it’s easy to become gravely concerned about the state of education at all levels in the US, which directly impacts the development and deployment of what economists refer to as human capital. Do we under-allocate resources to teaching schoolkids business and entrepreneurship skills and tools, and at the college level, do we turn out too many English and philosophy grads compared to market needs, and not enough engineers and STEM grads?
Lipton Matthews cautions us against worrying about the wrong things. The educational qualifications of the products of American schools and universities matters less than their executional and implementational capabilities. America is a nation of do-ers, and that type of expertise is embedded and innate, from the time of the founding fathers and early immigrants who built the America economy. We prize innovators more than inventors — the ones who successfully turn ideas into marketable products and services. Entrepreneurship is action, and American business capitalizes the talent for execution, combining scientific learning with creative action to generate innovation. Executional capacity comes more from a market orientation than from formal learning.
A concern about the research component of the Global Innovation Index’s “human capital and research” classification is, perhaps, more justified. Government-directed research dominates formal research budgets — directed to fields such as climate change — for universities in the US, and the historical evidence is clear that this pool of research is inappropriate for the support of entrepreneurship, despite European aspirations to an entrepreneurial state. Brilliant scholars and researchers who could be entrepreneurs and innovators are diverted into unproductive activities.
It’s difficult to quantify private sector R&D we must hope that it is sufficient to counter-balance the state’s diversion of research funds. In fact, Lipton Matthews points out, we must expect the state and innovators to be in competition. The former prefers control and stability versus the latter’s pursuit of disruption and change.
Infrastructure: Think local and regional, not national.We are frequently presented with stories about the crumbling of US infrastructure. That’s the wrong level of focus, according to Lipton Matthews. First we should compare US infrastructure to other countries, where the quality of engineers and engineering may be lower, and so roads, bridges and communications networks are inherently superior in the US. Second, we should focus on infrastructure in our localities and regions. Local communities can manage infrastructure well in support of local businesses. Some towns and cities will have better-managed and better-maintained infrastructure than other parts of their state, and businesses will be attracted there.
Market sophistication: capital flowing to best entrepreneurial uses.Lipton Matthews interprets the Global Innovation Index’s category of market sophistication to refer to the financing of startups, scale-ups and innovative entrepreneurial businesses. American deployment of venture capital and the widespread networked access to investment funds are examples of market sophistication in practice. Ordinary people can invest in startups and innovation, and entrepreneurs at every stage of their journey can arrange access to investors.
While these investment funding networks may not be perfect, and while we may encounter some challenges in moving capital to the bottom of the pyramid, nevertheless, the private financial sector in the US is effective in directing funds towards innovation. While there may be some erosion of purpose, from long term funding of innovation to making money via short term trading in-and-out of markets, this does not detract from America’s lead in market sophistication.
Business sophistication: The ability of business to absorb new knowledge and use it to innovate.Bart Madden called knowledge-building proficiency the central differentiating function of the successful firm. Our businesses are learning machines, continuously generating new knowledge via R&D, marketplace experiments, interactions with customers and feedback from all business activities. While it’s possible that Americans might be eclipsed by some other countries in the race to produce patents, this is not a relevant measure. Marketplace innovation is the test of business sophistication, not patent registration. Knowledge accumulation must be accompanied by knowledge application.
America’s entrepreneurial nation of doers not only engages in eternal learning but in the adaptive entrepreneurial method of act-learn-improve. The rest of the world has not fully caught up.
SummaryIn Lipton’s eyes, America was oriented for entrepreneurial success by the founding fathers and early immigrants, and will continue to innovate and grow as a result of entrepreneurship. Only if we get in our own way through excessive statism, regulation and government intervention that misdirects our energy and resources will we break the well-established historical track record.
Additional ResourcesGlobal Innovation Index: Mises.org/E4B_209_Index
"For Now, Entrepreneurship And Innovation Still Hold A High Place In The USA" by Lipton Matthews: Mises.org/E4B_209_Article
What can economics tell us about designing fulfilling jobs and productive workplaces? Quite a lot if we apply the economics of subjective value and empathy. Melissa Swift is the author of Work Here Now: Think Like A Human And Build A Powerhouse Workplace. She discusses her research on the Economics For Business podcast.
Knowledge CapsulePoorly designed jobs and workplaces are dangerous, dull, annoying, frustrating and/or confusing.The results of academic research have confirmed how alienated many workers are from their jobs, and the trends in these findings are worsening, not improving. During the pandemic, many of us had the opportunity to stand back and survey this situation, and realize that it’s a problem that we need to address.
We can do better by applying Austrian economics principles of subjective value and empathy.The economics of subjective value should point employers in the direction of asking how employees feel about their jobs and the sense of purpose and meaning they derive from them. Why do these considerations not arise, or why are they insufficiently acknowledged? Melissa Swift sees what she calls a wall between how human beings operate and how the world of work operates. We think in discrete terms about “work” on one hand, and “people” on another, and don’t integrate them well.
Managers have demonstrated a penchant for intensifying work (doing more in less time and with fewer resources) and for pressing for over-collaboration (too many reports, checkpoints, meetings and interactions and exchanges, and belonging to too many teams) with the ultimate result of detracting from an individual’s capacity to get things done. Managers don’t necessarily tie the design of work to impact delivered or value created.
In fact, much work is performative, putting on a display of work that is not necessarily productive (writing impeccable but essentially useless reports, for example).
Managers should be actively looking for and rooting out problems of bad jobs and poor work environments.Melissa Swift’s formula is to be humble and curious in asking how work feels to those who are doing it. Employees know their work better than managers do (an observation which, of course, turns management science on its head).
There are a couple of “monsters” that can be identified and tamed. One is the anxiety monster - we all feel anxiety about whether we are productive enough, or doing good enough work, or being viewed in a favorable light. Anxious managers stand over people, telling them to work harder and faster. We must shut down all the anxious stories that are in our heads.
Employees can be over-anxious about customers, too. We may tend to over-deliver on customer care and customer expectations, to the point where we train them to be so demanding that they go beyond the point where the corporation is capable of fulfilling its own promises.
Once “monster” jobs — those that generate excess anxiety — are established, there’s a tendency for the HR “copy machine” to copy-paste them throughout the company, so that more employees become stressed.
Listening for job stress and devising better ways of working is an entrepreneurial task.The entrepreneurial mindset is to listen to customers (in this case, job incumbents), to identify unmet needs, which are aways based on emotion and can never be articulated perfectly clearly, to creatively design new solutions to the customer’s felt problem, and to institute positive change using the new solution. This implies continuous adaptive change in job descriptions, performance expectations, structures, team and tasks.
The entrepreneurial approach is often hard to apply in the corporation. One reason is that incentives are lined up to favor what Melissa Swift calls “smooth”. Management incentive schemes are often designed to encourage “smooth” — no drastic changes or turns, steady progress. Yet the adaptive entrepreneurial system does not promise smooth, and can’t delver it. Innovation in response to changes in customer preferences or competition can be bumpy. And many organizations suffer from autoimmune disease — the defenses go up as soon as something unknown or unprecedented is encountered.
Good leadership can counter the auto-immune response — but it’s leadership that does less rather than more, relaxing constraints and letting those closest to customers and markets to make any needed adjustments and to respond at the rate of change that the market demands. Business school concepts of leadership have goaded executives into over-managing and over-controlling, and reversing the over-active concept of leadership is one of Melissa Swifts core prescriptions.
The HR Department is a big part of the problem.The deep history of HR is dark. The function was founded to quell violence between labor and management. HR was to stand in the middle and to keep a lid on a boiling pot, as Melissa picturesquely expressed it. Performance management — mechanically measuring humans’ output in these toxic adversarial environments — was never a warm or supportive concept. As big business became more centralized, HR simply became more empowered and widened its scope. There was never much humanism in HR.
HR departments are not typically thinking about work and how work is changing and how to make it a better experience for people. If they were, they’d be thinking differently about matching talent to jobs, thinking more deeply about how alienating and constraining automation technology can be to those who have to use it. They know they are being monitored and measured and assessed.
Melissa recommends couples therapy for technology and those who work with it — to stop each party from driving the other crazy.
Asynchronous work, deconstructed work, transparent work.Melissa’s book has 90 strategies for organizational level and team level problem solving actions and adjustments. We discussed three directions for better work.
Asynchronous work: fewer meetings, which provides greater flexibility for workers, it naturally de-intensifies (you don’t have to have the report ready for the regularly scheduled Thursday meeting), and it makes for more relaxed collaboration across time zones. Asynchronous work tends to be better documented and more permanent.
Deconstructed work: start with tasks to be done rather than job descriptions; assemble the optimum combination of humans and technology to get the tasks done; let talent flow to the work, i.e., it doesn’t matter if it is full time employees, part-timers, project specialists or gig workers or agencies or consultants doing the work, so long as the tasks get done by the best-qualified talent.
Transparent work: make all information available to all employees at all times, nothing hidden or out-of-bounds. As a result, employees and teams have all the information they need to do their jobs, with no need for hierarchical or administrative intervention. Accountability and empowerment are enhanced, and new talent may emerge when you don’t hire for information but for skill in using it.
Additional ResourcesWork Here Now: Think Like A Human And Build A Powerhouse Workplace by Melissa Swift: Mises.org/E4B_208_Book1
Bullshit Jobs: A Theory by David Graeber: Mises.org/E4B_208_Book2
What is strategy, and is it useful for business? Business schools want you think it is the critical factor in competitive success or failure. They teach structured markets, divided up by market share, with boundaries and external and internal forces to be assessed and countered. “Where to play and how to win.” They see strategy through their lens of financialization and utilize fictitious economic calculations like discounted future cash flows and market capitalization. There’s very little Austrian flavor in their view — no acknowledgement of subjective value and the qualitative drivers of value, customer sovereignty, empathy, constantly changing customer preferences, no role for the entrepreneur in helping customers learn what they can want in an evolving world.
Our guest Erik Schön provides us with an entirely different view of strategy, which he arrives at via a synthesis of three great strategists: Sun Tzu, John Boyd, and Simon Wardley.
Knowledge CapsuleStrategy is how to survive and thrive and, for a business, the key tool is harmonization.Sun Tzu identified Purpose as the fundamental factor that keeps people united: customers, producers, suppliers, partners, owners, executives, employees, supporting each other without fear through success and failure.
In Sun Tzu, there are four more fundamental factors:
Landscape — your business environment.Climate: the forces acting on the environment.Doctrine: ways of operating.Leadership: actions, decisions, choices, and gameplays.Master all five to succeed, or else fail.
John Boyd added the dynamics of continuously changing intentions within the pursuit of the realization of purpose. (We find reflections here of Mises’ concept of constant flux — everything changing all the time.) Boyd’s definition of strategy Is a mental tapestry of changing intentions for harmonizing our efforts to realize purpose in a world that can be bewildering.
The purpose of strategy is to improve our ability to adapt: a vision that magnifies the strength and commitment of its adherents, and a grand ideal or noble philosophy providing a binding paradigm for all.
Boyd’s famous framing of the learning process to develop the ability to adapt is the OODA Loop.
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For Wardley, strategy is the art of moving in and manipulating an environment using tools such as positioning and technological innovation. Wardley’s major contribution is to visualize strategy in the form of a map where the X-axis is movement in the environment in predictable steps:
Genesis: a new technology or solution or brand is introduced; it’s unique.Custom built: a company identifies ways to serve customers with constructed products and services from the new origin.Product: move from custom built to standardization, including sourcing standard parts from suppliersCommodity: there’s nothing left that’s unique, many companies can be producers.Evolution: a new genesis emerges.
The automobile industry provides an example.
Genesis: the first internal combustion engine.Custom built: the first car brands, often from craftsmen and small workshops.Product: Many suppliers, competitive differentiation (Ford versus GM).Commodity: ICE automobiles produced in many countries (Japan, South Korea, China, Italy, etc.) with limited customer differentiation.Evolution: the beginning of the EV era.
Wardley’s approach is that all markets exhibit this evolution. It’s important to know the current landscape and predict the future landscape, moving through it with “the why of purpose” (to survive and thrive) and “the why of movement” (taking a particular action that moves you through the landscape). Everything evolves through supply and demand competition.
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The Sun Tzu, Boyd and Wardley approaches to strategy can be combined in the concept of the Strategy Cycle, Strategists move continually through the phases and components.
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The reference to these strategy masters enables businesses to move beyond business school strategy.Move beyond strategy as wars, battles and combat for market share, towards strategy as individuals, teams and organizations fulfilling their shared purpose.
Move beyond strategy for survival in competitive environments to sustainably thriving in a world with a high rate of change.
Move beyond strategy development as planning, metrics and data towards strategy development for a harmonized direction based on regular assessment of needs (especially customers’ needs) and the organization’s purpose.
Move beyond strategy development as execution and chasing targets to decisions and actions in a harmonized direction by everyone everywhere in the organization based on high situational awareness.
Move beyond business as maximizing shareholder value to business as succeeding together with customers and other stakeholders.
Move beyond leadership for managers and people in hierarchical leader roles to leadership as a service provided by all people in the organization.
Move beyond practices and principles for optimizing parts to harmonizing the whole.
The art of strategy is to succeed by securing harmony among stakeholders, and keeping competition off-balance through evolving better capabilities to influence, adapt and map.
The three strategists offer complementary views of strategic success.
Sun Tzu:Unite society rather than divide.Unite the organization rather than divide.Unite the team rather than divide.Make the organization resilient by cultivating purpose and doctrine.
Boyd:A grand ideal, overarching theme, or noble philosophy that individuals can shape and adapt to unfolding circumstances.
Wardley:Know your user — know your customers and know how to create value through meeting their needs.Set exceptional standards.Be resilient to cope with a wide variety of extremes and changes by rapidly adapting.
The great obstacle to adaptiveness in strategy is inertia in its various forms.Success breeds inertia, and inertia kills. It’s rarely a lack of innovation that kills companies, but rather inertia caused by pre-existing business models. Any past success with any component or element will tend to create a resistance to change. Inertia is a loss of capital — whether physical, human, social, or financial.
Strategists look to identify different categories of inertia and devise ways to counter them.
Category of inertiaCounterpointPeople resist disruption of past normsPast has evolved / lead the charge Write down cost of legacy, run more efficiently Building future agility Already happening in the market, falling behind Fear of transition to the newLet’s build new skills internally Develop capabilities in-house Develop relationships with new suppliers Work on adapting practices, not scrapping them Are we sure we can make the new work? Don’t seek certainty, seek learning Develop new standards, use open source Use multiple vendors, use brokers Improve supplier relationships Changing business models is hard Avoid death spiral; new approaches e.g., ecosystem Risk mitigation; spin off the old Use rewards, education, training Perfect telling the new story Leading without pressure and control.Erik uses the gardening analogy to illustrate the Sun Tzu style of leading without pressure and control. The gardener tends the garden gently, tilling and planting and watering ahead of time, and the flowers grow. Today we might call this style “self-organization”.
The three strategists are very consistent with the action-focused approach to entrepreneurship from Austrian economics. Action is learning. The path is made by walking. Try things out. Draw some Wardley maps as a trial. They’ll take you a long way.
Additional ResourcesThe Art of Strategy: Steps Towards Business Agility by Erik Schön: Mises.org/E4B_207_Book1
The Art Of Leadership: Purpose and Integrity for Sustainable Success by Erik Schön: Mises.org/E4B_207_Book2
Erik Schön on LinkedIn: Mises.org/E4B_207_LinkedIn
A Collection of Wardley Maps: Mises.org/E4B_207_Maps1
A Wardley Map of the Automobile Industry: Mises.org/E4B_207_Maps2
Entrepreneurship is by no means exclusively American. But this country has led the way in unleashing, encouraging and elevating entrepreneurship as the creative and virtuous pathway to the creation of new value for all. As a republic, we’ve established the institutional framework in which entrepreneurship can flourish, and entrepreneurs who are successful in creating value reap — and keep — the rewards. Dr. Samuel Gregg, in his book The Next American Economy, examines how this framework was designed at the founding, and discusses what we must all do to preserve it and re-animate it despite the attacks on it from the left.
Knowledge CapsuleEntrepreneurship and the founding of America are intertwined.America remains the most entrepreneurial country in the world, even if the degree is declining. Our nation has many people willing to pursue the uncertain path of creating new economic value for customers through new products, services and businesses; and, equally importantly, people who will try and buy the new offerings.
Alexis de Tocqueville captured the entrepreneurial character in Democracy In America. He thought everyone in America was entrepreneurial. He noted that those immigrants who arrived would quickly start a business, then move on to another one. He observed the tremendous creative energy of the United States. Immigrants have already embraced change in the act of leaving one country to establish themselves in another, and business entrepreneurship is a direct expression of this same love of change.
In fact, says Dr. Gregg, America was designed by its Founding Fathers — as they plainly expressed in the Constitution, Declaration Of Independence, the Federalist papers and documents like Washington’s Farewell Address - as a commercial republic based on entrepreneurship, and not a political or military or top-down republic or mass democracy. Commerce — or what we would call business — was not viewed with disdain, as it was in aristocratic Britain, but as republican virtue. Washington’s Farewell Address refers to the importance of expanding, of national and international navigation and trading, and about the development of strong markets to give Americans an outlet for their production. Business was viewed as the height of civilizational activity. There was a commercial ethic in the vision of a commercial republic which would grow wealth for all. Economic expectations were high and political institutions were designed to be compatible with these economic expectations.
There is an increasing trend towards government and the administrative state strangling the creative energy of American entrepreneurship.The erosion of institutional integrity shift and suppresses the creative energy of entrepreneurs. A strong tradition of property rights, in which entrepreneurs can feel confident that they will not only be able to earn but also keep the reward that come from satisfying customers and meeting demand, is an important element of the incentive structure for entrepreneurship. Similarly, entrepreneurs need to feel confidence that commercial disputes will be fairly adjudicated in courts. And they also need to feel confidence that government regulation will not act as an unreversible ratchet of restrictions on their value-creation activities.
The trends in the business environment in the US are currently running in the opposite direction: the property rights of successful entrepreneurs are being increasingly questioned and squeezed, commercial interests are viewed unfavorably in courts, and the regulation ratchet is running in the direction of more, not less, restriction on commerce.
Dr. Gregg sees the anti-entrepreneurship trend beginning in the Progressive Era and gathering pace since the days of Woodrow Wilson. Progressives seek forms of control that will suppress economic uncertainty and social turbulence. The entrepreneurial embrace of change and pursuit of new value must be suppressed. If society and the economy is to conform to their design, unpredictable creativity must be excluded. The progressive control urge took expanded form in the New Deal and the Great Society and all the successive opportunistically explosive expansions of government power.
The anti-entrepreneurial tool is regulation and the administrative state.Dr. Gregg employs the term corporatism to mean legislators and elected politicians, government departments and their administrative bureaucracies working together with big corporations and NGO’s to impose control through regulation — “attempting to manage everything for everyone else”. Corporatism is very uncomfortable with freedom, and is more than willing to trade off liberty, and the capacity of markets for entrepreneurial competition, in favor of stagnation and the vision of engineering a specific economic outcome. Their preference is for a form of regulatory state capitalism that exerts control over free enterprise.
Recently developed constraints such as ESG and DEI are a manifestation of state capitalism with a particular ideological edge that emanates from left-leaning politics. Companies can no longer have a free choice in the assembly and orchestration of their human capital, which will seriously impair the capacity of the economy to deliver what consumers expect of it.
Most of the government’s regulation is not aimed at any “public good” (e.g., overall workplace safety) but at special protections for specific interest groups. Often, the businesses who are protecting their interests are the ones who, first, initiate the regulation, and second, write it, through their lobbying firms. If citizens were more habituated to asking who is the group behind any specific regulation, there’d be a greater understanding of this problem and a developing distaste for regulation.
Dr. Gregg sees the expansion of state capitalism and the regulatory state as cyclical and capable of reversal.The trends are in the wrong direction, but are not irreversible. Dr. Gregg expressed great confidence in the ability of Americans to work their way around the regulatory barriers to creative entrepreneurship. He highlighted two of the optimistic themes in his book:
Capital, capital, capital: Regulation has made it increasingly difficult to match up small entrepreneurial businesses with the capital they need. It takes lots of expensive lawyers to navigate the regulatory jungle that exists for capital acquisition in the us. Yet, American entrepreneurs are proving to be just as creative in capital acquisition as in other fields. They can find their way around the regulatory system. Inventions such as crowdsourcing are a good example of new ways to access capital. The fintech industry is entirely dedicated to freer access to capital. Angel funds, regional and local venture capital funds, new entrepreneurial communities (such as Brandjectory) and new two-sided investment platforms provide more impetus.
Deregulate, deregulate, deregulate: If we want to retain the American edge in entrepreneurship, we should focus on reducing the size and scope of the regulation at the local, state and federal level. One of Dr. Gregg’s fears is that individuals become political entrepreneurs, and their efforts are directed towards finding ways to thrive in an expanding administrative state and insufficiently on creating new and improved products. Let’s find creative ways to reduce regulations, rather than creative ways to survive.
Additional ResourcesThe Next American Economy: Nation, State And Markets In An Uncertain World by Samuel Gregg: Mises.org/E4B_206_Book
One of the most helpful insights of Austrian economics for business is the understanding of uncertainty. To complete a sale to a customer is to take that customer on a journey from high uncertainty to lower uncertainty — sufficiently low that they’ll make a purchase and enter into the experience of ownership or receiving service. We illustrate this principle via the market for small business insurance — a service that our guest Ryan Hanley describes as confusing, time-consuming and costly, i.e., fraught with uncertainty for customers. He addresses the problem by freely dispensing usable knowledge, and explained to Economics For Business how that revolutionizes the industry.
Knowledge CapsuleIn a market where knowledge is hard to acquire, a knowledge provider creates new economic value.
The subject of small business insurance is quite opaque for customers. The language is often arcane and the terminology is hard to understand. The type size on contracts is small. It’s often unclear to customers what coverage they need, or what coverage they have, and what coverage they need. Ryan Hanley listened to customers’ questions and requests from his time as a retail sales agent and quickly understood that the provision of easy-to-consume and easy-to-understand insurance knowledge would be immensely valuable to customers. He started writing blogposts and FAQ’s for this purpose.
Expanded experience provides the foundation to be a credible and useful knowledge provider.
Ryan Hanley has held positions in the insurance field from sales agent to VP Marketing to Chief Marketing Officer to CEO. He’s also tried entrepreneurship in other industries. He’s talked to a lot of customers to understand their issues and problems and to try to solve them. This accumulated experience gives him the foundation to be a knowledge provider. He knows what knowledge is missing, what knowledge is most useful, and what form it should take for best delivery.
Knowledge becomes even more valuable to customers when it’s delivered with high empathy.
Ryan stresses that insurance is a superb service. If a customer business experiences a shock — its premises burn down, or it suffers a criminal theft — insurance is there to make things right again. It provides sustainability for a business and reassurance for the business owner and employees. Insurance is a high-empathy service.
However, the customer interface with insurance can be low-empathy — confusing and time consuming, and highly inconvenient to navigate by reading through contracts and filling out forms. Ryan’s solution is “human optimization”: making insurance easier to understand and easier to navigate and providing human contact and the human touch to add value. He points out that the insurtech innovations from Silicon Valley, which aimed to make insurance more efficient via an all-technology / no humans approach, has resulted only in unprofitable and failed startups. Customers need humans to give them trust in a complicated field they don’t understand. Digital automation is not the entire answer.
Freely available knowledge and the human touch combined with better technology elevates the service recipe to a higher level.
Ryan recognized that the native tech for the insurance industry, that had been built up over the years but become frozen and resistant to innovation, was a contributor to customer frustration. His answer was not new digital technology to replace the old, but a clearer identification of the customer problem: the multiple insurance tech systems were not well-connected with each other and not well integrated. The solution lay in better API’s and better software integration, which is what Ryan concentrated on. So now he could bring the human touch, plus new knowledge to fight confusion and opacity, and better technology exhibited as faster flow between content modules.
The business benefit lies in customer relationships and customer retention.
The business model for insurance depends on customer retention. Selling a policy is not profitable on day 1, but becomes profitable over time as cash flows from periodic premium payments. Customer retention is the key to profit and retention reflects satisfaction. Ryan is demonstrating that setting a high standard at the front end of the contract, with a more human interface, freely dispensed knowledge, and convenient navigation of the insurance process, results in profitable revenue streams and a high cash flow ROI over time.
Listening to customers, understanding their needs, and discovering the best way to serve results in retention.
Customers are looking for a special form of reducing uncertainty.
Insurance sells protection from risk. This is math to them, a calculable probability that governs what they charge for premiums and how much capital they need on hand for payouts. For customers, insurance is relief from uncertainty, a subject value that’s not math. They worry about sustainability: will they survive the shock when there is a fire or a crime. Ryan’s approach is to help them advance from high uncertainty (I’m not sure of all the risks, I am not sure what is the right coverage for my business) to lower uncertainty (I’ve been given new knowledge, so I am more informed, I know enough to make a choice of policies and providers). Ryan’s company can customize service (including, for example, matching payments schedules to the seasonality of a customer’s business) so that the customer feels certainty that the service is matched to their need.
Knowledge is education plus creativity. The result is trust.
The kind of knowledge that Ryan dispenses about insurance is education. Recipients are learners, filling in knowledge gaps. It can come in the form of YouTube videos or blogposts or any other form. Ryan’s Rogue Risk site offers hundreds of videos and articles. He is educating the customer base.
Creativity in communication is a vital part of the recipe. Education delivered with creativity stimulates curiosity and productive conversations. Even for a potentially dull subject matter like insurance, creativity add spice and extra interest. Creativity is human, and the human component can deliver trust. Giving knowledge away rather than hoarding it is a great start towards a trusting relationship.
In economics, production and marketing are not separate concepts. Production responds to customers’ needs and marketing is the expression of those needs inside the firm. The entire customer-facing activity of the firm is marketing. Like any other business activity, there is constant flux brought to bear by changing customer preferences, competitive innovation and market evolution. Marketing must be adaptive to change, and a major shift is occurring right now. Mark Schaefer writes about it in Belonging To The Brand: Why Community Is The Last Great Marketing Strategy.
Knowledge CapsuleEstablished strategies and tactics of marketing are no longer effective.Marketing thought-leader Mark Schaefer puts it this way: marketing doesn’t work like it used to. The established techniques were biased towards outbound communication, such as advertising, PR and events. Mark classifies these techniques as “interrupt and annoy” to try to get customers to give their attention to feature and benefit of the company’s offerings. The communications environment shifted from analog to digital and from outbound to interactive, but interrupt and annoy remained the primary technique.
Finally, there’s an alternative marketing strategy.The new strategy goes by the term “community” or “community building”. As economics advises, it’s a product of customer sovereignty. People want to belong to communities that share values and interests. And in the digital age, where work-from-home and glued-to-a-screen are life conditions that can lead to profound loneliness, the need for belonging is amplified. The covid lockdown experience exacerbated the problem.
Community is an experience that is highly valued by customer, distinguished via three features:
Connection with each other. There’s a group feeling of difference that’s not shared with others who don’t belong to the community.Purpose: community members gather because they have a shared reason to do so, whether it is software development or wine appreciation or the development of technical skills. There are shared rituals and traditions and common behaviors that generate a sense of group identity and bonding through common values.Relevance: A thriving community adapt and adjusts as times and members’ needs change. Adaptability strengthens group cohesion and assures continuity and resilience.There’s a business case for community building.Community-building may replace brand-building as a primary pathway to facilitating value for customers and thereby generating strong cash flows. The technique has a viable business model.
Differentiation: when customers bond in community, they’re differentiating themselves and the brand(s) they prefer and support. It’s a lasting advantage.Market monitoring: a community is a continuing conversation, a source of insight and signals of change.High speed information: the flow of information from customers and markets to firms is another source of advantage. The behaviors and preferences of community members can be continuously polled, with the opportunity for fast response.Trust. Businesses are recognizing the importance of trust in relationships with ever-greater clarity. Brand communities are trusted by their members; trust is inherent.Advocacy. Community members become the marketer. They communicate benefits and positive experiences. User-generated content both reduces marketing costs and adds authenticity and belief.Loyalty: The most profitable customers are the most loyal customers. Community members are loyal, and, in fact, go beyond loyalty to “attachment”.Co-creation. Value is created by customers in their own experience, or it can be viewed as co-created through interactions with the firm and its products and services. In brand communities, there is community co-creation, such as in LEGO Ideas groups and the IKEA user community.Membership as a product: Some communities become the business modem as members pay both to join and maintain membership and purchase the products and services of the community.Cultural alignment: community is a trend, especially for younger people experiencing social and digital isolation.Customer data: when members freely express their values and preferences, they create a rich new first-hand data source.Purpose is the critical driver.There’s a case to be made that a brand is its purpose. A clear and compelling purpose provides inner direction for the entrepreneur and the management team throughout the entrepreneurial journey. Shared purpose can bind customers to the brand. The same is true for a brand community; Mark Schaefer talks of bold, piercing purpose that aligns every resource of the company towards the community goal. Harley-Davidson is one (well-used) example: fulfilling dreams through the experience of motorcycling. The purpose is a customer experience, aligned with their values and open to their expansive and creative interpretation.
Corporate purpose, when genuinely felt and well-expressed, Mark writes, can be existential (this is why we exist?), differentiating (how do we make a difference?), values-based (how are our founding values relevant to the world?), distinctive (what headlines will be written about us), adaptive (how is the world changing in a way that unites us with our community?) and fulfilling (how can we fulfill customers’ dreams?)
Additional ResourcesMark’s Books:
Belonging To The Brand: Why Community Is The Last Great Marketing Strategy: Mises.org/E4B_204_Book1
Marketing Rebellion: The Most Human Company Wins: Mises.org/E4B_204_Book2
The Marketing Companion podcast: Mises.org/E4B_204_Pod
Mark Schaefer website: BusinessesGrow.com
Progressives claim that poor nations are that way because wealthy nations exploit them through the capitalist system. Cultural institutions, it turns out, are the most important indicators of wealth and poverty.
Original Article: "When It Comes to National Prosperity, Don't Forget the Culture"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Dr. Peter Klein, professor of entrepreneurship at Baylor University and co-author of the new book Why Managers Matter, joins Jeff and Bob to explain the huge disconnect between supply and demand for labor in post-COVID America.
Dr. Klein's new book Why Managers Matter: Mises.org/HAP378a
Despite worries that foreign "competitors" will surpass economic production in the United States, innovation and entrepreneurship are still important here. For now.
Original Article: "For Now, Innovation and Entrepreneurship Still Holds a High Place in the USA"
This Audio Mises Wire is generously sponsored by Christopher Condon.
The concept of risk provides us with an excellent opportunity to bridge between formal economic theory and personal business experience. Economics provides us with rigorous understanding of risk and uncertainty and the distinctions between them and their various types. But risk — the word that we use in everyday conversation — bring with it subjective feelings that affect how we approach it.
Knowledge CapsuleIt’s appropriate for entrepreneurs to reframe the concept of risk so that they can embrace it wholeheartedly.Risk has traditionally been framed as the downside of a choice. It’s the potential negative outcome for anything we try. But we just have to look at our own lives to see that a lot of risks we’ve taken have generated upside, whether that’s choosing a college, getting married, or taking a particular job. If we feel good about the outcome, then risk is a path to reward.
Part of the reframing of risk is to see it as a process rather than a single choice.Risk can sound like it comes at us as a single choice, or an event, or a once-and-for-all decision. It’s much better to think of risk as a process — a behavioral process rather than a decision-making threshold. The risk process is one of experimentation —taking small steps, trying different things, getting feedback from the market, making adjustments, then trying some more things.
Instead of “starting a business”, we can think of setting out on the pathway to entrepreneurship. Instead of “committing to a future new product launch”, we can think initiating an exploration with low resource commitment until we have better feedback knowledge in order to take the next step and commit more resources. We can think of a new initiative as an experience gap that we look to fill with knowledge from experts and experience from mentors or advisors who’ve done something similar.
The key to this reframed risk process is a courageous commitment to perpetual learning.Through learning, we can all redefine our understanding of risk and re-establish our relationship with it. A part of risk is the ego-bruising realization that we don’t know everything and can therefore make mistakes, or take actions that have unintended consequences.
By embracing learning, we establish a social reward for not knowing — learning is viewed positively, as a reward. Developing new knowledge is one of the primary roles of the entrepreneur. While it may take intellectual courage to own up to not knowing, the courage is rewarded with new understanding and new advantages. There’s always opportunity to learn more.
Imagination is an antidote to risk.Imagination can overcome risk. We all have the capability of imagining future achievements — “future wins”, as Angie Morgan Witkowski put it. Imagination can be an exercise in creativity, and it’s OK to let it run wild, releasing our minds from the restraints that risk can impose. Taking the time for free-thinking can be very beneficial.
The pathway to the imagined future is to marry possibility with probability. In our exercise in imagination, it’s easy to eliminate the impossible. But we shouldn’t limit the possible. We can start from the imagined possible future and then work back through probabilities about whether we can accomplish it. Angie stimulated her business imagination vi a sidewalk margarita bar in Florida and ultimately opened a successful coffee shop in Traverse City, Michigan. It was a process of working backwards from what was possible to what was more probably, given her circumstances.
Similarly, her consulting business started by imagining writing a book about a better style of leadership than is taught in business school. She contacted literary agents, who encouraged her not only to write the book but to also start a speaking business. The audience for her speaking engagements sought consulting help, and she developed a series of workshops as part of the delivery system. Her consulting business is now cross-industry, from startups to the oil-and-gas majors, and worldwide. It started with imagination.
Imagination is complemented by hard work and realistic capacity assessment.It would be wrong to think that the reframing of risk to action and perpetual learning comes additional without costs. Angie mentioned two. One is hard work. All learning pathways must be undertaken with the commitment to working as hard as it takes to advance. It requires time, effort, and continuous review. The intellectual courage that Angie highlighted is hard work in itself — the cognitive work of thinking about how to think, exercising cognitive discipline, exploring flexible options such as design thinking, that require the effort of looking at problems from many different perspectives.
The second cost Angie mentioned is the honest assessment of our capacity. We can imagine future wins and assess the probability of achieving them, but we must be honest about our capacity. Do we have the resources, do we have the skills, can we assemble the right team, are we willing to undertake the hard work?
Putting hard work and capacity together means we don’t risk an inadequate attempt to solve the target problem. As Angie put it, using Marines language, don’t be “half-assed”.
Action is more important than planning.Angie’s prescription in her book, Bet On You, is for one-third of time to be allocated to planning and two-thirds making things happen. The make-things-happen part is what generates the feedback loop and learning that is so important. Here are Economics For Business, we’d probably relegate planning to 10% or less of resource allocation, but the point is the same. Action is the more important.
There is one aspect of planning that can deliver extra value, and that’s planning for failure, or contingency planning. Our imagination should be partially applied to imagining what could go wrong. How would the contingency transpire? What would we do next if it did? We should prepare for resilience in the aftermath of a setback.
A plan, in Angie’s words (which, in turn, come from the Marines), is a reference point for change.
Ultimately, risk must feel good.If the antidote to the downside of risk is imagining future wins, then we can also benefit from a focus on the wins we experience every day. Choose the path that feels good both tomorrow and today, and that makes all efforts worthwhile.
Additional ResourcesBet On You: How To Win With Risk by Angie Morgan and Courtney Lynch: Mises.org/E4B_203_Book
Bet On You Podcast: Mises.org/E4B_203_Podcast
Angie Morgan Witkowski on LinkedIn: Mises.org/E4B_203_LinkedIn
Entrepreneurial business solutions can lead to better outcomes in every economic endeavor. In the field of medical care, entrepreneurship has been hampered by non-market arrangements. There’s some sense of an emerging trend towards better choices for users, a trend that we discuss with economist Dr. Murray Sabrin.
Knowledge CapsuleAll systems evolve. The current system of medical care uncoupled from private markets evolved in ways that result in higher costs and poorer outcomes.
Our economy — and the economic experience of all of us as individuals — would be improved (i.e., greater customer value would be experienced) if we could lighten the burdensome weight of government regulation and its consequent effects on the system of medical care and medical insurance.
Our homeowners insurance, our automobile insurance and our life insurance are market products that give us the experience of seeking information and making informed choices based on pricing and perceived benefits. Medical insurance has evolved differently — it’s tied to work and puts us in a medical system where prices and choices are opaque and highly constrained. The associated costs are a great burden on the economy, and they result in diversions of productive investment from better uses.
The evolution of employment-linked healthcare began in dangerous industries like forestry logging, when employers introduced on—site medical care to treat on-the-job accidents — employers understood the mutual benefit of a healthy workforce. During and after World War II, the incentives for employers shifted: wage controls prevented them from attracting workers with higher pay, and so they introduced the benefit of tax-free healthcare benefits. An industry linking employment and medical care grew by leaps and bounds.
Today, both employers and employees are beginning to understand the drawbacks of the evolved system.In the evolved medical care system today, employees feel constrained because they can’t freely choose their doctors and service providers, and healthcare treatments they might want are often made unavailable to them. They’re not made aware of pricing, and therefore unable to make informed choices.
Employers are beginning to understand the high costs for traditional indemnity insurance, and many of them are seeking alternatives. Dr. Sabrin listed a number of these emerging innovations.
- Employer self-insurance.
Instead of incurring the heavy cost of insuring via the conglomerates like Blue Cross Blue Shield, Humana, Aetna, United Healthcare and others, many employers are shifting to self-insurance, hiring an independent third-party administrator to set premiums for normal expenses, and utilizing re-insurance against the cost of catastrophic medical events.
- Medical savings accounts.
Financial innovation has opened the possibility of utilizing current savings for future medical expenses, ideally deposited tax free, appreciating tax free and withdrawn tax free (although, inevitably, there are government restrictions). It’s another component in the free-market medicine revolution.
- Medical cost sharing.
Some affinity groups take the route of medical cost sharing — groups pooling funds to pay individual medical costs. Some of these groups may create membership lifestyle qualifications — non-drinkers, non-smokers, etc. — to link healthy behaviors to lower medical care costs.
- Wellness rather than healthcare.
The realization is dawning that medical care costs are inflated by unhealthy lifestyles. Employers and employees share a mutual interest in a healthier workplace and healthier workforce. Better alignment of incentives could encourage healthier eating and drinking habits, greater levels of exercise, and generally more health-conscious behavior. The feeling of entitlement to healthcare that can result in a lowered drive to stay healthy is a moral hazard that has been induced by the current medical care system. Reducing medical care costs via a healthier workforce is a win-win for employee and employer alike.
Restoring the doctor-patient relationship via Direct Primary Care.
The primary care doctor who has a knowing and caring relationship with individual patients, and who knows their ailments and their lifestyle, and their family and economic circumstances, is a historical tradition in American life, a part of the American dream. The corporate medical care system took this relationship away in many ways, replacing it with an impersonal system of “in-network” availability of physicians with no personal relationship component.
Direct Primary Care is restoring the doctor-patient relationship following principles of entrepreneurial business design. A doctor contracts with a small number of patients — few enough to ensure availability and access — who pay a subscription fee, sufficient to provide cash flow for the doctor’s office and immediate support functions. The doctor constructs a personally curated set of network connections to specialists, such as cardiologists or urologists, and to services such as imaging and lab analysis, so that patients can be directly connected with pre-selected and approved providers for specialist needs.
Direct Primary Care can eliminate or circumnavigate much of the bureaucracy, paperwork, and creativity-stifling sclerosis of current day corporate medical care systems.
- Pricing transparency.
A parallel innovation to DPC is demonstrated in transparent pricing clinics and surgeries, the clearest example being provided by Surgery Center Of Oklahoma (SCOO) which famously provides an open price list for commonplace surgeries, with no surprise surcharges or hidden fees. These prices are often much, much lower than would be charged for the same service by corporate hospitals; the quality is often higher; the speed of getting an appointment is faster; and the most important trait is that the pricing is transparent to the end-user. Patients become consumers in the traditional sense of the word — able to make a free choice based on open pricing information.
- Better self-monitoring.
How’s your health? You may not have sufficient information for a good answer – the medical care system often makes information hard to access. One improvement is the self-monitoring that is technologically enabled today. Your Apple watch, for example, can tell you a lot about your vital signs, as can apps+devices like Kardia or a simple scale.
Consumers may also be able to find a local DPC doctor or naturopath with whom to share the data for recommendations on natural solutions for any signals they might detect. This is a decentralized approach to healthcare that’s consistent with the general trend away from restrictive top-down centralized structures and processes.
Additional ResourcesThe Finance of Health Care: Wellness and Innovative Approaches to Employee Medical Insurance by Murray Sabrin: Mises.org/E4B_202_Book1
From Immigrant to Public Intellectual: An American Story by Murray Sabrin: Mises.org/E4B_202_Book2
MurraySabrin.com
MurraySabrin.Substack.com
It’s the ambition of every entrepreneurial business to advance from a standing start to customer—recognized leadership in its chosen field. It’s achievable, even without breakthrough technology and venture capital financing. Trini Amador’s Gracianna Winery is one of our Economics For Business entrepreneurial businesses of the year for 2022 for precisely such a journey story. Trini joins us to review the principles, processes and programs that are driving success.
Knowledge CapsuleGracianna is the most awarded winery.Metrics of success can vary across categories and industries. In the wine industry, awards presented in tastings conducted by prestigious panels and arbiters are important signals to customers. In a recent period, Gracianna winery, a small craft producer in the highly competitive Russian River wine area of Sonoma County, California, has become the most awarded in its class. And since that class is, by the owner’s choice, world-class — the best-of-the-best — the achievement is elevated to the highest possible level. Examples of the awards won include gold medals at the Sommeliers Choice Awards and the Sunset International Wine Competition, and double gold at the Los Angeles International Wine Competition. More awards are listed at Gracianna.com/Awards
Gracianna winery has also won hospitality awards for its tours and wine tastings, including a #1 position on TripAdvisor for Things To Do In Healdsburg, CA (out of 117 competing alternatives).
Everything begins with a commitment to understanding customer needs.Trini and his family set themselves a goal of making a mark as a world class winery. They’ve certainly done that. How? Trini Amador is an entrepreneur in the Austrian tradition: the entire journey starts with deep understanding of customers and their needs. Who are the people who enjoy world class wines and associated experiences, and why do they choose to participate in this industry as consumers? What kind of experiences do they seek? How do they want to feel about those experiences?
Why do they undertake travel to visit different wineries? Why do they choose California, and Sonoma County and the Westside Highway in the Russian River Valley? How do they like to buy online? Why do they join wine clubs? All of these choices are emotionally driven — the answers lie in the heart and not the data.
Becoming a world class winery is a direction of travel, and the destination becomes clear with more and more learning about customers and their needs, wants and preferences. Brand vision is integrated with customer understanding and empathy.
Focus and feedback can take a brand to the top.Trini describes his company and his team as obsessively focused on customers. As they collect more and more customer knowledge via more and more interactions, the better they get at serving customer needs.
There are really only two I techniques: listen and observe. Since the Gracianna experience includes onsite tastings and tours, the Gracianna team can meet customers face to face and listen for their responses, preferences and hopes. And since all Gracianna wine is sold direct via the internet, butting activity can be observed directly. The requisite business skill is always to pay attention for signals, and always attend to the feedback that results from interaction. All guests are self—selecting themselves to be part of the Gracianna story. They’ve chosen the relationship. Gleaning the motivation behind their doing so is the goal of the marketing team.
Consistent, precise execution is more important than strategy.Once the brand’s direction is set, and an initial understand of customers is established, then execution takes over. Execution is a daily discipline, and the power tool is consistency: establishing a high standard and maintaining it in every action.
It’s perfectly possible to build a brand this way. Trini likened his approach to building a bird’s next — one twig at a time. Every act of execution, every customer service interaction, every e—mail and every tasting service is another twig added to a perfectly shaped, ultra—strong construction. Small brands can claim ownership of an equity this way (such as “best tasting room experience” on TripAdvisor) without expensive investment in communications; just execute, execute, execute. Let employees on the team exercise both their responsibility and their creativity in precision execution. Always aim for effectiveness (the best possible execution) rather than efficiency (the lowest cost or least—resource execution).
The best kind of planning is contingency planning to establish a prepared adaptiveness.Wine is, at its fundamental level, an agricultural business. Trini calls it rhythmic — grow, harvest, make wine, store wine, release a vintage. No two growing seasons are ever alike. In addition, there can be crises — excess rain, floods, unusual growing temperatures, fires, pests. The best way to deal with these variations is contingency planning, i.e., imagining all the things that could go wrong and having a set of actions in mind if they do.
Adaptiveness is a core attribute for all entrepreneurs, and is especially applicable in wine. Explore and expand is an orientation that fully applies — once the curves that nature throws have been negotiated.
The greatest entrepreneurial attribute is courage.In face of all the challenges and amidst all the uncertainty of an entrepreneurial business, Trini maintains that the key to a successful outcome is not so much strategy as courage. Make the best decisions you possibly can based on understanding customer needs, and then have the courage to act on the decision. The action generates interaction, which results in feedback, which provides the knowledge and energy for the next decision and next action.
Courage is the entrepreneur’s best business tool.
Additional Resources"Gracianna: Award Winning Winemaking and Entrepreneurship" (video): Mises.org/E4B_201_Video
Gracianna.com
Lisa Amador’s Cookbook, Comfort! A Gracianna Member-Inspired Cookbook: Mises.org/E4B_201_Cookbook
Trini Amador’s "Brand Uniqueness Blueprint" (PDF): Mises.org/E4B_201_PDF
We’ve conducted 99 conversations with value-creating entrepreneurs, and we’ve conducted about 100 Q&As with business school professors who research and teach value creation. Here’s a headline summary of what we’ve learned.
Knowledge Capsule1) A firm is defined by its purpose.Firms with a clear purpose that aligns everyone who works there, along with all suppliers and partners and customers, perform at a high level over the long term. Lack of clarity of purpose is associated with fluctuating performance and often with “fade” — permitting competitors and market changes to erode away a firm’s advantage.
Knowledge Capsule #199: Mises.org/E4B_200_A
2) A successful firm’s purpose is always based on value for customers.Purposeful firms identify a vision of value received by the customer, and commit themselves to it. They craft a business model to deliver the vision, including continuous increases in efficiency and continuous innovation, thus expanding the value space in which they operate. They build and maintain strong relationships in all directions. They look to the long term, including future generations.
Per Bylund and Mark Packard on Subjective Value, The New Economics Of Value and Value Creation: Mises.org/E4B_200_B
Econ4Business.com/value
3) Firms need a deep understanding of value.We say in Austrian economics that value is subjective. It’s formed entirely in the mind of the customer, as result of a customer’s learning process: becoming aware of a firm’s offering, evaluating its attractiveness, comparing it with alternatives, putting it to use and assessing whether the usage experience met expectations. They learn from their own perspective, in their own context, and in the process of running their own system (their household, their office, their factory) and living through dynamic changes that alter their perspective. Value is a 2-way flow: the value proposition flows to the customer, and the value experience flows back to the firm as cash flow and feedback.
The value cycle is complex and understanding it is very demanding, as is understanding the customer and their system. Winning firms work hard to build a deep value knowledge.
The Value Learning Process: Mises.org/E4B_200_C
4) Purpose + Value Creation + Entrepreneurship.In Austrian economics, entrepreneurship is the driver of the business system. The term is often misinterpreted as pertaining to start-ups and small business innovation. It actually pertains to value creation. Entrepreneurship is an approach to business that starts with the customer and their needs — a definition of what new value opportunities are currently unmet — and develops the knowledge and assembles the capability to craft a product or service to meet those needs. There is time uncertainty and resource risk in committing to this development. Any firm and any project that pursues this new knowledge with the intent of creating new customer value is entrepreneurial, irrespective of scale.
Entrepreneurship also weeds out elements that are not value drivers — bureaucracy, obsolete assets and unproductive infrastructure such as luxury office suites. Entrepreneurial firms are focused and efficient.
This is Value Entrepreneurship: Mises.org/E4B_200_D
5) Entrepreneurial firms operate unique value-centric business models.Entrepreneurship is action, and the set of actions the firm takes to make money consistently over the long term is called the business model. Business models vary by industry — some industries are more profitable than others — and by firm — in every industry, there is something about some firms that makes them more profitable than others. That something is their business model.
The business model that emerges from 199 Economics For Business episodes is the 4V’s model:
Value understanding: building an advantaged and exclusive knowledge base on understanding your chosen customers and their value needs and value preferences.
Value facilitation: designing and assembling a system to meet those needs and preferences and taking it to market for feedback on customer acceptance and approval.
Value exchange: market implementation at scale to generate reliable recurring cash flows from customer purchases and relationships.
Value agility: systems to receive and respond to feedback in a dynamic, responsive flow.
Per Bylund introduces the Austrian Business Model: Mises.org/E4B_200_E
The Austrian Business Model Video: Mises.org/E4B_200_F
Hermann Morris’s Business Model: Educate The Industry: Mises.org/E4B_200_G
- The entrepreneurial mindset is different.Over 199 episodes, we observed the following characteristics of the entrepreneurial mindset:
Greater capacity for imagination: imagining great futures for customers;
Better judgment: judgment is intent (the strong emotional relationship with a desired successful outcome), plus intuitive decision-making when data are incomplete, plus confidence in action-as-experimentation, whatever the degree of uncertainty;
Learning: entrepreneurial firms are learning machines, and especially good at challenging their own assumptions.
Empathy: the skill to understand how customers feel subjective value, and to process data through the customer’s mental model;
Orchestration: entrepreneurial firms seldom have direct control over all the resources required to deliver value, and they are expert at orchestrating others’ resources, including their time and skills and knowledge.
Embrace of change: entrepreneurs don’t fear change, they welcome it as an opportunity.
Peter Klein: Opportunities Don’t “Exist”. Entrepreneurs Create Them: Mises.org/E4B_200_H
Victor Chor’s Entrepreneurial Orientation: Mises.org/E4B_200_I
- Explore and expand.Entrepreneurial firms not only embrace change, they make it, through a process we call explore and expand. It means always running lots of experiments to see what works unexpectedly. Experiments should be designed to refute existing assumptions. There should be a wide variation of experiments, not just a series of nuanced changes. Entrepreneurs look for a big variation in outcome and so they make big variations in inputs.
The Age Of Strategy Is Over: The Replacement Is Explore And Expand: Mises.org/E4B_200_J
- Harnessing the highest values.What guides customers’ behaviors are not features and attributes, like pricing and performance metrics and guarantees, but values. The firmest guidance comes from the highest values. If a customer’s highest value is family security, they’ll never buy any offering that doesn’t align with their value system. Successful entrepreneurial firms know how to climb the values ladder from features to highest value, providing strong rungs at every level, and always going all the way to the top.
Internally for business, the highest values are service to others, delivered in the form of value creation, and ethical behavior.
Value As A Basis For Business Building: Mises.org/E4B_200_K
- Managing the loopBusiness is a flow. In business-as-a-flow, there’s no start and no finish. It’s non-linear. The environment is entirely uncertain and unpredictable. A business forms its intent, and then chooses and implements actions it judges will advance that intent. There’s no way to know what the result will be, and so the business commits to receiving and reading the feedback, making appropriate adjustments, and then implementing new, adjusted actions, to gain the next round of feedback.
This is the flow of knowledge-building, and it flows as a repeated loop, with the same process but different actions, new learning and continuous adjustment.
With sound and active monitoring and management, the loop will generate some durable learning that merit repeated action. Cash flow will flow back to the company, and profitable returns will grow. The loop can be self-reinforcing.
Mark McGrath: OODA Loop: Mises.org/E4B_200_L
Bart Madden: Proficiency With The Knowledge-Building Loop Is The Key To Value Creation: Mises.org/E4B_200_M
Value for customers is the purpose of all entrepreneurial business. Firms big and small must know, follow, and adhere to the principles of value creation. This is pragmatic not theoretical — the consequence of a failure to do so is that the firm cannot survive.
Bartley J. Madden studied value creating firms as a co-founder of a successful investment research firm and then managing director of Credit Suisse HOLT. He is now an independent researcher and founder of the Madden Center For Value Creation in the College of Business at Florida Atlantic University.
He joins the Economics For Business podcast and shared a summary of a lifetime of research.
Knowledge CapsuleA systems thinking approach provides the best route to understanding value creation.The business firm is a sub-system within a bigger system, that of society. The effectiveness of the firm is tied to organizational learning and the evolution of dynamic capabilities. Bart Madden’s pragmatic theory of the firm treats it as a holistic system with a well-defined purpose. If it is successful in achieving its purpose, it will benefit the larger societal system.
The purpose of the firm is a four-fold composition of mutually reinforcing goals.Sometimes, the business literature is guilty of treating purpose as a PR statement, a catchphrase that can be communicated without it necessarily governing the firm’s behavior. Bart Madden’s view of purpose demonstrates much greater depth, appropriate for complex systems management. Purpose is 4-fold:
A vision of the value that can be realized by customers, and that can inspire and motivate employees to work for a firm committed to ethical behavior and making the world a better place through customer value. [[{"fid":"137418","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 1","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"1":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 1","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"Example 1","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"1"}}]] Customers consume value by experiencing it in their interactions and relationships with the firm. The customer’s experience is dynamic within their own system of competitive offerings and alternative choices.Survive and prosper through continual gains in efficiency and sustained innovation. These are long term performance variables that depend directly on a firm’s knowledge-building proficiency. A firm must generate a return that is greater than the cost of capital, and as it matures, this return can be eroded away by competitors who offer lower prices or different features to customers. Building knowledge and translating it into new business capabilities is critical for long-term survival. [[{"fid":"137419","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 2","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"2":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 2","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"Example 2","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"2"}}]]Work continuously to sustain win-win relationships in every direction. Relationships with customers are primary for value creation, and relationships with employees and managers must generate the understanding, motivation and commitment to delivering customer value, while relationships with suppliers, collaborating firms and other partners must result in their best support for value creation. It’s a way of living and doing business that engenders trust all around. Shareholders are also rewarded as a consequence of these relationships.Take care of future generations. The long-term view of the pragmatic theory of the firm as a system within the bigger system of society emphasizes thoughtful concern for the future, so that return on capital can be sustained. Paying attention to minimizing waste in the earliest product and service design stages can serve the future, and this includes minimizing pollution (a form of waste) and reducing harm to the environment.[[{"fid":"137421","view_mode":"image_no_caption","fields":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 3","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""},"type":"media","field_deltas":{"4":{"format":"image_no_caption","alignment":"center","field_file_image_alt_text[und][0][value]":"Example 3","field_file_image_title_text[und][0][value]":false,"field_caption_text[und][0][value]":"","field_image_file_link[und][0][value]":""}},"attributes":{"alt":"Example 3","class":"media-element file-image-no-caption media-wysiwyg-align-center","data-delta":"4"}}]]A firm that is successful in achieving its four-part purpose benefits customers, employees, partners, suppliers and shareholders, as well as society at large.
Nurturing and sustaining a knowledge-building culture is the most critical driver of long-term performance.Knowledge-building is a continuous loop:
Knowledge base, purposes and worldview: Every firm has a knowledge base that determines current perceptions or current worldview, which includes ideas and beliefs and assumptions about interacting with the world.
Perceptions: We see the world through our perceptions and construct our reality that way. We may be self-assured about some favorite ideas about the obvious way to proceed, but we may be proven wrong via future learning.
Purposeful actions and consequences: With its purpose in mind, the firm takes actions, and each action has consequences, which may or may not have been anticipated.
Feedback: Learning from actions and their consequences is consumed as feedback, a critical component of the knowledge-building loop. The knowledge base changes as a result of this learning. An existing assumption may be replaced. Humility is important when traversing the knowledge-building loop.
New understanding and new perceptions: As a result of feedback and learning we may be able to evaluate our assumptions differently and perceive the world in a new and more accurate way.
It’s hard to be skeptical about our own strongly held beliefs, and therefore a cultural commitment to experimentation — the kind that’s capable of revealing obsolete assumptions — is necessary.
Knowledge-building stems from firm culture.Knowledge-building proficiency is a culture which views everyone in the firm as a value creator and a knowledge worker who can continuously improve their own problem-solving skills. This, in turn, motivates all employees since they can take great satisfaction from their jobs.
One of the errors of the traditional command-and-control management structure is that it assumes the smartest people are “higher up”, and it takes decision-making away from those closest to the customer and to the most relevant knowledge. The higher-ups set short-term targets for the employees, which is inconsistent with treating individuals as learners and value creators.
Knowledge-building occurs, and must be nurtured, at every layer of the firm.
The correct view — and the correct measurement — of firm performance is the life cycle.All firms traverse an inevitable life cycle. Bartley J. Madden’s books and research picture it this way.
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During a period of high innovation, economic returns are high, and firms can reinvest at a high rate. This inevitably fades as competitors erode the advantage. In maturity the returns approach the cost of capital, and the business model may fade to the point where it fails to make the long-term cost of capital. That’s why firms must always be investing in long term new innovation projects for continuous refreshment and to repeat the high return stage. They must demonstrate to investors a skill in making these high return long term investments. The stock price is an appraisal of this skill.
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The life cycle components are the long-term cost of capital, the return on capital that results from knowledge-building proficiency, the fade rate and the reinvestment rate. The metrics of firm performance are those related to the life cycle.
Additional ResourcesThe Pragmatic Theory of The Firm and The Knowledge-Building Loop (PDF): Mises.org/E4B_199_PDF
Books by Bartley J. Madden:
Value Creation Principles: The Pragmatic Theory of the Firm Begins with Purpose and Ends with Sustainable Capitalism: Mises.org/E4B_199_Book1Value Creation Thinking: Mises.org/E4B_199_Book2CFROI Valuation: Mises.org/E4B_199_Book3Reconstructing Your Worldview: The Four Core Beliefs You Need to Solve Complex Business Problems: Mises.org/E4B_199_Book4Paper: "Bet on innovation, not Environmental, Social and Governance metrics, to lead the Net Zero transition" by Bartley J. Madden (PDF): Mises.org/E4B_199_Paper
Good Strategy Bad Strategy: The Difference and Why It Matters by Richard Rumelt: Mises.org/E4B_199_Book5
Plain Talk: Lessons From A Business Maverick by Ken Iverson: Mises.org/E4B_199_Book6
Brands are prized by corporations as significant value-driving economic assets. Brands help customers enjoy more valuable experiences, raising willingness-to-pay levels and thus improving cash flows — higher cash flows as a result of higher prices, faster cash flows because branded products tend to turn faster than their non-branded counterparts, longer lasting cash flows because brands have longevity in customers’ perceptions, and less volatile cash flows because brand loyalty can smooth out the effects of economic booms and busts.
For these reasons, corporations invest in brands and brand building. Catherine Kaputa makes the case that individuals should invest in themselves as brands, and makes the tools of brand-building available to individuals for personal brand-building: the brand of you.
Knowledge Capsule You are a brand, assessed subjectively by your customers. Think of yourself as a brand. Think of your customers - your boss, other leaders and decision-makers in your firm, your colleagues, your clients, your suppliers. They all have a subjective perception of you and the value to which you can contribute in any business situation. Is it the perception you want? Do people see you as the problem solver and solution designer for their problems? Like any brand owner, you can work to actively shape that perception. As Catherine Kaputa puts it: If you don’t brand yourself, others will, and they may not brand you the way you want to be branded.
The first tool in the branding toolbox is positioning. The branding community has developed the idea of brand positioning. In the perception space in which your brand operates, you seek to identify a unique, highly differentiated position. You want to be perceived as different and better. Positioning is the identification and selection of that unique space in the minds of customers and the basis of the of credibility, reputation and trust to be able to make the claim.
Importantly, positioning requires outside-in thinking. Think of your customers first, their needs, their mindset, and their perception of the other brands in the space. Your positioning must be in their minds, not yours.
Differentiation is a most important element of positioning. Typically, perception spaces are competitive. Customers looking for solutions to problems and better experiences scan the space for alternatives and make comparisons between them. Know your competitors, assess them through the eyes of your customers, and find a positioning that is both different from and better than alternatives for your customer, using their mental model and assessment criteria. Aim to “own” that unique space - meaning that the customer identifies you as the only one or the best one of their alternatives to meet a particular need.
Attach an idea to yourself. A way to pin down a perception in a customer’s mind is to attach an idea to a brand, in this case yourself as a brand, in a way that the connection is immediate and becomes automatic. The idea should be singular and highly focused. Catherine Kaputa recommends a process of subtraction to reach a singular idea — you’ll start with a multi-layered and possibly complicated idea, but if you keep subtracting the least relevant, least important and least differentiated elements, you’ll arrive at the pared-down singularity. You should be able to express it in a phrase or a sentence, one that you can keep repeating to embed it.
Her own example in her marketing career was to brand herself as “good with difficult clients”. Every marketing services company has clients or accounts or marketing challenges that are deemed to be difficult and not everyone wants to be exposed to that risk. Someone who steps up and enjoys performing well on such a stage is both differentiated and highly sought after.
Personal brand positioning strategy templates provide another tool for self-branding.
In her book The New Brand You, Catherine Kaputa provides 10 brand positioning templates as examples of how an individual might approach the process of self-branding and build their own brand.
Download "Ten Personal Brand Positioning Strategies" in PDF: Mises.org/E4B_198_PDF
These are complete templates for rigorous use and application, appropriate for individual interpretation, embellishment and nuance.
One example is the Innovator strategy. Let’s use this template as an example of the self-brand positioning process.
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What’s the customer need that the Innovator addresses? Identify your target audience and the problem they want solved. Innovators are needed to create something new, when existing strategies are failing or sales are declining or new market entrants are redefining the terms of competition. New solutions are sought, and Innovators are the ones people turn to. Innovators are recognized as the creative resource that’s required.
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What are the attributes to point to in order to claim the Innovator positioning? Catherine Kaputa lists 5:
Visionary with clear objectives: not just creative, but capable of identifying business objectives for creativity and of seizing opportunities.
Brilliant at problem-solving: full of ideas, but always directed towards solving important problems.
Bold risk-taking: when others hold back, Innovators are eager to design and run experiments from which to learn, knowing there’s no such thing as failure, just new knowledge.
Fresh thinking: not following the crowd but diverging from the norm.
Inventive: Innovators demonstrate the capacity to be first in new designs, new thinking and new ideas.
The point is to evaluate yourself against the attributes of the positioning type: is this you?
- The next step is a positioning statement. Catherine provides examples:
Sample Positioning Statement: An innovative professional in an industry beset by mergers and dynamic change positioned herself in the following way.
Draft Sentence: For senior managers, boss, clients, industry who need new products and services I stand for innovative problem solver in industries undergoing massive change.
The format to use is: For (target audience) who needs (problem you solve) I stand for (value proposition).
- Add reasons to believe. Pick three reasons and 3 keywords or phrases as to why customers should invest in your positioning statement by hiring you or giving you the project.
Innovator is just one of multiple possible strategies. Yours may be one of these or a combination of several. There’s a personal test you can take at Mises.org/E4B_198_Test for initial input to start your positioning process.
Positioning is a means not an end: there is more work to do. Catherine Kaputa follows the logic of brand positioning all the way to implementation. It’s not a theory, it’s a practice. There are actions that brand marketers take to communicate and embed their positioning. She cites three major ones: visual identity, verbal identity and brand marketing.
Commercial brands spend a lot of time, effort and resources on a brand’s look: logo design, package design, website colors and typefaces, video style, and so on. The goal is to communicate a style and an engaging and brand-appropriate visual personality. The same principles apply to personal branding - choose your look, your dress-style and fashion carefully and thoughtfully.
Verbal identity comes from the words you use, the story you tell, and how you communicate in presentations, e-mails, tweets, speeches and conversations, whether in the conference room, the auditorium or on zoom. Work on it.
Marketing your brand should be guided by your goals for your personal brand. Once you have them defined, choose your media, your message, your content, your campaign tactics and your metrics.
Additional Resources The New Brand You: How to Wow in the New World of Work by Catherine Kaputa: Mises.org/E4B_198_Book
Find your own brand positioning (Mises.org/E4B_198_Test) on SelfBrand.com
"Ten Personal Brand Positioning Strategies" (PDF): Mises.org/E4B_198_PDF
Business success goes beyond numbers and planning and finance acumen. There’s an emotional component to it, ranging from the courage to make decisions without knowing the outcomes in an uncertain future, to the resilience of weathering storms and coping with unanticipated crises. There is also, of course, the joy of achievement and goal-attainment. There’s a concept identified as emotional intelligence that individuals and teams can cultivate as an element of a mental model that’s well-aligned with business performance and positive business outcomes.
Knowledge Capsule The entrepreneurial method is to pursue change, but people’s natural attitude is to resist change. We have an inbuilt, biological resistance to change. It triggers fear and anxiety that get in the way of moving towards the change that we seek. In addition to this emotional resistance, we develop habits that keep us in the status quo, and present another barrier to behavioral change. We all must fight an internal battle between our old habits and desired new habits.
Entrepreneurs develop a special emotional intelligence that motivates action. Entrepreneurs are in the business of making change. They can overcome the natural emotional and behavioral barriers because they have a highly developed emotional intelligence. They have such an emotional relationship with their vision of a successful outcome for their efforts that they can overcome fearful restraints and resistance to change. They are especially highly motivated to take action. It’s their emotion that drives action, not intellect.
Emotional intelligence is much more influential in business success than IQ. A 40-year study at UC Berkeley found that EQ (emotional intelligence) is 400% more powerful than IQ in predicting which individuals would have success in their field. Private companies like PepsiCo and Apple have uncovered similar findings in their internal studies.
High emotional intelligence not only releases personal energy and creativity, but it also results in higher levels of interpersonal trust and shared engagement with others. With high emotional intelligence, we are driven to help others to enjoy better experiences as well as to advance out of our own comfort zones to access new areas of achievement.
The consequence of achieving high levels of emotional intelligence is higher levels of trust and engagement in business, and, thereby, better business results.
Everyone can improve their emotional intelligence and benefit from its compounding effect. We are pretty much born with our IQ — we can’t increase it. But everyone can raise their level of emotional intelligence. Not only that, but emotional intelligence is a compounding asset — we can raise it and raise it again and keep on raising, so long as we work at it.
Part of the equation is personal energy management. Phil Johnson identifies personal energy as the core element at the heart of the power of emotional intelligence. We “give our energy away” when we permit others to disrupt our emotional flow — make us annoyed or angry or resentful or frustrated. As a consequence, we feel the need to “steal energy from others” by getting the better of them or by exercising a command-and-control management style. The net result is strife, dissension, and misalignment — where team or corporate energy is wasted. We can avoid this waste by cultivating emotional intelligence.
There are high-ROI habits, practices and skills that help to build emotional intelligence. Happily, we can practice some of the habits and skills that develop and demonstrate emotional intelligence.
One such habit is authentic listening: when we take criticism personally, we give away energy. So, if we eliminate all personal inner-directed emotion from our reception of comments and suggestions from others, we can utilize all the experience and knowledge that’s shared with us for betterment and improvement. Don’t resist, don’t judge. Don’t let attachment to our own preferences get in the way of receiving input. Don’t raise walls. We have no personal interest in what others think of us, only in the information they can impart, which might be useful
The other side of the coin is authentic communication: be sure that all the content of our communication is factual and positively motivating and designed to be helpful to others, strengthening trust and engagement. If we develop a consistent reputation for authentic communication, we’ll raise engagement (and Gallup reports that employee engagement is at a very low level today, which is a great cost to economic productivity).
In addition to habits and practices, Phil Johnson urges us to commit to the emotional labor of recognizing our own fears, biases, and status quo preferences, and to establish an emotional distance between our motivations to action and our ego-based fear. It’s emotional labor that pays interest — it has a high ROI.
Emotional intelligence releases the power of intuition, and creates a state of flow. When we fear making decisions, we try to rationalize those decisions, to seek objectivity and lower uncertainty. When we distance ourselves from fear, we can unleash intuition — that decision-making capability that is beyond our understanding and comes from our unconscious brain. Intuition takes over more and more as we master emotional intelligence. We make choices that are not intellectual — we go beyond our intellectual ability.
Emotional intelligence takes us to a flow state. We get away from thinking and move towards intuitive doing, beyond our comfort zone beyond our fear and anxiety.
Additional Resources Phil Johnson on LinkedIn: Mises.org/E4B_197_LinkedIn
Phil Johnson’s Zoom Calendar: Mises.org/E4B_197_Zoom
Videos from alumni of Phil Johnson’s MBL (Master Of Business Leadership) Program: Mises.org/E4B_197_MBL
UC Berkeley Study, EQ>IQ: Mises.org/E4B_197_Paper
Success in business — serving customers well, and achieving growth in revenues and assets with a return on capital greater than its cost over the long term — is tied to knowledge-building, whereby everyone in the company learns more and more about specialized and advantaged methods of generating value for customers. Customer value fueled by knowledge-building flows back to the company as cash flow as a result of customers’ willingness to pay (which, itself, is a piece of knowledge to be discovered through testing and experimentation).
The uncertainty of the future means that a lot of knowledge-building must be achieved through experimentation — testing ideas to find out if they work or not. The earliest stage of this testing is bound up in the concept of criticism. Bart Vanderhaegen, a philosopher, epistemologist, and business consultant, explains the role of criticism to Economics For Business.
Knowledge Capsule There is broad agreement on the need for adaptiveness in business. It is becoming more and more accepted to view firms as operating within a complex adaptive system in which the interactions of millions of agents, and the resultant emergence of new outcomes and new system properties, require an acute sensibility regarding change — and speed of change — in the business environment and an ability to make adjustments in response or, if possible, in anticipation.
This adjustment process often goes by the name of adaptiveness.
What, exactly, is being adapted? Bart Vanderhaegen’s analysis is that it is ideas that are being adapted and adjusted. He defines idea in this business context as a goal and a plan to achieve that goal — a desired end and the associated means. It is ideas that ultimately result in changing people’s behavior, changing product and service offerings, and changing markets.
If the idea is wrong, it will fail in achieving any desired change. To establish why or how an idea is wrong requires criticism.
Criticism is an artifact of the science of knowledge. Critical rationalism views knowledge as useful information we use to solve problems we face. It can never be viewed as final — it’s conjecture about possible solutions that we are continuously challenging and criticizing to expose any error that we can subsequently correct to improve upon the solution, and to get closer to economic reality. That’s adaptation.
Firms actively seek the criticism of the market. Once ideas have been activated as products and services, firms are comfortable with the criticism of the market. As Mises observed, the customer, by buying or not buying, returns a verdict on every business’s offering. And business welcomes the criticism, in the form of sales report, or market share analysis, or market research. The market is full of feedback, and in the case of non-buying, the feedback is criticism and triggers improvements or an adaptation of the plan.
In business, there tends to be less comfort with criticism in the pre-market stage, but it’s a necessary tool for refining options and making decisions. In Bart’s way of saying it, the word criticism, when used in business, has “kind of a weird smell around it”. There’s a culture of what he calls justificationism. We are taught to project confidence bout business plans. Executives claim expertise in the domains for which they were hired. The boss is correct.
This is all misplaced. What we should be confident about is capacity to solve problems, and not be scared of making mistakes, but rather to be eager to adapt our knowledge to observed reality when it changes.
By utilizing criticism methodically, businesses can unleash its power. The proper use of criticism is to criticize ideas and not persons. We always want to celebrate the owner of an idea, and grant them autonomy to accept or reject criticism. Bart’s three step method for business criticism is:
Start with the presentation of the idea by the idea owner. There should be the opportunity for a full and reasoned presentation. Questions of clarification can be asked, but no criticism at this step.Then follows the offering of criticism. It should be high quality, constructive and specific as to what elements are in doubt and why, and what can be improved. General opposition such as “That will never be accepted here” (which could be said of any idea) is not acceptable.The criticism session is completed with a consent stage, in which the idea owner indicates which criticisms he or she finds relevant and will act on to improve the idea, whether in ends or means or both. Consent is in the discretion of the idea owner and should not be the result of any pressure by critics, whatever their rank or status. There is no “softness” in this: there is a shared and passionate commitment to improve. Successful adaptive businesses develop a positive culture of criticism. It’s important to analyze and classify the prevailing firm culture. Some cultures will discourage or reject criticism as a method for improvement, especially those that are hierarchically organized and have a tradition of authoritarianism.
The appropriate culture values truth and values adaptiveness, and celebrates the identification of error as a successful step towards improvement. Bart called this culture a “tradition of criticism”, which sounds contradictory since the word tradition is usually associated with preserving the status quo; but a tradition of criticism implies a kind of stability around the practice of criticizing. People become comfortable with it, and try to become better at it, and are proud to be part of the path to betterment through criticism.
The Amazon 6-page memo system is a good example of the tradition of criticism. Idea owners are required to prepare a detailed memo describing the idea and the business case and this is submitted to a committee of reviewers in a dedicated meeting, escalating in rank towards the most senior management as the idea is vetted, improved, and increasingly strengthened. It’s a tradition and a part of the Amazon culture.
Such a culture is not initiated with an announcement or a campaign, but emerges organically as a universal tool for everyone in the firm to utilize.
Additional Resources Pactify Management: PactifyManagement.com
Bart on Twitter: @B_Vanderhaegen
Bart’s podcast: Fallible Management (Anchor.fm/FallibleManagement)
Bart’s email: bart.vanderhaegen@pactifysoftware.com
A great benefit of the internet age is the capacity to accumulate, accelerate, and intensify connections between entrepreneurs, knowledge sources, investors, mentors, collaborators, and service providers. Businesses with a valid value proposition who are in the launch and early expansion phases can interconnect a network of powerful and qualified resources to support their growth. A good way to do so is to utilize a platform (another product of the internet age) designed for the purpose. Tom Malengo established a platform called Brandjectory to serve just this purpose for consumer packaged goods (CPG) startups.
Key Takeaways and Actionable Insights. Brandjectory’s value proposition is to solve the problem of how to build an investor-ready business. The purpose of a B2B business is to help customers achieve their own purpose. Brandjectory helps with the purpose of becoming investor-ready, the condition of qualifying for funding in the eyes of investors. The problem is multi-faceted, from having an investable value proposition, to having the systems and structure in place to qualify for investment, to overcoming the functional obstacles of expansion, to having access to investors, to having the capability to pitch effectively and persuasively. Brandjectory helps with all phases, for all stages of investable business from pre-market seed stage to post-market Series A where a proven business model and revenue stream represents the bar.
All knowledge is specialized: select and know your sector. Brandjectory focuses on consumer packaged goods businesses, often identified by the acronym CPG. It’s a sector with open-ended innovation opportunities — e.g., how to make foods and beverages and cleaning products and pet products healthier — along with an identifiable set of obstacles to overcome, such as the cost and difficulty of securing and maintaining distribution in supermarkets and other retail channels. An investable business knows the available innovation gaps and has a practical knowledge of barriers and how to overcome them.
Define value in your sector with reachable target customers. The Brandjectory system stresses the understanding of subjective value — that it’s an experience of the customer, and is defined by what they feel is important to them and how they feel a new brand will satisfy their need in that area of their life. Value demands an emotional connection, sustained over time. Too many founders, says Tom Malengo, CEO of Brandjectory, do not exhibit a full understanding of value. They are more focused on what’s new or different about their product, or on their recipe or ingredients. This is a functional perspective, and misses the emotional component. Tom’s technique in assessing a founder’s understanding of subjective value is a careful but intense questioning, driving towards a true focus on what’s important to consumers.
Value understanding must be translated into a value proposition. A value proposition is a structured template for the communication of proposed value to the consumer, enabling them to recognize it. The value proposition must capture the emotional element of value — how consumers will feel better. It’s not just about good taste, for example, but the joy of consumption, the family sharing, the feeling of contributing to health rather than undermining health.
On econ4business.com, you can read about value propositions (Mises.org/E4B_195_Value), and watch the E4B value proposition design video (Mises.org/E4B_195_Video).
Potential investors will probe for the founder’s true understanding of value propositions — it’s a qualitative rather than quantitative assessment. A founder must be skilled and effective at communicating this understanding.
Investor-readiness also implies an identification of all the challenges to growth and how to overcome them. Investor-readiness will vary by business stage. The state of readiness might encompass the capacity of the sales network, or of production processes, or the scalability, sustainability and security of the supply chain, or the strength of processes and systems, or the innovation pipeline, or the quality of the advisor group. Tom’s guidance to founders ensure that they know all the questions investors will ask, and leave nothing to chance in framing their answers.
The required knowledge-building is achieved through networking and connecting. A major benefit of the Brandjectory platform is its network of advisors, industry experts, mentors, and investors. Founders can connect to them and meet them, and not just listen but also gather knowledge through questioning and discussion. Plugging in to a powerful knowledge network is less stressful than pitching and more conducive to learning.
The members of the network have a wide range of incentives. Investors can pick up information about trends and new ideas even if they don’t invest directly. Industry experts can sense the response to their information and knowledge sharing and get market feedback. Many mentors enjoy the sense of giving back to their industry and community after years of working. All entrepreneurs can, and should, assemble a network like this. Brandjectory is a convenient way to do it for CPG entrepreneurs.
It's important to understand the role of knowledge in firm performance.
Tom Malengo says knowledge is power for entrepreneurs — the power to solve problems, address challenges and overcome obstacles. It can be a competitive advantage to gather more specialized knowledge than competitors and incumbents.
Professor Per Bylund sees specialized knowledge as solving the production problem (see Mises.org/E4B_195_Book) — the difficulty of initiating new economic production that no-one else has ever attempted, i.e., innovation.
Brandjectory takes the problem-solution approach to knowledge building. Entrepreneurs who confront a problem or issue or knowledge gap can ask the appropriate question of the appropriate expert or tap the experience of a more seasoned businessperson and benefit from the exchange, a kind of accelerated learning.
Brandjectory is a celebration of the all-American practice of entrepreneurship. Tom Malengo views entrepreneurship as the fabric of civilized society, a tradition that is especially strong in America. Our first settlers and many of our founders were entrepreneurs, and the encouragement of new ideas from any and all sources, giving everyone the chance to pursue their commercial development and experience economic success is woven into our way of life.
An entrepreneur, as Tom sees it, is someone who refuse to tolerate the existing status quo and demands better and is willing to exert their own effort and expend their own resources to bring it about — a very Misesian view. Through Brandjectory, he intends to help and support all those in pursuit of betterment in CPG. His platform concept — where the business model is to invite entrepreneurs to join for a fee, with unlimited free access to the knowledge platform and expert network, no commissions, middleman dealmaker cuts, brokerage charges, retail markups, affiliate costs or any other “bite” — is pure support for aspirational growth companies.
Additional Resources Brandjectory website: brandjectorynow.com
Tom Malengo on LinkedIn: Mises.org/E4B_195_LinkedIn
Breakthrough theory becomes effective practice when it is successful applied by real-life entrepreneurs. The E4B entrepreneurial method is actualized by Hermann and Elizabeth Morris in the very distinctive business model for their brand, The Nail Hub.
Knowledge Capsule The true purpose of a B2B business is to help your customers succeed. While outside observers focus on transactions — how much does this business sell, what are its revenues? — entrepreneurial business owners and operators focus on customers and customer relationships. Revenues follow from relationships. This insight is critical, since it guides business model development.
Business-to-business models are especially responsive to relationship strategies. When a customer feels that the relationship with a supplier makes their business performance better, they can become a customer for life. That’s a recipe for strong and sustainable growth.
First, observe the ecosystem in which you operate, and identify gap opportunities. Systems thinking is an important component of the entrepreneurial method. A firm is a component or a node in a network of interconnected services we can call an ecosystem. Hermann’s and Elizabeth’s ecosystem is the Nail Fashion industry. Nodes include salons and salon owners, the nail technicians (sometimes employees, sometimes independent contractors) who provide service to consumers in the salons, equipment manufacturers and suppliers, product manufacturers and suppliers (for nail gel, etc.), and product distributors.
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Hermann and Elizabeth were able to identify a number of gaps in the ecosystem. Many salon owners were enthusiastic about their industry but not well-trained or experienced in the basic economics of business. Many of the technicians were passionate about their trade, but not highly trained in the latest techniques and technologies and in product selection. There were aspects of marketing that were underdeveloped, such as audience segmentation. And there were inconsistencies between products in both quality and safety.
In the mind of the entrepreneur, these gaps are opportunities. The entrepreneurial question is: how best to fit in and contribute to the ecosystem. The business model response is determined by individual entrepreneurial orientation.
The beginning orientation was that of an operator. Given their knowledge of both the high potential of the industry and the gaps to be addressed / problems to solve, the Morrises’ entry point was as an operator. They embarked upon the journey to design a differentiated salon experience with superior nail technique, better products, better trained technicians. They ran the salon with better business acumen (they both came from high-level corporate positions and were able to bring sophisticated operating and financial experience). They segmented with an unusual and especially comfortable in-salon appeal, and via location.
They were successful. There was a lot of learning, which Hermann identifies as overcoming pain points.
The next growth step comes from re-orientation to larger scale. How could the Morrises scale their salon business? They thought through multiple openings (e.g., open and operate 20 salons), acquisition (acquire 20 salons), and franchising (sell franchises to multiple independent owners).
All of these alternatives would require new capability development: establishing standards and a repeatable business model, including a reliable financial model, designing a multi-unit system of supply chains, capital deployment, décor, training and location scouting, and a new kind of marketing to salon managers or franchisees.
The Morrises were reorienting to thinking as proprietors of a new kind of multi-division business. It’s a different orientation, seeing the same ecosystem from a different perspective.
Meanwhile, Elizabeth had the idea for a podcast to share her expertise and knowledge and passion for the industry. It was free business advice, free guidance, free technical training, teaching different aspects of running a salon and technical aspects for nail technicians. Its purpose was a service to consumers (better salon experiences), to technicians (better craftsmanship) and owners (better business operations). The podcast was called The Nail Hub. It generated a great positive reputation in the ecosystem and a lot of positive feedback. The knowledge that The Nail Hub podcast shared was enthusiastically welcomed.
The Nail Hub podcast feedback resulted in a further re-orientation. The Nail Hub podcast was helping salon owners and those technicians who were independent contractors renting positions in salons to improve the way they ran their businesses: better management, better understanding of customer needs and segmentation, better approaches to pricing, revenue and profits, better techniques, and better products.
What if a podcast can become a business model? Hermann and Elizabeth developed an entirely new B2B services business model which could be summarized as “educate the industry on how to operate a business, and supply them with the highest quality products to fit their business”.
Importantly, the education is free to consume. The Nail Hub YouTube channel is free to access, and offers over 140 videos on every aspect of business operations, finances, equipment, products, and techniques. The videos are expensive to produce. The model is that the investment in education will be repaid through loyal customers buying the products that The Nail Hub offers for purchase.
The curation of products itself is a service. The Nail Hub has identified a distinctive set of criteria for product selection (health, safety, non-toxic ingredients, cruelty-free) and does the research and validation so that purchasers can be confident in their choices and tin he integrity of their promises to the end-consumer.
The products are not the lowest price, they are the highest quality. Salon owners who have not fully absorbed The Nail Hub’s education on consumer segmentation, pricing, and customer experience will not be a good fit within The Nail Hub’s customer set. The Nail Hub business model has a high internal consistency and integrity.
The Nail Hub has re-oriented to B2B service provider educating an entire industry to provide superior consumer experiences, better product quality and profitable operations — i.e., re-orienting from facing those challenges to helping others to face and overcome them.
One of the cornerstones of the B2B services model is authentic subject matter expertise. The Nail Hub can help salon owners and nail technicians thrive through their independent action because Hermann and Elizabeth developed a deep subject matter expertise. They’ve been salon owners and faced all the developmental issues that owners face. They’ve trained nail technicians. They’ve evaluated salon equipment and they’ve committed their resources and time to researching high quality, innovative products that meet their highest standards. Hermann stresses that the arduous development of subject matter expertise is the necessary foundation for a trusted service business.
Another is to choose customers carefully. The Nail Hub is making a substantial investment in their customers via their free training and education. The business model that they enable is specific: the highest standards, with the best trained operators, providing a reliably superior consumer experience. The pricing model is premium, which supports the use of the highest quality products and the provision of the highest quality salon environment. Race-to-the-bottom operators who pursue the lowest prices as a competitive edge are not a good fit in The Nail Hub ecosystem, and Hermann makes this a clear element of The Nail Hub’s B2B communications. Choose your customers to match your positioning.
The evaluation of the business model does not lie in conventional metrics. When the business model is to invest in the success of customers, the conventional metrics of revenue, margins and annual profits are not the primary measures of success (although, of course, they must be acknowledged). The evaluation of the model comes via the feedback loops. Is the educational service welcomed? Does it result in better operations on the part of salon owners? Do salon owners and independent technicians become customers for life? Do product manufacturers clamor for entry into The Nail Hub’s curated product set? Are product trends — safe, non-toxic, healthy, etc. — moving in the desired direction?
This is the entrepreneurial ethic: make customers more successful, make the world a better place.
Additional Resources "Evolving The Nail Hub Business Model" E4B Graphic (PDF): Mises.org/E4B_194_PDF
The Nail Hub YouTube Channel: YouTube.com/TheNailHub
The Nail Hub Website: TheNailHub.com
There is a threshold of diversity below which no organization can operate with complete effectiveness. Diversity in this sense does not only include the “Big 3” DEI elements of race gender and sexual orientation, but also education, experiential background, business partner diversity, learning capabilities — all of the organizational resources that Austrian economists refer to when they talk about the creative combination and recombination of heterogeneous assets. Dr. Ella F. Washington, author of the book The Necessary Journey, joins Economics For Business to make the business case for diversity.
Knowledge Capsule The business case for diversity is built on the sustainable competitive advantage in productivity that it can bring. Dr. Washington’s book is a global, multi-variable survey of the effect of diversity orchestration on business results. She describes a wide variety of business cases, in large, medium-sized and small firms, in businesses ranging from global hospitality services to IT to alcoholic beverages production and marketing, and many more. She looks at diversity not just through the “big 3” lenses of race, gender, and sexual orientation, but also educational achievement, cultural background, learning capability and interpersonal communications variables. In all cases, well-orchestrated diversity made a demonstrable and positive difference in business outcomes. Diversity is a tool for competitive advantage.
The business case is globally applicable. Dr. Washington has studied and provided consulting services to global firms and to local and regional firms in many countries. She sees diversity not as a provincial political issue but as a business tool for elevating human performance. There is a lot of hard work involved in identifying and understanding local differences, and some challenging decision-making and communications issues. Getting diversity right is not always comfortable, and many perspectives must be balanced. But it pays off in results.
Value and empathy are at the core of diversity management. Subjective value lies at the core of Austrian entrepreneurship. Subjective value is in the mind of the customer, it’s a feeling that’s experienced. When businesses deliver a valuable experience, customers engage enthusiastically. The same is true for a group of employees. An organization that can empathically feel the experiences of all its employees, and can orchestrate the environment and the culture that recognizes, caters to and enhances their felt experiences, can achieve the exciting collaborative energy of alignment and harmony. Austrian principles of subjectivism and empathy apply in all areas of business thinking.
People want to feel valued, and the feeling is personal and individual. No matter the size of the corporation, each individual counts in their own way.
Diversity policies always benefit from the free incorporation of multiple perspectives as compared to centralized mandates. Dr. Washington’s case studies consistently demonstrate that decentralization and localized management is a better tool for productive diversity that central mandates. One of her case studies concerns Sodexo, a French company specializing in food services and facilities management, employing over 420,000 people in 80 countries all over the globe.
Through the processes described by Dr. Washington, Sodexo came to realize that thinking and acting locally was the key to achieving the diversity target of collaborative productivity AND elevated human performance through valued experiences. Diversity solutions could not be formulated in the central HQ, or even country-level HQ’s, and even regional and local offices. It was the individual sites where people work together in small teams that should be the focus. A general goal was established — it was termed “Spirit Of Inclusion” — and then specific programs were resourced and implemented at the local level in ways that comported with local needs.
To quote from one of the Sodexo executives, “engagement across the organization very soon became an enabler of business growth and business success”.
Diversity has a future orientation — influencing future performance. In the US, diversity policies are often pitched as addressing past wrongs. In another case study, the President of Infosys, an India-based technology company, stressed his focus on building the services of the future. A diverse work force is, in his words, the most viable business model. Since the company would be engaged in building new services for a new future and a more diverse audience (i.e., in new countries, new situations, new circumstances), then it’s smart to try to imagine the needs of that future workforce, and how to maximize its capability for future success. A diverse workforce is better able to develop superior understanding of a diverse customer base.
One of Infosys’s diversity tactics was to extend hiring in the US to community colleges. Many tech firms focus on 4-year university graduates exclusively. Infosys felt that (a) they might not be competitive in hiring those candidates, and (b) such a focus excluded a lot of bright, trainable people from two-year community college programs. They also found out that the two-year students often exhibited greater “learnability” — they could be trained and coached in the Infosys way with outstanding results in achievement and productivity.
Another source of diverse talent is the individual making a mid-career switch. Infosys opened up its thinking and its recruitment to include this type of diversity too. Career-switchers tend to excel at learnability.
As is always the case in entrepreneurial economics, imagining a better future opens the pathway to better implementation. At the close of her case studies, Dr. Washington tells us her respondents’ answer to a question about the workplace utopia of the future. All the answers are different, but the principle is the same: conceptualizing the most productive workplace in terms of how employees feel and how the feeling can be translated into effective and consistent contribution, collaboration, and business results. How do firms awaken and stimulate the best capabilities of all their employees? That’s the business case for diversity.
Additional Resources The Necessary Journey: Making Real Progress on Equity and Inclusion by Ella F. Washington: Mises.org/E4B_193_Book
TheNecessaryJourney.com
Dr. Ella F. Washington on LinkedIn: Mises.org/E4B_193_LinkedIn
When firms apply the principles of Austrian economics to business management, we call the result the Adaptive Entrepreneurial Method. It’s adaptive in that it is a continuous learning process, and it’s entrepreneurial in elevating customer value realization as the most important business purpose.
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Businesses that follow the adaptive entrepreneurial method put customer value first. Value in Austrian economics is customer value: contributing to customers’ feelings of being better off as a result of the interaction with an entrepreneurial business or service provider. A useful way to think about value is in terms of alignment and order. A value exchange is a harmonious alignment between customer and entrepreneur, in which both parties benefit and both parties’ interests are served. Order is represented by the customer’s decision, a point of clarity in a world of multiple choices, overlapping preferences and broad-based uncertainty.
Entrepreneurial businesses make value their purpose and identify it in alignment and harmony with customers. Everything else — cash flow, profits, growth — follows.
Entrepreneurial orientation enables the right interpretation of data and information for customer value realization. Mark McGrath emphasizes the powerful role of entrepreneurial orientation in business success. Orientation is a mindset — a kind of internal operating system — that guides firms to translate information from customers, partners, competitors and the market into an effective, winning vision and mission.
The essence of orientation is learning. Uncertainty is assumed, and orientation is the unique set of filters through which entrepreneurs and management teams process the quantitative and qualitative data that customers and markets present. Mises called it economic calculation: the entrepreneurial capacity for combining a constantly changing stream of information into a business decision. The decisions are always reviewable and revisable; a learning mindset makes entrepreneurs comfortable with frequent decision changes in response to changing information and feedback. Principles — such as the primacy of customer value — remain the same; it’s actions that are adjusted.
Businesses that don’t learn can get locked into models that no longer reflect the realities of the marketplace, and lose their effectiveness.
People, ideas, and things. Learning, adapting, and changing are difficult capabilities to master. Continuous change can feel disorienting absent the right mindset. How do companies achieve this mastery? Mark McGrath quotes Joh Boyd on the eternal verity of people, ideas, and things — always in that order.
The first critical component are the people engaged in and operating the business. They must be good at change, comfortable with constant flux. They must accept VUCA — volatility, uncertainty, complexity, and ambiguity — as the normal condition. At the same time, management must be conscious of how each new change or wave of change impacts people, and anticipates the effect it will have on them.
In this change-accepting environment, unlimited new ideas can emerge via the creative process. They can be tested, and marketplace results become the yardstick. When new ideas look promising in terms of the results they potentially enable, then things can be changed: capital can be redeployed in new combinations, marketing campaigns can be revised. When people are pre-prepared, smooth transitions are achievable.
Continuous Reorientation And Entrepreneurial Intent. While entrepreneurial orientation is the firm’s operating system for processing information, it is not fixed. Adaptive firms are continuously reorienting, Active reorientation supports learning, recognizing that all perceptual models are only as good as the moment they were developed. They must be renewed to stay relevant. Challenging assumptions and reframing problems must be continuous in order for firms to thrive and use change to advantage. Effective orientation looks to the future rather than the present, emphasizing agility and avoiding clinging to outdated models.
Reorientation precedes intent and reshapes it. Entrepreneurial intent can be equated to what systems thinkers call vision. A vision is shared and provides a North Star for everyone in the firm, but that doesn’t preclude adjustment in continuous alignment with customers. The vision is to serve customers, and customers are also changing and adjusting. Thinking in terms of intent (rather than, say, implementing a rigid plan) permits greater flexibility in pursuit of the vision.
Entrepreneurial judgment is decision and action. The theory of entrepreneurship emphasizes judgment — that mysterious-sounding capability of entrepreneurs to make economic calculations from a mix of data and intuition. That can sound like a kind of mulling over of options. But it’s much more active than that. The entrepreneurial method emphasizes deciding and acting. Decisions are recognized as hypotheses; it’s impossible to know exactly what to do, so action-oriented develop hypotheses about what actions could have the effect they desire. The hypotheses are carefully aligned with their intent in order to double-check the logic as far as possible. But the purpose is not to be “right” but to generate feedback information so that alignment can be better informed by reality.
Action — the implementation of decisions — is an experiment, a test of the hypothesis. Action produces interaction (with customers, with retailers, with competitors, with the changing market environment) and thereby provides new information in the form of feedback, which might indicate the need to change actions next time.
The number of hypotheses and tests can be narrowed; what’s important is that they reflect as wide a range of perspectives as possible — from those at the front line interacting with customers, whether in person or at the call center or online, from engineers and operatives, from finance and HR, and from all relevant points of view. The more diverse the range of perspectives, the more likely it is that different angles of view will provide new insights and illuminate blind spots. Make sure that internal communications are organized so as to make it possible for all perspectives — including dissenting Cassandras - to be recognized and acknowledged.
Candid self-assessment of people in business leadership roles is a good place to start the adaptive entrepreneurial journey. Some elements of the adaptive entrepreneurial model require the discarding of standard ways of managing. For example, many businesses spend considerable time and effort developing plans that lock in budgets and resource allocations, and don’t make allowance for constant adjustment and change. It’s useful to take inventory of these practices and question whether they can be abandoned or reformed in pursuit of agility.
Additional Resources The "Adaptive Entrepreneurial Method" Graphic (PDF): Mises.org/E4B_192_PDF1
"Destruction and Creation" by John Boyd (PDF): Mises.org/E4B_192_PDF2
Mark J. McGrath on LinkedIn: Mises.org/E4B_192_LinkedIn
"Orientation: Bridging The Gap In The Austrian Theory of Entrepreneurship" (AERC 2022) by Mark J. McGrath and Hunter Hastings (PDF): Mises.org/E4B_192_PDF3
We are living through a particularly bad moment in history for free markets and capitalism. Government, not business, is promoted as the solution to all problems. Young people have never known any other environment, and one of the consequences is the skepticism about capitalism that they learn in school, college, and university. One solution to this problem lies in better business education — shaping how young minds think about business by shedding light on the social and individual benefits of capitalism that might otherwise be deliberately shadowed by misinformation and misdirection.
Allen Mendenhall is leading the way with a new business curriculum at Troy University.
Key Takeaways and Actionable Insights There are unmerited concerns among young people today about the ethics of capitalism and business. Business is too often cast as the “bad guy” in the movie of life. Business is portrayed as exploitative and greedy, and businesspeople as self-serving. Historical scandals like Enron and WorldCom are cited as case studies. But this presentation is a caricature; there’s no evidence to support it. Business is the essential component of the capitalist system that has raised standards of living and quality of life all over the globe and especially in the West, where markets are somewhat freer.
Business didn’t have the same bad rap in the past. In the nineteenth century, there was a great celebration of the civilization-advancing commercial republic powered by the protestant work ethic. The image of the businessperson was a positive trope — it was a good role to be a businessperson creating value for others. Businesspeople were the good guys. They innovated, collaborated and served. We’ve lost that imagery.
A lot of the unmerited concern emanates from educational institutions, especially universities. Who is teaching young Americans to be skeptical about capitalism and business? A large portion of the blame goes to educational institutions, and especially universities. There’s an anti-business and anti-capitalism bias among the teaching profession in higher education that is communicated to students.
In this academic anti-business campaign, there’s a special role for economists, who have dehumanized economics by trying to make it a mathematical science. All their equations and computer models have the effect of taking humanness — the role of subjectivism, individual preference, and individualized emotion — out of economics. They try to reduce human behavior to a predictive data-driven algorithm.
The heritage of economics is humanizing. The mathematical approach to economics is not the tradition of the Austrian school approach, which embraces a humanizing perspective. Commerce cultivates virtue; the pursuit of honorable profit leads businesses to act with good faith and integrity in joining with partners to produce products and services that are valued and welcomed by customers because they serve their ends in their search for betterment in their lives.
The concept of honorable profit is often alien to students, and requires new learning: that profit is an emergent result of all the detailed interactions of individuals in a market, sending price signals to producers to indicate what society wants them to produce. Profit is a result of these signals indicating that society wants the producers to continue offering their goods and services.
Understanding value is central to understanding the ethics of capitalism. The emergence of profit is an outcome of the generation of value for customers. Value is central to the ethics of business, and Professor Mendenhall’s new course at Troy University places it squarely in the center. Value is subjectively determined by the customer, and the purpose of business is to help them realize the value they seek with the right products and services responsive to their wants, preferences and goals.
But here’s where the plot twists. The big corporate business community — representing less than 1% of businesses by count but the biggest proportion of GDP by dollar revenues - has been incentivized by Wall Street to pursue shareholder value (goosing stock prices) and stakeholder value (the diversion of value away from customers in favor of non-customer interest groups). Value for customers and even profit now takes a back seat to supposedly serving constituencies such as climate activists, victim groups, and, of course, government. Stakeholder value can act as cover for the CEO who fails to generate profit: they can claim to be focused on socially more important things.
The generation of value for customers, guided by the confirmation signal of profit, is no longer primary — except in Professor Mendenhall’s Troy University curriculum.
The perspective of entrepreneurship can help students appreciate ethical business. While young people express disdain and distrust for capitalism, they often have a more positive attitude about the concept of entrepreneurship. They realize that entrepreneurs are problem solvers, and that they add value to people’s lives. People benefit from the risks entrepreneurs take and the personal sacrifice they make. Entrepreneurial innovation makes lives better.
Students appreciate this, and can even identify some corporate CEO’s to whom they are willing to grant ethical approval — individuals such as John Mackey or Richard Branson. And many young people see entrepreneurship as aspirational — they want to start their own businesses and make a lot of money (i.e., profit!). Looking at business from an entrepreneurial perspective generates more positive attitudes, and we can show that all businesses started entrepreneurially, and are sustained by their continuing entrepreneurial performance, i.e., profitably delivering value for customers. If there are questions about corporate ethics, they relate to their non-entrepreneurial functions — such as HR (whence a lot of corporate wokeness emanates), legal (the people who write the opaque and deceptive terms and conditions that justify surveillance), finance (directing activities like stock buybacks that divert value from customers), and compliance (keeping corporations closer to government and more distant from markets).
Part of Allen’s approach to his students is to teach the entrepreneurial mindset — not just for business, but for life in general. He calls it “unleashing the inner entrepreneur” and includes what he calls “the economics of your dreams”, the secret of win-win, the creativity of the market, the entrepreneurial principles of career building, starting a profitable business, and character and leadership.
He also covers personal finance skills — developing knowledge of stocks and bonds and mutual funds and other financial instruments, insurance, retirement planning (even at age 18!), investing, spending, and, of course, personal management of student loans. It’s the entrepreneurial approach to life.
We should develop a new value proposition for business schools as humanness schools. Business schools today are part of the problem. They don’t focus enough on how business can be the catalyst for positive change. They should be committed to solving problems affecting not just business, but humanity as a whole. But reading business school leaders’ and graduates’ speeches and their books demonstrates that they’re not trying to help humanity as a whole but a few selected businesses and a few particular industries. They’re not dedicated to helping ordinary people, as they should be.
Allen’s new curriculum aims to redress that imbalance.
Additional Resources AllenMendenhall.com
"Corporate Wokeness Hurts The Groups It Purports To Help" (AEIR) by Allen Mendhall: Mises.org/E4B_191_Article1
"Troy professor: Students ‘very enthusiastic’ over anti-woke business scholars program" (Yellowhammer News) by Dylan Smith: Mises.org/E4B_191_Article2
Allen Mendenhall on Fox Business—"Ending Wokeism in the Corporate World": Mises.org/E4B_191_TV
Entrepreneurial businesses embrace adaptiveness and change, and continuous innovation enabled by flexible and responsive organizations, empowered at every level. That doesn’t mean there’s no role for managers. Inside the corporation, entrepreneurial management co-ordinates the business flow of responding to changing customer wants and preferences, so that resources are allocated and reallocated to the production activities that customers value the most. In fact, management is becoming more important, not less. Professors Peter Klein and Nicolai Foss explain entrepreneurial management in their latest book, Why Managers Matter: The Perils of the Bossless Company (Mises.org/E4B_190_Book), and Peter Klein visits Economics For Business to highlight the key points.
Key Takeaways and Actionable Insights Management co-ordinates the constant flux of entrepreneurial business. The essence of the adaptive entrepreneurial organization model is responsive change. Entrepreneurial businesses don’t lock themselves in to 5-year strategies and annual plans. They recognize that markets are in constant flux as a result of changing customer preferences, changing competitive activity, changing technologies, and changing conditions in business channels and in the economy. Change is the normal condition. It’s what Ludwig von Mises termed constant flux.
Management is required inside the firm to adapt and respond to change outside the firm. It’s not possible to manage the change in markets, but it is a necessity to manage resource allocation and productive activities inside the firm.
Management is co-ordination and orchestration, not authority and hierarchy. We might think of the concept of management in its industrial age guise of authority and hierarchy: some people “higher up” in the organization telling others “lower down” what to do. This kind of hierarchical authority can’t work in the digital network age; it’s too slow to process incoming data from the marketplace and too rigid to quickly or effectively implement newly imagined responses to those incoming data.
But in Professor Klein and Professor Foss’s analysis, management no longer equates to old-fashioned authority and hierarchy. Management is co-ordination: assembling the right resources — both human capital and complementary capital assets such as supportive technologies — in the right combinations (often referred to as “teams” in today’s management language) for the right shared task with the right shared goals. Professor Klein likened this to orchestration — there’s a conductor who guides the orchestra in playing the same symphony together, without telling the individual players how to play their instrument, and leaving the details of implementation to the individuals and their specialized skills.
Some orchestras may have better results than others because their teams have been well-recruited and well assembled and they respond better to management co-ordination. All firms and teams are complex adaptive systems, with emergent outcomes influenced by internal forces, one of which is management.
Management is culture more than authority. How do managers achieve a better outcome as a result of managing their teams? Professor Klein believes that they institute a successful culture, as opposed to designing an organizational structure. He defines culture in terms of norms, customs and practices — the accepted way (or simple rules) of “how we do things around here”. More specifically, in the customer-centric entrepreneurial firm, “here’s how we plan to facilitate value for our customers around here”. Skilled managers paint the pictures — the “vision”, if you will — in the minds of employees of the customer value standards the firm will achieve, and the customer experiences that the firm will facilitate.
Modern managers are comfortable with and quite expert at adaptation. The modern managerial culture is a far cry from traditional hierarchical managerial authority. It has the built-in flexibility for adaptiveness to the rapid rate of change in today’s digital business world. A well-functioning management process in a loosely structured organization can change internal production processes, teams and resource allocations in response to external changes in customer demand and marketplace conditions.
In fact, Professor Klein points out, through relevant case studies, such a management structure can be better at adaptation than, for example, a network of independent contractors and suppliers that would be challenged to orchestrate responsive changes to an external change, since each would have a different experience and process it through a different cultural orientation. They wouldn’t co-ordinate as well or as quickly as internally managed teams.
In certain cases, management authority can sometimes be a relevant organizational tool, so long as it is applied in a contingent fashion. The relevance and usefulness of authority varies by circumstance and business situations. Its usefulness is contingent, and managers must be sensitive as to when to apply authority and in what style.
Why Managers Matter identifies two distinct styles of managerial authority, Mark 1 authority and Mark 2 authority. Mark 1 authority is traditional command-and-control, exerted top down — superiors telling subordinates what to do.
Mark 2 authority is exercised through design rather than command: finding the right person for the task, combining the best-qualified people in teams, and giving them a goal with a wide latitude in their process and implementation in achieving the goal.
An important element of the contingent approach is to empathically identify the subjective preferences of employees. Some will respond well to flexible, open-ended direction that enables them to exercise their own initiative. Others might prefer the certainty of clear direction. One type of salesperson might be highly motivated by a 100% commission remuneration plan, another might feel more secure with a base salary with the potential for an achievement bonus upon exceeding quota.
Professor Klein identifies two broad sets of conditions for the exercise of Mark 1 and Mark 2 authority. When there is a high degree of interdependence between people, teams and tasks, such that it is critical that tasks are highly coordinated, completed at the same time and combined in a highly specific fashion, then management intervention is required and it will include Mark 1 elements. When production is more modular, when tasks and projects can be completed interdependently, then Mark 2 management can be exercised through a decentralized, flat and culturally aligned organization. (Professor Klein cited the example of the type of higher education institution where he works; all the professors can design and teach their classes, do their research, and publish their papers and books with a high degree of autonomy.)
Management is becoming more important, not less. In a rapidly changing world, where employee attitudes and experiences are very different than in the pre-digital world, and where global markets and their interconnected structures are more uncertain and cyclically unreliable, and where the pace of disruptive technological innovation is accelerating, good management is more important than ever for the success of our economy and our society. Smart managers are needed to find the right balance between operational excellence through established processes and adaptive change through adjustment and experimentation, a balance that business scholars call the ambidextrous organization. It can’t happen without management, and without managers.
Additional Resources Peter Klein’s book page: Mises.org/E4B_190_Klein
Why Managers Matter: The Perils of the Bossless Company by Peter Klein and Nicolai Foss: Mises.org/E4B_190_Book
Public Affairs book page: Mises.org/E4B_190_PA
Entrepreneurs always generate new value for customers; that’s what they get paid for. It’s not always necessary to create a new market; there are many creative ways to expand the value potential of established markets and carve out a territory in the new expanded space.
James Kent, founder of the innovative apparel brand Rogue, White and Blue, talks to E4B about the entrepreneurial value creation method he pursues in growing a distinctive and differentiated brand in what might look to outsiders like a crowded market, but which to him looks like unbounded opportunity.
Key Takeaways and Actionable Insights Entrepreneurs start with what they love — it’s the first source of differentiation. James is a lover of open-air experiences — of walking and hiking and exploring trails and off-road lands, of snowboarding in the mountains, and enjoying all the freedoms of exploration and everything to do with the great American outdoors. “What do I love?” is one of the first questions an entrepreneur asks of themselves, and James is certain of his answer.
Adding knowledge and experience fortifies the entrepreneurial recipe. All experience and most knowledge are individual. What we pay attention to, and how we learn is always unique to us personally. James picked up some valuable experience by working in sporting goods retail stores, both interacting with customers in stores and working his way up the corporate ladder into management positions. This commercial experience in sporting goods was highly complementary to his love of the outdoors, and the two became a productive combination in James’ entrepreneurial approach.
James was able to gain some even more fine-tuned experience by working as the first employee of a start-up, running an office in a location removed from the head office. This provided exposure to the entrepreneurial experiences of risk-taking, autonomy, maximizing the use of limited resources and using business development tools like Google AdWords — all directly useful for a future business journey.
A third layer of relevant experience came from joining the National Guard in a patriotic spirit of service. The service ethic is fundamental to all entrepreneurial endeavors.
The stage is set: what kind of business to launch? James asked the entrepreneurial questions. What do I love? The outdoors and outdoor recreation. What do I know? Apparel and apparel retail. What are my resources? Passion, the genuineness and clarity of commitment, design ideas, and a small amount of savings. Who are my customers? People who share the same passions.
Where will differentiation come from? It came from a reservoir of genuine feeling and the combination of two streams of thought: recreational love of the outdoors and patriotic love of country. The combination became the brand Rogue, White and Blue, described by customers as “the patriotic version of Patagonia”. It’s wild and unexpected like the American landscape, and it embodies patriotic design ideas, both in visual look-and-feel and in functional attributes such as Made In America.
The commitment to a differentiated brand platform creates a differentiated supply chain, differentiated production, and differentiated presentation. Entrepreneurs design their production infrastructure and supply network backwards, starting with the brand and then identifying the system components that will bring it to life.
James had design ideas in his mind. He self-taught himself Adobe Illustrator to get them from his mind into digital documentation, occasionally hiring outside designers on Fiverr at low variable cost for some specific refinement tasks. Modern technologies ranging from design software (and the training videos and additional user content available online for new adopters) to digital printing to internet-enabled collaboration sites like Fiverr can be combined to create a complete value network with limited fixed cost investment.
The next step down the supply chain was to find screen printers and James tested alternatives until he identified the best craftspeople in that specialized profession. He made them his business partners, which enabled him to benefit from their expertise in identifying the right Made-In-America apparel manufacturers and the right high-quality fabrics. By ordering garments through the printers, he was able to give the printers a more profitable business model while offloading some risk (e.g., of misprinting) onto them. The shared value space was big enough for everyone in the network.
The integrated platform of a differentiated brand and a differentiated supply chain is the result of entrepreneurial commitment: to brand integrity, quality, style, and consistency.
Finding customers through entrepreneurial action. At the outset, there wasn’t any marketing budget for Rogue, White and Blue. How does a brand get customers in those circumstances? Not by advertising but by entrepreneurial action: by meeting customers personally. James had a good instinct for who his customers would be based on input from like-minded friends and family. So, he went out to meet similar people by setting up a sales table at selected events where they might congregate. The first one was a gun show, and then more broadly outdoors-themed events. James vividly remembers the excitement of show attendees stopping by his booth, immediately bonding with the “patriotic version of Patagonia” brand feel — they didn’t need to be told, they understood it without prompting — and paying cash for the products. Rogue, White and Blue started with a batch of 96 T-shirts which quickly sold out.
Growth is funded by cash flow and there is no shortage of growth drivers and growth ideas. Cash flow is the most important financial indicator of business performance and it’s the most important source of growth capital. Profit is an accounting notion, and debt-financed development has its own set of risks. Cash flow is a pure indication of customer approval and customer value. Therefore, it provides the best funding source for both working capital and investment capital — turning the value experienced by consumers into the funds that enable expanded and enhanced value experiences in the future.
Rogue, White and Blue has expanded into more designs, new apparel items, a strong website to drive sales, and a reinforced brand presence.
Customer feedback loops ensure continuous improvement and progress. Meeting customers face-to-face or getting their feedback via the internet — these are feedback loops that help entrepreneurs refine their offering. The feedback may concern product quality, design, or brand imagery; it’s all positive input for an entrepreneurial business that is open and not defensive whenever there is criticism.
The entrepreneurial life is exciting. How are we all going to share in the productivity of the economy? The old way was to take a job and participate as an employee, hopefully ascending the hierarchical ladder of a firm or translating increased experience and skill in a profession for higher wages.
As the digital economy unfolds, and more of the work is being performed through algorithms and A.I. and machine learning that’s translated into process automation, the traditional ways of sharing in economic production will be blocked.
The better alternative is economic participation and reward through entrepreneurship. James Kent describes the entrepreneurial life as exciting and fulfilling. It requires a thorough commitment and it’s hard work — he described the long nights he’s devoted to the Rogue, White and Blue brand — which he finds energizing and motivating. There’s a commitment and a service ethic, and a consequent freedom.
Additional Resource Use the promo code E4B for a site-wide discount at roguewhiteblue.com
We define entrepreneurship in terms of people working creatively to make others’ lives better. That’s a very broad statement, of course, so it’s instructive to observe how individual entrepreneurs choose to make some customers’ lives better in some specific ways by applying special skills and knowledge. Let’s call it finding an entrepreneurial focus.
Economics For Business talks to Jordan Lams, founder and CEO of Moxie, an industry pioneer in manufacturing, branding, and distributing cannabis products.
Key Takeaways and Actionable Insights. Entrepreneurs find their focus — or, sometimes, it finds them. Bruce Lee is reported to have said that the successful warrior is the average man, with laser-like focus. Entrepreneurs develop focus on particular customers, in order to understand them better, empathize with their wants, and deliver them the experiences that they value. Developing this focus may take time, or it may come early in the journey, but empathy always provides the pathway.
Jordan Lams observed the pain of a family member during a time of illness, and how cannabis products could bring some relief and comfort. From that time, he became focused on the health and medical benefits of cannabis in a broad range of personal circumstances.
From a position of focus, entrepreneurs develop the deep knowledge that becomes their marketplace advantage. Entrepreneurial focus directs research and knowledge gathering. In Jordan’s case, he gathered academic research, medical literature, and clinical studies, and he talked with medical practitioners about cannabinoid therapies. Networking brought him into contact with researchers and doctors and clinicians and product developers. He established a uniquely robust knowledge platform.
Focus plus knowledge leads to opportunity tension. Some entrepreneurial theorists have coined the term opportunity tension — that period when an entrepreneur’s focus and knowledge point to a market opportunity, but there remains unresolved risk in the process of seizing it. The entrepreneurial solution, of course, is to take the risk. Jordan executed his commitment by taking a job in the retail sector of his chosen industry — a place to meet customers one-on-one, and look backwards at the supply chain.
Customer orientation is refined by direct contact, conversation, and experience. Working in retail enabled direct customer contact and unfiltered conversations about customers’ preferences and wants, the benefits they sought compared to the benefits they experienced, and a general deepening of customer knowledge.
In addition, Jordan was able to observe the supply chain, including the interruptions and inconsistencies that detracted from customers’ experiences. Product quality was inconsistent and supply was unreliable. To an entrepreneur, this looks like opportunity.
Knowledge, experience, and customer contact provided the ingredient for a new firm and a new value proposition. Jordan sums up the firm he founded, Moxie, as knowledge + infrastructure. A status quo of incomplete knowledge, inferior and inconsistent products in unreliable supply chains can be replaced by a new market of shared and distilled knowledge delivered via consistent and trustworthy quality. Customers are able to develop trust and confidence in a brand based on knowledge (“we know what we are doing”) that brings new maturity in the form of scale and process control and quality assurance to an emerging market category.
The company’s knowledge base enables vertical integration because the knowledge is broad and not narrow, the recruitment of strong partners because shared knowledge makes for robust collaboration, and new standards of quality, adherence to which strengthens customer expectations.
The firm’s foundation supports both R&D and open innovation. All markets are changing at high rates of speed at all times. That’s why innovation is the essence of entrepreneurship. Standing still is a losing option. Jordan invests I R&D in the form of lab research (in pharmaceutical quality labs) exploring new product forms and new combinations, while also participating in the open innovation of knowledge sharing that goes on throughout the industry. R&D supports both specialization (making current offerings even better) and market expansion (new products, new forms).
Brand building will be the patient route to long term growth. While business environments change fast, one way to invest with patience in a consistent direction is to build a brand. A brand can reflect customer values — the things that matter to them — in a way that creates lasting bonds. On its website, Moxie positions its brand as a force of character: courage, grit, determination, nerve. It provides an emotional connection to customers who value self-realization and self-actualization.
Patient entrepreneurs can see the regulatory maze as a locus of opportunity, too. Moxie was the first licensed cannabis brand in California, and sees itself as a pioneer in leading institutional and regulatory progress. Instead of viewing regulators as business obstacles, Jordan employs his empathy skills to understand their position, their role, and their needs. He provides them with resources of information, industry knowledge and collaboration, and contributes where he can and where it’s appropriate to help them arrive at decisions and translate them into subsequent implementations.
As in building a company and building a brand, patience can pay off in future strength.
Additional Resources EnjoyMoxie.com
Jordan Lams on LinkedIn: Mises.org/E4B_188_LinkedIn
Business is a form of applied economics. Its purpose is to make people’s lives better. Profit is the signal from society that business is doing a good job in the customer’s estimation. This is a completely human system, a form of human action and interaction. Business schools take the approach of mainstream economics, that mathematics is the tool of choice, expressed in data analytics, accounting, financialization, and numbers-based plans and strategies. The Austrian school approach offers a very different path. Professor Per Bylund joins the Economics For Business podcast to highlight some important differences.
Key Takeaways and Actionable Insights Business logic based on understanding subjective value. The purpose of business to facilitate customer value. The pursuit of new economic value brings new firms into existence, the continuing realization of new value experiences for customers results in business growth, and recurrent refreshment of value propositions keeps businesses thriving and healthy.
Consequently, value is fundamental to business. Yet it is widely misunderstood. Sometimes it’s misconstrued as shareholder value, a function of stock price performance. Usually, it’s financialized as a set of numbers and indexes.
True value is in the mind of the customer. It’s the experience of feeling better off as result of interacting with a business — making a purchase, taking a subscription, or using a service that makes life feel better, and that feels like a superior choice compared to alternatives.
Customers decide what to value, and therefore what to purchase, and thereby decide the success of a business. All businesses must learn this value logic, and Austrian economics for business provides the understanding that points to the implications for business action.
Thinking in subjective terms. An understanding of subjective value reverses the flow of business thinking. It’s easy and conventional to think in objective terms about products and prices — what a firm produces and offers and the price the firm charges. It’s harder and somewhat counter-intuitive for businesses to think about how each individual customer feels — what’s important to them, individually and personally, about the unique ecosystem in which they make their choices (e.g., their family profile, what kind of a house they live in, or the subjective resource allocation priorities of each of the individual firm they work for).
The customer decides what is valuable to them, and that’s the basis from which business action must proceed.
Value-guided creativity. Business is a creative discipline. Because customer preferences and priorities are continuously changing, because competition is continuously aiming at making a superior customer proposition, because technology is continuously making new benefits and new customer experiences possible, and because we can’t possibly know how all this will work out in the future, businesses must always be changing, improving, adding, renewing, becoming somehow better in the future than they are today.
The only way to invent the future in this way is through creativity — new ideas, new combinations, new routes to convenience, new removal of barriers. Creativity can be random and unpredictable — we don’t know what is going to be successful out of all our creative ideas. Therefore, we apply constraints so that creativity operates within productive boundaries, and the generative constraint is customer value. If all our creative ideas are guided by the constraint of “will the customer find this more valuable”, then the opportunity for productive innovation is greater. If we place ourselves in the shoes of customers, and try to simulate what they will feel when they experience a new value proposition, we’re on the track to business success. This is value-guided creativity.
Business as a flow. Business schools emphasize planning and strategy (and strategies are often just long-term, bigger plans). These are tools of prediction and control — predict the future (we will achieve $10 million in annual revenue this year) and control how we get there (100 salespeople must sell $100,000 each). The numbers can fill a spreadsheet.
Similarly with organization design: the spreadsheet in this case is an org chart, with layers and reporting pathways and divisions and units, another exercise in statics.
The Austrian recognition of constant change results in re-thinking business as a flow. Thinking in statics is potentially disastrous because the world can change while your firm does not. Thinking dynamically opens the firm to feedback loops from the marketplace, listening to customers and monitoring when their preferences change or competition shifts, and being open to adapting and adjusting.
Organization design gives way to orchestration, the constantly changing arrangements dedicated to the improvement of the customer’s value experience.
Every business can and must act entrepreneurially. Our term for the orientation towards and capacity for constant change — constant pursuit of new customer value — is entrepreneurship.
In the popular vernacular, the word entrepreneurship has come to be associated with charismatic individuals, like Elon Musk or Jeff Bezos or Reed Hastings. They are identified as the instigators of and catalysts for new value generation. That’s fine — such individuals are important in challenging the status quo. But for effective and commercial and sustainable new value generation, the entire firm must be entrepreneurial — highly sensitive to how a particular configuration of resources and a particular business model and value proposition serves customers, and to changes in the business environment that require adjustment on the firm’s part. The firm must be flexible enough to make these adjustments. Often, the market data comes to the firm from the edge, where front line employees working directly with customers gather the inbound information about change. The entrepreneurial firm ensures that the new information flows freely and is acted upon, and gives those closest to the customer the authority to make responsive changes.
Business schools often teach static and defensive concepts such as economies of scale and competitively insulated market structures. Business for them is production management. Business from the Austrian school perspective is value discovery, value facilitation and responsive change in the form of new products, new services, and new value.
Entrepreneurial empathy as a tool. When we think of business tools highlighted in business schools, we might think of strategic planning, data analytics, accounting, process management, incentive compensation, and financialization.
The tool of choice for the entrepreneurial firm is empathy. Empathy is customer-first thinking. It focuses on identifying and understanding what customers feel is missing in their life, what they long for and wish for. There’s a gap between customers’ actual experiences and their desired experiences. They can’t articulate solutions, but they’re brilliant at identifying the potential for improvement. If the customer feels that some experiences could be better, or that they’re struggling in some capacity with an experience, that’s a signal for the creative entrepreneurial firm to experiment with new ways to deliver that betterment.
Entrepreneurial firms create better futures for their customers via empathy. They bring customers new things that they can want, that weren’t available to them in the past or of which they were not aware.
It’s not all numbers. Just as mainstream economics has been rendered irrelevant and meaningless to real people because of its insistence on the use of algebra and mathematical models instead of real world observations, so mainstream business schools have made business into a world of spreadsheets, accounting, data analysis, bar charts and graphs, and structures and formulas.
Austrian school business thinkers understand the role of qualitative assessment — understanding people as humans as opposed to statistics, understanding emergent processes, understanding feelings and subjective value, and that the things that matter to people, both employees and customers, are values not numbers.
That’s why narrative and sense-making stories are taking the place of plans and strategies. Software development provides a good example: user experience design is a narrative about how customers prefer to interact with the software they are using, rather than a focus on lines of code.
Action and feedback loops. The ultimate replacement for business school concepts of planning and strategy is action. Entrepreneurship is action. Action generates an effect — a feedback loop from the marketplace that signals the result of the action. The customer purchased or did not purchase. The rating improved or worsened. Revenue grew or declined. In the A/B test, B was preferred.
The feedback loop is processed as learning, and new decisions can be made and new actions taken based on that learning, eliminating some possibilities, and opening up others. Innovation is introduced to the market and new learning follows new innovation in a continuous loop.
In the thinking of entrepreneurial action, acting faster and sooner is better, because the effect is generated faster, the feedback loop accelerates, and the resulting new action is fresher and and more responsive to the customer’s needs. When action is bolder and more daring, the feedback loop is more informative and clearer in its signals. The future unfolds as a result of entrepreneurial action.
Entrepreneurs don’t act alone or in isolation. The unfolding of the future is the consequence of many actions on the part of many people and firms. The market, therefore, is a process. Action and reaction keep it moving in unpredictable ways — resulting in what complexity theorists call emergence.
The Austrian School is a complete system for business. We didn’t have sufficient time with Professor Bylund in the podcast format to cover the complete range of business functions, including marketing and accounting and business model design, but these are all improved and enhanced by what we can call the Austrian approach. The goal of Economics For Business is to deliver this complete system in the form of tools, posts, articles, papers, books, videos, and podcasts like this one.
Additional Resources Austrian School Versus Business School: A side-by-side comparison (PDF): Mises.org/E4B_187_PDF
How To Think About The Economy: A Primer by Per Bylund: Mises.org/Primer
How do new markets form? When consumers change their tastes and preferences and behaviors, how are the markets to serve them activated? The markets don’t yet exist — entrepreneurial action is required to create them. The answer to the question, of course, is that entrepreneurs — real people taking the real business risk to initiate new business experiments — provide the new energy and new initiative to create markets where previously they didn’t exist.
Jared Wall is one of these creative entrepreneurs, and thchempspot.com is his creation.
Key Takeaways and Actionable Insights. Courageous entrepreneurs lead the way into new markets as they are still forming. Entrepreneurs bring the energy that opens new markets and new pathways to economic value. New markets can emerge as the result of changing consumer tastes and preferences, new channels or platforms, new forms of delivery, new technologies or a combination of several catalysts — but the energy, initiative and drive of the entrepreneur is always the necessary ingredient for the ultimate emergence of new value and new market arrangements.
New discoveries and new innovations often provide the entrepreneur with market-opening mechanisms. Serving customers in new and different ways doesn’t always require new products and services, but it is often the case that the discovery or invention of novel combinations can lead to innovation — that is, new and better experiences for customers that were previously unknown or unavailable or narrowly distributed. In the market for consumable cannabis products, there emerged a new THC variant called Delta 8 THC, a cannabinoid that offered both different product performance and different accessibility. The emergent new ingredient provided the pathway to a whole new market opportunity.
Legislation and regulation are complications and barriers in formative markets, but often their ambiguity provides an opening for innovative entry. The courageous entrepreneurs who lead the way into formative markets often encounter legislative and regulatory barriers, since these are static drags on progress and innovation and never keep up with the changes in markets. At the same time, the regulatory thicket can sometimes be useful to the entrepreneur who can cut a new opening others can’t imagine.
In the market for consumable cannabis products, Delta 8 THC became such a new opening, which was cut when some content in a comprehensive congressional Farm Bill encouraged the commercialization of certain kinds of hemp, of which Delta 8 THC was one of the by-products. Legislators and policy authors can’t think about the future the way entrepreneurs can, and they did not envision the future world of innovation they were unlocking.
The regulatory maze is an aspect of legislation and regulation — but every maze has an exit path.
Innovation in formative markets combines and compounds. Jared Wall launched thchempspot.com to offer Delta 8 THC experiences to consumers. Those who shop at the site find a lot more innovation than just this ingredient. There are multiple new consumable forms for varied experience delivery — gummies, chocolate bars, chewing gum, soft gels, and peanut brittle, among others.
Where do these innovations come from? Not from the R&D labs of major corporations, that’s for certain. They originate in the creative minds of imaginative entrepreneurs, and they take shape in their experiments and prototypes and willingness to try new things. Will they all be big successes? Of course not. But they will all generate feedback loops of acceptance or non-acceptance, reviews and ratings and experience sharing; they’ll contribute to innovation as an ongoing cycle of learning. Society enjoys better choices because entrepreneurs unleash their creativity and don’t hold back from experimental designs.
Market infrastructure and market institutions can’t always keep up with entrepreneurial change, but new supportive services quickly appear to lubricate frictions and provide institutional arbitrage. All commerce needs infrastructure such as payment systems and institutions such as banks, and market formation can sometimes move faster than infrastructure and institutions can adapt. Jared Wall had this experience — PayPal and major banks cut off services because thchempsot.com, while serving legitimate customers with legal products, was deemed a “high risk” business, outside their terms and conditions.
Yet, in a quite inspirational way, business services emerge in these situations to navigate around the barriers of poorly adapted institutions. Jared found consultants who offer the service of connecting so-called “high risk” businesses with value-network partners willing to collaborate with them. Jared was quickly able to replace his payment system and banking infrastructure. There was a service interruption, but it was temporary. A new network of mediating services quickly formed to bypass institutional barriers.
The creation and sharing of new information is a big part of the innovation equation. Jesus Huerta De SotoJesus Huerta De Soto; Socialism, Economic Calculation, and Entrepreneurship; 2010; Chapter 2, "Entrepreneurship". identifies the creation and sharing of new information as the central activity of entrepreneurs - informing customers of new products and services and new offerings and prices. Entrepreneurs are constantly creating, updating, and improving the information resources they make available to customers. High quality information enhances value.
On thchempspot.com, Jared provides information in Q&A form, pull-down menus, and product descriptions. He’s self-published an informative e-book that’s free on the site, and he publishes an informative newsletter. We can sometimes feel unclear about the value of information, but in formative markets its importance is primary not secondary.
Every business should have an exit plan in mind from Day 1. Why? Because it’s impossible to control the timing of an exit or the changes in circumstances that might precipitate it. Venture capitalists know this, and build in their exit formulas at the time of their initial funding. Entrepreneurs should think the same way. And, like any business process, selling a business is a knowledge-based process that repays an investment in learning its techniques and critical success factors. Economics For Business talked to Jessica Fialkovich, a successful business builder in her own right, who founded Exit Factor, an advisory firm that helps entrepreneurs get the most from selling their businesses.
Key Takeaways and Actionable Insights Entrepreneurship provides better career control and security than corporate life. Jessica climbed the corporate ladder, investing effort and skill into being a great employee. But she was just a name on a list when the GFC came along - a list of those to be let go when Lehman Brothers (her employer’s funder) collapsed.
She realized that entrepreneurship provided her with great security. There’s uncertainty, but the entrepreneur decides what their future is, takes responsibility for those decisions, and accepts the accountability.
She built a successful business through hard work and the discovery process of identifying target customers and finding new and better ways to bring them value. Her chosen business was in wine sales to wine-loving customers, many of whom were connoisseurs. She developed many specialized services including finding rare wines for collectors, and her clientele spanned the globe. She incorporated the latest technologies and innovated in marketing techniques. She worked long hours, talking to customers across 16 time zones from Japan to California.
Then she decided to sell.
Entrepreneurs experience a lot less support when selling a business than when building it. When you’re successfully growing a business, everyone wants to help, providing you with business services and supplies, and advice and ideas. What Jessica found when she came to sell was that she was on her own. It was hard to find expert help, or the requisite resources, or pretty much any kind of support infrastructure for a transaction of the size she was planning. For big business, there’s investment banking. For the 99.9% of businesses outside the Fortune 500, there was nothing similar. There were some so-called business brokers, but they were not dedicated specialists, not professionals in the specific process of selling, unreliable and poor at client service.
As an alert entrepreneur, Jessica understood that this finding signaled a market need. The first step to design for an under-served market is to draw on relevant experience from parallel markets.
Business development always starts with first principles: is there a market to be served, in that some potential customers feel an unmet need or have a meaningful problem to be solved? Jessica had first-hand knowledge of the problem, and talking to entrepreneurs in similar situations reinforced her confidence in the market’s potential.
The comparison market Jessica chose was investment banking, which can be thought of as selling businesses of a larger scale. There’s an established investment banking process and a timeline of steps and milestones from preparing an evaluation, to developing the pitch deck, to the identification of the best buyers and the tailoring of a marketing plan for them. Jessica’s husband had some relevant investment banking experience which enhanced the knowledge transfer from one field to another, and provided a reality check for the process design.
Business-to-business services development and execution has its own set of rules; the most important one is the nurturing of relationships. A business brokerage is a high-intensity B2B service bundle requiring a lot of in-person customized relationship management. There’s pitching the potential customers in the first place, customizing the service tom their particular business and to meet their specific needs, with a big need for staff training to deliver these specialized services. B2B service providers must be both sales experts and process experts. That requires a lot of human capital.
Jessica’s answer was to design and build a system-based model that, once in place, could be repeated and reproduced via well-trained staff with the right IT support.
She has found B2B services to be even more demanding than sourcing rare wines for connoisseurs. Selling a business is somehow more personal and individual. A client’s perception of what their business is worth may be quite different than the market’s perception. It’s the nurturing of relationships that smooths out the potential jagged edges in these transactions.
Some insights for entrepreneurs selling their business. Identify your exit options from Day 1 of your business. Since it’s impossible to control exit timing - which may be due to unforeseen changes in circumstances - it’s best to lay the runway from the start. Plan to run a salable business, as well as one that’s profitable and growing. Don’t have a fire sale or panic sale or be unprepared.Tailoring your selling process to the size and type of your business is important. There are different influences on what moves valuations up or down depending on business size, but, in all cases, it’s a process with a beginning, a middle and an end to be planned for in advance. You’ve got to know how to find buyers, how to source offers, and how to keep your business in good shape for due diligence.Conduct regular health checks for evaluation. Always know what your business is worth. Find out how businesses are valued in your industry or sector. Make sure your business shows well on the criteria that are applied in your field.EBITDA multiples are the dominant valuation metric. You may read in the Wall Street Journal about businesses being acquired for brand value, or for technology integration, or for other reasons of corporate M&A strategy. For small and medium size businesses, EBITDA multiples remain the dominant metric. There’s some art regarding what the precise multiple may turn out to be, but it’d within a range and is not going to vary wildly.There is some room for qualitative factors and subjective valuation. Jessica listed subjective factors ranging from the degree of business involvement of the owner (and the worry that their future absence might be detrimental) to the perceived quality of the brand and its imagery and reputation.The ultimate asset is a proven and scalable business model. If you can demonstrate that your business model returns increases in revenue and profit growth for additional investments in capital or people or marketing, then you are most likely to find an eager buyer. Make sure you can model your business in this way and that the data are clean and credible. Additional Resources Getting The Most For Selling Your Business by Jessica Fialkovich: Mises.org/E4B_185_Book
ExitFactor.com
Jessica on LinkedIn: Mises.org/E4B_185_LinkedIn
Before Steve Jobs and the iPhone, there was Malcolm McLean, inventor of the shipping container. McLean made the iPhone—and many other things—possible.
Original Article: "Malcolm McLean: The Unsung Capitalist Hero Who Changed the World One Container at a Time"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Entrepreneurship is the key to real development, but cultural attitudes are often a significant barrier to entrepreneurship in the developing world.
Original Article: "Entrepreneurship in Developing Countries: Still a Work in Progress"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Do the principles of customer value generation that we espouse in our Economics For Business program apply equally for both B2C and B2B businesses? The answer is emphatically yes. B2B customers are seeking subjective value and a value experience just as B2C customers are. They have a clear sense of the things that matter to them, and those include emotional and personal values as well as price and functionality and performance.
In fact, trends that begin in the B2C domain often quickly begin to influence the B2B domain, and the alert entrepreneur can track those trends in B2C and establish an early advantage by exploring them for their business customers. Rick West has done exactly that with his business services company, Field Agent.
Key Takeaways and Actionable Insights In addition to identifying a meaningful problem, and providing an effective innovative solution, entrepreneurs in today’s B2B market must offer the right service delivery platform. Rick West created a company called Field Agent to provide B2B customers with a meaningful service: monitoring their retail stores and shopper behavior and collecting in-store data about the interactions of shoppers, stores, shelves, displays and products. This kind of information is high value for both the retail operators (like Walmart) and the companies that sell products through retail stores (such as Procter and Gamble or The Coca-Cola Company). The set of services often goes by the terminology of “shopper marketing”.
Typically, such business service offerings have a long and cumbersome sales cycle. The service provider and the service client get in contact, there are meetings, prices are negotiated, and contracts are prepared and signed. Then, once the service is executed, there are more steps in analytics and preparation of presentations of findings, and another big meeting to discuss the findings and recommendations. Lots of meetings, lots of travel, lots of time, lots of lawyers.
Is this the right service delivery platform? It’s been virtually institutionalized over time. But it’s not a good fit with modern business models and the modern technology-shaped environment.
The Amazon effect. Think about purchasing on a shopping platform like amazon.com. The customer first self-educates. If there’s a complex product to buy – such as an expensive flat screen HDTV with internet connectivity and interaction with all the latest entertainment ecosystem devices like Roku and streaming services like Apple TV – the customer might search for information via google, might visit some ratings sites, do some comparison shopping, and generally collect information to get to the point where they are confident of making a purchase. They don’t need to speak to an HDTV salesperson or a “customer success manager” or to sign a paper contract.
Or think of a slightly more complex transaction such as buying a car on Vroom. There are some contracts to be signed via DocuSign, but confident shoppers are comfortable with self-educating, making their decision, committing, and experiencing the delivery of the car to their home, perhaps with the added service of taking away their old one.
This is the world of services and service delivery we live in today. Your B2B customer also has a life as a consumer and an internet shopper, and is fully aware of the efficiency, convenience, and safety of these kinds of transactions. Call it the amazon effect: customers becoming comfortable with the “click-to-cart” experience, without interpersonal interaction with a salesperson or other service personnel.
Why not in B2B services?
Click-to-cart has arrived in B2B services. Rick West’s customers for Field Agent services can purchase them on plumshop.com. A full array of shopper marketing services is offered via pull-down menus in categories such as Audits, Marketing, and Insights. Under these headings are Display Photography, Price Check, Shelf Management, Price Sensitivity Study, and dozens more, all in the language of shopper marketing that’s well understood by the knowledgeable B2B service buyer.
Clicking on any one of these takes the client to a price list and a detailed description of the service and its output, all in the colorful and engaging presentation style of an e-commerce site (like amazon.com!) The client can create an account online and make a transaction just as easily as buying a TV on amazon (and probably easier than buying a car on Vroom).
Self-educated buyers know exactly what they want, and the description and designation of the services are crisp and clear. Clients can check out testimonials, comparison shop, and take all the steps any smart B2B service purchaser would take to get themselves to the point of confidence and trust.
Some customized services will always be a client requirement, but there will be a rapid shift to more and more self-service. Some clients and some projects will always require a custom, tailored response, and Rick’s company has both custom service and automated service capabilities. One point he makes is that a first project might be customized and accompanied by in-person client service, while for the second or repeat purchase, the client will be comfortable with the click-to-cart process.
Rick’s guessing a 70:30 split for automated versus customer services over time in his field, especially as the interface software learns and becomes better and better at responding to client needs and preferences.
B2B entrepreneurs are trend-spotters in the B2C domain. People are people. Economic behaviors that we can observe in consumer shopping and buying are bound eventually to show up in business-to-business markets. They’re the same people – your B2B client is a consumer when not at work. Smart B2B entrepreneurs keep an eye open for B2C trends that can be expected to transfer to B2B and jump on them early.
Additional Resources Field Agent: FieldAgent.net
Plum: PlumShop.com/fa/shop
Rick West on LinkedIn: Mises.org/E4B_184_LinkedIn
Patents lack a basis in natural rights; to the contrary, they may be a patent absurdity.
Original Article: "Patents and Progress"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Like all other places, Africa has a more nuanced history than what people previously have believed. The continent was not devoid of technology before the advent of colonialism, as there were pockets of inventiveness and small-scale manufacturing.
Original Article: "Yes, Precolonial Africa Had Technology and Economic Life before Colonialism"
This Audio Mises Wire is generously sponsored by Christopher Condon.
How do companies make decisions? Data certainly don’t make decisions, nor do analytics, nor do the computers they run on. Human begins make decisions — the human factor is crucial. Subjectivism is paramount, even in the age of big data and A.I. The key still lies with the people who are interacting with the data to generate human insights.
Ahmed Elsamadisi is one of the leading data scientists in the world. He’s worked on self-driving cars and nuclear defense and some of the biggest business challenges on earth. He believes that it is the stories we tell from data that drive business success. We are privileged to interview him at Economics For Business podcast, and he gave us a lot of useful advice we can all use every day in managing our businesses.
Key Takeaways and Actionable Insights The data community has made data and algorithmic analysis far too complex, to the point where it’s no longer useful for business. The path-dependent route to today’s complex data tables was paved with lots and lots of columns and lots and lots of rows. These data tables are leftovers from the early days of computing SQL language was designed to manipulate these rows and columns. A.I. comes along and can analyze all the possible combinations of data cells. Business executives ask their data departments to generate a lot of these combinations to search for patterns. It often takes a long time, a lot of revisions, and generates no clear answers.
Another aspect of history is the use of dashboards. We tend to design dashboards rather than formulate good business questions. The metrics on dashboards are sometimes useful for operations but they’re often not at all useful for understanding the causal connections between data points. Consequently, different people can interpret them in different ways and there is no consensus as to what they mean and what to do about it.
The purpose of data analytics is to generate good decisions that lead to action. The entrepreneurial method drives towards D and A: decisions and actions. Analytics should help to formulate the hypotheses on which to base decisions. The problem with complex dashboards and algorithmic pattern recognition is that they often don’t give clear direction on recommended action, especially when the interpretation varies depending on who is doing the interpreting.
Ahmed’s experience is that sharing a numerical dashboard with 10 executives is very likely to result in 10 different interpretations, and the resultant confusion and disagreement freezes action rather than accelerating it.
We need data to tell us stories that we can all rally around. The most powerful tool for developing consensus around action is narrative — often called storytelling. While 10 dashboard interpretations might lead to 10 different action plans, a single well-told story can align everyone who hears it, understands it, and internalizes it. We heard about the power of narrative in episode #181 (Mises.org/E4B_181) in which Brian Rivera explained the role of storytelling and sensemaking in The Flow System of management, and in episode #152 (Mises.org/E4B_152) where Derek and Laura Cabrera explained the power of aligned mental models for driving business. Stories achieve alignment.
Ahmed Elsamadisi built his service, narrator.ai, to output data analytics in the form of a story. The complexity riddle is removed and replaced with a narrative that all executives, not just data scientists, can understand. Narrator.ai re-integrates data science with the all-important human element of understanding stories.
The way to get data to tell stories is with a conversation. Ahmed says that the way we ask questions (data queries) is flawed. It’s quite a normal practice to set the A.I. to search the data tables to look for patterns to see if anything interesting emerges. This is what Ahmed calls “lazy hypothesis generation”, which is never going to yield useful actionable insights (yet many big analytics companies are taking in huge customer revenues for just this service). Clients may claim to be making data-driven decisions but that’s mis-characterizing this business behavior, typical though it may be.
Ahmed advises us to think more in terms of a conversation with data. To facilitate this, he has developed a universal data model with just three variables: an entity (such as a customer), an action, and time. Every business question is about a customer taking some action in some time period. The universal data model enables the conversation: what action did the customer take in what period of time, e.g., when did they open the email and what action did they take after opening it. This is not a database query, it’s a more thoughtful question about the customer experience and how to understand it.
Ahmed told us that training customers in this conversational mode of interaction with the universal data model results in a cultural shift in thinking. The conversation can go back and forth in several iterations until the understanding is fully honed. Clients hear the data talking to them through the stories that narrator.ai generates. The have deeper insights and a story to share to form a consensus around the action that the story suggests. Narrator.ai clients have used stories for everything from describing new product specs to updating board decks.
Great conversations with data are based on empathy and thinking about the customer experience. At Economics For Business, we elevate customer empathy a the most important business skill, in the context of an understanding of customer value as subjective, a good feeling from an enjoyable or satisfying experience.
Ahmed advises us to think in this same way when formulating conversations with data to generate insights. If we think about the customer’s experience, desired and actual, and the actions they take before and after that experience, and the time context of the experience, we’ll do well in formulating good questions. The action component of the universal data model is central to the Austrian deductive method: knowing what people do can help us deduce motivation and expectation. Knowing what they did next can shed light on the ends they had in mind. Actions like opening e-mails or repeat buying are also revealing of intent and expectations. The more we converse with the data, the more insight we can gain.
Storytelling with data is another implementation of subjective quantification — with the benefit of enhanced intuition over time. In episode #176 (Mises.org/E4B_176), Peter Lewin introduced us to the Austrian concept of subjective quantification — turning customers subjective valuations into numbers such as capital value on a balance sheet. We tested the subjective quantification term with Ahmed, and he endorsed it — with a major addition. It’s important to include the dimension of time. If, over time, we have better and better conversations with data and formulate better questions and hypotheses, we’ll get better and better at generating insights. Our intuition will improve. We’ll get a better “feel” for the data. Even our empathy can become more accurate.
Additional Resources Narrator.ai and its excellent blog, Narrator.ai/Blog
"Top Ten Signs You Have A Data Modeling Problem": Mises.org/E4B_183_Blog
Ahmed Elsamadisi on LinkedIn: Mises.org/E4B_183_LinkedIn
It’s often the case that lead users — the most sophisticated, committed, and energetic users — are an excellent source of innovation ideas. Those customers who are most engaged are thinking the most intensely and the most creatively about what they want from the usage experience. We came across a particularly instructive example: video game modders. Who are modders, what do they do, and what can we learn from them? Professor Gordon Miller has studied this important entrepreneurial phenomenon, and he joins Economics for Business to share his knowledge.
Key Takeaways and Actionable Insights. Modding is user-generated value innovation. Modding, from modifying, is the act of a changing a game, usually through computer programming, with software tools that are not part of the game. This can mean fixing bugs, modifying content to improve it, or adding content. But modding is not an activity taken on by those at game companies—developers release patches and downloadable content, not mods. Modding is instead done by players and fans of the game… Modding is more than adjusting the preferences or game settings, it is making changes that cannot be made through the game as it is.
Game producers and designers enable and encourage this user innovation. Game producers have come to recognize that the creative ideas and initiatives of the modding community can contribute new value to their businesses and franchises. Games like Minecraft enable users to explore, within a predesigned GUI, a practically endless 3-dimensional world to build innovative structures and other things like functional computers and console emulators. Minecraft also makes available code and tools for modders to create mods that are essentially new games, or major innovations within the original game. The famous DOTA (“Defense Of The Agents”) game is entirely the product of the modding community, encouraged and enabled by the developer, Valve Software.
Modding is a practical application of the theory of absorptive capacity. Absorptive capacity refers to the capability of a firm to recognize, collect, assimilate, process, transform and use external knowledge for competitive advantage in innovation, flexibility, and overall business performance. The external sources of knowledge are knowledge networks, either formal or informal or a combination of both. Formal networks might include suppliers and partners, university research departments and labs, and even industry share groups. It’s sometimes called open innovation — actively looking at and tapping into what other firms are doing.
Informal networks are those like the modder community — lead users, user groups, tinkerers, and so on. This is sometimes referred to as distributed innovation or user innovation — it’s not the producer originating the innovation, but an external informal source.
The challenge is to be able to generate awareness of these sources of knowledge, evaluate them, bring them inside to the company for evaluation and processing, and turn them into useful innovations or internal changes.
In highly dynamic industries, it is productive to tap into these knowledge networks. Professor Miller refers to the external networks of knowledge, both formal and informal, as the wisdom of the crowd. If you are operating in an environment characterized by high dynamism and rapid change, the wisdom the of crowd is an important and often decisive resource.
The wisdom of the crowd can contribute to innovation and business performance, especially in the form of idea diversity.Innovation performance improves through better firm capitalization of knowledge resources.The wisdom of the crowd offsets firm rigidity — making it more receptive to new ideas,Entrepreneurial judgment can increase innovation performance by increasing absorptive capacity.Innovation performance feeds back into absorptive capacity, creating an iterative self-improvement loop. Professor Miller proposes three areas of business development by capitalizing on external user groups. First, firms struggling to innovate due to internal rigidities may well benefit from developing communities — similar in concept to modding communities - connected to their own industries. By absorbing and incorporating the learning that occurs in such groups, they can take advantage of readily available innovative ideas for change.
Second, these communities may also provide a wellspring of talent for enhancing the firm’s absorptive capacity in useful ways. This is a pool of unique and entrepreneurial individuals with the potential to enhance the firm’s human capital and make the firm more explorative.
Third, even if the firm does not fully tap in to all the knowledge coming from the community, there is still the potential for new solutions to emerge that are stimulated by external ideas. There are always hobbyists and fans, and technology easily facilitates their interactions. Crowdsourced knowledge provides a uniquely useful tool for enhancing organizational innovation.
The wisdom of the crowd is a path to profit. Modding as an art form allows players to express what they most want games to be. This becomes a useful indicator for determining the most profitable paths to pursue. Firms seeking to enhance their innovative capabilities and remain profitable must pay attention to external sources of learning, however informal.
Additional Resources Download our free E4B PDF: "Assessing Your Firm’s Absorptive Capacity": Mises.org/E4B_182_PDF
The Invisible Hand In Virtual Worlds: The Economic Order of Video Games by Matthew McCaffrey: Mises.org/E4B_182_Book
The traditional approaches to the structure and management of firms are becoming barriers to customer value. The Austrian capital theory approach recognizes that all value in the corporation flows to it from the value experiences of customers. Therefore traditional organization design — centralization, hierarchies, divisions, bureaucracy, command-and-control — insofar as they are poorly aligned with customer value actually detract from the value of the firm.
There are alternative approaches to business organization, several of which we have highlighted in Economics For Business. One well-articulated alternative is The Flow System (Mises.org/E4B_181_Book). We talk to one of the authors of the concept, Brian Rivera.
Key Takeaways and Actionable Insights The first principle of all business organization is the delivery of customer value. The superiority and broad applicability of the Austrian business model emanates from its value-dominant logic. The purpose of business is to facilitate a value experience on the part of the customer. Only value matters, and all else (resources employed, raw materials used, production costs, organization, supplier partnerships, etc.) follows. Austrian capital theory enables managers to identify value drivers (i.e. what resources, raw materials, production costs, organization, partnerships result in the most value for customers).
The focus of the Flow System is to deliver the best value to the customer through FLOW: the interconnection of complexity thinking, distributed leadership, and team science.
Flow is another term for entrepreneurial judgment. In Brian Rivera’s book, The Flow System, flow is described as “a narrative of in-the-moment decision making of judgments”. It is entrepreneurial action and interaction with the environment, irrespective of structure. It’s goal-oriented adaptive and collaborative behavior of teams and firms.
The Austrian perceptions of the market as a flow, value as a flow and capital as a flow mean that the Austrian business model is perfectly consistent with The Flow System.
Mastering complexity thinking is fundamental to implementing the flow system. Many business environments exhibit high variability and uncertainty. We’ve used the term VUCA to characterize them: volatile, uncertain, complex and ambiguous. All business managers and entrepreneurs can benefit from adopting a complexity world-view, and understanding business as a complex system.
Complex adaptive systems are open, continuously dynamic, evolving, learning, and responsive to external changes. They can oscillate between order and disorder, they’re non-linear and can’t be predicted or controlled.
Brian Rivera highlights a number of techniques to manage in such an environment, including:
Sensemaking: the development of narratives or storytelling to conceptualize the complex environment and develop an appropriate set of mental models. The question to ask is, “What’s the story?” — the story that can unite the firm and its partners around a shared understanding and shared purpose.
Weak signal detection: in complexity, signals are never clear; uncertainty is the norm and errors are always a possibility. Weak signal detection is simply intensifying the scnning of the environment for insights and noticing more, so that both threats and opportunities can be detected earlier to avoid surprise.
Action: the only source of real knowledge about the world is experience, and experience results from action. Therefore, The Flow System emphasizes action — the D and the A in the OODA loop.
The Flow System employs a new definition of leadership: distributed leadership. Distributed leadership is described as leadership that extends horizontally, vertically and every place between. The tools of leadership are not structures (such as hierarchy and top-down management) but methods:
Psychological safetyActive listeningIntentShared mental modelsBias towards actionCollaborationMentoring. Perhaps the most essential factor is psychological safety among team members. It’s a group property — a shared belief in which the team is safe from interpersonal risk taking. Individuals can speak up, take risks, and experiment without fear of criticism or reprisal so long as every action fits within the shared belief framework. There is no command structure, and teams are the building blocks of the organization.
There’s a new field of team science for collaborative functioning in the workplace. Team science is multi-disciplinary. Teams are necessary for the development of solutions in many problem areas, and the research behind team science has been conducted in many fields (ecology, healthcare, organizational science, psychology and more).
A team is a collection of individuals with a shared goal, who interact and are interdependent in their tasks, who have different roles while sharing responsibility for outcomes, and constitute a social entity embedded in a larger system (a business unit or corporation) requiring them to manage relationships across organizational boundaries.
A major section of the book The Flow System is devoted to an overview of the current state of team science as it relates to business organizations, covering team size and composition, teamwork, team processes and team transitions, team culture, team effectiveness, and combining teams for multi-team scaling.
Here’s a sample concerning the functions of shared leadership in a team:
Compelling team purpose — exceeding individual goals.Members work jointly to integrate their complementary talent and skills.Outcomes are collective, joint efforts.Members adapt their working approach to each other.Mutual accountability plus individual accountability. Core principles and attributes of The Flow System. Customer firstValue is a flowComplexity thinking, distributed leadership and team science can facilitate the flow when they are interconnected and synchronized. Additional Resources E4B Knowledge Graphic — "The Flow System Guide" (PDF): Mises.org/E4B_181_PDF
theflowsystem.com
flowguides.org
The Flow System by by John Turner, Nigel Thurlow, and Brian Rivera: Mises.org/E4B_181_Book
Teams That Work: The Seven Drivers Of Tea Effectiveness by Scott Tannenbaum and Eduardo Salas: Mises.org/E4B_181_Book2
Entrepreneurship today is a movement, a welling-up of new economic creativity, combined with a great desire for economic freedom and the joys of self-reliance and discovery. The movement is newly empowered by enabling institutions that simply weren’t around a few years ago, including the internet and its digital economic platforms. Professor Raushan Gross is a great observer and great documenter of this entrepreneurial surge, and he joins the Economics For Business podcast to share some of his original and distinctive observations about the very human aspects of his new entrepreneurial studies.
Key Takeaways and Actionable Insights Let’s not over-theorize and over-professionalize entrepreneurship: it’s people finding new ways to thrive by creatively serving other people. There’s an explosion of university entrepreneurship programs, entrepreneurship research and entrepreneurship methodologies. There’s an attempt to professionalize entrepreneurship, to make it a product of business schools.
Raushan Gross sees things differently, through a humanist, subjective and ethical lens. He looks at the culture of entrepreneurship, the social movement of individuals making their way in life in a new manner, seeing new opportunities to make their lives better for themselves and their families by making life better for others.
There’s a newly emerging set of institutions and a new class of entrepreneur: the digitalpreneur. Economists take an interest in how institutions shape behavior and economic activity. They see institutions as constraints. They sometimes call them “the rules of the game”. Professor Gross has a different take. The new institutions of entrepreneurship — the internet, digital platforms, e-commerce, digitization in general — are not constraining; rather, they are openings to a new space with new possibilities. This digital space is welcoming. There’s abundant knowledge to be shared. There are new ways to think about access to resources, about production and marketing and organization. There’s a new world of price signals, much more flexible and fast-changing, and the route to cash flow and profit is faster.
Professor Gross identifies digitalpreneurs as a new economic class: not higher or lower, not defined by their origins or background, free to move at any speed and to access any place in their relentless, unbounded pursuit of entrepreneurship.
Today’s entrepreneurs are rewriting economic history: from the invisible hand to the visible hand to the digital hand. Adam Smith introduced the metaphor of the invisible hand — the concept that individual economic actors and firms entrepreneurially pursuing their own profit goals generate the economic system we call free market capitalism, with benefits for all of society. Friedrich Hayek expressed a similar idea as “spontaneous order”. The invisible hand guided the rapid growth in real standards of living of the industrial revolution.
Then the visible hand imposed itself: the concepts of management control, and of planning and centralization. Creativity, innovation, and rapid growth were suppressed, while bureaucracies expanded. We got “Bullshit Jobs”, in David Graeber’s locution, from which creativity and caring were expunged.
Professor Gross takes us beyond both the invisible hand and the visible hand to the digital hand, which gently guides digitalpreneurs to participate in or even create new markets. The digital hand is generative. It enables digitalpreneurs to operate their own digital platforms, to construct their own digital economy, to assemble their own economic knowledge and to find their own unique place in the knowledge economy. The digital hand opens up new pathways to economic freedom.
Digital entrepreneurship can be conducted at any scale, but watch out for the dead hand. Where are the corporations in their embrace of digitalpreneurs? Certainly, there are the new digital corporations like Amazon and Google who seem willing to hire members of the new class and turn them loose in creative experimentation. But what about the old economy corporations who need to make the transition to the new world? Are they hiring entrepreneurs? Are they enabling entrepreneurs, freeing them from bureaucracy and from the command-and-control hierarchy? The evidence so far is that they are not.
How to integrate the entrepreneurial orientation into a corporate organization remains an unsolved mystery. How can the corporate advantages of reach and scale be leveraged to further realize the senses of purpose and meaning that drive entrepreneurship? How can corporations shift to the entrepreneurial culture?
They need to find ways to eliminate what Professor Gross calls the Dead Hand — bureaucracy, regulation, control, risk-aversion, centralization, procedures, and rules.
But corporate culture is not the only barrier to the realization of the entrepreneurial society. There are other cultural barriers to overcome. Professor Deirdre McCloskey is famous for her analysis that the catalyst for what she calls The Great Enrichment — the 3000% increase in real standards of living in certain Western countries from 1800 to the present — was a change in how we talked about entrepreneurship. The perceptions and descriptions of the bourgeois life of commerce transitioned from scorn to admiration. Entrepreneurs came to be seen as bold and innovative, a force for good, providers of desirable services enhancing the quality of life.
Professor Gross sees a fresh need for such a change in language and cultural support for the new age of digital entrepreneurship. One example he gives is the language of venture failure. Initiatives that are concluded early or don’t hit some target or don’t attract sufficient buyers or don’t generate enough profit to be sustainable are deemed “failures”. This characterization tends to lead to erroneous conclusions about risk (as in risk of failure) and about the people who engaged in the initiatives (“failures” or, worse, “losers”).
There’s a much different and better way to frame the same data as learning, and augmenting the pool of knowledge. When we think of entrepreneurship as a flow, we can visualize how information flows from the past to the present, elevating the intelligence of every entrepreneur and every firm that’s operating today. Not only does knowledge flow, it compounds, so today’s entrepreneurs can be exponentially more informed than their predecessors.
The more we adopt this win-win cultural approach to cumulative entrepreneurial knowledge-building, as opposed to the win-lose language of failure and success, the closer we’ll come to the beneficent entrepreneurial society that Adam Smith imagined, before he was so rudely interrupted.
Additional Resources Join Economics for Business today and receive a free copy of The Emerging Institutions of Entrepreneurship eBook by Raushan Gross: Mises.org/E4B_Join
Jeff Deist: Welcome, Dr. Smith. I know you are a University of Oklahoma alum and your surgery center is in Oklahoma City. Are you an Oklahoma native?
Keith Smith: Yes, I am. I was born in Tulsa and lived in the Southeast corner, in the Southwest corner, and ended up right in the middle.
JD: Do you think being a Midwesterner informed your worldview or your medical career?
KS: I think so. Part of the reason I’ve remained in this area is it’s always been my impression that the ratio of people to doctors in this part of the country is higher.
JD: We know each other through your involvement with the Mises Institute, and I’ve spoken to your organization, the Free Market Medical Association (FMMA). You understand me when I ask this loaded question: Medicine in the United States is in big trouble, isn’t it?
KS: Yes. As an eternal optimist, I would say that big medicine is in big trouble. The system is dysfunctional, but people are waking up. There are alternatives out there that are free market, and people are becoming aware that they exist, that they work. With this awareness, it becomes real tough for the big monsters—that is, the cartel that controls the strings with their pal, Uncle Sam—to continue driving the getaway car in this heist.
JD: I hate hearing the term “system” to describe medicine! Nobody talks about the American shoe leather system or the Doritos distribution system. Somehow, we’re able to get all these other goods and services without a “system.”
KS: It’s a system because we in this country look at people as a collective and as groups. And anytime we look at people from a medical perspective as groups or a system, that begs for a central, system solution, and that’s part of the problem.
JD: How did the United States go from having doctors and facilities envied by the world to this third-party nightmare we have today?
KS: I think it happened in the early sixties, when the federal government decided to inflict this monster they called Medicare on us in 1965. It’s no coincidence that this happened right after Harry Truman’s Hill-Burton Act in 1946, which populated the entire country with hospitals in almost every county, whether there was a market for them or not. Those hospitals did not want to deal directly with patients to receive payment, so the federal government created this trough that hospitals could plug into to be paid directly. I believe Medicare followed the appearance of all these government hospitals to ensure that they would all be paid. That was disruptive of what was otherwise a functioning marketplace.
Physicians in the early days objected to this, but the federal government knew that they could buy the support of the physicians by agreeing to pay 100 percent of whatever they billed. Thus, physician charges, no surprise, soared, and physicians were making a lot of money for many years under the Medicare system. Eventually all the objections to it broke down except in very small enclaves of real, true-blue free marketeers, like the members of the Association of American Physicians and Surgeons. Medicare popularized the idea of third-party payment. It increased the wages, the payments to physicians and hospitals for services they provided. That probably was the most pivotal and disruptive move and what brought us this third-party monster that we have now.
JD: So, the federal government was the original third party. How did the ostensibly private third-party insurers, big HMOs and PPOs, for example, become so involved?
KS: It grew quickly in the early 1990s as the Medicare trust fund, whatever that is, began to see that they were running out of money and the current contributions taken from people to support it didn’t begin to satisfy what was going out the door. Medicare then started draconian price cuts. As an anesthesiologist, I was paid $1,100 when I started practice in 1990 for the service I provided in open heart surgery on a Medicare beneficiary. In 1992, President George Bush inflicted the resource-based relative value scale on the Medicare system and on physicians, and the payment I then received for that same procedure was $550. These folks from Harvard decided that they could assign a price to every physician service that was supplied. A year later they came in with round 2, and the last payment I received for a six-hour open heart surgery was $285 for the anesthesia component.
JD: Wow.
KS: So, I quit. I quit filing claims. I don’t mind being charitable, but not at gunpoint. I quit participating in the Medicare system. I took care of Medicare patients, but I quit filing claims. When that happened, it caused a lot of fear across the medical community, and some physicians became attracted to non-Medicare payment sources. That worked for a little bit, but then non-Medicare payment sources, whether it was Blue, Untied, Cigna, Aetna, Humana, whoever it was, realized that they could continue to charge high premiums but use the Medicare fee schedule as a benchmark and pay for medical services at a lower rate, therefore increasing their profitability and their power. That was sort of a marriage where this public-private mess got started, and that’s still where it is now.
JD: And then, of course, Obamacare comes along and literally mandates so-called health insurance for the public. It creates these exchanges and everyone starts talking about the healthcare “marketplace,” but the exchanges represent anything but. You are required to have insurance under pain of penalty, and that insurance is not priced according to your actuarial risk. It must cover things like pregnancy or alcohol abuse. You’re not allowed to have a bare-bones catastrophic policy. Some marketplace!
KS: It’s actually worse than that. They pulled the big companies in to secure their support and had to give them concessions. One was called the medical loss ratio that allowed the bureaucrats and the politicians to use a heavy-handed approach with the insurance carriers and dictated that no more than 30 percent of their revenue could be used for administrative purposes. So that meant all of the insurance companies, except for the giant ones, closed their doors. It was a consolidation and it was intentional. Now there are only four: Blue, United, Cigna, Aetna, and they all had a hand in seeing with that regulation that only the most giant players could endure.
Obamacare also banned the construction or expansion of physician-owned hospitals. That was necessary to gain the support of the American Hospital Association. The administration also recognized Big Pharma’s profits were going to come increasingly from new biologic drugs, and as more and more pharmaceuticals went generic, there was less profit for Big Pharma. To secure the support of Big Pharma, they promised a ban on foreign competition in biologic drugs, and a week after they made this promise, the FDA declared foreign biologic drugs unsafe. There were all sorts of shenanigans like that. It was anything but a marketplace. It’s very devious to call it a marketplace.
Ironically, Obamacare was great for the Surgery Center of Oklahoma because in another big favor to the insurance companies, the federal government allowed deductibles to go sky high. So, the prices we had listed online were increasingly cheaper than people’s deductibles. Obamacare actually drove patients to the Surgery Center of Oklahoma because they became shoppers. They had sticker shock. They were spending their own money to buy the service that they needed and that we provided. It was very ironic that people found out, like the Canadians, the only single payer they could count on, really, was themselves.
JD: In Mises Institute circles we talk about the “financialization” of the economy, referring to how central banking has brought about low interest rates, encouraged mergers and acquisitions activity, encouraged malinvestment, and created a lot of leverage and other distortions in the economy. Insurance for everyday basic services seems to have “medicalized” the country. Many people are sick and addled, using dialysis and taking ten prescriptions.
I was in Pennsylvania recently and saw a billboard touting the largest employer in the state. It’s not a steel company. No, the biggest employer in the state of Pennsylvania is the University of Pittsburgh Medical Center. And it really struck me as artificial.
KS: It’s on both sides. The presence of the third-party payment system, it makes the buyer, the consumer, the patient, more inclined to enter the system if the barriers are low. The presence of a third-party payment drives utilization beyond what it should be. It also invites the unscrupulous on the seller’s side. It was no mistake that when the federal government assigned pricing through the resource-based relative value scale, they got everything wrong and the prices that were too low resulted in shortages in those services and the prices that were too high caused an abundance. Some of the services that were grossly overpaid were in abundance. Suddenly there were residents deciding, I want to go into that field because Medicare pays through the nose for that stuff. The financialization affects both sides. It invites and incentivizes unscrupulous behavior on the seller-physician-hospital side, but it also drives utilization on the patient-consumer side. It’s like Ambrose Bierce said: accountability is the mother of caution. There may indeed be some unhealthy habits that people have undertaken that they might not if they thought “I’m going to have to pay for acting like this.”
JD: Let’s talk about your story. You go through medical school and residency in the late 1980s. Some of the doctors training you at that time (older doctors in their fifties, sixties, and seventies) would have cut their teeth when the country still had an excellent cash system in America. Those days were not so long ago.
KS: I was fortunate to be around some of those physicians, and so I knew it was possible for there to be a real market. My great-uncle Walter was the only physician in a town in southwest Oklahoma. Walter Bayes was a great man. He was the guy that got on his horse in the middle of the night, in the winter, went to someone’s home and delivered a baby or saw to the sick. He was a very wealthy man, and he charged very, very little but he did very, very well. He was in a cash market, but sometimes it was pigs and chickens. He was beloved. People in the town of Chickasha still call their hospital—the old timers call it Bayes Hospital because the first hospital in town was the bottom story of his house. He lived in the top story. So, I knew, in spite of much of what I was taught and learned in medical school, in residency, that there could be a market. I was market leaning when I finished my training, and that made it all the more painful to realize once I got out and into practice that I was really aiding and abetting a robbery, a real crime. I was an accomplice, and I was helping hospitals rob patients that came through the doors and had surgery in which I participated.
JD: He was your great-uncle?
KS: He was my great-uncle. My brother’s also a physician, and he has a special room in his office that displays Dr. Bayes’s exam table and his tools and books, and it’s kind of a museum room. It’s very cool.
JD: What was your first job, then, out of medical school and residency?
KS: My first job out of residency and fellowship was here in Oklahoma City. In 1990, I joined an anesthesia group that serviced three hospitals. I was focused primarily on cardiac anesthesia and pediatric anesthesia. I might do a cardiac procedure or a vascular procedure at four or five different hospitals in one day. I was very busy and traveled all over town.
I was self-employed in my first real job. I never received any kind of salary. I never received any kind of income support. When I came to Oklahoma City, I joined this group, and what that meant was I was someone on the list, that when surgeons called our group, I was available. I was one of the anesthesiologists that was available, and all of the people that were part of this anesthesia group were all friendly competitors. If a surgeon liked me better, then he would ask for me on Tuesday instead of anybody else in our group. I borrowed money to buy the anesthesia machine, borrowed living expenses, and went to work and worked as hard as I could. I was scared to death of not being busy enough. I was scared of the debt that I’d incurred. We lived very modestly, and I was out of debt within six months. I paid off all the debts. I provided good service to the surgeons I worked with, and I was very popular with them and got very, very busy and very, very successful.
JD: Did you already have a wife and children at this point?
KS: Yes, I had a wife, a child, and one on the way, so I had reason to be a bit anxious. I wanted to be successful. I had real responsibilities. I was trained very, very well. I did my anesthesia training at the University of Arkansas and was fortunate, very fortunate, to meet people who were true mentors, some of which had been in private practice and were at the end of their career and just decided that they wanted to teach. When I arrived in Oklahoma City, I hit the ground running, very well trained, very confident, and loved what I did. I still have a full-time anesthesia practice, and I love it, particularly the pediatric part.
JD: Do you worry that young people in med school today don’t have those kinds of mentors?
KS: I do, and for that reason, I’m supporting the Benjamin Rush Institute chapter at the University of Oklahoma. I was contacted by a medical student whose husband is an Austrian economist. She’s a second-year medical student, and she wanted to know if I would help her establish a Benjamin Rush Institute chapter at OU. For your readers who are not familiar with it, it is the institute that helps medical students think about practice in a free market—in other words, not to be employees.
We had our first meeting, and I provided all the pizza and beer they could eat and drink, and we had twenty-five medical students show up, which is about a sixth of their class. The next meeting was even bigger. I brought bankers in, and I had the bankers talk to these medical students about why they should rent their soul to a bank, because they can get it back, instead of selling it to a hospital as an employee, where they can’t get it back as easily. I’ve had physicians come in who were employees who broke away and can tell them, “You know, as an employee, it’s not what it’s cracked up to be, it’s really awful, and now that I’ve broken away, I not only love my practice, but I regret that I ever was an employee.” I’m bringing speakers in to help these students understand that there is another way and it’s a more ethical and honest way, and it’s a more patient-centered, patient-focused way, and they should live and die by the market discipline, just like every other business. They shouldn’t have a full waiting room just because they’re signed up on some third-party PPO plan. They should be busy because they’re really good at what they do, and if they’re not really good, they ought to find something else to do.
That’s the way the market works in every other industry, and that’s part of the problem. What we see in this country is not a failure of the free market. That’s not the system we have. The system we have is a disaster because the free market is not at work. Everywhere it is at work, you see prices fall and you see quality soar. I’m happy that I am living to see this healthy resurgence of market principles in this industry. I think that this cheaper and better approach is impossible to argue with, and I think we’ll just see it spread.
JD: We hear about the medical school debt some of these young doctors have. They can’t buy equipment or afford malpractice insurance. Their expectation is to be an employee of some big organization like Kaiser. That’s so unlike your great-uncle’s experience.
KS: That was part of why I was so excited to connect with medical students, because the people who have backbreaking debt are the residents. By the time someone gets to residency, they may be too far gone, either financially or ideologically.
JD: Terrible.
KS: I was very excited to connect with the medical students because they’re not too far gone, either financially or ideologically. You just had to be there to see it, the dropped jaws and the wide-open eyes of these medical students when a banker tells them, “I want to help you, I want you to be my customer, and I will do a good job and I will treat you right because I want you to be my customer long term, whenever you have other financial needs.” And the idea that yes, there is capital out there that I can access without selling my soul. I think that a lot of the folks in medical training who are further along are so down deep in a hole that this sort of a message is less appealing to them. That’s why I was excited to get to them early.
JD: You need to do a barnstorming tour of undergraduate schools and deliver a speech called “Before You Go to Medical School”! So, pretty early on in your career you conceived of breaking away and starting the surgery center?
KS: After I dropped out of Medicare and stopped filing claims in 1993, I realized that I was part of a profession that was not governed by market principles, and that started to bother me. I saw the care that patients were rendered in the hospital dwindling, and I didn’t want to be a part of that. The quality of the care and the cost of the care were not favorable to the people receiving and buying the care. I knew the only way as an anesthesiologist that I could ever be a part of a more market-based, more patient-focused practice was to own and control the institution, the facility. It’s not the physician charges, typically, that bankrupt patients. It’s the hospital charges that are so difficult for patients. It wasn’t always that way.
In 1993, I was aware of a surgery center that was in trouble, and I made several overtures, to buy it and they were all unsuccessful. There was talk amongst many physicians in the Oklahoma City area who were disgruntled with what they were able to collect for services rendered and how the hospitals were mistreating their patients medically and financially. I started talking and gathering people together with the idea of building a facility. We had about eighty surgeons originally involved, but it was like herding cats, and they started to splinter off and do their own thing. This turned out to be a good thing because some of what these individuals did worked better and was more efficient in a small group rather than part of a larger group. Everything sort of fell apart after awhile.
I wound up on a hunting trip by pure accident and in the lodge met the two people that I needed to talk to about this failing facility. When I told them I wanted it, they jumped at the offer because they needed to unload it. And so, Steve Lantier, my partner in crime and anesthesiologist, and I bought it, and the Surgery Center of Oklahoma was born on May 28, 1997, twenty-five years ago. We bought everyone out and had 100 percent control. It was almost five years from the time I thought “I’ve got to get out of here and control my own place” to getting it done. We were wildly successful very early on, so successful we decided to build our own place, and that’s the facility we occupy now.
JD: I’ve heard you tell a story about when you got that first call regarding a procedure and you didn’t know what the hell to charge.
KS: That’s right. We bought this place with the idea that we would provide the highest-quality care at a reasonable price, that patients would always know what they were going to pay us, and that we would never take a dime of money from the government.
A week after we opened, a young woman called and wanted to know how much we would charge her to have her breast mass removed. I had no idea. I put her on hold and called the surgeon and asked him how much he wanted, and of course, he didn’t know. I pressed him and he said $500. I said, “That’s great,” and hung up on him before he changed his mind. I knew the procedure would take about twenty or thirty minutes, and as an anesthesiologist, I bill for my time. I kind of had the number in mind for what the surgery center should charge in order to be profitable. Then I realized she would want to know if she had cancer. So, I called a pathologist friend and asked him how much he wanted to examine the specimen. He didn’t know, and he finally said $28. I added it all up, while she was still on hold, and I said it would be $1,900, and she said, “For what?” I said, “Well, for everything.” She then told me the so-called not-for-profit hospital down the street wanted $19,000, and that was just for the facility.
After the surgery, we sharpened our pencil and looked at everything and realized we made a profit. Since that time, we have found, pretty much, we are 80 or 90 percent cheaper, most of the time, than those who claim to not make a profit at these big institutions, big hospitals. Still we don’t make a lot of money. We have a good marginal profit, but it’s not a grand slam, and we’re very, very happy to run our facility in that way. I’ve had phone conversations with countless patients from foreign countries, in all fifty states, just like that one for any number of procedures, from knee replacements to cochlear implants, you name it.
JD: When you were starting and developing a menu of cash prices for surgery—all-inclusive anesthesiologist, surgeon, and after care—surely vested interests in the state of Oklahoma opposed you?
KS: You know, we had had many legislative battles, and it was coming at us from the insurance companies and the hospitals. I think by the time I put the prices online, they thought they had killed us. There was one legislative move that really hurt us, and that was when the insurance commission in the state of Oklahoma allowed the stacking of deductibles. Patients who went out of network had to meet their in-network deductible before they started again at zero out of network. That put us out of financial reach for a lot of patients, and it hurt us. It almost killed us. So, when I posted the website in 2009, it was almost as a last act of defiance. And I do think at the time, the hospitals and insurance companies thought they had finally finished us off. When I posted the website, I think it was ignored at first. Then they chuckled about it and thought this was kind of funny, a desperate thing. Then it wasn’t funny anymore and they got angry, but there really wasn’t anything they could do about it. By that time, the Republican legislators at the state capitol had begun to waive the free market flag, and they didn’t attack us like they did in the early days to protect the hospitals that were their clients. They didn’t know how to attack us.
I receive inquiries from patients who need inpatient surgery, they need their colon removed for cancer, or they need part of a lung removed or some gigantic spine surgery or heart surgery. And now I actually contact these hospitals that tried to put us out of business and ask them, “Do you want to help this patient from Florida who has a pituitary tumor? Just give me your pricing and let’s not haggle. Give me a good price so you can set that up. Otherwise, they’re going to go somewhere else.” So, these hospitals that were dead set on killing us are now vendors of a clearinghouse that I run that pays the surgery center and all the physicians at my facility. I pay hospitals too and their surgeons. This move has actually overwhelmed these hospitals that were so opposed to it in the beginning. Now, even though they’re cloaked and kind of in the closet, they are participating in this movement because it’s too powerful for them to ignore.
JD: In those early years did you have to take time away from your professional work and go lobby or testify? Did you have to get involved politically on a personal level?
KS: Yes, I did. I spent a lot of time at the state capitol defending us. We made some friends at the state capitol initially. They were Democrats. They saw us as underdogs. They found it very refreshing that we did not accept money from the government because it wasn’t that sleazy conversation where I wanted a favor. I was asking them, “Just leave us alone and let the market work.” Who goes to see their legislator and says, “I don’t really want anything from you, just please resist the attacks on us that were meant to hamstring our operation.” One of our early Democrat defenders was an avowed socialist. Our approach and our demonstration that markets work in this industry has turned my socialist colleague into a true libertarian. He just didn’t know how markets worked, and once he did, he’s as true-blue a libertarian as anybody I know now. What we did changed his whole worldview.
There was a national effort to ban physician ownership of facilities, and there were some people here in Oklahoma who were a big part of that effort. I went to Washington a couple of times and actually testified before a committee. But most of our challenges were here at the state capitol. The state health department was even weaponized against us at one point. So yes, there were a lot of challenges, there were a lot of hurdles, and I think that it helped me. It sharpened my teeth. I was in situations that I was not trained for as a physician, dealing with people who were very savvy communicators, people who could speak their mind very eloquently, even under fire. I found myself in those situations, and it made me sharper, and it made me better, and it prepared me for much of what I later had to face opening and running a surgery center. We have 116 surgeons here now, and I’ve had many media appearances, not all of which have been friendly. And, all of those experiences back then, as stressful as they were at the time, now that I look back, I know just made me better.
JD: You quoted a woman $1,900 total for a procedure that her local hospital wanted $19,000 to perform— and that was just the facility fee! These kinds of disparities, ten times or more, are incredible. Imagine the ungodly sums, the billions of dollars wasted on surgeries alone in this crazy nonmarket system. You are a threat. That’s an awful lot of money for that local hospital to leave on the table.
KS: I think we are a threat, but it’s difficult to argue against cheaper and better. Initially there were some salvos in our way to suggest quality-wise, maybe we weren’t as good as someone who charged ten times what we did. That didn’t go anywhere because we had already established a reputation in Oklahoma City and in the state of Oklahoma.
We took care of all of the Division 1 athletes. As a pediatric anesthesiologist, Steve Lantier and I had anesthetized most of the corporate execs’s children in the city. We had a solid quality reputation. Those attacks gave me a chance to talk about price equality and how the reason prices are high is that there’s no competition going on, and if there’s no competition, you don’t have to be any good. That was very uncomfortable the first time I said that to a hospital exec. A hospital exec one time asked me under fire, “How do I know that your surgeons are any good?” And I said, “Well, unlike your surgeons, we don’t make more money when something goes wrong.” Through these attacks, we learned to help make sure that their attacks backfired.
Again, I think we are a threat, but some of the big players know that this is coming. I had a major Blue Cross executive, who’s head of an entire state for Blue Cross, recently tell me that he’s a big admirer of what we’ve done but that it scares the hell out of him. They know that it’s coming and they’re going to have to accommodate this all-inclusive transparent price-approach to care.
I’m helping hospital execs get into this business. There is a network of hospitals here in Oklahoma and four or five other states that are involved. “Do you want this patient from Alabama or California?” Patients they would never know about otherwise. There’s not that much risk to them to step into this world. Working together, we help create and curate inpatient bundled prices, all of which are listed, by the way, at a different website called Atlas Billing Company.
I think people also know—even the big dogs in this industry know—it’s going this way and they want the help of someone who’s on the inside. That balances a little bit the desire they have to destroy the movement. I think that it’s gone too far for them to kill it. I knew when Donald Trump signed an executive order that mandated price transparency that as wrongheaded as that was, in terms of the results that it had, it changed the narrative. Now the weirdos are the ones who won’t tell you how much a tonsillectomy is. Now it’s the people that said “Well, we don’t really have any idea. We don’t know how long that surgery’s going to take” or “We don’t know if the patient’s going to spend a lot of time in recovery room.” Those people are seen as the sleaze that they are. The narrative has changed, and that’s one of the reasons, even though we’re a threat to the system, that the system doesn’t know how to attack back.
JD: Some surgeons and certainly some healthcare administrators must make far more money under the current system than they should.
KS: That is absolutely right. I’ll say this, though: by and large, physicians are moral, ethical folks who do the right thing. There are people out there who are operating unnecessarily, and those are the folks who are making a ton of money, people who are doing procedures that ought not to be done. We don’t allow those people in our facility, and the market has a way of sniffing those people out. One thing I’ll say is when hospitals employ primary care doctors, the primary care doctors are valued and judged, paid and bonused, based on the extent to which their referrals make money for the mother ship. So, primary care doctors refer to surgeons who are employed by hospitals, and the more surgery they do, the bigger bonus the primary care doc receives. It’s really awful.
There are administrators who shouldn’t have a job at all, and you look around a hospital and you shake your head and wonder what is it that this person does that contributes to patient care. But multimillion-dollar hospital CEOs have a lot of responsibility. We don’t have an administrator at our facility, or rather, I’m the administrator. This top-heavy administrative apparatus that sits on top of the industry is a result of government regulations, which the big players in the industry have welcomed, and it’s also a result of the third-party payment system that I think is breaking down.
JD: I suspect that those million-dollar hospital CEOs actually detract from patient care with their busywork. You had a lot of stress getting the cash surgery center up and running and breaking the mold. Your life could have been more comfortable as an anesthesiologist in the system. Was it worth it not to deal with government and third-party insurance and all the medial billing bureaucracy?
KS: Mises said, “People go from A to B because they prefer B to A.” All in all, my life is satisfying. Stress-wise, it’s the stress I’ve chosen. And the stress of the market is real. You have to perform. You have to have good results. You have to have good outcomes, or the market will murder you. We have embraced that because everyone in my organization is confident of their abilities. We’re not afraid to compete, but there’s a stress that goes along with that too because the expectations for those of us out in the marketplace embracing that discipline are higher than they are for the cogs in the wheel. But yes, I feel vindicated, and all of the battles that we endured in the early days have borne fruit. There are countless patients, tens of thousands of patients, who have benefited from our approach, whose assets and wealth have been preserved, whose children have had surgery who otherwise could never have afforded it. There are many, many success stories over the years, so I’m paid in that way too. I have a very rich existence because of the friends and relationships that I’ve had with coworkers, surgeons, employees, and people who have supported us. Yes, it’s been hard, but it’s been very, very rewarding.
JD: And of course, some of your patients come from places like Canada, where a so-called single payer system gives them “free” surgery only after a long wait.
KS: That’s right. They’re paying with their time. We operated on a Canadian recently, and this is a common story now, the woman needs a hysterectomy and is in line waiting for three years.
JD: Wow.
KS: Their system is so dysfunctional. It’s three years of getting transfusions because of her bleeding. And for $8,000, she can end her nightmare and have a hysterectomy. The wait for a knee replacement is also three years right now. And in fact, when I launched the website in 2009, the first patients to come were Canadians. People come from all over the place. About 40 percent of our patients, in any given week, sometimes even higher, are not from Oklahoma. They travel here because they hear about us for one reason or another. We turned twenty-five years old, as I said, this week, and we had a big party. We had a big crawfish boil and invited three hundred people. Ron Paul and Steve Forbes sent congratulatory videos. Larry Van Horn, a healthcare economist from Vanderbilt I’ve become friends with, he sent a nice video of congratulations.
The people in Oklahoma, the employees that I’ve worked with at the Surgery Center of Oklahoma, we know we are part of something that’s bigger than just your average surgery center. It’s provided sort of a model for others who have followed up. WellBridge Surgical in Indiana just launched and it’s a carbon copy of the Surgery Center of Oklahoma. These facilities will begin to pop up all over and there will even be some hospitals putting their toe in the water. They will do this because they are afraid that people will leave their community and travel to Oklahoma or to the guys in WellBridge to get their surgery.
JD: At those prices, you can fly first class to Oklahoma City and stay at the Four Seasons! You talked about the Surgery Center of Oklahoma and its tertiary care: anesthesia and surgical services. But there is also a revolution at the primary care level. Direct primary care (DPC) doctors who accept cash for frontline family-practice medicine are growing. You know and are friends with many, many doctors in this movement through your work with the FMMA. Can you just give us a brief sketch of the DPC revolution and where it is going?
KS: The direct primary care movement, I believe, is the most disruptive component of this free market healthcare movement. It was founded by two physicians in the United States with very different approaches: Lee Gross in Sarasota, Florida, and Josh Umber, in Wichita, Kansas. They were aware of the concierge movement, where physicians charge patients $10,000 a year whether they see them or not, just so the patient can have immediate access. Lee and Josh thought, Why can’t we have a blue-collar version of that where we offer care that regular people can afford? They kind of backed into it by thinking, How much money do I feel I ought to make as a doctor? What is fair? And I wonder if I had six hundred patients or eight hundred patients in my practice instead of three thousand, like many primary care doctors do, and they paid me $70 a month, and I’ll be at your beck and call. See me whenever you want. You can text me. This movement has exploded. And the most disruptive part of it is these are self-employed, right-up-against-the-wall capitalists and are not hospital employees. When a patient walks into the office of a direct primary care doctor, that direct primary care doctor is working for that patient. They’re not working for the hospital, and all the conflicts of interest are gone. If that patient is attracted to a direct primary care doctor, they also probably have sticker shock. They’re a member of a cost-sharing ministry or they’re part of a self-funded plan which pays for these direct primary care subscription memberships.
Recently a patient walked into a direct primary care doctor’s office with appendicitis. I get a call, “Can you do an appendectomy on this guy?” Well, yes. And that whole episode of care cost less than $6,000. Just think about that: patient goes to the ER because they don’t have access to a direct primary care doctor, and then they’re hospitalized and have an appendectomy in one of these giant price-gouging hospitals, and you’re looking at $30,000 or $40,000 minimum.
I’m proud to be friends with many in the direct primary care community and really do view their role in this movement as a most critical one.
JD: Can we conclude that big medicine is in big trouble, but the evolving cash market gives us reason for optimism? Would you agree with that assessment?
KS: I would agree with that. I keep coming back to Rothbard’s quote that the market is beautiful but it’s also powerful. We’ve been witness to that. We are seeing the beauty of the market discipline at work and how it is making prices fall and quality soar all at the same time. But we’re also seeing how this tiny movement, these individual direct primary care doctors, this surgery center in Oklahoma City, has exerted an incredibly powerful influence on the market, as small as we are. So, big medicine is, I think, in big trouble, and it’s because of market discipline and the power that it wields.
JD: Excellent, Dr. Keith Smith. I want to thank you for your time.
KS: It’s always good to talk to you.
There is an excellent, deeply researched, Austrian economics-founded theory of customer value: the value learning cycle, which we explored thoroughly in Episode #178 (Mises.org/E4B_178). How do entrepreneurs and executives apply that theory to create customers, delight them, and grow strong brands and businesses? That’s the subject of the second part of Mark Packard’s business handbook for value creation, Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers (Mises.org/E4B_179_Book).
Key Takeaways and Actionable Insights Entrepreneurs can’t directly access the customer’s mental model, but they can apply empathy to run simulations. Entrepreneurial empathy is the ability to see the world through the mental model of the customer. We all see the world through mental models rather than directly, and each of us has our own, unique mental model. But mental models can also be shared and aligned. A mental model is a way of thinking about real situations or about the real world. It’s quite possible to describe someone else’s mental model. We can first ask them questions (“How do you think about your current situation?” “What do you do when the car you drive gets to 50,000 miles on the odometer?”) and then run hypotheses or ideas through the model that emerges (“How do you like this?”, “How does this make you feel?”, “Would you buy this product?”)
Empathy is knowledge-based, and therefore can be practiced by any entrepreneur. It’s not the case that some people are more capable of empathy than others. Since empathy is knowledge-based, it can be learned, developed, and trained. It’s a process of filling different buckets of knowledge about your customer. There’s factual knowledge about them, as well as factual knowledge about their consumption or usage (e.g., location, frequency, any reports, or ratings they’ve provided). And then there’s experiential knowledge — what an experience felt like to them.
Only the customer has this experiential knowledge, only they can feel it. But if the entrepreneur can understand the customer’s mental model, it’s possible to simulate what that experience might feel like — feel what they feel. It’s possible to get closer and closer by experiencing it yourself: eating the food you’re offering them or the beverage you’ve designed, using their mental model rather than your own. The customer’s experiential knowledge is tacit — it can’t be communicated directly — but entrepreneurs can get closer to it through simulation, and interpret it through empathic technique.
Be aware that there is always the risk of what Mark calls interpretive loss — we listen or observe but we don’t interpret the data properly or fully. Our downloadable pdf provides direction on where interpretive loss occurs and how to safeguard against it.
There are some techniques to reinforce the accuracy of empathic investigation. Lead users: In every category, there are users who feel needs and experience unsatisfaction / dissatisfaction more intensely. Give investigative priority to them.Contextual in-depth interviews: Communication can be more productive using specific techniques from our E4B tools library. The contextual in-depth interview technique is one of our useful tools.Ethnographic deduction: Ethnography is the technique of observing users in action. It’s a better tool than a survey or questionnaire — what users do is more informative than what they say when answering surveys. Researchers deduce motivations from observation.Behavioral data: Some data streams can be the equivalent of ethnography — observing users buying or searching as an indicator of their needs, preferences, and concerns.Entrepreneurs can also learn from themselves: We are all both consumers and producers. In the categories that are most important to you, observe your own behavior as a user. Be aware of your concerns as a customer. Make your empathy channel customer-to-customer. From value propositions to innovation. Developing a value proposition is a problem-finding process. Designing an innovation is a problem-solution process.
Problem-finding is the development of knowledge of a problem to be solved from the customer’s perspective, using the experiential learning from the mental modeling exercise. A problem is not the same as a need — it’s a specific gap in the solution landscape of products and services from which the customer can choose, a gap that can be filled with a new solution yet to be identified but capable of identification.
Problem-solving is the application of resource knowledge and technical knowledge to identify a new solution. The entrepreneur must navigate multiple uncertainties to arrive at a solution — demand uncertainty (is there real demand?), technical uncertainty (will it work?), resource uncertainty (will I be able to gather the resources to get to a solution?), capability uncertainty (can I do this?), and competitive uncertainty (will someone else beat me to it?).
Mark’s book includes a multi-step process for problem-solution creativity. One of the most interesting is knowledge combining.
What’s a pancake boat? It’s a combination of two very basic words and ideas that represents the potential for something new. Perhaps a very flat-profile boat for floating under low bridges. Or a breakfast barge touring the harbor. The point is the combination. When entrepreneurs can combine technological knowledge with problem knowledge, it’s possible to invent a new solution without inventing a new technology.
Mark has two suggestions to help with knowledge combining. One is to become interested in technologies. If you are having a hard time devising a solution, it’s probably because you are not familiar enough with technologies that are already available to do so. Find tech websites that can keep you up-to-date on the latest discoveries and applications. The more you understand about the properties and capabilities of resources and technologies, the better you can leverage those properties and what they do.
The second suggestion is a specific method. List as many different resources, technologies, and skills that you know about — software skills, hardware skills, people skills, technologies you’ve worked with, processes you’ve worked with, etc. Keep the list updated.
Then turn to the problem you are trying to solve. Mentally step through all the resources on your list and bring each of them into active memory. Try to think of a possible solution using each one. Keep going through the whole list. You’re bringing technical knowledge schemas forward while holding your problem knowledge in active memory.
Do any of the solutions stand out? Are there any that are truly outside-the-box? Are any of them impossible with current technology? That’s good. Do more research. You might find a breakthrough answer.
It takes time, commitment, and resources, but when you are passionate about the entrepreneurial process the effort will pay off big time.
Entrepreneurs get inside the mind of the customer to make the world a better place. The goal of entrepreneurship is to enhance and improve the state of well-being experienced by customers. To achieve this goal, entrepreneurs aim to understand the customer’s mental model, and run creative solutions — potential futures — through it to simulate the customer’s new experience. It’s a counter-factual exercise, but entrepreneurs can improve their capacity, and their odds of success, with practice, commitment, and the use of some of the cognitive techniques Mark Packard recommends.
Additional Resources "Contextual In-depth Interview Technique" (PDF): Mises.org/E4B_179_PDF
"Interpretive Value Learning" (PPT): Mises.org/E4B_179_PPT
Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers by Mark Packard: Mises.org/E4B_179_Book
Groups targeted by class warriors in America will achieve more if they follow the Igbos’ path and ignore the politics of grievance.
Original Article: "Africa's Entrepreneurs: The Igbos of Nigeria"
This Audio Mises Wire is generously sponsored by Christopher Condon.
Getting into the minds of customers is the universal need of everyone in business. A new book by Mark Packard, Entrepreneurial Valuation, provides a new understanding of how customers identify value in the constant, never-ending flow of the value learning cycle. Mark joins Economics For Business for a two-part episode on how entrepreneurs can better understand value in order to delight customers.
Key Takeaways and Actionable Insights Getting into the minds of customers is the universal need of everyone in business. The business world is enthusiastically adopting the insights of Austrian economics. They appreciate the unique economic perspective that can help grow and strengthen customer-facing businesses — and that means all businesses. Professor Mark Packard is presenting his insights on customers and how their minds work when choosing what to buy in a new book, Entrepreneurial Valuation, with the sub-title An Entrepreneur’s Guide To Getting Into The Minds Of Customers (Mises.org/E4B_178_Book). It’s a business book for every business and every businessperson.
The first step is to experience value as customers experience it. They learn it. The purpose of business is to create value for customers. And for customers, the pursuit of value is everything. It’s life — a never-ending process of identifying what they expect to be valuable to them and trying to weigh up their choices between alternatives. Human beings are always valuing, all the time. In fact, Mark makes the point that we should think of value as a verb, not just as a noun. Value as a noun has a specific meaning: it’s an experienced benefit that constitutes a change in well-being from a state of unwellness to a better-off state. The benefit is the experience, and it can be ascribed to something that made us feel better off, which therefore has value.
Valuing — the verb form of value — refers to human beings constantly deciding what to do and what to choose based on their valuation process. And that process is learning — learning from previous value experiences, and learning from observing others. As customers, people are always asking: what makes us and others the best off we or they can be?
Entrepreneurs must have their own, complementary, value learning process: learning what customers value and, ideally, what they will value in the future.
Customers can be unsatisfied or dissatisfied. It’s important that entrepreneurs address these value states differently. The default state for people is unsatisfied. We have unmet needs that we feel all the time. Mises called it a state of uneasiness. Needs like hunger can be satisfied in the short term, but the satisfaction degrades quickly. Needs like security or freedom or friendship may always be unsatisfied, or at least part of the time. There is always a state of greater well-being to aspire to.
Dissatisfaction is a different state. A customer may have applied their value knowledge — made a valuation — to predict a future value experience, and it falls short of their expectations. They made an error. This results in a feeling of dissatisfaction
Both states are opportunities for entrepreneurs: to meet a hitherto unmet need, or to substitute satisfaction for dissatisfaction via a new or better solution. It’s important to know the customer’s state of well-being and its source.
Customers have limited value knowledge and considerable value uncertainty, yet they must make value predictions. Customers use the value knowledge they possess, from previous value experiences or observing others in the market, to try to predict a future improvement in well-being for themselves. What choices should they make to achieve this improvement?
How do they make the prediction? They perform a mental simulation of future value experiences. They imagine themselves having a future value experience with a particular product or service. Via the simulation, they form their predictive valuation: the benefit they expect to experience in the future.
When they actually use the product or service, they assess the actual value experience and compare it with the prediction, thereby updating their value knowledge. They ascribe to the product or service the satisfaction or dissatisfaction experience they feel. Or they might ascribe it to a set of circumstances or some other context. In any case, they have a new mental model: a new experience they can ascribe and use for future predictions.
Value learning is a cycle. Self-assess to identify unsatisfaction and dissatisfaction;Search for new value propositions with new satisfaction potential;Compare the new value proposition with alternatives (and with others’ experiences);Make an economic calculation: willingness to pay;Purchase;Usage experience — including objective value experienced in consumption and subjective value experienced as degrees of feelings of satisfaction (e.g., delight at exceeding expectations versus satisfaction at meeting expectations versus disappointment at failing to meet expectations);Assess usage experience compared to value expectation;Adjust value knowledge base and revise future expectations. Austrian economics helps businesses get into the minds of customers to monitor and understand their value learning. Economics is a much better discipline than finance on which to construct an approach to growing a successful business, because economics is the science of choice: how customers choose the ends they pursue and how they choose the means they perceive as best for attaining their ends.
It’s the Austrian school of economics that is most useful. Traditional economics believes that customers seek utility — what’s useful to them. But subjective value doesn’t reside in utility, it resides in the satisfaction that comes from the feeling of making the best choices. Behavioral economists believe that customers have a tendency to make poor choices (from the economists’ point of view) because of incomplete value knowledge.
But Austrian economists accept the customer’s mind as it is. The goal is to understand how customers choose and how they experience value in their everyday lives, how they negotiate value uncertainty, how they set expectations for the future and how they compare actual experience with expectations. What goes through their minds? To know that requires getting inside their minds, which is what Professor Packard is trying to help us to do with his new book.
Additional Resources "Experiential Value Theory: How Customers Think About Value" (PPT): Mises.org_E4B_178_PPT
Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers by Mark Packard: Mises.org/E4B_178_Book
"Tools For The Value Learning Process" (PDF): Mises.org_E4B_178_PDF
The business-as-a-flow orientation embraces continuous adaptive change within the firm. Traditional slow-motion control mechanisms like strategy and planning are no longer appropriate. The new toolkit that entrepreneurs are developing includes the after action review (AAR), a learning tool rather than a misguided attempt at predictive control.
Key Takeaways and Actionable Insights In a VUCA world, entrepreneurial orientation embraces change and adaptation in order to reach goals. Learning fast is critical in times of accelerated change. A business firm must change at least as fast as its market and its external environment if it is to survive and thrive — ideally faster. In earlier podcasts, we’ve made reference to the OODA loop as a non-linear change management framework: Observe changing data, filter those Observations through your firm’s capabilities, culture, heritage, and experience to understand what the new data means to your firm specifically, re-Orient if it’s indicated, make new Decisions and take new Actions, and monitor the feedback loops for updated Observations. Speed of progression through the loop is a competitive advantage — make changes faster than your competitors.
One of the keys to successfully managing change is a bias for action. It’s possible that in some situations some businesses may fear taking action — they lack confidence in their own hypotheses and are concerned that their action might be “wrong”. Austrian entrepreneurship takes a different perspective. Entrepreneurial orientation and intent shape decision-making by giving it a high potential focus and, thereafter, every action is framed an experiment from which to learn. Learning enables a greater capacity for reframing. Curt Carlson, in E4B podcast #175 (Mises.org/E4B_175), told us that relentless reframing is key to success in innovation. Learning through action is paramount.
The tool for learning from action is the AAR – After Action Review. The After Action Review is a simple device that asks the questions: what did we intend would happen, what did actually happen, what can we learn from what happened, what will we change next time we take action.
Intent — What are the intended results and metrics?It’s important to continually review the shared understanding of intent among those participating in any action or project or initiative. Shared intent is the mechanism that supplies direction and thrust so that everyone is moving in the same direction. It’s sometimes called commander’s intent (in the military) or leader’s intent (in Agile team science). It’s key that every team member subscribes to and can articulate the intent.Performance — What happened? Is there a performance gap compared to intent?“What happened” can be a challenging question because observation is often subjective, and individuals in different vantage point and with different perspectives can provide different reports or estimations of what happened. Cultural factors become important – front line actors and individuals located lower in a hierarchy must be able to speak freely about what they observed without fear of contradiction or condemnation by superior. A performance gap must be viewed as a learning opportunity that is good for the entire team and the firm as a whole.Learning — What was the cause or source of any performance gap?In a high-speed learning culture, teams are eager to identify causes or issues that give rise to performance gaps. In complexity thinking, it is not always possible to identify linear cause-and-effect linkages, but it’s generally possible to identify areas for improvement as a result of experiencing a setback. It may simply be necessary to run more experiments until a better performance can be attained. It may be possible to identify obstacles that can be removed. It may be possible to identify risks that can be mitigated. In any of these cases, learning via experience (i.e., after action) advances knowledge and augments adaptiveness.One possible learning is that the intended result is not, in fact, within the capacity of the firm, leading to either a decision to augment capacity or a decision to redirect existing resources into other lines.Next Time — What should we change?Learning leads to new hypotheses which can be implemented through new action. The After Action Review identifies what changes in behavior are appropriate to try in a future action. There’s the opportunity to eliminate waste, or abandon no-longer promising trials, or experiment with improved ideas. In a learning culture, there is eagerness to return to action armed with new knowledge and to explore new potential. AAR’s can span all time periods: before action, during action, after action. When should a firm conduct AARs? All the time. In fact, there’s a role for before action reviews, during action reviews and after action reviews. All have the same structure.
What is / was / is going to be our intent?What challenges will we expect to face / are we facing / did we face?What have we learned in the past / what are we learning right now / what caused the latest gap?What will make us successful this time / what adjustments should we make right now / what will we change next time? A learning culture and orientation are critical to the successful application of AAR’s. Learning via AARs is not mechanical, it’s cultural. The culture of the firm must be that there’s no development, no progress, no improvement without learning. Mark McGrath links the learning culture to the growth mindset. The relevant assessment is not one of strengths versus weaknesses but the mindset of the firm compared to that of its competitors. Seeking growth is a mindset, and so is learning. It’s a humble mindset in which we recognize our bounded understanding and seek eagerly to augment it with new knowledge.
There are simple shared rules for individual AARs and for the learning culture: shared goals and mental models, open to every level of the organization, psychological safety, transparency, shared findings, preparation for next time. Within these rules, every firm can build a capacity for learning that becomes a capacity for growth.
Additional Resources E4B AAR template (PPT): Mises.org/E4B_177_PPT
Background reading: NextForge.com
"Orientation: Bridging The Gap In The Austrian Theory Of Entrepreneurship" by Mark McGrath and Hunter Hastings (AERC 2022 Paper): Mises.org/E4B_177_PDF1
Mark McGrath on LinkedIn: Mises.org/E4B_177_LinkedIn
OODA Loop: Mises.org/E4B_177_PDF2
At the core of the entrepreneurial orientation that is the engine of vibrant, growing, value-creating, customer-first businesses, we find the principles of subjectivism and subjective value. Subjective value embraces not only the value the customer seeks, but also the value that entrepreneurs establish in their companies: capital value. Once businesses master these two principles in combination, they can open new horizons of innovation and growth.
Key Takeaways and Actionable Insights A fundamental advantage of Economics For Business over traditional business schools is the understanding of subjective value. It’s hard for conventional businesses, and for the traditional instruction in business school, to fully embrace all the insights of subjectivism and the subjectivism of value. The traditional bias is towards numbers, quantification, prediction, and financial control.
Value is conflated with price and profit. Value is what customers will pay, cost is what the producer pays for inputs, and profit is the difference. Value is inherent in the thing that is produced. Finance and accounting are the numerical tools for computing these relationships.
When business embraces subjectivism, the value is not in the thing. Human minds bring value to the thing. Value comes ultimately from the consumer or end-user. They evaluate the offerings available to them and make value decisions, to part with their money (or not) to claim the value that’s offered.
Value is better thought of as a verb rather than a noun. It’s an emotional driver of decision-making.
Firms can’t impose their concepts of value on customers. A key difference for the subjectivist approach is that customers alone determine value and producers can’t create it and sell it. Value is experienced by customers and, of course, experience lies entirely with them and can’t be reproduced or projected or simulated by producers.
That doesn’t mean that there’s no role in value generation for businesses. Steve Phelan broke down the firm’s value role into 3 parts: value imagination, value delivery and value capture.
Value imagination is a belief about the future — entrepreneurs imagine (or have a “hunch” about) a future in which a target customer experiences value from the producer’s offering, the goods and/or services they make available to customers. This imagination step is a major component of the entrepreneurial journey construct we employ at econ4business.com to help businesses generate value and grow. It’s creativity at work — where value creation starts.
Value delivery is implementation of the imagined value: designing the goods / services for commercial offering, assembling all the components required for implementation (including people in team roles as well as production assets) and taking the offering to the marketplace with a price and a value communication bundle.
Value capture concerns how much of the value experienced by the customer flows back to the producer. Typically, value production takes place in a system — perhaps including retail channels, or a wholesale partner, or a bank of financial partner. How much of the value flow do they take? Or how about competition, who might copy and undercut. Or suppliers who violate contracts or under-perform on contracted services. Entrepreneurs must pay close attention to value capture.
Subjective value thinking extends to business investment decisions. Subjectivism applies not only to value but to the assets of a producing firm. The subjectivist approach understands assets as providers of potential services that customers might value. Most classes of assets (including people) can be assigned to multiple different uses and multiple configurations for the provision of different services. Entrepreneurship weighs up — evaluates — all the possibilities and assigns the assets to their greatest value generating uses.
Value calculus assesses the value-producing arrangements inside the firm. Entrepreneurial producers of value face in two directions: outward to the market and customers, and inwards to the firm and its internal organization.
Looking inwards, producers must calculate which assets — including both human capital assets and physical assets — in which combination result in the greatest value for customers at the least cost. This requires an evaluation that assesses value flowing to the customer from the firm. Since value is subjectively determined by the customer, this calculation is extremely challenging. Peter Lewin called it subjective quantification, and Steve Phelan used the term value calculus. It’s a combination of qualitative and quantitative assessments that’s learned over time. It’s highly contingent on the (changing) value preferences of customers.
Internally, managers must combine their people assets and physical assets in a way that produces most value based on this uncertain and changing value calculus. Entrepreneurs and owners can’t be the decision-makers for everyone, and so the organizational technology must be designed for greatest value generation. Instructively, that organizational technology has been changing over time — from highly structured and divisionalized organizations to today’s more open, networked, and interconnected organizations.
The tool for capturing this value calculus is EVA — economic value added. Capital is a value. In fact, Ludwig von Mises remarked that it was unfortunate that business ever coined the term capital goods, because it tends to make us think of capital as something solid and fixed. It’s not — it’s the result of the value calculus that Steve Phelan talks about.
Capital value can be measured, but not in the way that is captured on a P&L or a balance sheet — creating numbers that appear to be exact, and fixed and fully determined. Entrepreneurs must estimate capital value and the estimate is that of the valuer. They do so algorithmically — there’s a process and a routine but it’s not necessarily mathematical. It includes breaking down the asset combination into smaller and smaller components — perhaps individual people or teams, or perhaps divisions versus the entire company, or perhaps some set of components that can be thought of as an integrated grouping — and assessing their relative capital value contribution. Money values can be used since this helps the expression of relative value, but the algorithmic computation is never exact. Its validity is always in the eye of the valuer. The goal is to find costs that don’t add value, or don’t add as much value as other costs.
Accounting and finance — one looking to the past to measure what happened and one looking to the future to predict what will happen — offer objective-looking numbers, but they truly reflect the subjective value calculus of the entrepreneur in trying to allocate economic value added as accurately as possible.
Additional Resources "An Austrian Theory Of The Firm" by Peter Lewin and Steven Phelan: Mises.org/E4B_176_PDF1
Austrian Capital Theory: A Modern Survey of the Essentials by Peter Lewin and Nicolas Cachanosky: Mises.org/E4B_176_Book
"Entrepreneurship in a theory of capital and finance — Illustrating the use of subjective quantification" by Peter Lewin and Nicolas Cachanosky: Mises.org/E4B_176_PDF2
Curt Carlson has devoted his life to value creation and innovation — VC&I as he sometimes characterizes it. He has been CEO of SRI, a “pure innovation” company where the business model was to create important new innovations that positively impacted the lives of many people. Examples of his innovations are Siri (ultimately sold to Apple) and HDTV (the technology that enables the streaming so many people enjoy today).
He started a consulting company called Practice Of Innovation, which established methods of innovation available to everyone and every firm. Now he teaches at University, aiming to develop a new generation of innovators.
He talks to Economics For Business (econ4business.com) about value creation and innovation as a life skill.
Key Takeaways and Actionable Insights Value Creation is a complex adaptive system. Value creation is a system of many agents, components, arrangements, technologies, constraints, and unpredictable emergent outcomes. There are a challenging number of variables, and there’s a requirement for highly integrated collaboration and recursive and iterative process, utilizing adaptive feedback loops and continuous readjustment. It’s hard — and quite rare — to get right and easy to get wrong.
The essential element of value creation is the mental model. The mental model for value creation is solving important and meaningful problems for others. It shouldn’t be about launching a new business or a new technology, but about helping others. And, since people don’t think in terms of “I have a problem to solve,” the value creator must also understand the customer’s mental model. They experience dissatisfactions. They wish things could be better. They make trade-offs. They can’t always articulate what they want. They have to learn what to want, and value creators can help them to understand what they can want in the future.
Mental models are fundamentally important to the creation of value. We all have mental models of the way we’d like the world to work. The value creator is able to identify — “get inside” — others’ mental models and see the world the way others see it. This perspective is vital — the critical first step in the value creation process.
The calculus of value is subjective. Value can only be defined by the individual who experiences it. Individuals make a mental calculation of value – it might include some numbers and some thoughts, feelings, preferences, and ideas. They are able to make this calculation in their own mind, even though the potential costs and benefits lay in the future.
The dimensions of value are many. When evaluating the purchase of a car, for instance, the price is part of the calculation, but so is the appearance and pride of ownership, the comfort, the gas mileage, the color of the seats, the cost of maintenance, and many, many more features and attributes and functional and emotional benefits.
Despite the difficulty and complexity, people are agile and adept at making this complex calculation. Value creators must be able to appreciate how customers make the subjective calculation — the calculus of value.
The removal of barriers to the experience of value is a good way to create it. Convenience is often highly valued by customers. It represents the removal of barriers to value – easier to operate, less time taken, less physical or mental effort required. These are all valuable. The iPhone provided a more convenient way to enter data (responsive touch screen versus traditional keypad), and this played a big part in its adoption and success. The mental model is that people want to do things that are easy to do. They don’t want the clumsiness of a tiny keyboard on a phone. They don’t want to read a 20-page user guide for a new piece of software. They don’t want packages that are difficult to open or retail stores that are crowded and hard to shop. Identifying and understanding mental models like these gives skilled value creators their competitive advantage. If barriers are perceived negatively by customers, then create value for them by getting rid of barriers.
A need is not a problem to be solved. A need is a mental model. Reframing is the tool for understanding. Curt uses the example of the slow elevator in a prestigious office tower. Residents complain. Engineers might try to solve the problem by re-engineering the elevator for greater speed. A value creator would try to identify the mental model of the complainers. That’s reframing. They are annoyed because they feel that their valuable time is being wasted; they’re bored for a few seconds. Understanding this mental model opens up the possibility for new value approaches. Add a digital screen in the elevator with a news feed so that people can use the time to catch up on the latest headlines. Or add a mirror so that they can use the time to check their clothes and hair before going into the meeting.
Most value creation challenges can be better addressed through reframing. In fact, Curt describes his innovation method as “relentless reframing”. The art of value creation is teasing out the customer’s mental model. Do it again and again, back and forth between the value creator and the customer, to get the understanding of the customer’s mental model right.
Value creation is coupled with innovation: VC&I. The definition of innovation is not just the new idea or new product or new service. It’s the sustainability of any new solution once it’s delivered into the marketplace. Customers use it and prefer it, they pay enough for it to sustain the financial business model, they repeat their purchases and provide supportive comments and assessments. To be truly sustainable, the innovation must appeal to a lot of people, not just a few early adopters. The benefits must be greater than the costs to the user, based initially on their value calculus, and subsequently on their actual experience. And the offering must be better than competition. To get customers to change from a competitive offering, Curt says the degree of superiority must be 2X to 10X.
Curt uses the N-A-B-C process tool as a methodology for innovation teams. On previous visits to the Economics For Business podcast, Curt has laid out the framework of his N-A-B-C model and how to use it. See our E4B graphic tool (Mises.org/E4B_175_PDF) and the Key Takeaways summary from the podcast #37 (Mises.org/E4E_37).
N = Need: Identifying and understanding the customer’s mental model, and perceiving the world as they perceive it, getting to their perspective of how the world can be improved. This is where relentless reframing applies.
A = Approach: Designing an innovative solution with a sustainable business model. The temptation is always to jump straight to the approach without truly understanding the Need, according to Curt. This always leads to error and requires a pivot.
B>C = Benefits Per Costs: This is the customer’s value calculus, very hard to get right as a result of its multi-dimensionality and combination of qualitative and quantitative measures.
C = Competition: What are the alternatives among which customers are choosing, whether direct or indirect - remembering that not buying anything is an alternative they’ll consider. Overcoming inertia requires a high degree of superiority.
Our econ4business.com toolkit (Mises.org/E4B_175_PDF) includes a full explanation of how to apply this tool.
Value Creation and Innovation is a life skill that can be taught to everyone. Solving others’ problems is a deeply human activity. We’re all wired to do it for each other, every day. Value creation can be taught to kids of any age in school, and it can become a life skill. It can be taught to people studying any discipline in universities and colleges, from humanities to hard sciences, so that they can apply it in their field. It can be taught in every firm, whatever the line of business.
The resultant life skill is the mental model that life is about solving meaningful problems for others. It’s about understanding and appreciating others’ mental models. Reframing is the tool for gaining this understanding. Value creation is a fundamental capacity for everyone. They can make an impact on society by solving problems that matter.
Additional Resources "N-A-B-C Innovation Process" (PDF): Mises.org/E4B_175_PDF
Curt Carlson on Innovation Champions: Mises.org/E4E_91
"Answering the Million Dollar Question (Part 1)—How Value Creation Forums Help Create Winning Research Proposals": Mises.org/E4B_175_Article
Negative feedback loops are the ultimate source of value. Mises called it “uneasiness and the image of a more satisfactory state”. Bill Gates said that “Your most unhappy customers are your greatest source of learning”. Negative feedback loops give us the opportunity to improve our service delivery capacity, and the value proposition behind it. Sterling Hawkins has identified the ultimate feedback loop for personal performance. He calls it discomfort. We should seek discomfort, analyze it, understand it, and utilize it as an ultimate tool for improvement. His book is titled Hunting Discomfort (Mises.org/E4B_174_Book) and we talk to him about it on the Economics For Business podcast.
Key Takeaways and Actionable Insights Discomfort is a feedback system. There will always be physical, mental, emotional, or even spiritual discomfort in our lives. It’s necessary and useful. It signals to us how we are interacting with our environment. It keeps us oriented. Sterling’s case is that we shouldn’t try to avoid it, we should embrace it – he recommends that we actively practice hunting discomfort. Once we find it and embrace it we work our way through it, and the result is personal growth. We get better.
First, face reality. The first discomfort Sterling outlines is facing reality. In business, we often say that it’s a great challenge to align the firm’s internal assessment of reality with what is actually going on in the external environment, especially in times of rapid change. We may just not see reality accurately. Our product may not be as well-liked by customers as our research tells us it is.
We can’t change reality, but we can change how we see it. We can change our belief structure. One way is to run many experiments where we can objectively and empirically measure results, and expand on what works and discard what doesn’t. We might find some things that work that we didn’t believe could. And we might find that we thought worked simply does not. Both represent valuable learning and provide us with a reality we can grasp.
Eliminate self-doubt. Self-doubt is mentally wrestling with questions and beliefs and insecurities. It’s the world of “I might” rather than “I will”. Sterling’s advice is that self-doubt can be a gift. It indicates an unwillingness or inability to commit. And yet commitment is often associated with entrepreneurial success. It’s part of what Professor Peter Klein calls entrepreneurial judgment: the capacity to choose which action to take and to follow through with it.
Choose your commitment as wisely as you can – which includes choosing those actions not to take. Sterling’s metaphor is Get A Tattoo. It’s an irreversible commitment everyone can see.
Some people find discomfort in exposure. If you commit, you might feel more exposure than you’re comfortable with. You might have to raise money, when it’s not your skill. You may have to make a presentation about which you’re not feeling 100& comfortable. You might be the only one expressing disagreement in a meeting full of groupthinkers.
Sterling’s recipe is to assemble a support group — he calls it your street gang. They’re supporters, subject matter experts, mentors. You’ll make your commitment to them, and they in turn will give you honest feedback, trust, and loyalty. You’ll still be committed but you won’t feel so exposed.
We take on greater and greater challenges — and that’s uncomfortable. As businesses take shape and grow, the challenges only get bigger. We might get to the point where we want to avoid some of the big challenges. But that’s the wrong viewpoint. The alternative is to turn challenges into an opportunity to find new ways to utilize our resources — to use them as a portal to advance from the status quo to a new reality. The method is reframing. What if you tried the opposite of the status quo solution? What if you looked at the challenge through someone else’s eyes, using their mental model rather than your own – what would they do? What if you change the assumptions about the way you’re addressing the challenge? There are many ways to reframe challenges, and reframing can release you and give you new energy.
The greatest discomfort is uncertainty. Economists talk endlessly about uncertainty in business. It’s a consequence of the unknowable future. But you own your own uncertainty — for entrepreneurs, it’s a feeling, not an economic concept. It’s subjective. We’re not only uncertain about outcomes, but about resources, about financing, about our capacity, about our partners. Uncertainty is multi-dimensional. It’s also guaranteed — we can’t avoid it.
Economists, therefore, say that entrepreneurs bear uncertainty. It’s what they do. It comes with the job. Sterling’s word is surrender: don’t fight or fear uncertainty, but accept it willingly as a cost. Give up resistance. Get into your discomfort zone. Entrepreneurs need to be doing hard things most of the time, however uncomfortable that might be.
Additional Resources Hunting Discomfort. How To Get Breakthrough Results In Life And Business No Matter What by Sterling Hawkins: Mises.org/E4B_174_Book
Visit SterlingHawkins.com
How do we change others’ behavior? In business, it’s a challenge we face every moment. Can we persuade a customer to switch to our brand or service? Can we get the board or the C-Suite to approve our proposal? Can we convince a VC to fund our startup? The common denominator across all these tasks is influence. How do we make the case with sufficient influence? The solution lies in using tools informed by Neuroscience. Economics For Business talks with Rene Rodriguez about his book Amplify Your Influence (Mises.org/E4B_173_Book), and his research into the neuroscience behind influential interpersonal communication.
Key Takeaways and Actionable Insights. Influence is a determinant of business success. In the past, there was a classification distinction between “soft skills” in business management and the more highly respected quantitative capabilities of finance and strategic planning. Today, that is no longer the case. The ability to harness communication to change others’ behavior is fundamental to making progress in the business world, and an inability in this area means an executive or manager will be perceived as ineffective. Setting out a vision that no-one follows is fatal.
Influence is also the way to help people make better choices for themselves. Influence can be considered by some to be manipulation, but there is absolutely no need for that perspective. Influence may be exerted to help people better evaluate the choices and options open to them. Influence is providing information that may not otherwise have been available to the audience, or that had not been considered in the most appropriate light. Influence unleashes what Rene Rodriguez terms “voluntary energy”; they are pleased and delighted to be offered a better decision-making path.
There is hard science behind the soft skills of influence. Influence is applied neuroscience. Neuroscience explains how and why humans resist change. It’s a threat. The first reaction to any new information is often resistance. We don’t like to question what we believe we know, or abandon the guidelines on which we’ve been operating, or change the heuristics we use. It’s a common, shared trait.
That’s why influence is the “how” of leadership: influencing behavior change when the natural response is to resist it. It’s also the goal of marketing, teaching, managing, selling, and communicating.
It pays to learn a little bit about neuroscience for each of these actions.
The power to influence can be amplified by using three techniques. As with any business tool, there are techniques that can be perfected to improve the performance in use. Rene highlighted three:
Sequencing: The brain processes information in certain sequences. First, it looks for threats (like “change” or “new ideas”) in order to sort between danger and safety. If it perceives a threat, it shuts down – no influential communication will get through, Next it seeks value – feelings of being valued, being engaged, being inspired. The right sequence of message delivery starts with a communication of positive value (so that the brain can believe it is in a safe place), followed by communication of caring, active engagement and inspiration.
Framing: people perceive their own reality through their own framing. If your frame of reference for pizza is high calories, excessive cheesy fat and too many carbohydrates, it doesn’t matter how delicious the pizza recipe Pizza Hut presents to you, you are going to be unreceptive. In the battle for attention and shared meaning, an influencer must set and claim the frame in advance of any message presentation. Communicators and innovators practice framing and reframing to improve their skills. For example, creative innovators always create the frame of solving a problem for others, requiring them to see the problem as others see it and experience it, and enabling the future communication of the solution as a relief of unease or removal of dissatisfaction or discomfort. Framing is based on empathy - seeing from others’ perspectives and aligning with their values. That’s why the Economics For Business value proposition design tool starts from “Who is the customer?” and “What is their need?”.
The tie-down: There needs to be a close. Our target audience’s brains are flooded with information from all directions at all times. We need to make our message stick. The tie-down is a tool to make sure the audience has the chance to understand what our information will mean to them, what value it can add to their lives, and how it will help them achieve their goals.
To ensure execution of the tie-down, Rene recommends that we all have an Influence Objective in mind: the specific action, thought or behavior we are aiming to influence. The tie-down is often a summary or emphasis of benefits, or a powerful takeaway or a “magic phrase”. It ties down our message in the audience’s brain.
The art of influence lies in storytelling. Brain scans show that when we are caught up in a story told by a skilled storyteller, we stop daydreaming and become fully present. We become focused. We narrow our attention to what the storyteller is saying. There’s a response in positive brain chemistry, as well as empathy and trust — a neural coupling between the storyteller and the audience.
Stories help us organize data, discern value, and make better decisions. Influencers work hard at becoming good storytellers. Rene left us with a 10-step guide, which we provide as a free pdf.
Additional Resources Amplify Your Influence: Transform How You Communicate and Lead by Rene Rodriguez: Mises.org/E4B_173_Book
"10 Steps to Amplify Your Influence" (PDF): Mises.org/E4B_173_PDF
A strange strand of thought has emerged in European political economy circles that has been given the name of The Entrepreneurial State. The headline claim is that the state (i.e., nation state governments) can and should intervene in the economy to bring about innovation, and that, indeed, it is absolutely necessary for grand, mission-driven undertakings such as climate change amelioration and the commercial development of next-generation technologies. Economics For Business talked to Christian Sandström, co-editor with Karl Wennberg, of Questioning The Entrepreneurial State (see Mises.org/E4B_172_Book), a compendium of analysis by thirty-two leading economists (including friends of E4B such as Peter G. Klein, Samuele Murtinu, and Saras Sarasvathy) to demonstrate the fallacies of the case for an entrepreneurial state. There’s a lot of sound economics to be learned from Professor Sandström’s book.
Key Takeaways and Actionable Insights There’s a warm climate in Europe for government solutions to perceived economic problems. “The entrepreneurial state” is one of the forms these solutions take. Entrepreneurship is well-developed in Europe, and recognized as a growth accelerator. Nevertheless, since 2008-9, country-level growth rates have been below expectations.
Professor Mariana Mazzucato originated the concept of “the entrepreneurial state”, telling fellow economists that they were all wrong in expecting growth to come from private entrepreneurship. Only government has the scope and scale to act entrepreneurially at the level of lifting the growth rate of the whole economy, overcoming the barriers to the introduction and commercialization of new technologies, and tackling the great missions such as climate change amelioration. Historically, she claims, this precedence has always applied: the state leads innovation and private entrepreneurs follow to fine tune the details of marketplace adoption and implementation.
The ongoing failure of Green Deals represents just one illustration of the errors of the entrepreneurial state. One essay in Professor Sandström’s book spotlights what he calls Green Deals: directed investments in various technologies aiming at so-called sustainable development. Public funds distort incentives in the market, making it “rational” for firms to pursue technologies without long-term potential.
One of his examples is a municipality in northern Sweden that accumulated billions of Swedish Krona in debt investing in industrial plant aiming to create car fuel from cellulose, with the ambition of creating an environmentally friendly substitute for gasoline, which would also result in new jobs and a regional resurgence in competitiveness. The process of extracting ethanol from cellulose proved to be more difficult than promised, and no technological breakthroughs occurred. The 2008 recession resulted in falling prices for ethanol, yet more public money was poured in. The end result has been a high debt burden on the municipality, no new jobs, and no reindustrialization for the region.
As Professor Sandström and his co-author Carl Alm conclude, this case and other similar cases stand in stark contrast to ideas about an entrepreneurial state successfully taking on risk and pursuing new technological opportunities.
There are fundamental reasons why governments can’t act entrepreneurially. First, governments don’t operate in markets and they are not subject to market tests, like going out of business if they fail to meet customer needs. They bear no genuine entrepreneurial risk. They have no competitors and so no process of competitive refinement and improvement. Their entrepreneurial actions can’t be evaluated. In effect, they want to achieve innovation without entrepreneurship, which is an impossibility.
Governments lack the required competence for the tasks they claim to be able to undertake. Peter Klein, Samuele Murtinu and Nicolai Foss introduce and explain the economic concept of ownership competence. Entrepreneurs operating in competitive markets have strong incentives (i.e., their own property and their own funds) to allocate resources that they own or control to the most productive applications and to generating the value that the market prizes most highly. Knowing what to own, when to own it (or dispose of it), and how to create value through ownership, all under conditions of uncertainty, requires a skill set that bureaucrats and public actors don’t have and can’t exercise. Public employees can’t exercise the ultimate responsibility that comes with ownership.
Bureaucrats can’t reproduce the human factors of entrepreneurship. Saras Sarasvathy introduced us to the entrepreneurial method of business innovation in episode #131 (Mises.org/E4B_131). Entrepreneurs self-select into the role of uncertainty-bearing, and then initiate projects and advance through a process of market co-creation, making commitments and then adjusting those commitments based on feedback loops and customer responses. They develop a lived experience that enables them to identify new goals to pursue and new means for pursuing them along the pathway. Creativity and adaptability are more relevant to success than investing acumen and planning.
Governments can’t operate in this way. They place big bets, with quantitative goals and illusions of predictability of outcomes, and they pay with other people’s money. They are not capable of finding the serendipity that guides the entrepreneur.
Governments don’t understand the innovative generativity of new technologies. Professor Sandström’s book includes quite extensive examination of what is identified as the Digital Platform Economy (DPE) — the digital entrepreneurial ecosystem of platform access to markets, data, algorithms, and cloud computing capacity (There’s a useful report on the DPE provided in the book at Mises.org/E4B_172_PDF). Digital platforms are enablers for entrepreneurial creativity and business building as a consequence of the access that they give to new business tools and the interconnections to resources, both human and material. The platforms are provided by private companies, and the resulting value creation is user and customer co-generated.
Governments misunderstand the Digital Platform Economy. They see platform providers as monopolistic owners of excessive market power to be regulated and taxed, and totally miss the value generation of hyper-connectivity between buyers and sellers, the complementarity of firms on both sides of the platform, the open access and the lowered transaction costs.
These digital platforms will do much more to encourage entrepreneurial growth than any government ever could.
Governments’ errors are repeated because there is no genuine evaluation of their activities, initiatives, and “missions”. Professor Sandström investigated the way that the results of government innovation expenditures and initiatives are assessed. He found that most evaluations are conducted by consultants, paid by the hour and mindful of the opportunity for future business if their work is well-received by the government that employs them. Some other assessments are conducted by the government departments themselves.
Perhaps unsurprisingly, Professor Sandström could find only 5% of these assessments that were critical in any way (mostly simply to say that the desired results were not achieved).
Moreover, the assessments were economically incomplete. There was no identification or discussion of opportunity costs (what better uses could the funds have been put to) or of administrative costs, which are high since bureaucratic infrastructure grows with each new initiative.
The government’s best role is to remove itself as a barrier, and possibly to help remove additional barriers (for which it often bears responsibility in the first place). Is there such a thing as innovation policy? Professor Sandström says no. He does point out that, in the Austrian tradition, removing barriers to entrepreneurship can help to create the type of environment in which innovation can flourish. This might involve the elimination of legislation and regulation that gets in the way. It could also include nurturing educational institutions to bring the right kinds of thinking and learned skills into the marketplace.
Any such initiative should be general and non-selective. Picking winners should be left to markets.
Additional Resources Questioning the Entrepreneurial State: Status-quo, Pitfalls, and the Need for Credible Innovation Policy, edited by Karl Wennberg and Chris Sandström (PDF and ePub): Mises.org/E4B_172_Book
"The Digital Platform Economy Index" (PDF): Mises.org/E4B_172_PDF
Chris Sandström on Twitter: @ChrisSandstrom
How do businesses actually manage — rather than plan for — continuous change? The increasing adoption of systems thinking in business tells us that the world is changing very fast, and companies need to change at least as fast as their environment in order to thrive. It’s comfortable to talk about but hard and uncomfortable to do. Most people prefer to continue to do what they’re used to rather than embrace change and constant experimentation.
There’s a lot to be learned from the military where special forces are trained to specialize in rapid reaction in chaotic or VUCA (volatile, uncertain, complex and ambiguous) worlds. They face an ever-changing environment (often described as kinetic). They have a very pure evolutionary process: what wins, survives. While the military organization is hierarchical, military operations are flat so that tactical decisions can be made by the people on the ground.
While we are anti-war, we can nevertheless recognize that the military has experience and expertise in managing and organizing for continuous change. We can learn from it.
There are significant barriers to overcome to implement rapid change management in business. Certainly, the time scales are different. Companies change at an intergenerational pace, one generation of managers (or managerial techniques) learning from the last one. In hierarchical organizations, people reach managerial and executive positions by accumulating experience. By the time they get to their high position in the hierarchy, they have locked in an old mental model. They miss the signals of change and fall back on preconceived ideas and notions and methods.
In addition, there is considerable inertia to overcome — a resistance to change that acts as a blocker to agility. It’s human nature to resist change. Once a company has established a niche or a market share, it’s genuinely hard to abandon the strategy or the tooling or the products and services and the marketing that got them there.
To put it in military terms, change is a constant battle.
Situational awareness is a set of tools that are transferable from military to business to improve management of change. Situational awareness governs how well your understanding of the world maps to reality. It operates along two perspectives and 3 time frames.
Internal situational awareness concerns the orientation of your firm, resources, capacity, the capabilities of your team, morale and so on. External situational awareness concerns markets, competitors, customers, trends, technologies, and all the environmental factors that are subject to change.
The three timeframes in military terminology are tactical, operational, and strategic.
The tactical timeframe concerns people on the ground in contact with the environment. In business, this can be the sales team or customer service or engineers in direct contact with customers. They’re doing implementation work but they are also the sensing mechanism. They may have daily or even hourly cycles for intention to change, making the change, learning from the consequences of the change and moving forward to the next change. They must be empowered, trained and equipped, and confident about their freedom of action and adaptation.
The strategic timeframe is the macroeconomic scale of what the firm is trying to achieve for the customer. This frame may be months or years, and dictates how to organize, how to invest, and where to allocate resources.
The operational timeframe is between the other two. How does the firm integrate short term implementational excellence with long term strategic engagement with a changing environment? How does the firm integrate all the hourly and daily information coming from the front line with the long-term investments and resource allocation projects? In a software business for example, there may be a trade-off between building new tooling, which takes time, and rapidly delivering products from established tooling.
How to apply situational awareness. Actively use the 6-box framework (internal /external perspectives, tactical/ operational/ strategic timeframes.
To achieve better alignment of internal / external timeframes, look for mismatches across boundaries in the firm. Do the people working on the front line have the same understanding of the importance of the work as the managers and executives. Does getting thing done seem more difficult than it should be? Are the feedback loops fast? Is the information in the feedback loops spread throughout the firm, through multiple teams, divisions and silos? What’s the gap between perceived ideals and actual experience?
To implement across three time frames is an exercise in portfolio balancing and active discovery, with a high premium on sensing skills.
How much time and resource effort should a firm spend on refining its tooling (the operational timeframe) so that every produced end-product is exactly the same (the tactical timeframe) while keeping an eye out for environmental change, when a future competitor might introduce a faster cheaper product (the strategic timeframe)?
As Austrian economics always stresses, there’s no objective answer, just subjective learning from experience. For example, Netflix was part of the strategic timeframe that Blockbuster failed to manage. Blockbuster was operating its stores in a proven fashion (tactical) and adding new stores (operational), while rejecting the implications of the Netflix model. Today (May 2021), Netflix shows signs of missing some strategic signals. They made content their focus (tactical) and built original production capability (operational) but may be finding that customer tastes are changing and the appeal of their produced content is in decline (strategic).
Similarly, for the last few years, funding has been easy for startups (tactical) and so they have focused on long term market development (strategic) without hitting profit and cash flow milestones (operational). Now that funding is drying up, they are having to shore up their operational capabilities.
There are a couple of techniques that are helpful. One is Horizon Scanning: allocating some resources to identifying and picking out future external scenarios that represent potential change or strategic threats and building a response in advance. Another is red team thinking: mapping out future internal failure modes and then working backwards from them to identify the trip wires to look out for, and to nip emerging issues in the bud.
The after action review (AAR) is an important element of situational awareness. The AAR is applied not just in the military but in fast change business environments such as agile software development. It’s a tool to separate the quality of the decision you made from the outcome of the action that you took. We tend to get attached to our decisions, even if they were based on poor principles.
The components of an AAR include:
What was expected to happen?What actually happened?What went well and why?What can be improved and how? The discussion must be open and honest without hierarchy or blame. As far as possible, everyone on the team should participate so that all perspectives can be included. The focus is on results and dentification of ways to sustain what was done well as well as the development of recommendations on ways to overcome obstacles. It’s really important to identify with high fidelity what happened, because only then is there a good chance to identify new opportunities or trends with equal fidelity. In situations of uncertainty, it’s important to identify “what happened” accurately, in order to be able to identify what it means and what it implies for future actions.
AAR becomes part of disciplined execution. The Economics For Business community is familiar with the explore/expand method of managing business complexity: explore many options through experimentation and expand (by allocating more resources) those that show good results. Annika Steiber in episode 170 (Mises.org/E4B_170) called this capability “ambidexterity” — combining two logics of business in consistent and reliable execution on one hand and openness to change and exploration on the other.
Ben expands this thinking into the concept of disciplined execution. Once a process is proven and is producing reliable results, map it out carefully and then take individual steps or parts of the process and see if they can be further improved, e.g., by automation, without changing the outputs. Processes thus become more resource efficient in producing their output. Always be trying to improve what you already do well.
Similarly, once an “explore” project starts to become productive, apply the same continuous improvement standard. Map the process, examine parts that can be improved, and do so part by part so production is maintained and efficiency is increased.
All of this change dynamic should be driven from the bottom up. Process improvements, fast responses to feedback loops, experimentation and rapid change are all insurgencies — the established hierarchy and mental models will often find them hard to embrace. Insurgency is a bottom-up dynamic. When transformation is pushed from the top down, it often happens that the territory changes before the consultants have drawn the new map. The hierarchy’s role is to provide strong alignment with the orientation of the firm and its culture and vision-mission, alongside loose control of front-line action.
Additional Resources "Apply Situational Awareness To Manage Change" (PDF): Mises.org/E4B_171_PDF
Ben Ford’s website, where you’ll find his Mission Control services: MissionCtrl.dev
Ben Ford’s LinkedIn page, with a lot of presentations and recordings to learn from: Mises.org/E4B_171_LinkedIn
Innovation in organization is at least equal in importance to technological innovation and product / service innovation. It tends to get less attention, which is a great opportunity for imaginative entrepreneurs to implement change for competitive advantage. Dr. Annika Steiber has studied organizational innovation for over twenty years and is a global authority. She shares her insights with Economics For Business, including her analysis of the most dramatic organizational innovation of all, Rendanheyi.
Professor Steiber’s most recent book is Leadership For A Digital World (Mises.org/E4B_170_Book1), and is her most comprehensive guide yet for business management in the digital age. She’s the author of eleven books, including The Google Model (Mises.org/E4B_170_Book2) and The Silicon Valley Model (Mises.org/E4B_170_Book3).
Her Menlo College Rendanheyi Silicon Valley webinars are available at Menlo.edu/Webinars.
Key Takeaways and Actionable Insights Organizational innovation doesn’t get the attention it merits, even though it can contribute greatly to customer value generation. Innovation thinking tends to focus on technology innovation and product/service innovation, with the definition of innovation as the successful introduction of new customer value to markets. Organizational innovation is not often seen through that lens. But it should be. We can reframe the problem this way: does bad organizational structure subtract from the customer value experience? We can all think of ways in which it might do so: for example, poor customer service when customer-facing employees are not empowered, and layers of bureaucracy that impede responsiveness to customer needs. In those cases, organizational innovation could readily generate improved customer experiences and enhanced customer value.
Dr. Steiber had made organizational innovation her research focus for over two decades.
There are a small number of organizational innovators, and a lot of imitators. Google has been one of the originators of new organizational models. Many organizational innovations are pre-packaged — LEAN is an example — and implementers are following someone else’s lead. Others are long drawn out evolutions of incremental improvement without a great burst of innovation.
One example of what Dr. Steiber calls "an entirely new animal" in organizational innovation can be found in the early years of Google, which she studied first hand — she was embedded in Google as an independent researcher. She observed a different management model than anything she had seen before anywhere in the world. From this research, Professor Steiber developed six new management principles, published in her book The Google Model, and summarized in our free PDF (Mises.org/E4B_170_PDF).
Silicon Valley companies employed and expanded on the Google Model. Dr. Steiber studies the peers of Google in Silicon Valley and found that they all adopted the Google Model and its six principles, some more slowly than others. Interestingly, her research pointed to a DNA advantage for Silicon Valley going back to the gold rush: it was a location that attracted and was populated by innovative and entrepreneurial people who were capable of building businesses and new institutions from scratch in the late 19th Century, and in the 20th Century, it was the place where Information Technology emerged, was expanded and accelerated and first put to use in business. Knowledge and knowledge flow replaced management structures and face-to-face administration, including at early pioneers such as Hewlett-Packard.
Read "The HP Way"—an early Silicon Valley organizational innovation manifesto (Mises.org/E4B_170_PDF2).
The six management principles Dr. Steiber describes are:
Dynamic capabilities. Ability to integrate, develop, and reconfigure internal and external competencies in order to meet rapidly changing surroundings.
A continuously changing organization. Instead of waiting and springing into action after needs become pressing, a company should ensure that its organization is permeated with a proactive approach to change.
A people-centric approach. People-centric, focusing on the individual and liberating their innovative power and providing them with a setting in which they can express their creativity.
An ambidextrous organization. Two different forms of organizational logic within the same organization: daily production, which works best with a conventional planning-and-control approach, and innovation, which requires greater freedom, flexibility, and a more open attitude toward experimentation. An ambidextrous organization must successfully handle and utilize the energy inherent in the contrast between these two forms of logic.
An open organization that networks with its surroundings. Permeable boundaries and a constant and conscious exchange of information with the surroundings. Long-term survival requires that companies develop into more open networking systems.
A systems approach. A holistic view of the system and understanding that the system can spontaneously develop new characteristics that can be difficult to predict. These new characteristics can be positive, negative or a combination of the two, creating a demand for additional measures, such as decreasing the fallout from unexpected negative system effects.
We highlighted a couple of these new management principles.
A continuously changing organization The most successful companies are designed for constant renewal. They expect change all the time, and they lead its development. They aim for excellence on every dimension, applying three layers of expertise:
Be proactive: Search for change internally and externally. Embrace it and practice it.Experimentation culture: Try every initiative assuming that it could be a new opportunity. Mobilize fast.Don’t follow. Take the lead, change the standard, be disruptive rather than disrupted, practice creative destruction. These companies never lose external focus, continuously monitoring developments and competitors that could disrupt them, and constantly market-testing new initiatives. They have highly developed sensing capabilities.
An ambidextrous organization Combining the two logics of flawless daily execution for known established businesses and exploratory experimentation seeking unknown new business innovation is an organizational breakthrough. It’s a systemic view of an organization combining different kinds of leadership for the two styles, different cultural signals, different milestones, different incentives, and different evaluation criteria. One system is designed for stability and one for change.
Rendanheyi: the most radically entrepreneurial organizational innovation. True organizational innovation is very rare, but there is a new one that Professor Steiber described for E4B called Rendanheyi.
Rendanheyi is an organizational innovation for the network age in which a large company (Haier, the Chinese company that first instituted the model has 70,000 employees) splits itself into hundreds of microenterprises of averagely 60-70 people — but could be as low as 10 or so - each enterprise performing as its own entrepreneurial business with its own P&L, its own customer base, and control over hiring, budget, and distribution of profit, and over its own value-adding line of business. Defining characteristics include:
No bureaucracy, hierarchy, or pyramid forms of organization; no managers.Employees are not referred to as such — everyone can be an entrepreneur is the mantra; they choose which microenterprise to work in. The focus is on the customer or end-user and not on pleasing the manager above. Incentive systems reward all employees for value creation, and all individual employees are constantly trying to understand how to increase value for customers. Increased value creation is rewarded, and so wealth generation is democratized.Zero distance to the end-user: this is a Rendanheyi principle that brings the consumer or customer inside the microenterprise to co-create new value in the form of new products and services and solutions. Wholesalers and retailers, for example, can inject distance between a Haier micro-enterprise and its users; the enterprise might look to digital solutions to eliminate that distance. Generally, they seek to identify barriers to zero distance to the users and get rid of them.End-user is a general term, so that those micro-enterprises that are serving other businesses rather than consumers can nevertheless practice the zero distance principle. For example, there may be a marketing micro-enterprise within Haier that serves a manufacturing micro-enterprise and a sales micro-enterprise. All can be aligned with zero distance and can work to fulfill end-users’ needs.Paid-by-user. This principle focuses micro-enterprises on end-user value by emphasizing that all businesses live or die based on whether the end-user pays them for value perceived, or not. It’s Austrian customer sovereignty in action. The general tendency in paid-by-user is away from transactional relationships to extended relationships across multiple purchases in ecosystems and via subscriptions and memberships. Relationships are an important focus, and the focus is on creating life-time users.
A sports team on the playing field is a sound analogy for Rendanheyi. There is no central control, each team member is collaborating and combining specialized skills for a team result.
There is only limited call for corporate functions at the center of the Rendanheyi organization. There is a role for developing and furthering vision that crosses multiple micro-enterprises, and for portfolio decision-making as to where to invest resources. Some orchestration functions can be assigned to the center — for example, furthering ecosystem thinking whereby micro-enterprises serving a consumer domain such as the kitchen can develop multiple services including information services and integration services across multiple appliances, tasks, and problems for the kitchen ecosystem.
The result of the Rendanheyi model is the animation of a living system, a superorganism. Rendanheyi provides a genuinely new and different perspective on entrepreneurial organization at scale.
Additional Resources "Six Organizational Principles for Adaptive Entrepreneurial Models" (PDF): Mises.org/E4B_170_PDF
Rendanheyi Silicon Valley Center: Mises.org/E4B_170_Rendanheyi
Menlo College Rendanheyi Silicon Valley Webinars: Menlo.edu/Webinars
Menlo College Digital Management Courses and Webinars: Executive.Menlo.edu
Is there any industry a passionate entrepreneur can’t improve and enhance by elevating the customer experience? The answer is clearly no. Economics For Business talks to Jeff Arnold, who finds insurance fun, exciting, and a source of inspiration, and who is advancing profitably towards the new future he’s imagining, where buying insurance is so enjoyable that customers will stop shopping on price and clamor for the new experience he is designing.
Key Takeaways and Actionable Insights Passionate, creative entrepreneurs can deliver profitable innovation to any industry, no matter how static and rigid it may seem. Jeff Arnold loves insurance. He told us he finds it fun, awesome, and exciting. Studying the intricacies of contractually trading and transferring risk for payment generated a lifetime interest and passion in him. He’s turned that passion into revenue and profit by delivering new value to customers in aspect of their life or their business that is extremely important to them.
As a good Austrian, Jeff Arnold views his industry first from the customer’s perspective. Customer-first. That’s the Austrian way of business. When Jeff thinks about insurance, he thinks from the consumers’ perspective. They pay hundreds of thousands of dollars over a lifetime for insurance of many kinds: house, automobile, business, medical care, and more. Do they know exactly what they are buying — or, perhaps more importantly, not buying because of exclusions buried deep in the small type of the appendices to an insurance policy agreement? How do they feel about the customer interface, including call center phone trees and hard-to-decipher policy documents?
From this perspective, he is able to develop design principles for an insurance business with a better customer experience:
Help customers to think about a systematic lifetime plan for all their insurances;Help them develop the knowledge required to properly understand insurance offers and alternative policies;Give them the opportunity to customize insurance products for their needs as opposed to buying a commoditized vanilla product;Help them to get the exchange value from the purchase that is right for them.Give them an interpersonal experience that’s much better than the industry norm. Jeff focuses his customers on value, not price. Most often, buyers approach an insurance purchase with a transactional frame of mind: how can I pay the lowest price. They’ll shop around to find it. Jeff wants to put an end to “price shopping”, to be replaced with a value calculation: what coverage do I need, how did I get it, and who is the best provider?
The value calculation often entails discovering and eliminating exclusions — coverages that are excluded in the fine print of the contract. These exclusions occur in home insurance (which is especially hard to read and understand) auto insurance (there are 12-14 exclusions to look for according to Jeff) and commercial or business insurance (where many coverages are automatically excluded and must be built back in item by item, with careful attention to detail).
The value solution lies in the integration of technology and personal service. Jeff’s latest business, RightSure, aims to get individuals the right insurance by using A.I. in combination with “famously friendly humans”, i.e., staff carefully selected and trained to deliver knowledge and service in an amenable way. The A.I. can provide a preliminary phone interface, a chatbot interface on the website, and can do an excellent job of matching customer needs to the right policies. Famously friendly people can patiently explain all the policy options, point out what’s covered and what’s excluded, answer customer questions, and help them to make informed decisions. They’re good at listening, exhibit high empathy, and can help customers navigate from suspicion to trust.
The combination of A.I. and famously friendly humans delivers a superior customer experience while also achieving high levels of efficiency. The return on investment in human capital is as high as the return on technology capital. The combination generates brand uniqueness.
Jeff represents entrepreneurship in action in the insurance industry. Jeff Arnold is a quintessential entrepreneur. He’s driven by a passion for his industry, where he spent a career in multiple roles before launching his current business. He gathered knowledge he learned from others and from his own experience in those various roles. He innovates by having a more highly developed customer focus than others, and commits to a better experience for his customers than they can expect elsewhere. And he knows how to combine and recombine assets and resources in new ways to deliver that better experience. He continuously monitors the customer experience and customer sentiment to keep improving.
His primary skill are empathy and imagination — understanding the experience customers prefer and designing it in his mind before bringing it to life. He doesn’t need technology expertise to bring his vision to life; he can buy that on the market. It is the human factors of empathy and imagination that lie behind his superior product.
Imagining the future drives product and service innovation. After a lifetime in the insurance industry and informed by hundreds and thousands of conversations with consumers, Jeff can accurately identify current dissatisfactions and easily imagine future products and services to address some of those satisfactions. Some of the ones he mentioned in our conversation were:
The macro policy: Why do customers have to buy home and auto and business and medical insurance I separate policies and separate transactions. What if there could be one macro policy for a family, adjustable to new needs as life goes on yet still a “one policy” solution for managing all the risks a family faces?
Expanding liability coverage: It seems like lawmakers and courts are continuously finding new things the rest of us are guilty of, like saying bad things on social media. Liabilities are expanding — Jeff called it social inflation. What if our policies could keep up without us having to adjust them in new transactions?
New payment systems: What if we bought automobile insurance by the mile instead of in a lump? Or what if we got refunds based on good driving habits (which is beginning to happen with telematics)? Generally, the payment system of lump sums for coverage over a time period can be replaced by behavioral measures of consumption.
These are the kinds of innovation Jeff is imagining, and working hard on bringing to market. Entrepreneurs make the world a better place.
Additional Resources Jeff Arnold’s author page on Amazon.com: Mises.org/E4B_169_Author
Jeff’s website, Ambassador For The Insurance Industry: JeffArnold.com
The Art Of The Insurance Deal by Jeff Arnold: Mises.org/E4B_169_Book
RightSure.com
Markets are marvelous. They’re the poetry of economics. They are one of the most remarkable technologies humans have ever built. Beautiful businesses develop new markets both outside and inside the firm. We discuss markets with Anthony J. Evans, a business school professor who teaches that all businesspeople must become economists.
Key Takeaways and Actionable Insights A business economist is an Austrian who looks at the fields of economics and business to see how one is best applied to the other. Aim to be a good economist and a good business practitioner. Managerial economics is the application of the economic way of thinking and the insights of economics to the managerial task of creating value. It was Shlomo Maital who wrote, “Managers can’t just employ economists, they must become economists” (Mises.org/E4B_168_Book). Anthony Evans follows that direction and teaches his students at ESCP Business School that they’ll be more productive and more capable as businesspeople as a result of learning and applying economics.
Market system economics provides businesses with the best toolkit for success. Businesses are participants in the market system. Managerial economists study markets in order to find ways for businesses to use market insights, harness market mechanisms and understand the signals and information that markets provide. It’s easy for firms to overestimate their ability to affect the markets in which they are participating, and don’t sometimes they don’t fully understand or properly analyze what market prices are telling them.
Prices are the most important market signals, and they can transmit information about potential futures. They can guide firms on understanding how much value they are creating relative to competitors. They can provide signals about how to increase revenue by moving process higher or lower. They can help businesses understand opportunity costs and transaction costs.
Markets are decentralized experimentation, and if some new experiments by disruptive competitors are commanding purchases from actual buyers today, that may signal more buyers and more transactions in the future especially after prices adjust to higher transaction volumes. Monitoring prices and reading the signals must be a core managerial skill.
Market tests should be applied whenever feasible. Technology can help. Businesses should run a market test for every question that a market can answer: is this offering or initiative valued, is it preferred, can we put a price on it, will varying the price change the level of demand or acceptance, is the benefit greater than the cost, do some customers prefer a competitive offer? Run a market test — A/B test, pilot program, prototype evaluation, survey with customers, whatever is feasible.
Today’s technology provides tremendous help with low-cost digital testing methods, fast feedback loops, and efficient data processing. In fact, more and more, technology can relieve managers of the task of formulating their own understanding by automating the test procedures and the analytics and recommendations.
Markets can be brought inside the firm to improve business performance. Markets stimulate innovation, lower costs, and efficiency because customers always want better, cheaper, and faster and competing entrepreneurial firms always want to provide those benefits in the search for profits. The same effects of the market order can be sought inside the firm. What is the market value and the right price for marketing services from the marketing department, or HR services or IT services? What’s the marginal cost versus marginal benefit analysis for one more HR staff member, or the opportunity cost of one more IT system installation versus one more sales campaign? What’s the value of the knowledge flowing through the firm?
These are the kinds of questions that the market order can answer, and managers should always be asking them. Prices can be the metric for all learning.
Market economics can also guide organizational design and processes. Markets are dynamic and ever changing. Businesses must reflect and emulate this dynamism. Organizational design and structures must be flexible enough to enable dynamism and not erect barriers to change and adaptation. What are the forces that make markets grow and decline, and what are the forces that have this effect on firms? Organization should harness the forces of market growth.
Professor Evans’ suggestion is a constitutional view of the firm. Let simple rules of conduct emerge from a shared sense of vision and mission, codify them, and then let decentralized teams run the experiments that feel constitutionally right to them given their reading of market signals.
Subjective value is immeasurable, but can be gauged in market tests. The purpose of a firm is to generate subjective value, which is created by customers through their own experiences and co-created by the firms and brands and services that facilitate those experiences. Subjective value is intangible and immeasurable. But exchange value — what customers actually pay in an exchange transaction — can be a proxy in some cases.
Subjective value is a hard concept to grasp for those who have been educated or trained to think of value in objective terms, as something inherent in a product. Professor Evans finds his students, when asked to describe the value of an offering or an idea, instinctively gravitate to the product-based view, citing attributes, features and performance benefits.
Taking the customer perspective is very hard, and perhaps unnatural. The economic point of view is always to put the producer in the shoes of the customer, to take the customer’s view and identify the customer’s mental model for processing information and observation. It’s hard to do, and requires significant cognitive effort. But done well, it’s key to marketing, innovation, product improvement and competitive positioning. Empathically diagnosing subjective value is one of the greatest insights economics can give to business.
Entrepreneurs thrive in markets. Markets are the place where entrepreneurs ply their skills, and the entrepreneurial role will never diminish. Their imagination of the future and anticipation of future demand – even under conditions of uncertainty – their creativity and their judgment will always be important in the context of dynamic interactions of multiple players, offerings, and institutions within markets. The human factor is the most important.
Entrepreneurship is not an academic matter to be debated for the distinction of different nuances, but a practical matter of working and succeeding in markets. It concerns the identification of a profit opportunity via some kind of new product, service, method, or recombination of capital, and the ability to introduce this novelty into the marketplace, actively making decisions about resource allocation, cost, investment, communications and all the other elements of a business, overcoming obstacles and resolving difficult challenges. It is, as Professor Evans stated it, both ideational and implementational. Ambidextrous.
And the common backdrop for all entrepreneurs and businesses of all kinds is continuous change. In his book Economics: A Complete Guide For Business (Mises.org/E4B_168_Book), Prof Evans states that, “Economic change will disintegrate existing combinations (of capital goods) and force entrepreneurs to find new ones”. This action, which Prof Evans refers to as “recalculation”, is core to the dynamics and agility of entrepreneurs in markets. Recalculation is the creative pulse that provides the energy for generating new capital structures out of old ones.
Austrian economists have always been acutely aware of change as an economic factor. Perhaps the business world is catching up, but Austrians have always been ahead. It’s the perspective that entrepreneurs and businesses can co-ordinate with each other fruitfully in markets where change is so pervasive and so fast that no-one has complete knowledge and yet must be able to act. Austrian economics demonstrates that good outcomes are possible, even in these conditions of bounded knowledge, for everyone participating in the market, so long as entrepreneurs are free to do their work without intervention. It's a very powerful message.
People in business can be proud of acting as value generators and not feel any imposed need to “give back” or sacrifice themselves to artificially constructed restraints.
Additional Resources Economics: A Complete Guide For Business by Anthony J. Evans: Mises.org/E4B_168_Book
AnthonyJEvans.com
There’s a lot of speculation about the future of work — what form it will take, where it will be done, and who will do it (including the robots versus humans debate). We talk to Mo Hamzian, an entrepreneur who is not only theorizing about the future of work, but building newly imagined workspaces that combine spatial design with technology and custom services, making elite workspaces available to everyone.
Entrepreneurship is now both an economic and societal trend, opening up business opportunities of its own. Entrepreneurship is now, as our guest Mo Hamzian styles it, “a thing”. It’s in the forefront of culture, it’s always in the news, it’s a lifestyle choice as well as a business choice, it’s a career, it’s a source of new heroes for our time.
Institutions of entrepreneurship are growing: schools are teaching entrepreneurship, media are covering entrepreneurship, technology is supporting entrepreneurship.Standards are emerging: tools like our own value learning process and 4 Vs value generation model, as well as processes like the Business Model Canvas are becoming standards of the entrepreneurial method.The sharing of entrepreneurial knowledge in a community is expanding via mentoring by experienced entrepreneurs. As a consequence, we see the emergence of new societal norms. An entrepreneurial society favors self-reliance over dependency, resourcefulness over entitlement, breakout achievement versus structured conformity, and creativity over formula. Entrepreneurship is understood as a journey that is never completed, and may adaptively follow many diversions in pursuit of evolving goals, rather than a predictable climb up the hierarchical ladder of the corporation. Keep thinking rather than keep climbing.
Even inside the corporation, structure is giving way to small self-organizing teams and corporate procedures are being replaced by adaptiveness and agility.
One of the implications of the growth of entrepreneurship is the trend that gets the name “The Future Of Work”. Entrepreneurship brings many significant social changes, including flexibility of time and place and methods of work. And the government’s pandemic policies of shutting down office and work spaces and encouraging work-from-home accelerated those changes. Now it is clear, more than ever, that, in the digital age, there is no need whatsoever to commute through grey suburbs on jammed roads or overcrowded trains to get to a dull and depressing cubicle farm just so that you can be in the same building with the other sad souls who are your colleagues.
Cities will empty out, commercial office markets will enter a period of secular decline, and individuals will feel liberated and empowered to do their best work in the physical location and surroundings of their choice.
One way to seize the opportunity represented by the future of work is via real estate itself — repurposed and re-imagined. Mo Hamzian is an entrepreneur who sees the opportunity in real estate for work where many might see only decline. He looks at it through a different lens, as entrepreneurs do. Can real estate provide the multi-purpose flexibility and adaptiveness required for today’s and tomorrow’s work patterns? It can if looked at creatively.
The creative lens is the customer-first lens: everyone deserves the best workplace. Business thinking that prioritizes customer sovereignty can often solve the most challenging problems. Mo Hamzian translates the unmet needs of today’s distributed workforce as seeking the best space from which to work — comfortable, well-equipped, good acoustics and conferencing technology, a place that “recognizes you” and your needs.
He developed his ideas, in part, by studying the workspaces of the business elites — the top bankers, tech executives and corporate CEO’s. These are immersive, high tech, high comfort, high style ecosystems you never want to leave. They’re available to a very few. What if they were made available to a much wider audience? This is the way many markets evolve — first, affordable at great expense only for a few, then quickly expanded to a mass audience.
This is the idea behind VEL — Mo Hamzian’s startup to bring elite workspaces to a wide audience of users on demand.
Do your best work: the VEL concept is aimed at personal productivity, encouraging the individual to achieve high quality output in a temporary workspace. This implies, of course, some responsibility and commitment on the part of the user.Achieve flow: the ultimate level of individual work is characterized by the feeling of flow — the fulfilment of experiencing how good you are and how much you are improving while doing your work. VEL’s workspace and technology are designed to support flow.Elite environment for everyone: Mo Hamzian’s study of immersive elite workplaces enables designs that bring the same experience to a temporary workspace.Technology: From wi-fi telecommunications and conferencing to (in the future) A.I. and VR and holography, there’s a lot that technology can do to support high quality and high productivity work, and VEL can provide it on demand at variable cost and affordable pricing.Flexible access: customers can rent VEL space and technology by the hour or by the day, in whatever configuration they prefer.Democratization and decentralization: VEL workspaces are available to all, with an aim to distribute them across the country for wide availability, whether urban, suburban, or rural, wherever work can be done.Customization and recognition: Ultimately, the high-tech VEL workspace will recognize the individual when they walk in and configure to their customized set of needs. The VEL concept removes frictions and barriers that might otherwise stand in the way of the future of work and the future of distributed entrepreneurship. As we advance towards a more entrepreneurial future across the entire business landscape, from big corporations operated by flexible, agile teams to individual practitioners, gig workers and small, highly specialized and highly networked companies, concepts like VEL will be an important part of the enabling infrastructure.
Additional Resources Mo’s LinkedIn page: LinkedIn.com/in/MoHamzian
Mentioned by Mo as a worthwhile mentoring site: GrowthMentor.com
VEL website: MyVEL.com
To what extent should entrepreneurial businesspeople concern themselves with macro-economic variables? At E4B, our point of view is: not much. We don’t believe you can fully trust the data, we don’t believe you should put much credence in the interpretations of it, and we encourage businesses to concentrate on serving customers and generating value.
We made an exception this week to discuss the phenomenon of the inverted yield curve, because it might, conceivably, have some immediate effect on businesses and their customers. We talked with Dr. Murray Sabrin, author of Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide.
Key Takeaways and Actionable Insights The yield curve inverted. What does that mean? Technically, the yield curve inversion refers to short term interest rates on the 2-year treasury note doing above the interest rate on the 10-year treasury note.
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The reason this is of interest is that, historically, it’s a signal that the countdown to a recession has begun. At the human level, it means that market participants expect tighter short-term borrowing conditions, potentially making financing business activity more expensive and more difficult.
In reality, there’s no way to be certain of future conditions, and there are so many variables, from inflation to unpredictable Federal Reserve activities, that prediction is inevitably inaccurate.
Moreover, on their own terms, the Federal Reserve interest rate data are not consistent. The 3-month treasury rate remains 2% below the 10-year rate — no inversion there.
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Therefore, predictions of a recession should be taken with the proverbial grain of salt. It may be different this time.
What matters is what entrepreneurs do in the face of this uncertainty. Dr. Sabrin has a number of ideas and pieces of advice for businesses.
Examine conditions in your own sector rather than in macro-economic variables. Economic conditions and trends and outcomes vary significantly by sector. What’s happening in automobiles, housing, energy, and retailing is sector specific.
Look especially for those sectors where free markets are allowed to operate; there may be different trends there. For example, deflation (a continuous trend towards lower prices) might be anticipated from the technology sector as result of innovation and competitive striving, rather than the price inflation we are being promised from other sectors.
Similarly, pay greatest attention to your most relevant geography: neighborhood, city, and state. Economic conditions in Florida are a lot different than in California. Manhattan is different than San Diego. Your neighborhood might be different. Maybe your business operates internationally. Think about your relevant geography and not about the macro-economic headlines.
Focus first on your supply chain. Dr. Sabrin’s extensive research into the longitudinal success of entrepreneurial businesses emphasizes the important of reliable inputs. In risky economic periods, the supply chain may need bolstering — extra inventory coverage, additional suppliers in case of disruptions. This may be expensive and more expensive to finance amidst rising rates, but guarding against supply chain disruption is a primary concern. Don’t risk disappointing your customers because your supply chain breaks.
Maintain your most important lending relationships. If financing is a concern, look to bolster and strengthen lending relationships. Secure a line of credit. Nurture the relationship with your bank. And explore the newly emerging landscape of fintech lending — another example of free markets expanding the range of options and possibilities for entrepreneurs.
Here’s a financial landscape map from an earlier E4B podcast — use it to become familiar with the latest financing options: Mises.org/E4B_166_PDF
Your individual cost curve is not the same as that of the market. The current pervasive concern is with higher interest rates and higher costs. These are macro-economic variables. But the cost curve for your business does not have to be the same. Many suppliers will be lowering prices and offering promotions or special terms to maintain their business flow. You can take advantage by shopping around, rebidding contracts, and seeking out the most eager suppliers. Your micro-economics can be different than the headline macro trends.
Most importantly, seek opportunities within changing economic circumstances. An inverted yield curve is just another instance of continuous change, and change is the condition under which entrepreneurs thrive. They find opportunities in change. There are always growth sectors, there are always customers with needs, and there are always new openings, even when some doors are closing. The agile entrepreneur is alert to new possibilities.
Additional Resources Navigating the Boom/Bust Cycle: An Entrepreneur’s Survival Guide by Murray Sabrin: Mises.org/E4B_166_Book
"Financial Capital Options For Businesses at All Stages" (PDF): Mises.org/E4B_166_PDF
What drives customer behavior and customer choices? It’s the existential question for business; you’ve got to know the answer. But it’s a mystery, hard to unlock. The solution to this answer lies in what market researchers call insights, based on the Austrian deductive method that we summarized in episode #164 with Per Bylund (Mises.org/E4B_164). In episode #165, we talk to Darshan Mehta, a lifelong professional in the field, an advisor to global and local brands, an originator of insights technology, and a deep thinker in the field.
Key Takeaways and Actionable Insights Insights mark the road to innovation and differentiation and give businesses a competitive advantage. By definition, an insight is a deep understanding of the motivation of an individual: why they do what they do, choose what they choose, and stop doing what they used to do? What guides their behaviors, what they do with their time, and how they find betterment and ease?
These individual motivations can sometimes be exhibited as technology trends, social trends and cultural shifts. Insights help businesses understand the drivers of these shifts in the landscape, as well as how these shifts, in turn, change individual behavior. Causality works in both directions.
Insights are multi-dimensional, and businesses need to install multi-dimensional systems to generate insights. No single method and no single information or data source will deliver the deep and rich insights businesses need. Darshan Mehta recommends a multi-dimensional approach.
Conversations with customers This is the number one source of data for insights generation: deep, rich, personal, subjective, and revealing. It requires some skill development to be good at customer conversations. Empathy is a key ingredient — what Darshan calls “being a people person”, interested in how people feel, and with the curiosity to learn and the humility to understand that a lot of what is important to customer decision-making resides in the sub-conscious and is difficult to articulate. In fact, conversation helps people to learn how to describe their feelings and motivations, if the interviewer lets the conversation develop slowly and with time for self-reflection to dawn. The human-to-human connection factor is important, whether in a one-on-one conversation, a group setting (such as a focus group) or an online chat.
Whether your business is present in the conversation or not, customers are having those conversations, so it’s important to listen and take part.
There are tools on the econ4business.com website to frame in-depth interviews:
Contextual In-Depth Interview Method: Mises.org/E4B_165_Contextual and for listening with empathy:
Episode 33 "Isabel Aneyba: Listening From the Heart and the Techniques of Empathy": Mises.org/E4E_33 Behavior observation The Austrian deductive method comes into play when the data is in the form of behavior that we can actually observe — accompanied shopping, ethnography, buying data, shopping data, video data, eye-tracking, A/B testing. All of these give us information about behavior. The next step in insight generation is to deduce the drivers of the behavior. Sometimes we may have some conversational data or sentiment data (such as from surveys) to combine with the behavioral data, sometimes not.
The process of working backwards from behavior to motivation uses the question, “Why?” Why did they act that way? Why did they reject an alternative? What could possibly be behind the behavior? If they acted unexpectedly, or out-of-pattern, or differently than last time, why was that? The standard of 5 Why’s is often invoked to get to the deepest understanding. But it’s not the repetitive 5 Why’s of the child asking mom why they can’t have a piece of candy. The Why’s must be deeply thought-out, probing, significant Why’s to get to the next level of understanding.
Data analytics Analysis of so-called big data can make a contribution to multi-dimensional insights generation, especially if the data relates to behavior such as buying patterns, clickstreams, and cultural shifts in behavior (like Tik-Tok usage). Data can’t reveal drivers or deeply felt dissatisfactions, but it can reveal trends and even suggest some preferences (e.g., shifts in usage from one brand of social media to another). Data analysis algorithms don’t ask why, they ask what — especially what data patterns and pattern shifts can be observed. Bear this in mind when integrating data analytics into your multi-dimensional insights generation process.
Learn the language of dissatisfaction. The drivers of customer choice are always derived from dissatisfaction. Because they are seeking betterment, they must, logically, be dissatisfied with current conditions. It’s very tricky to identify dissatisfactions because the language of articulation is subjective and personal. Researchers and engineers and designers talk about “pain points”, but customers probably don’t. They may talk about what makes them “crazy”, or “upset”, or “frustrated”. Relative satisfaction / dissatisfaction could be revealed by brand-switching. Installing feedback loops for activation immediately after the customer’s product or service experience can help gather relevant data, especially if you can gather the feedback in the customer’s language rather than your own.
Insights are built through combination, recombination, and synthesis. “Insights lie where worlds collide” is a quote from Darshan’s book (Getting To Aha! Why Today’s Insight Are Tomorrow’s Facts). What he means by that is it’s a combination and recombination of conversational data and analytical data and trend observations and cultural shifts that ultimately generate the insight.
Blending and mixing and putting elements together to reveal new possibilities beats logic in the process of insights generation. Call it synthesis. And before synthesis can take place, the ability to break down wholes into component parts in a creative way is required. Analysis and synthesis, destruction and creation.
Ultimately, human emotion lies behind all insights and all innovation: experiences are feelings. Technically, the drivers of customer behavior change can be tracked to functional factors such as speed (faster), cost (cheaper), and / or convenience (easier). But beyond these lies emotion — the feeling that an experience is, was, or can be great. Customers buy experiences, not goods or services. A solution that evokes emotion results in (according to Darshan) a response that’s 12X stronger than one based on just faster/cheaper/easier. Therefore, an insight that evinces emotion — reveals it, brings it to light — is the most valuable of all.
It's important to understand the language of positive emotion, as well as the language of dissatisfaction. An experience evokes emotion when customers call it amazing or super-cool or use superlatives of that kind.
Customers bond most strongly to businesses that can align with their highest values. Beyond even the strongest emotional benefits lie highest values: lifetime values for which customers are always striving. Examples include family security — always a goal and never entirely realized — a sense of achievement — there’s always more to achieve — and a world of peace — we know today how elusive that is.
Brands that can associate themselves with these highest values — purpose-driven brands — or help customers attain them for themselves will be especially prized and loved in today’s markets. Humanizing brands in a digital world is a difficult standard to attain, and making the emotional connection with the customer on the subject of their highest and most strongly held values is the pathway.
Listen to the Economics For Business Podcast (Mises.org/E4BPod) on the role of highest values in business.
It's a modern expression of customer sovereignty that brand buyers are so active in evaluating products and services based on their assessment of the values exhibited by the corporations behind them, and that they seek to change the world through buying and not buying.
Better insights can help led us to a better world by identifying dissatisfactions and pointing to new solutions. Insights are visions of what makes us human, improving what connects us and unites us.
Additional Resources Getting To Aha! Why Today’s Insights Are Tomorrow’s Facts by Darshan Mehta: Mises.org/E4B_165_Book
iResearch.com
Think better, think Austrian is the mantra we have adopted for our Economics For Business project. Economics is a way of thinking. It’s conceptual, and its concepts can help businesses to make better decisions. The most important business decisions are those that pertain to the generation of value for customers, since that is the purpose of the firm. We talk with economist Dr. Per Bylund about exactly how the Austrian way of thinking helps businesspeople in every role to think better, and the business benefits that ensue.
Key takeaways and Actionable Insights. “Think Better, Think Austrian” means starting from first principles. Businesses are concerned with behavior — with action. The most important behavior is that of customers . Do they buy, or do they not buy?
The Austrian economics framework places people, and the effort to understand what they are trying to do, in the center of its analysis. First principles in Austrian economics teach us that people act to improve their circumstances—to somehow make things better for themselves. We recognize that people have a purpose in mind, and they make choices that lead them to attaining what they want or need.
It is from this first principle that business owners and entrepreneurs can work backwards to understand the motivations behind the actions of our prospective customers. We can ask why. And we should.
Thinking backwards reveals new understanding. If customers act in a way we don’t understand, or differently from the way we expect them to act, or hope they will act, we can work backwards from what we’ve learned without judgment and instead exercise empathy. They might do something “crazy” — like using a product in a very unexpected way, or buying a competitive product that we know to be “inferior” in some sense. We know that their action made sense to them, and that they believed they would be better off compared to alternative choices or actions. Working backwards from this understanding enables us to deduce their motivation, and what value they were seeking. We can learn from their “crazy” action and rethink our offering. We can choose to take their feedback, even if it doesn’t make sense to us, and offer them an alternative.
Thinking better requires a relationship with the customer. Successful business owners and entrepreneurs must develop a deep enough relationship with their customers to understand how they think, how they feel, and how they perceive things. Additionally, we must learn the context in which they are making their choices—there’s no such thing as a non-contextual choice. Per Bylund makes this clear when he explains that ice cream in summer is a different product choice than ice cream in winter, and clothes for business wear at the office are a different choice than clothes for working from home. Consider this: Whom does the consumer believe is observing and judging them and what standards are being applied? Those are important contextual factors to be taken into account.
The Austrian thinker considers all these influences on the customer and uses them to build and nurture relationships
We know that the ultimate purpose for customer action is the relief of some unease. How do consumers and customers decide what they want to spend their money on? Rather than asking ourselves what people want to buy, we can ask ourselves what decisions people make in pursuit of better circumstances. They start from a position of dissatisfaction. They feel unhappy, or disappointed, or feel let down or lacking in some way. Contented people don’t act. People whose every comfort has been seen to, and who lack nothing—people who aren’t experiencing any unease—don’t buy. Discontented people do. This never-fully-satisfied feeling of discontent on the part of the customer is the universal resource for the entrepreneur. It is never exhausted because people are never fully content or fully satisfied in all of their many needs.
Customers use this heuristic to calculate potential value, even though they likely have no idea they are doing it. They think, to what degree do I expect my choice to relieve my discontent? Satisfaction is achieved not so much via the benefit that products and services promise, but via the burdens that are taken away: less work, less difficulty, less effort, less cost to get to a feeling of less discontent or less fear or less concern or less stress.
Often, of course, customers’ concerns are social. How do others see me, how do I appear to them, how do I compare to others in appearance or competence or achievement? The relief of unease is always subjective and often the subjectivity comes in the form of the customer comparing themselves to others, or to their own assessment of others’ judgment of them.
The entrepreneur listens carefully to what customers say, and observes their actual behavior, then uses empathy to understand what process the customer is using to define their unease and ways to relieve it.
Additional Resources "Think Better, Think Austrian" How-To Guide (PDF): Mises.org/E4B_164_PDF
"Per Bylund on Opportunity Costs": Mises.org/E4E7
The medical care industry is so restrictive of individual freedoms — those of both of doctors and patients — that we can legitimately classify it as tyrannical. As is always the case, the solution will come from entrepreneurship, the creative and innovative response of individuals, doctors and teams and firms and their new business models to the dissatisfactions of patients and users of today’s system.
Joe Matarese is one of those innovative individuals. In episode #162 of the Economics for Business podcast, he described the nature and cause of the problem. In episode #163, he surveys the entrepreneurial solutions, some of which are beginning to emerge and some of which still lie in the future.
Key Takeaways and Actionable Insights As with all entrepreneurial solutions, the consumer is in the driving seat. The consumer — in this case, the patient — are clear in what they want, and what they don’t always get: quality care, accessible and convenient, at an affordable price.
Their definition of quality includes the alignment of interests between medical professionals and patients. Accessibility and convenience result from timely response to patient needs as opposed to lines, waiting rooms and delays. Affordable prices will arise when pricing is open as opposed to hidden behind the veil of insurance, co-pays, and healthcare-as-a-benefit rather than as an economic good.
Direct Primary Care is the business model that aligns doctor and patient interests. The new emerging model of membership-based primary care (see BigTreeMedical.com) is a doctor or a small team of doctors setting up an independent practice and recruiting a customer base of subscription-paying patients. In return for a monthly or annual subscription, the patient enjoys access, and one-on-one consultations on demand (usually via tele-medicine visits). The doctor is often networked into a pharmacy (or the practice obtain a pharmacy license) so the patients access to drugs is facilitated, and the prices of drugs to the patient can be lowered.
Most importantly, the patients are able to build a strong relationship with their primary care doctor. Health monitoring can be closer and more personalized, and early treatment — one of the most important variables in medical care efficacy — can be facilitated.
The direct primary care practice is networked into specialists and treatment centers so that the doctor and patient together can choose the treatment pathway that is best for the individual — tailored to individual circumstances and needs.
Personalized technology supplements the Direct Primary Care model, greatly enhancing the health outcome benefits for the patient. The direct primary care model and one-on-one patient-physician relationship provide the ideal conditions for the deployment of modern personalized technologies. Condition-monitoring watches and wristbands and other wearable or portable consumer electronics can provide the doctor with monitoring data and send an alert for any change in condition or abnormal reading. The doctor or patient can call for an immediate diagnostic consultation.
A direct primary care practice can be networked into an imaging center and a testing center for supplemental data acquisition — many of the new devices are mobile and can come to the patient, rather than vice versa, or can provide more immediate and convenient accessibility.
Personalized networked tech provides a new infrastructure for patient-directed monitoring and analysis (whereas the Obamacare “standard of practice” protocol predetermines what tests and diagnostics a patient can access, locked behind a bureaucratic gateway).
An entrepreneurial ecosystem of services will emerge to support the Direct Primary Care model. The opportunities for entrepreneurs in the new medical care ecosystem are, to use Joe Matarese’s word, endless. He cited, as an example, the Surgery Center Of Oklahoma (SurgeryCenterOK.com), which posts cash prices for surgeries online (no hidden fees), and can usually provide service within 24 hours. They take no insurance and patients pay cash. On a broader geographic scale, medical tourism destinations with open pricing give patients the opportunity to find best pricing and provide the latest equipment and top doctors.
There are cost sharing services such as Sedera (Sedera.com) that offer new ways for patients to pay for healthcare in a peer-to-peer sharing of large unexpected medical costs. Sedera’s Cash Pay Directory provides educational resources and shopping tools to “help members become savvy healthcare shoppers”.
There are negotiation vendors who help patients to get fair pricing on medical bills from the big hospital conglomerates. There are online pharmacy vendors, like Mark Cuban’s Cost Plus Drug Company (CostPlusDrugs.com), to help patients shop for the best drug values.
There are entrepreneurial services like Freedom Health Works (FreedomHealthWorks.com) to help Direct Primary Care doctors with billing systems, office tech and the business infrastructure for a modern practice.
In the entrepreneurial world of healthcare, entrepreneurs compete to provide the best and most affordable services ecosystem so that patients can enjoy the best healthcare.
Open pricing and cash payments are an important component of the new system. A big problem, perhaps the biggest problem, with the current medical care system is that the price system is not able to work in the way that it works in free markets. As Joe put it in episode #161, medical care system is “price-less”. Because payments are made by a third-party payer and not by the individual consumer, pricing becomes opaque to the user and economic calculation is rendered impossible. The third-party payment veil has resulted in price escalation and price manipulation and multiple prices for the same procedure at the same facility depending on whether the payments are immediate or deferred and the degree of bureaucratic and regulatory involvement.
If patients were to pay cash for treatments, they could make better decisions about exchange value. Catastrophic insurance for unexpected and rare events would make the use of insurance more like its application in car insurance and fire insurance — a properly priced optional spreading of risk for unexpected future events.
Consumers and physicians will collaborate in the creation of a parallel system for medical care. Joe Matarese believes the status quo medical care edifice is too rigid and entangled to reform. The solution lies in a parallel system. If consumers activate their demand for improvements in quality, accessibility, convenience and payments systems, entrepreneurs will respond with new market-based offerings. Customers will flock to them because of the benefits they perceive in contrast to the current system. Market feedback loops of satisfaction and dissatisfaction will rapidly fine-tune the new parallel system to a higher level of value and acceptance. Joe estimates that to will take only 5-10 years for the new system to take over.
Additional Resource "Entrepreneurial Solutions to Medical Tyranny" (PDF): Mises.org/E4B_163_PDF
Medicus Healthcare Solutions: MedicusHCS.com
Medical care in the US exemplifies how the perverse effects of accumulated, self-reinforcing economic errors can render a system dysfunctional for consumers. As CEO of Medicus Healthcare Solutions, Joe Matarese has seen the current system from the inside — working and interacting with thousands of hospitals and thousands of providers, primarily doctors, around the country, dealing with processes, bureaucracies, government reimbursement procedures, and the full gamut of the producer side of the medical care system. In Part 1 of a two-part podcast series, he gives us the informed insider’s view.
Key Takeaways and Actionable Insights Many forces combine and interact to produce the medical care system we experience today. Politics: As in almost all cases of market destruction, politicians are highly responsible. They have decided that the medical care of individual citizens is an appropriate field for their interventions, and they meddle in their usual ignorant and incompetent fashion. Dr. Scott Atlas of Stamford University was one who documented some of this glaring incompetence and its resultant creation of the crisis response to the COVID-19 pandemic in his book A Plague Upon Our House. The impact of political incompetence on individuals’ experience of medical care is not limited to COVID-19, but Atlas’ book provides one excellent example.
Regulation: Politicians don’t just meddle; they legislate and regulate. The Affordable Care Act of 2011 is a particularly significant milestone. It created a regulatory environment in which it became virtually impossible for independent physician groups to function. Smaller and rural hospitals could not survive the regulatory burdens imposed, and many closed or were acquired by larger hospital groups. The resultant consolidation and anti-decentralization led to centralized decision-making (particularly evident in the COVID-19 pandemic, but much more broadly impactful than just that event) to the effect that individual doctors are told how to practice and how to treat their patients. The one-on-one doctor-patient relationship that flexibly exercises the experience of the doctor on behalf of the individual needs of the patient and their particular condition Is no longer operative. Doctors now apply a centrally designed pre-determined “standard of care” (and are even told by the AMA what “woke” language to use when interacting with their patients).
Bureaucracy: With regulation comes bureaucracy. Central to the medical care system is the CMS bureaucracy — The Centers For Medicare And Medicaid Services. (You can visit the behemoth at cms.gov — it’s instructive to see the breadth and depth of its reach.) This is the home, for example, of the code lists that govern medical care billing and payment policies. Every doctor must code every patient interaction and every procedure, and the code triggers a specific billing amount. The care that doctors can give patients is governed by these codes and standard-of-care protocols rather than the heuristics an experienced doctor uses to treat individual patients in individual circumstances.
Perverse incentives: Out of the regulatory bureaucracy comes a cascade of perverse incentives. The billing code system leads to one of them: hospitals and doctors will lean towards treatments and billing codes that result in the best billing and revenue outcome for them, rather than what is best for the patient. Similarly, with the fee-for-service model of the Affordable Health Care Act, there’s always the incentive to provide the service or procedure that generates the best fee.
Financial Engineering: The worst financial engineering of the medical care system is the tying of health insurance to employment, and the general misuse, misunderstanding and mispricing of insurance that results. Insurance is appropriate for classes of events (like car accidents or house fires) which are known to have distributed incidence but unknown in terms of where and when they will take place. Individuals pay into an insurance pool that can be drawn on when an unlucky individual encounters an incident; we all hope we will never have to draw on it. In health care insurance, individuals pay for coverage which they know they will draw on. They expect insurance to pay for routine things they should really pay for out of individual income or savings. Medical insurance coverage is appropriate for rare or catastrophic events, but not for everyday health maintenance. In fact, insurance totally obscures the market for health care.
The combined result of all these forces is the elimination of economics from medical care. No free market: Medical care is the epitome of interventionism. There are no unregulated voluntary exchanges between buyer and seller, in this case patient and doctor. Every interaction is regulated, bureaucratized, coded, and distorted by financial engineering. Most importantly, there is no free market pricing. Prices are the indispensable signaling and information exchange mechanisms of markets; when they are suppressed, markets can’t function. The medical care system is, as Joe Matarese puts it, price-less.
No entrepreneurship: The function that solves consumer problems in markets is entrepreneurship. Entrepreneurs identify customer dissatisfactions and devise and present solutions for consumers to choose from. Entrepreneurship can’t operate in regulated healthcare. It is suppressed. Joe pointed out that, in the few corners where an entrepreneurial breakout has occurred — he mentioned medical tourism, Lasik eye surgery, cosmetic surgery, and The Surgery Center Of Oklahoma (SurgeryCenterOK.com) — prices have been lowered, quality increased and value spread wider and wider in the market, reaching more and more consumers.
Repressed Innovation: A major output of freely priced entrepreneurial markets is innovation. Entrepreneurs bring improvement in the form of new services and offerings, improved processes, and the application of new scientific discoveries. The innovation process is highly repressed in US Health Care, as in, for example, the FDA’s long and arduous bureaucratic process for approving new drugs resulting in delays in their adoption costing millions of lives.
Replacing the free market is an edifice of massive, plodding, constraining entities. The top of the monstrous pile can probably be assigned to Big Pharma. The massive amount of funds flowing through the pharmaceutical companies empowers their commandeering of the medical community. Government healthcare agencies such as CMS, FDA and VA take up their entwined cronyist positions related to Big Pharma and Big Hospitals. Big Insurance is the financial engineering for the edifice. The bureaucracy regulates them all, but from a position of having been captured through the lobbying process. The patient sits at the bottom of this stack, squeezed by its weight, restricted by its rules, and constrained from receiving individualized care even though doctors and nurses are capable of providing it.
The COVID-19 experience was an instance of the negative consequences of regulated, bureaucratic, perversely incentivized and politicized medical care. The standard four pillars of a medical response to the COVID-19 pandemic would have been:
mitigationearly outpatient treatmenthospital treatmentvaccination Instead, we were bureaucratically and politically accelerated towards a mass vaccine solution, satisfying the perverse incentives of Big Pharma.
Mitigation could have embraced healthy lifestyles, nutraceuticals, and some stratifying of risk by patient age. Instead, it was botched with ridiculous and useless mask mandates and pointless (and damaging) lockdowns.
Early outpatient treatment for those infected would have recognized the “golden window” of outpatient treatment in the first two or three days of the case to reduce the need for later hospitalization, as documented by Dr. Serafino Fazio and others in a published paper (see Mises.org/E4B_162_Paper), with drugs like ivermectin and hydroxychloroquine, but these were ridiculed, and their use repressed. By the time hospital treatment is needed, the condition has changed from one of inflammation and clotting to pneumonia and lung infection, with potentially worse outcomes. The use of remdesivir was centrally authorized, and this drug is much more expensive and risks worse side effects than the early treatment drugs.
The four pillars were abandoned for the centrally planned decision of mass vaccination.
There is a pathway out of medical tyranny. Principles of Austrian economics can help us find the way out of the current situation. Some of the principles we might apply include:
Let free markets operate: The medical care edifice refutes and represses free markets and market pricing. The first step in a solution is to restore markets to medical care.
Customer sovereignty: Markets are built around the consumer as “the captain of the ship”, determining the purpose and direction of the voyage. Consumers would exercise their sovereignty in a one-on-one relationship with their primary care physician.
Decentralization: Decisions in markets are made close to the customer and not via centralized bureaucracies.
Network versus hierarchy: Austrian economics views markets as networks of specialized nodes connected by 2-way information flows and provider-consumer interactions. The medical care edifice is a hierarchy not network.
In Part 2 of "Entrepreneurial Solutions to Medical Tyranny," Joe Materese will identify some specific ways that we can build a parallel system outside the edifice to bring back consumer sovereignty and free markets.
Additional Resource "Entrepreneurial Solutions to Medical Tyranny" (PDF): Mises.org/E4B_162_PDF
Medicus Healthcare Solutions: MedicusHCS.com
Your individual experience is a business asset. Life is teaching us more than we sometimes realize. An insightful analysis of what we’ve experienced, combined with purposeful translation, can generate unique intellectual property on which to base a unique approach to business. Connie Whitman joins Economics For Business to share her experience and her development of a thriving, resilient, and adaptive coaching and training service.
Key Takeaways and Actionable Insights Experience is an asset that reveals our business superpowers. Life teaches us whether we fully realize it or not. While climbing the job ladder at a firm may seem like the pursuit of credentials and titles, it’s better understood as an accumulation of knowledge and learning that can be applied in the future in entrepreneurship.
Connie Whitman enjoyed a 20-year career in financial services up to the SVP level. It was her customers who pointed out to her what “superpowers” she was developing — a distinctive capacity to assist all parties in a complex collaborative contract to fully understand the benefits accruing to each one of them individually and all of them collectively.
We all can have these superpowers, but we don’t always realize them until a third party points them out, through asking for input or advice or seeking us out or praising us. It’s important to learn the right kind of self-assessment — and to learn to listen to others’ assessment of us — so as to be able to understand our own superpowers.
We can translate our experience into intellectual property that forms the basis for an entrepreneurial business.
Connie Whitman transformed her experience into both a brand philosophy and a scalable methodology. Connie knew from her experience in business that the function entitled “sales” is often viewed negatively: sales activities and salespeople might be accused of rapaciousness and avarice, however unjustified such accusations may be. She intended to develop a service in coaching and training in the sales field, and so it was important to distance herself from these misperceptions. Her counter was selling from a place of love: relationship selling based on love, respect, and integrity. Selling is the construction of an “everybody wins” proposition. It’s an honorable implementation of the entrepreneur’s ethic of service. Anyone using Connie’s techniques would evoke for themselves a feeling of pride and self-respect that the critics of the sales function try to deny.
She crafted a methodology for selling from a place of love in the form of a seven-step selling process. It is replete with Austrian principles of subjectiveness, empathy, and customer sovereignty.
Preparedness: Planning in advance to assemble all the knowledge and understanding available to make you informed and ready; anticipating what the customer will want to know and is likely to ask.
Connecting: Using empathy to connect on the basis of what’s important to the customer in order to establish credibility.
Exploring: Asking questions to learn as much as possible about the customer’s needs and preferences in the context of their current circumstances.
Active Listening: Connie’s phrase is “be present” — listen intently and indicate that you have heard accurately by asking follow up questions to further explore customer needs.
Presenting Solutions: Framing all value propositions as a solution — reliving customer unease.
Confirming: The process of closing the sale, actively asking the customer for their business.
Following up: Consistent, persistent, and respectful (CPR) follow up to confirm satisfaction and potentially extend the relationship.
Connie’s method has evolved and improved over the years — nothing is ever fixed, and all businesses adapt and learn. Yet this intellectual property developed from experience has proven to be solid capital generating both revenue flows and client satisfaction, not to mention word-of-mouth recommendations and references.
Business-building is a function of your network — another piece of intellectual property born of experience. You meet many people in your professional career and you make many connections. Your network is another IP asset. It’s one you should groom and keep fresh and active, turning it into another business asset.
An IP business can be lasting, but you may have to refresh the infrastructure. Connie’s in-person, face-to-face business model was challenged during the COVID pandemic. When business travel stopped, and a lot of sales training budgets were cut. The IP remained valid. The market signal was for her to digitize the business. She took classes and hired consultants to learn how to achieve domain authority. She educated herself on the technology required for digitization of her individual business model, and the processes for digital engagement that were consistent with her 7-step process and principles. The result has been further growth, and the continued fulfillment of pursuing her business goals, and realizing new ones.
Your entrepreneurial IP business can become your most fulfilling experience. Connie describes her entrepreneurial experience as immensely fulfilling — the most rewarding thing she has done in her life. It’s the realization of the value accumulated over a career, and the new value shared with clients in providing service to them. It has been tremendously hard work, of course, and has required some challenging resource allocation decisions — of both time and money — but the reward greatly exceeds the sacrifice.
Additional Resources "Connie Whitman’s Seven-Step Sales Loop" (PDF): Mises.org/E4B_161_PDF
ESP—Easy Sales Process by Connie Whitman: Mises.org/E4B_161_Book
Connie’s website: WhitmanAssoc.com
Changing The Sales Game podcast: Mises.org/E4B_161_Pod
Entrepreneurs can realize their goal to think better, think Austrian by taking a systems thinking approach. We can ditch linearity and hierarchies in favor of distributed networks and webs of causality and create better knowledge – more aligned with the real world — and better mental models. Professors Laura and Derek Cabrera of Cabrera Research Lab and Cornell University — leading authorities on systems thinking — speak to Economic For Business on the application of systems thinking for entrepreneurs, and everyone.
Key Takeaways and Actionable Insights There’s a crisis in thinking in the business world. Laura and Derek Cabrera have conducted deep research in the field of business thinking, and they’ve identified both the problems and the solution. The problems include reductionism (we’re taught to think about parts of systems instead of the system as a whole); hierarchical organization of thinking (versus complex distributed networks); thinking in categories versus breaking down part-whole groupings; thinking in terms of liner cause-and-effect versus webs of causality; and the prevalence of bivalent logic (right/wrong, black/white) rather than the multi-valent logic of many right answers.
This way of thinking is not well-aligned with the realities around us. The solution is systems thinking — the thinking of complex adaptive systems.
Systems thinking aligns with how the real world works. Our mantra at Economics for Business is Think Better, Think Austrian. Systems thinking is better thinking (and Austrian economics fully embraces complex adaptive thinking — what Mises called constant flux and Hayek called spontaneous order and Lachmann called the market as a process of combination and recombination).
Systems thinking defines complex adaptive systems in this way:
Autonomous agents follow simple rules based on what’s happening locally around them, the collective dynamics of which lead to the emergence of the complex dynamics we see.
This description is actually a mental model of a complex adaptive system. The products of systems thinking are mental models. None are perfect representations of reality, but they help us when they are better representations of reality.
Four simple rules of systems thinking produce better mental models. By following 4 simple rules, over and over again, anyone can become a practiced and adept systems thinker. The rules are captured in the acronym DSRP.
D is for Distinctions. Systems thinkers make distinctions between different things and different ideas. We can make distinctions between different customers, different costs, different sales channels, different suppliers, different employees. We identify boundaries, what’s inside and what’s outside. We differentiate, compare, and contrast.
S is for organizing ideas into systems of parts and wholes. Every thing is a system because it contains parts. Every e-mail contains words which contain letters which are made up of pixels. We construct meaning when we organize different ideas into part-whole configurations. We split things up or lump them together in systems of context. We group, we sort, we classify, we assemble.
R is for identifying relationships between and among ideas. We can’t understand much about anything without understanding the relationships between or among the ideas or components. Relationships include causal, correlation, feedback, inputs/outputs, influence, etc. Fundamentally, relationships are action and reaction. We live in an infinite network of interactions, including between our own thoughts, feelings, and motivations. We connect, interconnect, associate and join.
P is for looking at things from different perspectives. When we make a distinction or identify parts and wholes or identify a relationship, we are always doing so from one particular perspective, made up of the point from which we are viewing and the thing or things in view. Being aware of the perspectives we take is paramount to understanding ourselves and the world around us. If we change the way we look at things, the things we look at change. We frame, we interpret, we empathize, and we negotiate from a perspective.
Systems thinking is not a set of steps but a set of rules, and from the interplay of these rules emerges the dynamics of systemic thought.
There are four types of action for systems thinkers applying the DSRP rules. 1) See Information and structure. To construct meaning and mental models, we take in information and structure it. It’s important to recognize the difference between the information and how we structure it. A good way to do this is visualization: use whiteboards or sticky notes or software to map out systems and parts (e.g., boxes within boxes on a chart) and relationships (lines between the boxes). This physical manifestation of a system can help create new knowledge and point to solutions.
Laura and Derek told the story of a large conglomerate business that, by visualizing its divisions and functions and the information flows between them, was able to identify redundancies, see where communications and information was lacking or blocked off, and design a new and improved structure.
2) Use common patterns in the structure of mental models. Laura and Derek use the term cognitive jigs: forms of information structuring that can be used again and again. A list is one type of cognitive jig. It can be used to order priorities or structure wholes into parts. Similes and metaphors are jigs. There’s another called a relationship distinction system (RDS) that can help solve silo problems in organizational design by identifying required relationships and the people responsible for them, and the resources required to operate the relationship. Excel spreadsheets and tables are jigs. Look for useful cognitive jigs and use them over and over again. They increase the efficiency and speed of thought.
3) Make structural predictions. Austrians are wary of predictions because we know the future is uncertain. Here, we are not talking about predicting the future, but predicting the possibility of new knowledge existing after restructuring information. For example, a new relationship opportunity could emerge if we change our perspective. A new understanding could emerge if we break something that we were treating as a whole into its parts. We can identify gaps in our current thinking and make a bet that there’s something positive in changing that thinking. We can create new knowledge.
4) Embrace the logic of and/both. We are taught bivalent logic: there’s right and wrong, there’s black and white, there’s X and Y. There’s an alternative: multivalent logic. There can be more than one right answer. There can be a continuum rather than fixed points.
One example of multivalent logic applies in the analysis of what customers want. They have a variety of preferences, ordered in different ways at different times and in different contexts. They are continuously learning what to want, and always making trade-offs. Bivalent logic won’t help entrepreneurs understand customers’ choices or decision-making processes.
Another example of bivalent versus multivalent logic is cause and effect compared to a web of causality. We tend to think of cause and effect as neighbors on a timeline. The cue ball of cause strikes the colored ball of effect and moves it in a designated direction. But it’s more realistic to think of the events of our lives or our business having multiple causal factors. There are so many mediating factors and external and internal variables that lead us to be more systematic in our thinking about them. Purposely look for webs of causality rather than shoehorn observed phenomena into a linear causal model that doesn’t match the reality of the world.
Systems thinking includes the recognition of individual subjective purpose and intent. The perspective of methodological individualism leads Austrians to worry about whether systems thinking is well-aligned with Austrian thinking. I asked Laura and Derek this question. The response: “I would say that’s precisely what systems thinking entails — the notion that each individual agent is following simple interaction rules with other agents, and that those interaction rules are leading to the system and its emergent properties.
An example of an interaction rule from Austrian economics: humans act in order to improve their circumstances. Another is that they use their own subjective value system to determine what is an improvement. The action axiom, subjective value, opportunity cost in choosing between alternatives, profit and loss and the context of constant change are the simple rules of Austrian economics.
Practice, practice, practice. Systems thinking is something everyone should be able to do. It can be practiced. Our brains are already building mental models about the world. It’s already in us and so it pays to be aware of it.
It’s like any exercise: more reps make us stronger. Look at anything through the DSRP lens when you are feeding your dogs or driving down the highway observing billboard advertisements. Make the neuronal pathways of DSRP second nature.
This can occur at the level of individual learning or of organizational learning. In episode #152 (Mises.org/E4B_152), we discussed the organizational model of VMCL — an organization using learning to acquire the capacity to do its mission every day to achieve its vision.
Additional Resources "How to Become A Systems Thinker" (PDF): Mises.org/E4B_160_PDF1
"Practical Systems Thinking Actions and Behaviors" (PDF): Mises.org/E4B_160_PDF2
Systems Thinking Made Simple: New Hope for Solving Wicked Problems by Derek and Laura Cabrera: Mises.org/E4B_160_Book
Cabrera Research Lab: CabreraResearch.org
Rory Sutherland, Vice-Chairman Ogilvy UK, is a peerless marketing authority, revered throughout the business world. He published a blogpost with the title Wanted — an Austrian School of Marketing. In praxeology, subjective value theory, customer sovereignty, and ordinal value stacks, he identified the building blocks of a marketing approach for our digital age. We talk about it in Economics For Business #159.
Key Takeaways and Actionable Insights Mainstream economics has the wrong narrative about capitalism and, consequently, a misconception about marketing. Mainstream economics fetishizes efficiency, and regards marketing as a cost and an add-on business activity rather than fundamental and essential. There are multiple erroneous assumptions about consumer behavior such as adhering consistently to transitive preferences, perfect trust, and knowing to the penny how much utility will be derived from every transaction. Utility is defined in a circular fashion (consumers act to maximize utility / how do economists know what utility is / it’s the value that consumers try to maximize).
The influence of mainstream economics on business is to favor a focus on what Rory terms “instrumental objective means of business growth”, such as lower prices, and wider distribution. Business becomes obsessed with quantification, and, because value is not quantifiable, looks for other outcomes that can be quantified and used to justify investments. This approach misses the key point: that the marketing tournament is played out not in the objective arena, but in the subjectivity of the consumer’s mind.
Ludwig von Mises developed the science of understanding human behavior, and provided a unique economic underpinning for marketing. Mises introduced the new method of praxeology, making Austrian economics an entirely different science than mathematics-based economics. It’s the science of human behavior, of action, and can be combined with psychology and evolutionary biology in the development of a superior mental template for understanding business.
For marketers, the most telling understanding from praxeology is the consumer’s drive to relieve uneasiness. Mises phrases it: “The incentive that impels a man to act is always some uneasiness.” Note the terms “impels” and “always”. These are powerful insights for marketers. But more is required for action: “the expectation that purposeful behavior has the power to remove ….the felt uneasiness”. This is the task of marketing: to create such an expectation.
The relief of unease is the consumer’s primary drive, and therefore the proper focus of marketing. There is no need, as Rory phrases it, for marketers to “ladle on the positives” in their communications. Removal of unease works differently. It creates the expectation that uneasiness can be removed by actions the consumer takes.
Reputation, for example, is a reassurance to customers that they won’t be disappointed, and that promises made can, with some confidence, be expected to be kept.
A strong brand is a special form of such reputational reassurance.
Investment in a costly advertising campaign with high production quality can remove unease about the credibility of a seller — someone willing to invest in advertising must be confident that there will be widespread acceptance of what they’re offering, giving the buyer a corresponding confidence of not only quality but also social endorsement.
Guarantees, samples, and easy return policies are examples of widely used and effective unease-reducing marketing initiatives.
In fact, anything that reduces the work that customers need to do to enjoy the product or service (such as, for example, home delivery) can relieve unease and increase the value experience. Economists might call this reduced opportunity cost or transaction cost. Whatever the terminology, the unease-reduction approach is the most powerful marketing method.
One example Rory cited was that of zoom. While the technology has been well-established for some time, zoom was bedeviled by the problem of social unease in the early phases of its establishment. Is an electronic meeting as effective as an in-person meeting? Will a client think less of a service provider who doesn’t fly to see them, irrespective of the quality of the remote, technology-enhanced communication?
The analysis of unease — especially the socially-contextual unease inherent in a service like zoom — is a really important element in the understanding of value generation through marketing. Austrian school marketers can develop a special understanding by asking more questions about how best to reduce unease rather than how to increase desirability. Rory used the example of range anxiety for potential buyers of electric vehicles. Their anxiety about possibly running out of power before finding a charging station might be irrational based on their physical environment and infrastructure, but the anxiety nevertheless governs purchase and usage and demands relief.
Marketing is built on an Austrian understanding of customers and their subjective heuristics of value perception. Customers’ perception of the potential for the relief of unease is subjective and emotional. The appreciation of goods and services is not merely a product of their objective characteristics. Value for consumers can be created through psychology, not just through production. Value is a consumer experience, an emotional response driven by a subjective sense of what matters to them, embedded in context, story and meaning.
Changing consumer behavior is not a function of the objective reality of product and price. Marketers who focus just on these elements are “playing with a limited deck”, in Rory’s words. The presentation of a good or service to customers is fundamental to the value proposition. It’s not an add-on or an optional extra for business. Marketing can change customer’s minds through reframing, through changing the social context, or through any one of many, many more ways to change how they look at things.
Consumers evaluate through heuristics rather than rational calculations of economic benefits and costs. The marketing power of brand or reputation is a customer heuristic: a firm that has invested in its reputation through quality and service, reliability, and consistency in keeping its marketing promises, as well as cultivating its online ratings, will be rewarded in the marketplace. Customer disappointment — resulting from a failure to consistently keep promises — will be punished. Reputation and disappointment, of course, are subjectively perceived.
Austrian marketers thrive on the feedback loops. As Rory puts it, some people like plain white bread and some will pay $10 for a sourdough olive focaccia loaf. Marketers explore all the possibilities in a market — they embrace the messiness of customer preferences and the whimsy of their choices. Perfect competition deprives customers of these whimsical choices; it commodifies what’s offered by suppliers.
If markets were designed by suppliers there’d be less variance but also less resilience (fewer options). Markets are designed by consumers and value is created in customer-initiated experiences, facilitated by suppliers who listen and respond well. Consumers get what they want via feedback loops, sending signals back to the marketer about what they want and don’t want, and what they’ll buy and won’t buy.
Brands especially welcome market feedback so that they can align more and more tightly with consumer preferences, and customize the branded experience to an ever-greater extent, reinforcing the brand-consumer bond. It is the consumer feedback loop that drives innovation. Marketing is the listening and alignment function. It’s essential to the workings of capitalism. It is the tool for synthesis of value through the imaginative redefinition of what people value, based on their signals.
It is the Austrian perspective that deals so well with the unpredictability of marketing successes. Another limitation of conventional economics and quantification-obsessed businesses is the search for one right answer. Such restricted models of reality are dangerous. What capitalism and marketing are good at is coming up with multiple answers — increasing the potential solution space for problems, and increasing the number of ways to relieve unease.
The answer to any customer demand is never one thing, it’s multiple options for different value-uncertain customers to choose from. Sometimes there are what Rory calls “opposite things” (Red Bull and Coca-Cola) or sometimes multiple different things (a wide range of single serve beverages for a wide range of consumers in a wide range of situations).
Rory is an expert on unpredictable marketing successes. In his book Alchemy, he describes the “magic” of marketing and some of its unpredictable outcomes. One of the notable ones was the success of Red bull, a beverage brand that, according to research among its own consumers, “tastes kind of disgusting”. The testing agency had never seen a worse reaction to any new product. Why is there such unpredictability? As Rory puts it:
Models of human behavior devised and promoted by (mainstream) economists and other conventionally rational people are wholly inadequate at predicting human behavior.
Red Bull “hacks the human unconscious”. It has potent associations with risk taking behavior, with myths about the power of caffeine and taurine, with perceived signaling effects, and with several more psychological placebos. These have nothing to do with product and price, and make the success of Red Bull unpredictable.
Another way to say this is to call Red Bull’s success an emergent property. The future is unpredictable, but so is the past (we can’t really explain Red Bull’s success), even though we attempt to post-rationalize. It’s just one of several possible outcomes and we don’t truly know the story and how it happened.
Austrians’ embrace of emergent outcomes in free markets with freedom of choice makes marketers perfectly comfortable with unpredicted outcomes.
Much of business success is luck, instantiated by entrepreneurship and enabled by marketing. As a consequence of this unpredictability, extraordinary business success is a function of luck and timing. Business outcomes are largely probabilistic rather than deterministic. Sadly, 80% of the effort in business is applied to pretending that it is deterministic — in the form of planning and strategy activities for example.
The time and place of “take off” for new innovations and marketing campaigns is entirely unpredictable. There are two influences that can bring a little more certainty. One is the role of the entrepreneur, who is likely to be more single-mindedly focused and more persistent in betting on a single innovation than a larger corporation that has a portfolio and a risk-averse bureaucracy.
The second is marketing, which has the capability to change customer psychology and change their frame of reference, transforming a bleeding edge concept into something inevitable and compelling. Early-stage adopters are often seen as somewhat crazy (i.e., there is limited socially contextual acceptance for the innovation), and marketing can accelerate the adoption curve by reducing or eliminating the value uncertainty of more customers more quickly.
Importantly for marketers, Austrian economics takes a process view of markets, in which people and their preferences and their individual and social behavior are constantly changing. This “constant flux”, as Mises worded it, gives energy to marketing as a stimulus for innovation, improvement, and promises of better alternatives.
Additional Resources "The Austrian School Of Marketing" (PDF): Mises.org/E4B_159_PDF
Rory Sutherland's blog post: "Wanted — an Austrian School Of Marketing": Mises.org/E4B_159_Blog
Alchemy: The Dark Art and Curious Science of Creating Magic in Brands, Business, and Life: Mises.org/E4B_159_Book
Rory Sutherland on YouTube: "Praxeology: Time To Rediscover A Lost Science" (There’s a special frame at 8:10): Mises.org/E4B_159_Video
Entrepreneurship-as-design is brought to life in a wonderful conversation with Mark Romera, who conceived, designed and brought to market a values-driven vision of kids having fun playing in their backyards, via an impeccably crafted brand named Spimbey.
Key Takeaways and Actionable Insights. Entrepreneurs can identify innovation opportunities even in the most established fundamental routines of everyday family life. What’s more basic than kids playing with physical toys in the family back yard, running round, having fun, connecting with others? It’s fundamental to family life in the neighborhood. Yet, kids don’t get that experience so much these days. How to bring it back? That’s an entrepreneurial question that Mark Romera answered with Spimbey, a brand new playset product he designed and launched though his company, Spimba.
First, choose your customer. Mark chose Mom. Kids are users, but Mom’s the customer. She’s part of a family with target-age kids and some backyard space. She wants her kids to have fun, play safely outside, play with others, and develop themselves physically and mentally. She worries about how much time kids spend on their digital screens, and how that affects their development.
How does an entrepreneur develop the requisite deep knowledge about Mom? Talk to her; engage her in conversation. Go where the play takes place — the back yard.
Distill a complex need into a simple solution. Already, there’s a lot of complexity. Mom, kids, families, playthings and the materials they’re made with. This brings in safety considerations and regulations, as well as design and manufacturing needs and marketing and distribution needs. The best way to get started is work backwards from the simple solution — the concept of a finished playset, easily assembled by Mom or Dad in a suburban backyard. It needs to be simple for Mom to understand and picture in her mind, and all her questions (like safety and ease of assembly and sustainability) must have simple answers.
From this simple vision, entrepreneurs work backwards in a disassembly process to identify everything they’ll need and the network design to bring it all together.
Design and assemble a flexibly networked internal and external team. Mark was a sole founder. First, he assembled his team in answer to the questions, who can help me with this journey? He also had flexibility for when and where he needed team members. For the “internal” team (not necessarily employees but performing functional management roles) he looked for process development, product development, brand development and web development. He made careful decisions about types of people, level of experience and the ability to take responsibility in an agile process. Most important was brand alignment — a premium, high quality, high integrity brand presentation requires team members of an appropriate caliber who understand reputation building and high consumer trust.
Next, he focused on assembling the external support team: design, safety experts, materials experts, testing labs and safety certifiers aligned with the appropriate regulatory regimes, manufacturing partners, external sales and customer service experts, logistics, freight and delivery partners. The entire value network must be linked, and scheduled for the right inputs at the right time, all working backwards in the calendar from the critical date, which is the high season for retail sales of playsets. Co-ordination of value network nodes and information flows with process inputs, sequences and handoffs is a complex exercise which must be programmed before any work commences.
The design process is a combination of creativity, rigor, networking and collaborative integration. As we’ve learned, much of entrepreneurship is a design process, to get from a concept that’s generated internally to a completed product or project that can meet the rigorous demands of the external world, including Mom and the safety regulators, and the guardians of the distribution channels.
The design concept must take a form that everyone involved in the design process can see and understand in an appropriate way, without contradictions or misunderstandings. Then the appropriate design parameters must be assigned: safety, durability, ease of assembly and ease of use, manufacturability, regulatory compliance, freight and packaging constraints. Many of these design inputs must be outsourced — to computer design shops, materials specialists, manufacturers who can impose their own restrictions, warehousers and freight carriers who have specific requirements.
There is a lot of iteration, adjustment, change management and process orchestration to be managed as the design concept advances towards the market and becomes more and more solid, complete and comprehensively detailed. Mark emphasizes meticulous planning, and a calm demeanor with clear communications to keep the network aligned and on the same page.
Branding is a critical element. The product is physical, but the benefits are psychological. This includes the sense of fun and easiness for the kids, and the feeling of satisfaction and safety for parents. These psychic benefits must be captured in the brand presentation, both online and in physical elements like design and color and packaging. For Mark, his brand is his philosophy, captured in communication, presentation, design, production and delivery.
Mark Romera’s personal entrepreneurial journey passed through various business roles and experiences before branching into entrepreneurship. Mark worked in growth marketing, business intelligence, new business development and as an independent consultant solving strategic problems for business clients. As his responsibilities increased, he often felt like an entrepreneur inside the corporation. In growth marketing, he learned the power of testing supported by data. Test everything, without waiting for too much discussion about the pros and cons of an idea or concept. If it works, scale it up, if it doesn’t, try to understand why based on the data you’ve collected. Testing and experimentation produce data, and data reduces uncertainty. The data cycle requires speed for success, and not conventional structures or decision-making processes that slow things down.
Entrepreneurship brings unique psychic rewards. With his growth hacking and exploit-and-expand experience, Mark felt ready and eager to step into entrepreneurship. He told us he wanted something more, because something was missing. He wanted the freedom to develop his own ideas from scratch and to create something new and cool. The psychic reward from entrepreneurship is special. It combines the challenge of immediate implementation and a successful sales season with the long term vision of building a global brand, extending a product line, and gaining acceptance in markets worldwide.
The entrepreneurial journey for Mark is immediately highly rewarding with the long term prospect of increasing achievement and success.
Additional Resources Mark Romera’s "Entrepreneurial Journey as a Design Process" (PDF): Mises.org/E4B_158_PDF
See the completion of the journey: Spimbey.com
The terminology of complex adaptive systems sounds academic and abstruse, but the subject is not: it’s about the real-life, in-your-face problems and challenges that face a business every day. The secret to solving the challenges of complexity is adaptation. Luca Dellanna, a business expert on the subject, joins Economics For Business to explain how any firm and all management teams can harness the power of adaptation.
Key Takeaways and Actionable Insights Complex systems are a business’s everyday environment, and every business behavior is an adaptation. Every action a manager or leader takes should be aimed not just at its direct outcome but also for the adaptations triggered in your team, i.e. the longer term, second order future behaviors that are made more likely as a consequence of the immediate action. Take motivation as an example. Motivation results less from direct efforts (such as a “motivational speech”) but rather from the establishment of an environment in which good effort is recognized and rewarded. Your system action could be as simple as checking back with employees regarding assignments very quicky and providing feedback. This shows that their behavior is observed, appreciated and valued — a motivational environment to which they will adapt positively. A different environment can be demotivating, with negative long term consequences.
Fast, tight feedback loops are the engines of adaptive systems. Feedback is the energy of adaptive systems, and Luca urges that the feedback loops must be fast and tight. After-action feedback should be as close to immediate as possible, so that there is no uncertainty about whether action is praiseworthy or not. Dashboards and end-of-period bonuses are too delayed for motivational purposes. Similarly, feedback should be highly specific to the action in question, as opposed to a general — and, even worse, vague or unclear - evaluation. These “motivational moments” or “mission moments” can contribute to the sense of a shared mission and vision.
The opposite case can generate “motivational losses”. When a team member or colleague shifts from motivated and engaged to unmotivated and disengaged — ready to quit perhaps — it’s a motivational loss. These can be avoided. Treat these occasions as incidents, to be investigated and addressed. Usually, the best solution is productive clarity, because motivational losses usually occur in the event of unclear objectives or unclear directions. The solution to lack of clarity is to make it impossible to be misunderstood, and to do so from the very outset, so that there is never a need to be remedial.
People have mental contracts, and it’s important to understand and empathize with them. We all have two contracts, the one we sign, and the one in our mind which includes a host of intangibles that are unexpressed in the written contract. We might expect to receive promotion after an appropriate period of hard work, even though there’s nothing in the written contract to that effect, nor has anyone made us that promise. It’s an implicit contract. It’s important to identify and understand these mental contracts, and to end, through clear communications that can’t be misunderstood, all misconceptions that can lead to unfulfilled expectations.
Signaling must be clear and costly. Leadership behaviors act as signals to the rest of the organization. The signals must be clear and unambiguous. Words can be misunderstood or can be perceived as self-contradicting when there is inconsistency. Behaviors can be more clear and more consistent. Luca gave a safety example: instead of instructing individuals to wear helmets in unsafe areas, managers should go to wear the work is being done, and demonstrate the behavior. The more “costly” the signaling behavior to the manager, the more clear the signal. Luca gave the example of the founder of the Dupont explosives businesses living with his family at the factory where explosives were made. He put “skin in the game” to demonstrate the importance of safety in a notoriously unsafe industry — a costly signal, and one that had the desired effect.
How to become a systems thinker: practice adaptive thinking and apply it to yourself. Adaptive thinking can be practiced. It can become an expertise. Think through every reality to determine how other individuals are adapting to behaviors of others that concern them or affect their work. How do people adapt to the words that are spoken to them, or the instructions that are given to them? What are the likely second and third order effects? Always ask yourself, how is the system adapting?
Then apply adaptive principles to yourself. Fashion tight and specific feedback loops for yourself so that your actions generate immediate feedback. How are people adapting to your actions? Make sure you are using the right mental models. Check your assumptions.
Additional Resources Luca-Dellanna.com
"Managing Adaptive Systems" (PDF): Mises.org/E4B_157_PDF
The Power of Adaptation: A Guide to Bottom-up Growth that Lasts by Luca Dellanna: Mises.org/E4B_157_Book
Teams Are Adaptive Systems: 12 Principles For Effective Management by Luca Dellanna: Mises.org/E4B_157_Book2
Antifragile: Things That Gain from Disorder by Nassim Nicholas Taleb: Mises.org/E4B_157_Book3
Business success is a function of knowledge — the right knowledge at the right time applied in the right way. But knowledge is always scarce and incomplete and sometimes wrong. It is best to regard knowledge as a process: continually gathering changing knowledge from a wide range of sources to integrate into decision-making and action. Austrian economics can provide that integration, helping businesspeople with sense-making in a complex, ever-changing world of knowledge. Yousif Almoayyed joins Economics For Business to share his knowledge journey and the ways in which Austrian Economics provided him with the required integrating theory.
Key Takeaways and Actionable Insights Business knowledge is gathered from multiple sources and multiple disciplines. Gathering knowledge that’s relevant for business success is a process, a journey, and an exploration. It’s not limited to business subjects. A rounded businessperson studies economics, of course, but also history, psychology, languages, culture, computer science, political science. Why are these all relevant? Because business is a social science, concerned with how people think and perceive and interact, and how they adapt to new knowledge and changes in context and changes in choices. All the knowledge disciplines impact business.
There’s an exploratory phase in every knowledge journey, where we cast our knowledge net wide. Yousif Almoayyed describes how his early years of schooling included multiple schools both in his native Bahrain and in the US and other countries. He started to gather comparative knowledge of different countries and cultures. He decided to continue the process by traveling to and studying in China. He developed an elevated capacity for the critical business skill of empathy: seeing things as others see them, through others’ eyes, or rather, through others’ mental models. People who grow up with a different cultural and philosophical and religious and linguistic and institutional background develop different mental models. The facility to discern, analyze and understand those mental models helps businesspeople in their interactions with customers, competitors, employees, partners, and suppliers.
The exploratory phase of knowledge gathering doesn’t require us to think about applying that knowledge in business at the time of gathering. It’s building up a knowledge inventory.
Different fields of knowledge can yield different business skills. Yousif told us how he studied computer science and developed a deeper understanding of the clarifying explanatory power of logic. Via the discipline of computer programming, which requires efficient navigation to an answer that is both right and elegant, he was able to gather principles of logical reasoning that are highly applicable across disciplines.
He studied history and — by combining these studies with empirical observations in China and Cambodia and Africa as well as the Middle East — he was able to develop his skills in causal reasoning. What causes can be credibly and realistically and logically linked to what outcomes? What he observed on the ground did not always comport with what is taught in history books, since historians may use flawed or biased logic or incomplete knowledge. Best to construct your own reasoning chain and your own web of causality. This skill is highly applicable in business.
Linguistics helps with understanding the meaning that people intend when they speak. It helps with nuance and idiom, and with assessing people through their spoken words — another critical business skill.
Austrian economics is the system of thought and logic and insight that can integrate all this knowledge into a cogent way of understanding and explaining the business world. Yousif felt that, even with his wide range of multidisciplinary knowledge and multicultural experiences, he still did not understand people and their decision making sufficiently for business. Yousif discovered Austrian economics by reading its definitive treatise, Human Action by Ludwig von Mises.
He told us that he found the insights in Human Action, derived from theory, were highly confirmable in the real world via observation. Anyone can make the same discovery. Over time, for example, you will be able to build more and more confidence in your understanding of how people make their decisions, as well as in your own decision-making about the future. By understanding how individuals’ value systems drive economic decision making, you will be able to interpret and anticipate their economic choices. You’ll deduce the theories or mental models through which people see the world, and analyze their actions that way.
Value systems are at work in firms, also. When a firm has a value system of trust and collaboration, there will be an alignment of interests among everyone who works there, and with suppliers and partners. If you take such a firm as a customer, you can apply the same values-based approach to building a strong business relationship.
Running your own business is an original and customized application of principles of Austrian economics. You can’t read a book about how to run your own business, Yousif told us. Your analysis, using the principles, must be original. He gave the example of applying price theory in his domestic market of Bahrain. It’s an island, so it’s possible to track price fluctuations in inbound commodities — a special economic case. There are unique seasonal business patterns. Trading in oil has a disproportionate effect on economic conditions, and the oil industry is government controlled, so oil prices affect government spending. Boom and bust cycles are very real, and there is observable monetary distortion of firm-level accounts.
Yousif is able to plug these real and highly specialized data into his command of Austrian price theory to arrive at not only price decisions, but a wider range of decisions about when to build inventory and when to deplete it, and when and how to refresh his capital base, replacing older high-maintenance machines with new high-reliability upgrades. Theory is applied in practice in a very real way and in very real decisions. The results have been impressive: a turnaround of a firm to become a growth business and a market leader.
This is our aim at Economics for Business: applying economic principles to help you to improve and accelerate your business.
We all seek progress: at the individual level, the team level, and the company level. Flow is the term for the experience that we feel when we are making progress on challenging activities through our own actions. Flow is high productivity and high achievement. It is the sensation you have when making progress is “winning” over being distracted or frustrated. Organizational structure is often a barrier to flow. Bart Vanderhaegen tells Economics For Business how to transcend the barrier.
Key Takeaways and Actionable Insights Learning and change are good for people and organizations, but very hard to implement. Management books, management gurus and consultants are all for change to established ways of doing things. But the business landscape is littered with failed change and transformation projects. It’s not people who resist change, it’s processes and established practices and organizational structure. In many ways, structure is the biggest barrier to change, and the enemy of learning. Even when change projects re-make a business’s structure, it’s still there, just in a different configuration.
What if it were possible to transcend structure?
The secret lies in motivation. Austrian economics reveals the secret of motivation: every individual seeks better circumstances for themselves, trading one set of conditions that’s unsatisfactory for another set that they prefer. That’s an intrinsic motivation — it comes from inside the individual.
Most business systems rely on extrinsic motivations, what Bart Vanderhaegen calls carrot and stick. The firm metes out rewards in the form of awards and bonuses and promotions for behavior it wants to encourage, and withholds them when there is unapproved behavior. The firm takes a positivist or behaviorist view of the world: people can be “nudged” into approved behavior patterns.
Rewards have many flaws. They rely on predictions — setting future targets — that can never be reliable. These predictions are often fixed, unresponsive to changes in the environment, and usually set without much discussion with the individual who is to be motivated by the target. If the target is met or not, the individual finds it hard to know exactly how their actions contributed to the result.
There is a third kind of motivation: FLOW. It is possible to harness a third kind of motivation that is neither carrot nor stick, and relies on neither reward nor punishment. It can provide autonomy and freedom to individuals to pursue what they find valuable. They can see their own activity as a contribution to a greater end or purpose for themselves. This kind of motivation comes from FLOW.
FLOW is your absorption into an activity performed well. It’s the enjoyment of performing an activity to the extent that you are actually experiencing that you are good at it, while you ae doing it. The activity itself creates the motivation for it. FLOW easily wins the internal competition between getting distracted or diverted versus making progress on the activity.
We are progress-seeking creatures, and FLOW gives us the greatest sense of progress.
FLOW is practical, and can be harnessed, practiced, and linked to work and organization. There are three conditions for being in FLOW, or getting back to FLOW when you fall out of it.
1) A clear and specific goal for the activity.
This is not to be confused with aspirational goals like a corporate vision, or target goals like the year-end sales volume target. This goal is at the level of action. For the specific activity, what represents completion? In what time specific frame? What problem will have been solved when the action is complete?
2) Capture immediate feedback from the activity.
The activity tells you if you are making progress. Measurement is in the activity itself — there is no outside judge. If you’re not making progress, the activity can steer you back to it. Bart Vanderhaegen uses a tennis analogy: if your shots are going in, you’re making progress; if not, you can adjust your action.
3) The activity must have a challenging but solvable level of difficulty.
To make progress requires taking on challenges that can elevate our skills. FLOW requires overcoming difficulties (an insight that is contrary to the old adage of “keep it simple”).
For those who are quantitatively minded, Mihaly Csikszentmihalyi, the founder of FLOW studies, measured the appropriate degree of difficulty as 10-12% harder than one’s current ability — a kind of Goldilocks number of not too hard and not too easy.
This has profound implications for organizations engaged in motivation. They must present ever-increasing levels of difficulty to their employees and teams, as they learn to perform better and better in the flow of taking on challenging tasks.
4) Organizational structure is a barrier to FLOW and to its power to solve complex business problems.
FLOW can solve complex problems. When the overarching problem to solve is how to deliver customer value — which is a problem that cuts across all elements of corporate structure — a FLOWing team can succeed, because value is a clear goal, and learning by taking on difficult challenges provides a pathway to the goal. The customer doesn’t care how the firm is structured.
Internal structures of departments and functions and conflicting goals and rules can present a major barrier to FLOW and to customer value generation. A problem-solving team representing many departments and focused on the goal of customer value can transcend the barrier, and transcend corporate structure.
Therefore, Bart Vanderhaegen recommends not to spend time and effort creating a new structure when the current one is problematic. Create FLOW over structure.
5) How to put FLOW into action.
Like everything that has value, FLOW is a subjective experience. But there are some application actions that can help to generate team FLOW.
Organize a problem-solving network on top of the structural layer.
It’s an organic network that crosses departments and regions and functions and all other structural boundaries.
Give each team in the network a mandate.
A mandate is a problem to solve without specific direction on how to solve it. The team figures out what the solution will look like and how to get there.
Make the problems as open as possible.
The problem may be to define what are the most important problems to solve.
Create transparency (via a software platform) on the problems, ideas and progress.
Everyone “taking the pen” themselves.
Make sure the goals are linked to actions.
For the most open problems, goals can be set for a small number of steps: let’s get to the next milestone in 30 days (e.g., generating a first set of preliminary ideas).
Through criticism and testing, teams will be able to FLOW to new levels of comfort in solving the most difficult of problems. They become more and more capable. And the problem-solving network is scalable: it can become bigger and bigger and solve harder and harder problems.
Additional Resources "The Value-Creating FLOW Process for Business Problem-Solving" (PDF): Mises.org/E4B_155_PDF
Bart Vanderhaegen’s TED Talk: Mises.org/E4B_155_Video
PactifyManagement.com
The Pactify Podcast: Anchor.fm/Pactify
FLOW: The Psychology of Optimal Experience by Mihalyi Csikszentmihalyi: Mises.org/E4B_155_Book1
Creativity: Flow and the Psychology of Discovery and Invention by Mihalyi Csikszentmihalyi: Mises.org/E4B_155_Book2
For entrepreneurs, design is not just lines and shapes and colors and decoration, and it’s not just the look and functioning of a website or a building or another object. It’s a process of advancing from an idea or concept to marketplace realization as a customer-desired new service PR product. In fact, according to Professor Henrik Berglund, entrepreneurship is design.
Key Takeaways and Actionable Insights Entrepreneurs advance from idea to implementation via a process of design. How do entrepreneurs exercise judgment? How do they advance from an imagined idea or business concept or anticipated value to implementing their project in the marketplace and making sales to customers?
It’s a creative process. Some call the domain design science, although we Austrians would think of it in a more subjective framework as human design. In general terms, design provides the bridge from the internal environment of the firm (its capital, its capacity, its skills, its resources, etc.) to the external world of customers and the marketplace. Design facilitates the fit between the two. It’s a goal-driven process of getting to the right design: a value proposition design that attracts customers, an effective value network design for assembling all the components, a business model designed to deliver the value, and pricing and cost choices that result in profit.
The steps in the design process take the form of design artifacts. Design is not abstract. It’s action. The action takes the form of constructing design artifacts: things like sketches and flow chart diagrams and network maps and templated value propositions and business model designs and business plan spreadsheets, prototypes, landing pages and A/B tests.
There is a design pathway from more abstract and conceptual to more substantial and closer and closer to a marketable product, service, or business. The artifacts are not arranged in any specific order, but they are characterized by the progress from abstract to functional and detailed.
Most importantly, the design artifacts are measurable and testable, so that entrepreneurs can get more and more information about how well the design fits with the real world — customer assessments and feedback, simulations, beta tests and other feedback loops serve to make the design more substantial and the entrepreneur’s level of confidence higher.
Experimentation is one kind of design pathway. Professor Berglund described experimentation as a design interaction with an existing real-world situation, where the testing process is to assess how well the entrepreneurial vision works in that world. Is there demand? Will customers find the proposition useful, and will they buy? Through repeated and experimental testing, entrepreneurs measure their way to the best-fit adaptation of their concept to the market.
He used as an example of experimentation an early step in the development of Dropbox, in the form of a video that carefully described its function and benefits, and sought feedback from the market in the form of requests to join a beta test. The video was successful in attracting a beta test audience, reassuring the designers of the potential use case.
Transformation requires a different kind of design approach. Transformative ideas do not have an existing market — a “real world” — in which to experiment. There is no identifiable demand at the outset. The process is co-creation, with potential users and customers, of a new world or a transformed world. The design path is not the use of carefully constructed measurable artifacts, but of another kind, which Prof Berglund describes as mutable and transformable.
He used the example of the iPhone, transforming from the functionality of a phone — with a use case of intermittent 2-way communication events - to the concept of a handheld device with continuous use for a multiplicity of purposes aided by integration with software apps and internet connectivity. The vision was never precise, as it can be with experimentation. Apple outlined a more vague vision of possibilities and soft boundaries, and invited individuals and communities of software developers to join, collaborate, make specialized local contributions, and synthesize a new, emergent system over time.
Firms will typically employ a mixture of experimentation and transformation in a portfolio of projects. Experimentation and transformation are “ideal types” of design, not always as clearly differentiated in the real world as they are in theory. Nevertheless, it’s important for entrepreneurs to differentiate between them, and to maintain a portfolio of projects that instantiates both types.
Professor Berglund and Chalmers are engaged in a new synthesis of entrepreneurial theory and practice. Prof Berglund observes in a book chapter called "The Artifacts of Entrepreneurial Practice," that entrepreneurship scholarship has not always been very useful or helpful to practicing entrepreneurs. Now this is changing as researchers move closer to "the real time doings and sayings of practitioners involved in entrepreneurship". In the spirit of transformation, there’s a new synthesis of theory and practice that is being co-created. That synthesis is one of our guides at Economics For Business; we hope to gather from business entrepreneurs their evaluations about which elements of theory and research are of most use in practice.
Additional Resources "Opportunities as Artifacts and Entrepreneurship as Design" by Henrik Berglund, Marouane Bousfiha, and Yashar Mansoori (PDF): Mises.org/E4B_154_Paper1
"The Artifacts of Entrepreneurial Practice" by Henrik Berglund and Vern L. Glaser (PDF): Mises.org/E4B_154_Paper2
HenrikBerglund.com
Chalmers.se
Design & Assembly is the second pin (after Imagination) in the Economics For Business GPS system — the toolset to help entrepreneurs navigate their business environment. We talk to Brett Lindell, CEO of Pantheon Holdings (which includes Aegis Exteriors and Fortress Roofing) about his Design & Assembly approach that has helped him build a fast-growing business from scratch in the crowded, competitive, and demanding field of regional house construction. His advice: there are plenty of resources available; if you assemble the right resources to fit a system of assuring and delivering the best customer service, there’s a lot of growth to be harvested, whatever the industry.
Key Takeaways and Actionable Insights The entrepreneurial method uses currently available means to create the possibility of new future outcomes. The entrepreneurial method is not to try to control outcomes but to put available resources to use to explore possibilities. Brett Lindell used the method for his business launching pad:
Who am I? Experienced as a US Marine, a college student and a corporate executive in learning, planning, doing, and relationship building.
What do I know? A lot. How Marine Corps plan complex missions, and how they train inexperienced young people to implement amidst on-the-ground chaos. How the system of a global corporation puts the highly engineered products of a worldwide manufacturing web in the hands of construction site workers equipped with nothing more than hammers to produce sturdy and beautiful houses. How sandy beaches and a good climate attract residents who want to buy homes.
Whom do I know? There are companies in the construction industry craving nothing more than simple, reliable good service — which is scarce. There are young people graduating college in my region with limited job prospects who are enthusiastic and highly trainable.
Controlled downside: The entrepreneurial method controls downsides, and doesn’t pretend to control outcomes. Brett’s controlled downside was public commitment to starting, with the consequent specter of public shame if he didn’t succeed, knowing he hated the very possibility of shame.
Design is the series of steps from idea to a working system. Brett Lindell set out to design and assemble a system of systems to achieve his mission.
Geography/Market system: A magnet for homeowners (beaches, ocean, climate, beauty, great place to live) and therefore for developers and builders. Not dominated by cities and so the construction market is highly dispersed.
Labor resource system: Young people graduating college in the area face limited employment opportunities combined with high enthusiasm to stay in the area.
Organizational system: Integrate geography and labor resources via decentralized command that locates tools and decision-making autonomy in the hands of front-line customer-facing employees.
Service system: Basic research (talking to potential customers) revealed that the addressable market is for reliable service: answer the phone when they call, be on time for deliveries and appointments, keep the promises you make. Brett’s system is classic system design of simple rules: employees must (1) tell the truth, (2) pick up the phone when it rings, (3) return all phone calls, (4) customers in all directions — i.e., treat everyone like a customer and serve them as they want to be served whether they’re suppliers, colleagues, or anyone else in the system. (And for Brett, his employees are his most important customers.)
Rich knowledge encoding: Brett believes in handbooks — a belief he learned from the Marines. Handbooks encode all the knowledge of the firm on how to follow every process and implement every task. Every employee can thereby benefit from all the accumulated knowledge and experience in the firm, and the handbooks are continuously updated via new experiences and new knowledge.
Tech systems: In a relatively low-tech industry, Brett’s firm is a high-tech leader because he is always looking for and evaluating the latest technology for automation, work-reduction, and control. The technology can be in the form of apps or software or hardware, and is especially valuable when it can all be integrated together in end-to-end systems or sub-systems such as inquiry-to-order and order-to-cash. Technology integration for these sub-systems speeds up cash flow, reduces labor costs, and increases transparency, thereby enabling quick fixes and improvements. Brett would rather have too much technology than too little.
A plan: While planning can never predict or control the future, it can be an integrating theme for system design. Brett’s plans are a brief and compressed (one page) set of numbers, and those numbers are shorthand for a lot of detail. For example, if Brett’s company is to have the capacity to provide construction components and services for 50 homes in the current year and 500 the next year, then systems of procurement, logistics, sales and marketing, finance and technology must be designed to scale to handle more volume and more complexity without impeding growth. Time, resources, and personnel must be deployed appropriately.
Assembly embraces and harnesses the human element of the business system. A system combined with the right people, suitably trained, and equipped, and with the right mindset, produces the right results. When individual employees are oriented to independent problem solving and autonomous goal-driven creativity rather than central planning, the firm can cope with — and, in fact, generate — dynamic change.
Brett has injected as much humanity as he possibly can. Seeing his hires get promoted and take leadership and realize personal goals is his greatest reward. He has created a family-friendly firm where people can get home to their kids before they go to bed, and take the family on vacation without worrying about the office or the job site, knowing that the system will manage the absence. He creates jobs and makes people’s lives better. That’s the entrepreneurial society.
Additional Resources "Designing and Assembling a System for Entrepreneurial Growth" (PDF): Mises.org/E4B_153_PDF1
"The Entrepreneurial Method" (PDF): Mises.org/E4B_153_PDF2
Reach Brett at brett@aegisext.com
Why do entrepreneurs start businesses in the first place? They have a vision for the future and seek to work with other people to bring it about. Those other people may be colleagues and employees, directors and investors, suppliers, and customers. Organizing this multivalent work is hard. Thinking of your organization as a complex adaptive system yields new understanding and a new approach to organizing that results in improved goal achievement.
Laura and Derek Cabrera of Cabrera Research Lab are dedicated to sharing research findings that enhance the capability of any organization to reach business goals. They join the Economics For Business podcast to do some sharing with the E4B community.
Key Takeaways and Actionable Insights Systems Thinking resolves the mismatch between the way the real world works and the way firms think it works. World hunger is a wicked problem, yet there is enough food to feed the world. We don’t have the right mental model to account for all the social, economic, political, motivational, and cultural issues that shape the problem.
In the same vein, systems thinking in business is about building mental models that better align with the real world. Laura and Derek Cabrera provide an introduction in Systems Thinking Made Simple, and they mentioned some of the important changes in thinking that businesses must embrace to enter the new world of possibilities that systems thinking opens up. The first step is to recognize that LAMO thinking is inappropriate for a VUCA world.
The real world is agnostic about human endeavors
VUCA World
LAMO Thinking
The real world is non-linear
but we think in linear ways.
yet we tend to look sat things through a human-centered (anthropocentric) lens.
yet we tend to look sat things through a human-centered (anthropocentric) lens.The real world is adaptive and organic
yet we tend to think mechanistically and the metaphors we use reference machines (e.g., a universe like clockwork; mind is a computer).
The real world is networked and complex with a sprinkling of randomness
yet we think of things in ordered categories and hierarchies.
All businesses are complex adaptive systems. We have no choice in the matter. An organization is a living, breathing thing, organic — lots of individuals dynamically making decisions that roll up into the complex system. It’s not a machine.
An implication is that business executives and managers can’t operate on outcomes directly (e.g., via business “planning” or business “strategy”). Outcomes are emergent from the system and can be worked on only indirectly.
The traditional mental model for business organization is flawed. Laura and Derek capture the traditional mental model for organizational management in the acronym PCCU: Plan, Command, Control, Utilize.
Plan: Businesses create plans for the future, often in great detail, with rigorous discipline, and lots of numbers and projections. But the real world is changing too fast, and outlining detailed steps to reach a goal amidst rapid change introduces biases that can occlude opportunities for rapid and profitable adaptation to change.
Command: Hierarchical organization designs assume a military metaphor of command. Organizations are much more organic in the real world, tempered by social influence, compliance, resistance, and rebellion. Better to think of then organization as a network and a culture.
Control: Management likes to feel like it is in control, but the control paradigm is both unrealistic and unresponsive to organic change.
Utilize: The most detrimental organizational construct is the Human Resources department. Treating people like resources to be utilized is unsustainable. People are independent agents in the system who wish to co-evolve to a place where their individual goals and those of the organization are well-aligned.
The mental model for how complex adaptive systems work is Simple Rules. The great insight from complex adaptive systems thinking is that organizational behavior isn’t directed by leaders, but driven by followers. What are they following? Simple rules.
We can think of an organization as a superorganism. It self-organizes by following simple rules that guide the actions of individual agents in variable contexts. Autonomous agents follow simple rules based on what’s happening locally (that is, around them), the collective dynamics of which lead to the emergence of the complex, system-level behavior we observe: adaptiveness and robustness.
The simple rules for successful adaptive organizations are summed up as V-M-C-L. Vision: A seeing thing. Something we all see in the future, where we are headed. Not a tagline, not a statement on a website, not a corporate word salad. A vision is a shared mental model that everyone in the organization can see and articulate and align with. It’s in their hearts and minds. It gets employees excited and connected.
Mission: A doing thing. A mission is something that you do repeatedly over and over again to bring about the vision. It directs the work in the organization, with clarity about who does what. It’s clear, concise, easily understood and measurable.
Capacity: The organization must have the capacity to do the mission: the energy, the resources, the skills. Capacity is a system of systems all connected and working together, focused on, and directed towards doing the mission.
Learning: Learning is critical to expand capacity, reinforce mission and refine vision. It is the adaptive function. Organizations must love learning – seeking unvarnished feedback from the outside world as input into making the changes that are needed for improvement. This means loving reality and being brutally honest about the current state. Learning means improving mental models, and embracing the possibility that your current model is wrong.
In their book Flock Not Clock (see Mises.org/E4B_152_Book), where there is a detailed exposition and explanation of V-M-C-L, Laura and Derek cite the example of the app My Fitness Pal.
Vision: Healthy living is the new normal
Mission: Facilitate and motivate healthy behavior choices
Capacity: Build mission-critical systems: design, engineering, R&D, sales, and marketing, etc.
Learning: Feedback on whether living healthy is getting easier, whether more people are making healthy choices, whether more people are feeling joyful and powerful as a result.
Think of the elements of V-M-C-L as a pyramid you can construct from first principles: Thinking drives Learning, which drives Capacity, which drives Mission, which brings about Vision.
The emergent result of V-M-C-L is culture. Laura and Derek talk about training people to think in order to be able to learn. The first step is often unlearning the misleading mental models we’ve been taught to believe. When people start to think about mental models, they can recognize their own and those of others, and make comparisons, make changes, and find common ground.
If your mental model about your current situation is real — "brutally honest," as Derek put it — then the chance of changing that situation for the better is good. You’ll be able to identify a path out.
Culture can be built around the simple rules of vision, mission, capacity, and learning, by purposely constructing the four mental models of V-M-C-L. There is enormous organizational and economic power in the new understanding of complex adaptive systems and how they work in getting a group of disparate people to work together towards a goal as if they are a single unified organism.
Additional Resources Sign up for Laura and Derek’s Vision-Mission Bootcamp: Go.CabreraResearch.org/VMBootcamp
Visit Cabrera Research Lab online at CabreraResearch.org and on LinkedIn (Mises.org/E4B_152_LinkedIn).
"20-Point V-M-C-L Checklist" (PDF): Mises.org/E4B_152_PDF1
"Constructing the VMCL System" (PDF): Mises.org/E4B_152_PDF2
Flock Not Clock: Align People, Processes and Systems to Achieve Your Vision by Derek and Laura Cabrera: Mises.org/E4B_152_Book
Imagination is the first stage of any value generation journey — starting a development project, enhancing the customer experience, embarking on innovation, or building a business for the next year or the next decade. Imagination might sound like a fuzzy concept, but it’s a robust business tool, the engine of the entrepreneurial design process. Mark Packard joins the E4B podcast to put imagination into a business context and describe the possibilities it opens up.
Key Takeaways and Actionable Insights Imagination is central to entrepreneurs and entrepreneurship, and to innovation and advance in all aspects of business. We see business through mental models, as a kind of a movie our minds play for us. In this movie, we remember result and experiences from the past (which requires imagination) and we create images of what might have been, or, in the future, what might be. We know these images are not real, but they play through our mental model of business reality. They inform our plans and projects. We imagine cause-and-effect relationships between imagined concepts and ideas, and between actions and outcomes.
From new product development to efficient administrative processes, every aspect of business involves — and requires — imagination.
We can use imagination in simulating possible results. Not only do we employ imagination in our regular business activity, we also use it for advanced complex modeling. We add new inputs to what we have constructed in our imagination — in the form of “what if” queries - to create a new mental model that’s different from the current one: a prospective reality that we can plan for and try to achieve.
As we try to achieve that prospective reality, we receive feedback in various forms, which we use adaptively to further adjust and improve the mental model we hold in our imagination. Imagination is dynamic, always changing.
Customers are also imagining, and entrepreneurs must imagine what they are imagining. We’ve highlighted in earlier episodes, the Value Learning Cycle that customers complete in the process of learning what to want and what to value (see Mises.org/E4E_44). The cycle begins with predictive valuation — consumers predicting to themselves how much value they’ll experience from the product or service a business is pitching to them. That’s imagination at work. If they buy and consume, value is an experience that results — and experience is a mental representation that includes imagination. Then in their post-experience valuation, customers adjust their mental model based on their new value knowledge. Future predictive valuations will be imagined with this updated knowledge.
Imagination is central to customer expectations of value and to customers’ decision-making.
Businesses use three kinds of imagination to make a value proposition. Businesses develop value propositions for customers, utilizing 3 kinds of imagination: creative imagination (imagining the design of a future product or service that will deliver a valued customer experience); empathic imagination (imagining how the customer will feel as a result of the experience); and predictive simulation (imagining what the world will be like after pursuing the contemplated action).
Creative imagination is a combination of needs knowledge (what customers want) and technical knowledge (what can be produced with available resources). In both cases, more knowledge is an aid to the imaginative process.
Similarly, empathic imagination can benefit from more knowledge about the customer’s mental model, developed through relationships and conversations.
Predictive simulation is aided by rapid learning from testing and prototyping and developing design artifacts (like landing pages and A/B tests) that enable interim simulations of customer responses.
Imagination can’t be shared but visions can. When we work on a team or in a firm, it’s productive to be aligned on the imagined future at which the group is aiming and is working towards. Strictly speaking, we can’t share imagination. Everyone’s imagination is subjective and individual. You can’t imagine what I’m imagining.
What can be shared is a vision, because it can be described in words developed from a shared language. Of course, every individual may interpret the meaning of the words differently, but with repetition, explanation and persuasive presentation, the group can get closer and closer to shared meaning. The vision becomes a cultural artifact — how we think in this firm, what we aim for in this firm, how we see the future in (and of) this firm.
Similarly, in selling value propositions to customers, businesses are trying to get those customers to share a vision. We persuade them with storytelling, whether it’s in the form of advertising, or PR or social media or the words printed on a package.
Rhetorical skills — being able to communicate in a way that enable other people to see and share a vision, and to adapt it to their own vision — are key to successful entrepreneurship.
Some people are better at imagination than others — but you can work on the skill set. Many business icons are or have been symbols of great imagination at work, such as Steve Jobs in the past and Elon Musk today. They’re better at seeing the future than others.
But everyone who understands imagination at the foundational level, as Mark Packard explained it in the podcast, can get better at it, and train others to get better at it, too.
Imagination is a simulation run through our mental model based on knowledge we possess. One important step is to improve the knowledge set available for the simulation — better quality knowledge, more accurate knowledge, more detailed or intimate knowledge.
More needs knowledge and more technical knowledge will improve creative imagination. Keep up with new technologies and with consumer trends and marketplace developments.
More customer knowledge will enhance empathic imagination. Spend more time with customers. Use qualitative research (such as the E4B contextual in-depth interview: Mises.org/E4B_151_PDF) to understand their mental model better, so that the empathic simulations you run through that mental model will improve.
Predictive simulation is an act of imagination that improves with learning about what works and what doesn’t. Run more tests and new kinds of explorations. Explore, explore, and explore more. Don’t take your own predictions too seriously; rather, expect to be wrong in ways you never imagined. Be humble, be adaptive, be agile, and recognize that you do have to predict in order to act. Triangulate with what others are doing because they’re imagining too, and they may have more and better knowledge than you. Try to reconstruct their mental models and assess whether they’d be helpful for you.
Additional Resources Elon Musk’s Imagination (Video): Mises.org/E4B_151_Video
"Subjective Value in Entrepreneurship" by Mark Packard and Per Bylund (PDF): Mises.org/E4B_151_Paper
"Empathy for Entrepreneurs: How to Understand and Identify Customer Needs and Wants from Their Perspective" (PDF): Mises.org/E4B_151_PDF
"Mark Packard on The Value Learning Process" (Episode): Mises.org/E4E_44
We’re highlighting six of our 2021 podcasts that have special value for value creators. We invite you to listen to the special year-end podcast, and to sample each of those we’ve highlighted here, review the Key Takeaways we provide as a summary for each one, and download the free tools that accompany each podcast.
Per Bylund explains that all successful entrepreneurs are Austrians.Episode #143: Mises.org/E4B_143Resource: "Explore and Realize (and Keep Exploring): How Austrian Entrepreneurs Generate Value on the Path to Business Success" (PowerPoint): Mises.org/E4B_143_PPT
Mark Packard joins Per Bylund to explain how Austrian Value theory enables entrepreneurs to radically re-shape business thinking for greater value generation.Episode #108: Mises.org/E4B_108Resource: "The Value Generation Business Model" (Video) Mises.org/E4B_108_Video
Matt McCaffrey outlines the Austrian approach to business strategy: emergent not planned.Episode #127: Mises.org/E4B_127Resource: "Emergent Strategy Process Map" (PDF) Mises.org/E4B_127_PDF
Mark McGrath orients entrepreneurs to purposeful adaptation to emergence via the OODA loop.Episode #138: Mises.org/E4B_138Resource: John Boyd's "OODA Loop Graphic" (PPT) Mises.org/E4B_138_PPT
Ulrich Moeller provides the organization design model for the adaptive entrepreneurial firm: it’s boss-less.Episode #133: Mises.org/E4B_133Resource: "The Future Of Organization Design" (PDF) Mises.org/E4B_133_PDF
Saras Sarasvathy pulls it all together in the form of The Entrepreneurial Method.Episode #131: Mises.org/E4B_131Resource: "Better Lives and a Better Society" (PDF) Mises.org/E4B_131_PDF
Entrepreneurship is fulfilling and exciting and inspiring. It’s fun. It’s learning. It’s a sense of achievement. It’s a journey. Economics For Business loves to spotlight individual journeys to illustrate what’s possible, provide learning about how to create and grow opportunities, and to inspire new entrepreneurship. This week, we are joined by Victor Chor, who leads us on a journey from a hobby of flipping on eBay to creating a brand and orchestrating a high-energy global value generation community.
Key Takeaways and Actionable Insights The journey starts with action — develop your “doing skills”. Victor Chor started his journey via “flipping” on eBay: sourcing items to offer for sale, and using sales feedback (what sells, what doesn’t) to determine future offerings. He developed the “doing skill” (as opposed to a “knowing skill” that comes from formal business education) as he made more and more sales. Flipping was a hobby that became a business.
What’s the benefit? Well, it’s fun. There’s money profit. There’s a sense of achievement. And there’s learning.
Experimentation is at the heart of entrepreneurial success. How do you find out what works? You experiment. Try this, try that. Learning results. Victor learned the products that sell best. He learned scaling, as a repeatable process yielding increasing returns. He learned the best feedback loops for adaptiveness — in his case inventory management and how to keep it low through accelerated sales.
Experimentation is a learning loop: experiment, gather feedback, learn, improve, run more experiments.
Adopting customer centricity is a further advance on the journey. To a large extent, Amazon, with its “customer obsession”, led the way in making customer centricity the norm for e-commerce and internet selling. They not only continuously raise the bar for customer service excellence in terms of quality, speed, convenience, availability, and range of choice, they also introduced wide ranging competition between 3rd party sellers on their platform. Competition is a virtuous circle for customer satisfaction: if one firm establishes an advantage or a superior offering to which customers flock, then competitors must improve their offering even more to re-qualify for customer acceptability.
In this environment, entrepreneurs learn about continuous improvement and the need to create a unique customer experience that can establish some sustainable advantage. The ability to grow in sales revenues morphs into the design of unique customer experiences.
A further advance in the mastery of customer centricity is to engage customers in product and service development — what we’ve been calling co-creation of value. Through surveys and e-mail marketing and just hanging out and talking with customers, Victor’s team has developed an acute understanding of customer wants, needs and preferences.
And the technology field lets us all think like customers. Victor points out that he and his team are all customers for the products they take to market. They’re all looking for quality and convenience and technological excellence, all experiencing what inconveniences customers, and therefore even better able to serve their market.
The next level of advance on the journey is brand building — imagining, designing, assembling, and marketing a differentiated branded offering. There is a transition point where a project can become a brand. A project to develop and deliver a high-function technology product can cross into the branded perception and branded experience area. Branding is the ultimate power in delivering uniqueness. A brand can establish a sustainable and unassailable perception.
Victor Chor advanced into brand building through building his community. The people he hired into his growing business has ideas for establishing and growing a brand. Wholesaling and distribution and manufacturing partners contributed both ideas and capacity. Victor developed a very original concept of a brand as a representation of all the people involved together in the venture. His image for a brand is that “it’s a ballroom”: set it up and throw a party in which many can participate and all are welcome to help shape new products and the future of the brand.
Infinacore is the brand name around which Victor and his team have assembled their community. It’s focused on wireless charging and related high-tech convenience: the brand mission refers to “making the wonderful world we live in as simple as plug and play”. This is a brand platform with unlimited future potential, based on how customers define simplicity and plug-and-play in the future, and how they judge what they find to be wonderful.
Reaching out more and more widely expands opportunity and opens up new avenues. Early in his journey, Victor utilized the services offered via Alibaba. He made contacts, built up a buddy list, engaged in chat on the platform, and used the network to source products. Many of his contacts in manufacturing and trading companies stayed in touch over time. Some of them started their own venture and their own factories. Long term relationships developed, and links to capability and capacity multiplied and grew stronger.
Everyone in this network is on their own journey, feeling what Victor called the “shared vibe” of connection and collaboration.
Alibaba proved to be a catalyst for learning — for example, learning a shared language, learning to negotiate, learning to communicate, and learning working practices like minimum order quantities — and an opening of new avenues, such as contacts with factories that could provide white labeling opportunities and technology improvements for original products.
Ultimately, Victor was able to develop a leadership skill in entrepreneurial orchestration: pulling together and integrating resources, people and processes in a value network dedicated to the shared pursuit of high-tech brand building.
The journey is arriving at a new peak, but never ends. There’s a new product / wireless charging system launch coming up for Infinacore. It represents a new peak in both technology and brand, a unique original design with new benefits. The Infinacore community has advanced to a new higher level.
The company has refined its vision and mission, not simply as communication, but as a picture of the future around which everyone in the community can gather and in which all can invest their effort and emotional energy. It’s ingrained. There‘s shared passion and shared emotion.
This is the step that removes the anxiety of uncertainty. When the vision is shared and the mission — what the community does repeatedly every day to make progress towards the vision — is clear, then the future is not a scary unknown, but a goal towards which there is continuous advance. There’s no fear.
Additional Resources "The Evolution Of A Global High-Tech Brand" (PDF): Mises.org/E4B_149_PDF
Visit Infinacore.com
Follow Infinacore on Instagram: @Infinacore
Human action lies at the core of the application of Austrian economics to business: how do people act and how can we develop the best understanding of why they act that way. We apply that thinking to customers, and we can also apply it to business organizations. If we are able to answer these questions well, we can develop a profitable business model and an effective management model. Our guest Diana Jones has a distinctive perspective about the management model that’s based on understanding people’s personal and private experiences rather than their place in the hierarchy or their formal role in the process.
Key Takeaways and Actionable Insights Relationships are fundamental to all systems thinking, and to all business management. Sociometry is a tool to measure relationships. Sociometry measures relationships between people and within groups. The unit of measure is distance. People can feel close to each other and other group members, and this closeness results in certain types of behavior. People can feel distant from each other, resulting in a different kind of behavior. They can also feel close or distant to concepts, like the company mission or the annual plan, and to institutions, like the Board of Directors or the HR department or a firm’s way of pursuing innovation. They can feel close or distant to colleagues in a meeting, or to the meeting purpose and agenda. Measuring and understanding relationship distance contribute directly to performance management.
Sociometry reveals the disproportionate importance of informal structures over formal structures. It’s easy to think of the formal organization chart as the model for managing a firm. Planning descends from higher levels to lower levels, along with instructions on how to implement and what to do. It’s not how companies function in reality.
What makes companies work is relationships. People form bonds with each other, and the bonds they form shape the work that they do and how they do it. The bonds are often forged via sharing of knowledge and experiences that are private and personal rather than business and process knowledge. Productivity comes from people connecting on shared experiences, so that these personal and private relationships become more relevant to business operations than the formal structures, such as hierarchy. When relationships change, behaviors change, and vice versa. When relationships shift, the whole business system shifts.
Formal structures don’t work, at least not in the way top management thinks. And the titles associated with hierarchical position can be alienating and toxic to relationships, symbolizing and reinforcing distance rather than closeness.
Sociometry helps to focus on these informal relationships and especially on the most important ones that make a big difference: for example, to improve customer service.
There’s a role for leadership in this system of informal relationships, but it’s not the one that generally taught or written about. Leadership can emerge amidst informal relationships, but it doesn’t come from authority. Leadership is not to be confused with position in the hierarchy. Leadership entails the communication of vision and helping people understand it, share it, and do the right things to achieve it.
The informal structure and its relationships make the formal structure work. The formal structure produces cynicism, anxiety, and reactionary behavior. The informal structure can eliminate these negative tendencies, unleashing untapped talent and enabling and refreshing the firm.
Leaders help people as guardians of these informal relationships: monitoring, empathizing, and nurturing.
Many people need help working in groups. It’s typical practice in business management to assign people to groups: agile teams, project teams, product development teams, functional teams, and so on. It’s seldom questioned whether or not individuals understand how to work in groups. Usually, they don’t. They’re unsure whether to speak up or be compliant, or whether conflict is valued to arrive at consensus or is to be avoided.
This is one more element of Diana Jones’ thinking and method that tells us that the traditional thinking of business organization and management process is mostly wrong. Hierarchy and formal organizational models don’t work, titles and authoritative roles are counter-productive, and reporting relationships are irrelevant when compared to relationship distance / closeness. There’s a lot of the traditional management model blueprint we need to scrap.
The better route to exceptional team participation and team results is via empathy. In Economics For Business, which is the application of the principles of Austrian economics to business management, we allocate great importance to the use of empathy as a tool, usually in the relationship between a business or brand and its customer. For example, we use empathic diagnosis to understand a customer’s dissatisfactions and unmet wants.
In Diana Jones’s model, empathy is an internal organizational tool. She deploys it in a sophisticated way that identifies four different types of application.
Cognitive empathy: imagining and understanding how a person feels and what they might be thinking.Emotional empathy: accurately reading and sharing the feelings of another person, and reflecting on those feelings in a way that helps everyone involved.Compassionate empathy: going beyond understanding to taking action that helps people deal practically with difficult situations about which they’re emotional.Group empathy: the capacity to read the emotional tone of a group that’s sharing a challenging experience. The core competency is the ability to read people and their emotional tone or state. Diana Jones gives the skill a name: interpersonal perception. It’s a skill that can be developed in a learning loop of experience, experimentation, curiosity, and intuition.
Additional Resources "Trust-Distance Matrix: Assessing the Cost of Distance in Business Relationships" (PDF): Mises.org/E4B_148_PDF
Leadership Levers: Releasing The Power Of Relationships For Exceptional Participation, Alignment, and Team Results by Diana Jones: Mises.org/E4B_148_Book
Diana-Jones.com
Strategic management theories and entrepreneurship theories have diverged in academia. One perspective can’t recognize the other. Yet the most promising and successful new business approaches demonstrate an agile combination of both sets of theories. Professor Mohammad Keyhani joins Economics For Business to explain this phenomenon and help us point the way to the future of strategic entrepreneurship.
Key Takeaways and Actionable Insights. In business school thinking, there is a dichotomy between strategic management and entrepreneurship. In management scholarship, strategic management and entrepreneurship are distinct fields of study. Professor Keyhani calls them “two logics” of business.
Both logics have gained legitimacy from their origins in economics. As business theories, they base their arguments on models from the field of economics, which, of course, is older and more mature. By importing thinking from economics, these business disciplines are able to construct generalizable theories (as opposed to, for example, a case study approach). The most famous generalizable theory in strategic management is Michael Porter’s five forces framework, which borrowed from industrial organization economics. Most strategic management theories have been based on general equilibrium models of neo-classical economics. Strategic management became a theory of structures and constraints, and of imperfections in equilibrium (such as the concept of competitive advantage).
The entrepreneurship discipline has been more varied and diverse and less dominated by economic models. Entrepreneurship scholars look to Austrian economics, which is based on verbal logic rather than mathematical models. But Professor Keyhani, in his Ph.D. dissertation, found an integration route between strategic management and entrepreneurship using the framework of game theory, adding elements of time and dynamics (both critical in Austrian theory) and adding the innovation of computer simulation (to which more and more Austrian economists are open as a way of adding computable algorithmic rigor to verbal logic).
He established a way for strategic management and entrepreneurship to communicate with each other.
Strategic management is a theory of competitive structures. Strategic management models are based on models of competition among players with similar value propositions, maybe with slightly different cost structures and other small differences, but all considered as competitors to each other. The models look at the nature of the competition, the structure of the competition, and seek insights into why some companies may have advantages over others.
Strategy becomes an approach of identifying and building on strengths, about sustaining and managing an existing system, about operations rather than innovation, and about control and prediction.
The consequence is a series of blind spots, mostly to do with the dynamics of action over time, the uncertainty that accompanies action, and the learning that results.
Entrepreneurship is a theory of dynamic value creation. The question in entrepreneurship is how to create value and how to build a value creation system in the first place. The entrepreneur faces the questions, “Am I creating any value at all? Is anyone going to pay for this innovation and be happy with it? And will I be able to get more customers?” These questions precede the models that strategy and strategic management theory have been based on. Those models start off with the entrepreneur’s questions having been answered, so they are not useful at the value creation stage.
Based on Austrian economics, the entrepreneurship literature has provided mental tools and mental models for entrepreneurial thinking and an entrepreneurial approach to business. These include the emphasis on subjective value and customer sovereignty, and on uncertainty and unpredictability in business. There is value in action in the face of uncertainty, because it creates new information, which can support better decision-making. That mechanism is totally lacking in the equilibrium models of strategy.
Theories of entrepreneurial action to generate learning are useful not only for startups but also for larger companies, to help them think and act more entrepreneurially, and to counter the defensive and anti-innovative thinking of building on strengths and defending position. Managing an existing value generation system can result in losing the long-term perspective of innovation, adding new product lines, taking advantage of opportunities, and potentially building new strengths.
“Do both!” The best approach combines strategy and entrepreneurship. Professor Keyhani argues that, ideally, firms think strategically and act entrepreneurially, and he recognizes that, in the real world of practitioners, this is what businesses do.
He uses blockchain as an example. No company can say that they have an existing strength in blockchain because it’s a new technology and the business concepts that utilize it are only just emerging. It’s a level playing field.
Are there any advantages a company could have? Maybe a company has a lot of computer scientists and mathematicians. That might be a slight strength. But getting into blockchain businesses is an entrepreneurial action, largely different than building on strengths.
The approach to innovation we support here at Economics For Business is “Explore And Expand”, and Professor Keyhani sees a good match between the explore-expand dichotomy and the entrepreneurship-strategy dichotomy. Exploration is a blind spot in strategic management theory and modeling — there is pretty much no exploration in the five forces framework or the RBV (resource-based view) framework. Exploration — acting for the learning value to open up options for more things that can be done in the future — is the entrepreneurial way of thinking.
Effectuation (covered in episode #131: Mises.org/E4B_131) is another form of entrepreneurial logic. It recognizes that the entrepreneur faces so much uncertainty that it may not be possible to set specific objectives. But the entrepreneur knows that they want to do something, that they have knowledge and resources and relationships, and that they may be able to create some value from them. Effectuation is the “fuzzy front end” of value creation.
Another way to combine entrepreneurship and strategy is speed of learning. The general capability to be more adaptive than competition, to go through the learning cycle faster, is a dynamic capability that can be strategic.
Competitive moats in the software world. Is the structure-and-constraints approach of strategic management useless in the digital era we live in? Sustainable competitive advantage seems to be inapplicable when anyone can write software (or download it from Github), and access hosting and storage at scale from AWS.
But in fact, software entrepreneurs do think in terms of competitive advantage. The modern term for it is “moats”. Venture capitalists look favorably on businesses that can surround themselves with a moat to keep out competition.
The most discussed moat is network effects. This concept did not come from the neo-classical economics equilibrium models, but from the dynamic analysis of more users coming in to join existing users. The five forces framework suggests that advantages lie either in cost or differentiation, but a network effects advantage can be both.
Two-sided platforms with two-sided network effects add even more complexity. It’s strategic to achieve that status, but the theory did not emanate from traditional strategic management thinking.
Professor Keyhani introduces the next entrepreneurial strategy breakthrough: generativity. We talked in episode #104 (see Mises.org/E4B_104) about the new phenomenon of digital businesses identified by Professor Keyhani: generativity. Achieving generativity confers significant competitive advantage for any entrepreneurial firms who can develop it through technology. It’s an advantage that is not identified by existing strategy theories.
Generativity can be thought of as the automation of open innovation. Products and services can be designed to offer features that enable outsiders to innovate with them, and these outside innovations benefit the company. For example, the Google Pixel smartphone and the Apple iPhone are generative products or generative systems. With the tools these firms provide in the phones, outside developers can create new apps, that they offer on the Pixel or iPhone platform for other outsiders to use. The app developers make money, and so do Google and Apple, both from sales of outsider-developed apps in their app stores, and from in-app purchases. Google and Apple are not utilizing their own knowledge — they don’t know the problem the app is solving, or even who developed it or where they are. They don’t have to make the solution, don’t have to take the risk, and don’t have to pay salaries or development costs. Yet they profit from the innovation. It’s a huge competitive advantage for these two entrepreneurial companies.
Additional Resources "The Strategic Management Model versus the Entrepreneurial Model" (PDF): Mises.org/E4B_147_PDF
"The Logic Of Strategic Entrepreneurship" by Mohammad Keyhani: Mises.org/E4B_147_Paper1
"Was Hayek an ACE?" by Nicolaas J. Vriend: Mises.org/E4B_147_Paper2
The ultimate list of tools for entrepreneurs—"Entrepreneur Tools" by Mohammad Keyhani: Mises.org/E4B_147_Tools
Ceaseless flux. Those are words Ludwig von Mises used to describe the perpetual change in business conditions that entrepreneurs experience. The consequent need, he told us, is for a process of constant adjustment. The current word for that process is adaptation. Economics For Business talks to Luca Dellanna, a leading business expert who advises companies of all sizes on managing the challenge of continuous adaptation.
Key Takeaways and Actionable Insights Adaptation is a necessary capacity of all businesses. Adaptation is a necessity. The marketplace changes, customers change, technology changes. Change is the norm. Firms that don’t adapt will suffer and potentially die, so adaptation must become the norm for business. In complex systems theory, adaptation is the selection of strategies or actions that enhance survival or any other measure of success (or fitness, as its sometimes called) amidst swirling change. In business, adaptation means choosing your degree and pace of change.
Change will be externally imposed if it is not internally embraced. Businesses can influence the level of change impact. They can critically examine their mental models, and assess their products, processes, beliefs, and people, to evaluate their fitness for adapting to market change. To avoid change being imposed from outside the firm — to avoid negative natural selection, in the evolutionary metaphor – all layers of the firm must embrace change, and proactively adapt. Eliminate unfit products and processes, pursue the development of new ones that are better adapted, and upgrade people resources through thoughtful hiring and active learning.
Adaptation is different than responsiveness — it’s embracing harm. We talk a lot about a business’s responsiveness to customer wants and preferences, especially when those preferences are fluid and incompletely articulated and require interpretation. Responsiveness is critical — but it’s different from adaptation. It’s response to an external signal. Adaptiveness is embracing change inside the firm.
Luca Dellanna has a striking way of communicating this: he advises his clients to deliberately expose themselves to what he calls “harm” — new problems never before encountered. The exposure must not be to a problem that could overwhelm the firm, but one that can be addressed at a subsidiary level or component level or via adjustment in a shared mental model. Luca calls this “small harm” — specific problems (e.g., the price of a product or service compared to the customer’s willingness to pay). Proactively probe the problem, e.g., in a high pricing test, generate feedback and actively use the learning to adapt. Another word for “small harm” is stressors: situations that put stress on the firm. Set up systems to seek out these stressors so that adaptation is deliberate, and can be enculturated, rather than wait for a crisis that requires an emergency response.
Lack of discomfort is a problem to avoid.
Identify the leading indicators that describe the conditions that will change the future. Lagging indicators — such as revenue — are metrics that describe the past. There are leading indicators available such as number of customer contacts (describing what the pipeline might look like in the future), and satisfaction scores (describing future repeat sales). Luca recommends pairing one lagging indicator with one leading indicator to develop a metrics system.
This is not the same as popular consultant-proposed metrics systems such as OKR (Objectives and Key Results). Objectives are not leading indicators. The best leading indicators are behaviors, because these can be easily adjusted if observed to be in need of change. Falling behind on objectives does not yield an actionable response if not linked to a causal factor. Inadequate behaviors (e.g., conducting a sales call without following the proven process) can be addressed, especially if they are clearly linked to positive outcomes.
This is the same principle as Amazon’s focus on what they call controllable inputs, and Amazon knows a lot about driving business growth.
There are several strategies to pursue adaptation. Redundancy (having more than needed): A focus on efficiency and “no waste” can be detrimental to adaptation if it leaves no resources for experimentation and exploration. Employees need time to work on new things, not just on current tasks and issues.
Bottom-up initiatives: Central command and control can’t run everything, anticipate every harm, or plan every experiment. Ensure entrepreneurial empowerment of front-line employees and functions so that they can initiate learning.
Avoid game-over: In experimenting, calibrate the risk to ensure that a negative result is not overwhelming, and, in regular operations, be aware of any possibility of a major crisis — a Black Swan event — and be sure that it will not destroy the firm or deliver a setback from which it will be hard to recover.
Never stop exploring, in a culture of anti-fragility.
Nassim Nicholas Taleb famously coined the term “anti-fragile”. The company that has the most well-developed capacity to learn from problems and harm is the most anti-fragile. The culture of anti-fragility is always to surface problems when they are encountered and address them at the source. Luca stresses that culture is built when everyone in the company can see a consistent set of actions in which the trade-offs of addressing problems are consistent with the stated vision. For example, a culture of safe operations will be reinforced when safety precautions are taken even when the cost, in time or money or both, is high.
The leading indicator is that every individual and every operation and sub-operation is following safe practices, and that the company readily commits resources when a new safety procedure or installation is proven to be effective. If the trade-off is made that the new procedure is effective but too expensive to install, the culture will be punctured because the company has acted contrary to its declared vision.
Additional Resources "The Power Of Adaptation" (PDF): Mises.org/E4B_146_PDF
Read Luca Dellanna’s book, The Power Of Adaptation: Mises.org/E4B_146_Book
Another application of adaptation, Teams Are Adaptive Systems: 12 Principles For Effective Management by Luca Dellanna: Mises.org/E4B_146_Book2
Visit Luca Dellanna’s website to find more resources: Luca-Dellanna.com
E-mail Luca at luca@luca-dellanna.com
The field of medical care is so ripe for new entrepreneurial solutions. As is always the case, solution design begins with understanding subjective value, both for customers (patients) and providers (doctors) Christopher Habig of Freedom Healthworks (FreedomHealthworks.com) joins Economics For Business to explain how an Austrian, subjective-value focused approach is bringing market freedoms to medical care.
Key Takeaways and Actionable Insights Step 1: Like many entrepreneurs, Chris Habig started a revolutionary business from a place of familiarity and existing knowledge. The so-called effectual process in entrepreneurship begins with two straightforward questions: what do I know and who do I know? Chris Habig grew up in a family where both parents are physicians. This vantage point gave him the opportunity to observe the critical doctor-patient relationship first hand, as well as the way in which modern bureaucratized medicine imposes obstacles and complexities that strangle the value generation potential of that relationship.
Step 2: Assessing the subjective value gap. From his Austrian analytical perspective, Chris was able to identify the subjective value gap. For customers (patients) it is the loss of the positive feelings that they associate with the doctor-patient relationship. Chris summarizes them as advocacy, access and affordability: my doctor is on my side and looking out for me; my doctor is always available to me; I will not be excluded for economic reasons. These feelings are negated by bureaucratic medicine.
There’s a subjective value gap on the physician side, too. Research shows that doctors are stressed, and no longer find fulfilment in their work. Their mental health declines and there is an increasing rate of defection (leaving the industry) and even suicide. It’s a sign of a dysfunctional system to exert such an effect on its human capacity.
Step 3: Identifying the barriers to remove. Value generation often consists in the removal of barriers to the realization of the desired experience. Chris identified two major barriers: insurance and government. The current approach to medical insurance actually hampers the market for what customers truly desire, which is the positive feelings of the doctor-patient relationship. Now it’s a patient-insurer relationship: will my visit / test / procedure be covered? Will there be a big bill in the mail?
And, of course, the participation of government to enforce the current system through legislation and regulation perpetuates the barriers.
Step 4: The entrepreneurial solution. The solution is to free the system from its constraints through entrepreneurship. The physician is the entrepreneur on the supply side. Via a new business model called Direct Primary Care (DPC), the physician-entrepreneur creates a new value proposition for customers. Access is provided via a subscription model, and this financial innovation enables the thriving of a practice composed of a small number of patients to whom the physician can devote more time per visit, more attention, and more personal and individualized care. The physician is networked into a web of complementary secondary and specialist services that can be orchestrated for the individual patient’s need. All the associated business services are clustered around the DPC practice, and the physician does not need to be bound by a hospital system bureaucracy.
The new financial model enables the customer to take charge of their medical expenses, paying cash for current needs and reserving insurance for catastrophic events, which is the way it should be used. Consumer prices are lowered throughout the system.
Lives are improved on both sides of the doctor-patient relationship.
Step 5: The support system for the entrepreneurial model. We live in an age in which distributed entrepreneurship can be embedded in an enabling system of digital infrastructure. Part of the innovation that Freedom Healthworks brings to the renaissance of the doctor-patient relationship is the platform on which the DPC business model can run.
Chris has identified 158 steps for the set-up, operation, and maintenance of a DPC business model. These can all be hosted, enabled, and implemented on the physician’s behalf. Finance, technology, operations, marketing, and vendor relationships can all be systematized and partially or fully automated. The doctor can focus on the relationship component of interacting with patients.
Step 6: Scaling. Can entrepreneurs build out a fully-functioning cash-based direct care system to rival and ultimately replace the government-insurance company nexus? It’s already happening. As each DPC practice proves itself, more entrepreneurial physicians will make the transition and momentum will build.
DPC is an important example of the future of entrepreneurial economics.
Additional Resources "Enabling A Direct Primary Care Practice" (PDF): Mises.org/E4B_145_PDF1
"FreedomDoc Launch Process" (PDF): Mises.org/E4B_145_PDF2
Healthcare Americana podcast: Mises.org/E4B_145_Pod
Visit FreedomHealthworks.com and FreedomDoc.care
Every company starts as an innovation. Thereafter, the unceasing challenge is to keep innovating because the market continues to change, technology continues to advance and, crucially, customer expectations continue to rise. Economics For Business speaks with Joe Matarese, Executive Chairman of Medicus Healthcare Solutions, about how to build the culture of continuous innovation and overcome the countervailing forces of the status quo.
How to understand consumer expectations and build organizational culture that rewards continuous innovation: Mises.org/E4B_144_PDF.
Key Takeaways And Actionable Insights Every company starts as an innovation. The challenge is to continue — and ideally accelerate — innovation without pause. As Joe Matarese puts it, innovation gets you into the game. It’s how every company starts. There’s the identification of a gap in the marketplace and the operationalizing of a new innovation to fill the gap, better than any other competitor or rival entrant.
Innovation is seldom a great new invention or unprecedented leap. It’s more often the day-to-day incremental changes and improvements in products and processes to meet customers’ changing expectations.
The great challenge is to continue or even accelerate innovation as the company grows and expands.
Continuous innovation combines mindset, processes, technology, empathy, and organizational empowerment. The world is complex and ever-changing. Innovation is necessary for all businesses to keep up or even move ahead. Innovation is not simple, and it’s not easy — in fact it’s a continuous struggle against opposing forces. Joe Matarese has directed innovation from three vantage points: big corporate, startup, and large growth company. To achieve the goal of continuous innovation requires attention to multiple factors:
Mindset: Innovation must be the commitment for everyone in the company. That means always asking the question, “How can we do better?” Such a mindset requires both tolerance of discomfort — since there’s never any rest — and humility in the face of feedback. Innovative companies hire people with these characteristics and cultivate constant vigilance throughout the firm.
Processes: Things get done through the implementation of processes. Innovative are always seeking to improve their processes — make them faster, lower cost, and more efficient in their use of inputs, especially the use of people’s time. Innovation itself is a process, and process improvement is a form of innovation.
Technology: Irrespective of how innovative any one company may be, technology is progressing at an increasing rate of change with potential to render all processes faster, lower cost, and capable of higher quality and fewer errors. One way to ensure continuous innovation is the rapid adoption and early implementation of new technologies as they become available.
Empathy: Even more powerful than technology is the capacity to tap in to customers’ expectations. This is the source of knowledge about future requirements. Customers are experiencing new technology, are absorbing innovation from other firms in the market (whether they are firms that are competitive to yours or simply adjacent), are experiencing change, and their expectations are changing and becoming more demanding by the moment. By sensing their changing expectations, the innovative firm is in position to be a first responder or an innovator before the expectation has even hardened or matured. Being ahead of expectations is a powerful place to be.
Empowerment: People in front line sales and service functions are closest to customers and their expectations. Line operatives are closest to process implementation. Supply chain managers are closest to business partners and vendors. It is these front-line positions that are best placed to deliver information about expectations and what’s changing. They are also best placed to sense dissatisfaction and unease, and to make real-time changes and adjustments. If they are empowered to make changes and to both suggest and implement improvements — even if what they try doesn’t work — they will be more highly motivated and more likely to serve as an internal engine of innovation.
Tools: Joe shares how his company, Medicus, has developed tools for innovation. Internally, all employees have access to communications tools that ensure the customer data they collect, and the ideas they generate as a result, are widely circulated and responded to. Externally, doctor whom Medicus reimburses for services have access to a tool to record their time that is administratively simple and generates fast payment, addressing two measures of unease.
Our Econ4Business.com platform curates many tools for entrepreneurs. One example relevant to this episode is the "Continuous Customer Expectations Monitor" (see Mises.org/E4B_144_PDF2). It guides entrepreneurs through the continuous process of tracking and keeping up with changing customer expectations.
There is a constant counterforce to innovation that the innovative company must recognize and overcome. There is an innate human resistance to innovation and change. Consider this from a leading brain scientist and psychologist:
When information streams in through our sensory systems, it first stops off at our amygdalae, which are there to ask the question, “Am I safe?” We feel safe in the world when enough of the sensory stimulation coming in feels familiar. When something does not feel familiar, however, our amygdalae tend to label that unfamiliar thing as dangerous, and they respond by triggering our fight-flight-or-play-dead fear response. —Jill Bolte Taylor, Ph.D., Whole Brain Living (Mises.org/E4B_144_Book)
It’s natural in humans to resist change. It may not be safe. It may threaten my job, or my comfortable routine, or generate unwanted uncertainty. Fear of change is real. The function that exercises the fear response in companies is bureaucracy. Bureaucracy exists to ensure compliance with existing rules, and their consistent and uniform implementation. Bureaucracy is anti-innovation.
When a business leader commits to improving a product or process, he or she is undoing what someone else in the firm had championed and nurtured and maintained. It’s a constant battle that must be waged between change and the maintenance of the status quo.
The adoption of new technologies is an effective technique of innovation, but it can also trigger a fear response. Technology is the continuous innovator’s weapon. It advances at its own pace, as a form of evolutionary advance. Every technological innovation spurs new applications in the marketplace. The adoption of these new technology applications is a catalyst for continuous innovation in the firm, supporting both product and service improvements and the incremental efficiency of processes — faster, leaner, lower cost.
The fear mechanism exhibits itself as employees worrying about their jobs. Perhaps the application of technology will reduce the number of people supporting a particular process from 5 to 4 to 3 or 2 or even one or none. They fear that progress will punish them. They adopt a defensive mindset. The innovator’s goal is to change the mindset to one of anticipation of rewards for progress.
Basic economics tells us that resources which are no longer utilized in a process that is rendered more efficient are thereby released for higher and more productive uses. Innovation leaders can communicate that, and make sure employees know they will be rewarded for progress via new and better opportunities for them to contribute more through the higher productivity that innovation brings.
The greatest resource for continuous innovation comes from customer intimacy and empathy that senses customers’ escalating expectations. When we talk about a changing marketplace, we are really talking about customer expectations. Innovation elevates customer expectations and thereby triggers the next round of innovation in a never-ending cycle.
For example, now that many people carry iPhones and other smartphones, they’ve become used to unprecedented levels of convenience, interconnection, functionality, and intuitiveness. Their expectations for every other piece of technology they encounter, and every interface they navigate, are raised to a new level. There’s a marketplace of expectations and every new technology raises the bar.
The way to keep pace, and to have any chance of anticipating and meeting the next level of raised expectations is to get as close to the customer as possible, to be with them when they’re using your product or service or technology and listen and empathize when they express a wish (or expectation) that the experience could be easier, better, faster, less frustrating, more enabling. “I wish it were as easy as my iPhone” is the expression of an expectation that everything should be as easy as the iPhone.
Innovating firms build in mechanisms that make continuous innovation not only possible but likely. There’s a quote in the book Working Backward, about continuous innovation at amazon, to the effect that “Good intentions don’t work, mechanisms do”. The intent to improve a process or product is not enough; people already had good intentions in the first place. Mechanisms turn intentions into actions and achievements. Some of the mechanisms Joe Matarese recommended are:
Mechanisms for taking in data from and about customers: Customer intimacy has a mechanism, in the form of frictionless and unstructured data collection. Give front line employees and the technology they use the unfiltered capacity to gather customer information about their dissatisfactions and report it back.
Let people experiment: The E4B technique of explore and expand applies to everyone in the organization. Elevate experimentation over compliance. That’s the way learning happens.
Eliminate bureaucracy that is not mission-supportive: Every company eventually builds bureaucracies in order to support consistent application of business rules. Innovators differentiate between bureaucracy that is mission-supportive and bureaucracy that is mission-obstructive. HR is often a department where bureaucracy grows. If HR is helping to recruit talented people who will contribute to innovation, then the bureaucracy is mission-supportive. If HR imposes rules that unnecessarily impede innovation, then that part of the bureaucracy should be shut down. The goal is to liberate the value-generating creativity of everyone in the organization, and not to impede it.
Decentralization and entrepreneurial empowerment: Decentralization is a mechanism of innovation. The goal is for your organization to consist of hundreds of individuals thinking creatively and solving problems for customers. You want them all to think and to learn! They must know that the firm cheers them on for doing so.
Additional Resources "Designing An Organization For Continuous Innovation" (PDF): Mises.org/E4B_144_PDF
"Continuous Customer Expectations Monitor" (PDF): Mises.org/E4B_144_PDF2
Medicus Healthcare Solutions: MedicusHCS.com
Econ4Business.com
Whole Brain Living: The Anatomy of Choice and the Four Characters That Drive Our Life by Jill Bolte Taylor: Mises.org/E4B_144_Book
The weekend revolves around a discussion of strategy. Nearly 25 years ago, Professor Hans-Hermann Hoppe delivered his famous "What Must Be Done" speech on the pressing topic of how—and whether—to engage the state. Today his prescription for a bottom-up ideological revolution beginning at the local level rings more true than ever. With Hoppe's admonitions in mind, all of our speakers and panels will consider three vital questions: Where are we? How Bad is it? And what should we do now?
Recorded in St. Petersburg, Florida on October 22, 2021.
Successful entrepreneurs are Austrians, they just don’t know it yet. This is a famous assertion from Dr. Per Bylund, and we dissect its meaning in the latest Economics For Business podcast.
Key Takeaways and Actionable Insights Success starts from a deep understanding of subjective value (see Mises.org/E4B_143_PPT). What’s the value of a successfully completed Google search? What’s the value of the feeling of satisfaction that results from having cooked an excellent meal enjoyed by your family? What’s the value of the PowerPoint template you utilized to make a well-received boardroom presentation that may boost your corporate career?
Austrian entrepreneurs know not to ask the question in that form. First, value is not measurable; it’s a feeling or experience in the mental domain. It may have great intensity, it may have long duration, but it can’t be measured in dollars or with any other number.
Yet the generation of customer value is the entrepreneur’s goal. How can the goal be achieved when the understanding of value is so challenging and its measurement is impossible? This is the brilliant advantage of the Austrian entrepreneur.
The customer learns what a value experience feels like. A customer can’t describe the value they are seeking or what goods and services will deliver it. The value process is not one of demand and supply. As Ludwig von Mises understood, customers feel a sense of unease — “things could be better” — and begin to explore possible avenues to relieving their unease. Of course, this exploration takes place within a complex system of needs: individual and personal goals, family comfort and security, job success and economic status. Customers sort through possibilities with incomplete information and in the context of uncertainty. The gap between feeling unease and finding the best good or service to address it is large. They might try multiple potential solutions with varied cost/benefit profiles before they arrive at one that seems best, or better than alternatives. In other words, they learn: value is a learning process.
The entrepreneur helps their customers to learn. The customer’s value thinking is constrained: in the present, they can’t imagine a solution that they haven’t yet tried or that has not been available to them. The entrepreneur innovates around the constraint, by providing and communicating new means that the customer could utilize in the future.
Entrepreneurs can’t directly shape the customer’s choice. It’s a fallacy to believe that advertising or promotions or presentation of features and benefits can accomplish that. The customer’s context is too complex for such a simple mechanism to work. The entrepreneur creates a tomorrow in which the customer will feel better off, and provides the means to facilitate the experience, a means for the customer to learn what a better tomorrow feels like. They meet customers in a market that doesn’t yet exist.
Austrian entrepreneurs have a unique value generation tool. The complexity of the customer’s value system — all the components of value interacting and changing in time — can be simplified with the use of a key that Austrians call the hierarchy of values. Every individual has a set of goals or values they pursue in life. Some of these are more important than others — we call them the highest values. For example, people who engage in sport and athletic activities may have several values for doing so: for fitness and health, for social reasons, for self-improvement, and so on. One value may be the most important in their own individual hierarchy — for many people it is the sense of achievement. By improving their speed or time of running or bicycling, by winning a tournament or a league or playing on a winning team, the individual can experience a sense of personal achievement that is rare, valuable, and fulfilling.
It is a commercially strong behavior to appeal to this highest value among customers. Nike does this for example with its “Just do it” appeal. To simply undertake the athletic activity is achievement: you’ve done something. And, of course, Nike wearables help the process of experiencing the highest value.
All entrepreneurs can appeal to customers’ highest values, and the Austrian entrepreneur has deeper insight into this action.
Austrian humility is a success factor. So much of business success is projected as heroic implementation of superior strategy. Austrian entrepreneurs do not suffer from such hubris. They take a humble approach to business, understanding that the customer is often engaged in searching and learning without a clear outcome in mind, and that, therefore, the entrepreneurial business cannot be certain of any future results. Entrepreneurs humbly follow, letting the searching customer take the lead, and accepting the customer’s terms of service.
This is how entrepreneurs learn how to facilitate value — often from the harms they suffer from getting their value proposition out of alignment with the customer’s preferences. If the value proposition is wrong, or the price is too high, or the convenience not to the customer’s liking, then no transaction is made, and the entrepreneur must — humbly — adjust. The most successful entrepreneurs are able to maintain their attitude of humility at all points in the value cycle.
Austrian entrepreneurs take the role of fitting in to the customer’s value system. It’s a flow, not a plan. Conventional business planning is anathema to Austrian entrepreneurs. The linear process of producing and selling to generate transactions with the goal of meeting a targeted volume or revenue in a fixed period of time is not appropriate for the humble, learning, exploring business of entrepreneurship.
Entrepreneurial success stems not from good planning but from adaptively fitting in to the evolving value system we call the market — a system that is different for every individual customer, and into which many overlapping and competing entrepreneurial value propositions are also trying to fit.
Planning is not a good tool for this purpose. Creativity, imagination, and adaptiveness are called for. The dynamic of learning from the customer and adjusting to changing signals calls for responsiveness not plans. The entrepreneurial journey with the customer is a flow, sometimes through white water. In this context, the Silicon Valley concept of pivoting is appropriate, although not quite as the West Coast gurus see it. Their pivot is a one-time major shift in direction, perhaps to a new business model when the original one proves inadequate. The Austrian pivot is continuous and flowing, adjusting the boat to the subtle and frequent signals sent by customers.
Explore, Realize, Then Keep Exploring. We’ve talked in the past about an “explore and expand” model for entrepreneurial value generation. The entrepreneur co-explores various paths to value with the customer, and when one emerges as productive of significant value, the entrepreneur can expand the allocation of resources to that path and drive revenue growth, through selling more to the same customers, or recruiting new customers or both.
Professor Bylund added some nuance to this: the entrepreneur never stops exploring. When an exploration results in substantial value realized, there remains a lot of further exploration to understand the value experience of the customer in greater depth and detail, and continuous monitoring of changes and adjustments in the customer’s system and value network. The entrepreneur is continuously tested.
The entrepreneurial ethic is an ethic of service; profit is a shared outcome of consumer and producer choices. Entrepreneurial firms are in business to serve customers. This principle may be appropriately expressed via mission statements and expressions of purpose; it remains the core of all entrepreneurship. Profit is an outcome of two collaborative choices: the exchange price the consumer is willing to pay for the value they anticipate receiving, and the choice of costs the entrepreneur considers proportionate to the value he or she expects to generate for the customer. There are many entrepreneurs in the market for resources bidding on costs at the same time, and so the individual entrepreneur’s choices are conditioned by those made by others. Profits emerge from this system.
Cash flow is a better indicator of the capacity of the entrepreneur’s business model to convert resources into exchange value for customers (although not the artificial cash flows of engineered P&L’s — rather, the true cash flow of the customer’s eagerness to exchange for the newly produced offerings from the entrepreneur).
There’s a distinctly Austrian approach to entrepreneurial business. In a famous paper called "Inversions of Service-Dominant Logic," (see Mises.org/E4B_143_PDF) professors Stephen Vargo and Robert Lusch called for inverting “old enterprise economics or neoclassical economics” in favor of a new perspective. One of their proposals was an inversion of “entrepreneurship and the view that value creation is an unfolding, emergent process” to a position “superordinate to management”. Business schools, they stated, teach a management discipline rooted in the industrial revolution. There’s an emphasis on centralized control and planning. Vargo and Lusch sought to replace this approach with value creation as “an emergent process within an ever-changing context, including ever-changing resources; it is, by necessity, an entrepreneurial process”.
The distinctive Austrian entrepreneurship approach captures and expresses the emergent process, and provides entrepreneurs (and managers) with the tools and methods to help them shape thriving businesses as they discover new solutions to relieve customer unease.
Additional Resources "Explore and Realize (and Keep Exploring): How Austrian Entrepreneurs Generate Value on the Path to Business Success" (PowerPoint): Mises.org/E4B_143_PPT
"Inversions of Service-Dominant Logic" by Stephen L. Vargo and Robert F. Lusch (PDF): Mises.org/E4B_143_PDF
Entrepreneurial businesses acknowledge and understand the inevitability of boom-bust cycles in the Fed-manipulated economy. But they refuse to be defeated or even deterred. They find the profitable pathway through both the boom and the bust. Murray Sabrin has compiled a guide in his latest book, Navigating The Boom/Bust Cycle, An Entrepreneur’s Survival Guide (Mises.org/E4B_142_Book).
Key Takeaways and Actionable Insights So long as we have central banking, entrepreneurs will experience boom-bust cycles. They adapt to this reality. Entrepreneurship is, in its essence, focused on the generation of new value, producing betterment, growth, and improvement. While customer preferences and the nature of competitive offerings may change, and conditions such as pricing and contracts may vary, entrepreneurs work towards continuous enhancement of markets.
Their efforts are thwarted by governments, who can’t leave markets alone to function smoothly, and especially to central banks who aim overtly at manipulating markets through artificial credit creation. Austrian entrepreneurs are acutely conscious of this problem, since they understand Austrian business cycle theory. But they must nevertheless adapt to the boom-bust problems the central bankers bring about.
The first tool of adaptiveness is the recognition that there is the private economy and the public economy are different and separate. Some economists talk of a mixed economy, but, as Mises pointed out, such middle-of-the-road thinking is socialist. The public economy is where the government trades, including trading in money, debt, and credit manipulation, and in the regulations that governments use as their management tool.
Entrepreneurs seek to establish a private economy where the government does not trade. The most important part of the market where the government is absent is the creation of customer value, especially in the form of innovation. Governments destroy value and deny innovation. When entrepreneurs can operate in the light of value generation, leaving governments in the dark, there’s room for profitable operations.
Entrepreneurs can further protect their safe haven with good anticipatory timing of the boom-bust cycle. There are signals that help. Murray Sabrin’s book provides a long list of websites and links where relevant data is published that can help entrepreneurs watch the trend that might signal the timing of the boom-bust cycle.
The first signal is the so-called inversion yield curve, when short term interest rates start to elevate, and even get to higher levels than longer term rates. This is unnatural, implying that there is greater uncertainty in the short term than the long term. It can only happen when markets are fearful of the short-term consequences of government policies and interventions, even though they are confident of entrepreneurially-induced growth and improvement in the long run.
As a rule of thumb, according to Murray, the beginning of a recession can be anticipated roughly one year from the inversion of the yield curve. Of course, other factors can intervene, such as the government’s idiotic shutting down of businesses over the fake COVID-19 pandemic. Nevertheless, entrepreneurs should pay attention to the yield curve signal. They can monitor it at Mises.org/E4B_142_Fred.
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Another signal for entrepreneurs to monitor in the overall economy is the unemployment rate. This rate declines during the boom, and actually starts declining as the recession is ending or a few months afterwards. There are variations in the pattern by industry, which Murray describes in detail in the book. He provides a list of 12 St. Louis Fed employment data series to monitor, covering sectors such as manufacturing, durable consumer goods, finance and insurance, and construction.
He offers many more signals — such as homebuilder stock prices — to monitor boom-bust timing. There is plenty of data for the savvy entrepreneur.
Strengthening value effectiveness and value security beats managing for efficiency. The economics profession has been guilty of misguiding entrepreneurs with its focus on efficiency, i.e., managing for fewer inputs per unit of output, and eliminating “waste”. It can cause fragility, impede value generation, and slow down innovation and responsiveness to change.
One example is the management of supply chains. Managing them for maximum efficiency can also make them insecure, if, for example, there are no ready supplier replacements when one slips up. We are experiencing the impacts of supply chain fragility right now in the US. It’s for reasons extraneous to regular business operations, but the effects serve to highlight the need to keep supply chains secure under attack from government interventions. Entrepreneurial businesses that develop the strongest possible upstream supplier relationships and cultivate a richly connected value network may be able to perform better when boom-bust hits the supply chain.
Entrepreneurs fight the Fed on inflation. The Federal Reserve insists on maintaining its 2 percent inflation target, which is economically destructive in many ways (see "Why the Fed's 2 Percent Inflation Standard Is So Bad" by Ryan McMaken: Mises.org/E4B_142_Article). Entrepreneurs pursue deflation, always aiming to deliver better quality at lower prices. Why? Because it’s what customers want, and entrepreneurs are in business to serve customer needs. Entrepreneurs bring abundance. The Federal Reserve, taking the position that higher prices are good for the economy, promotes scarcity.
Entrepreneurs make their workforce a strong resource, rather than a source of cost-cutting in economic downturns. The purveyors of so-called efficient management traditionally see the workforce as a cost, and urges entrepreneurs to cut costs by firing people in economic downturns. Entrepreneurs focus on effectiveness instead, and see their workforce as a resource and a source of ideas and initiatives for improvement and adaptation in all environments. A motivated frontline workforce is closest to customers and can bring back information, ideas, and new initiatives to make the business more responsive to customer needs and more capable of delivering desired customer experiences. This is the case whatever the state of the Fed-manipulated economic cycle.
Growth entrepreneurs think expansively at all times. Entrepreneurs create new value for customers, and they don’t call a halt to their pursuit of value just because of the macro-economic data that’s being reported in the mainstream media.
They understand that customer preferences, or the order of those preferences, may well change in a boom or a bust time, and they maintain their vigilance in monitoring and responding to these changes. These are the signals to which they respond, not the economic headlines. Entrepreneurs look for the opportunity to introduce new goods and services at all times, and not just at the “right” moments in the economic cycle. They’re always looking for new ways to deliver more value. Perhaps, in a downturn, there’s a greater call for service and repairs on existing equipment than for buying new equipment. Entrepreneurs can adjust and recombine their assets to provide more repair work and thus make up for lost sales revenue.
Entrepreneurs are great cash flow managers, and tend to keep cash on hand or available for those times when this level of money can be utilized for expansion. One potential application in this book is the acquisition of assets from other businesses in a downturn, when business operators who are less savvy run out of cash and offer assets for sale at low cost. Murray calls this “picking up the pieces”.
There may also be the opportunity to expand geographically into new regions. There’s always growth somewhere.
In sum, the answer to the boom-bust cycle is value agility. In the 4Vs business model on the Economics For Business platform, the fourth phase of the value cycle is value agility. We use this term to indicate the speed of responsiveness that successful entrepreneurs exhibit in response to customer feedback. Murray Sabrin uses the same term in his book, and defines it as “a process where entrepreneurs... adapt and adjust to continue to meet consumers’ perceptions of value your business delivers” (p. 111).
He asks, “do entrepreneurs stick it out when the economy is in a slump or wave the white flag and close the doors?” Mastering value agility means never being faced with that agonizing decision.
Additional Resources Purchase Navigating The Boom/Bust Cycle, An Entrepreneur’s Survival Guide at Mises.org/E4B_142_Book. Use promo code BOOM20 for 20% off.
See a preview of Murray Sabrin's book at Mises.org/E4B_142_Preview (PDF).
"The 4Vs Business Model" (Video): Mises.org/E4B_142_Video
The Economics For Business platform: Econ4Business.com
"Why the Fed's 2 Percent Inflation Standard Is So Bad" by Ryan McMaken: Mises.org/E4B_142_Article
10-Year Treasury Constant Maturity Minus 2-Year Treasury Constant Maturity (Chart): Mises.org/E4B_142_Fred
All value is subjective. But often, when an exchange is to be made, a numerical value is required. It’s a special kind of economic calculation, what Bharat Kanodia terms “a subjective opinion based on objective facts”.
Bharat has built a career on valuations, from 2-founder garage start-ups to the Eiffel Tower. He shares his knowledge, experience, and insights with the Economics For Business podcast.
Key Takeaways And Actionable Insights Valuations start with a “what?” and a “why?” What is the subject of the valuation? Is it a building but not the land it’s sitting on? Is it a patent? Is it a monetized patent or just an approved patent? Is it the assets of a business or is the going business? All these definitions and classifications of what’s being valued clearly make a big difference to the outcome.
What is the purpose of making a valuation? It might be a step in buying a business. Or in selling a business. It may be a valuation of an asset for insurance purposes, or for estate tax estimation. The valuation may be a tool for raising capital, or an assessment following a capital raise. The same asset can have different valuations for different purposes.
That’s why it’s important to start with the what and the why.
The most challenging business valuation is for a start-up. Two founders working from a garage have a business idea and some code but no customers and no revenue. The business needs a valuation in order to raise capital. It makes no sense to value it on the basis of discounted future projected cash flows. They’re imaginary.
The business is going to be valued based on the story the founders tell, and a rule of thumb valuation that works backwards from the percentage of the business the founders are willing to give to a seed investor.
Most 2-founder garage pre-revenue businesses are deemed worthy of a $1 million valuation, because an investor can be given 20% of the business for a $200,000 investment, which are reasonable heuristics for both parties. Bharat advises founders not to haggle too much over this valuation stage — if the business is successful, this initial financial structure is largely irrelevant for the founders.
In subsequent post-revenue investment rounds, operations have more impact on valuation than future revenue projections. Even once there’s revenue and a validated business model, projected future revenues are seldom the basis for valuation. There’s usually a hockey stick projection, or a long list of unverifiable assumptions. It’s more important to investors — and valuers — to examine operations, and specifically whether the business owners have a valid, detailed, and convincing plan to scale up. This kind of operations planning demands great rigor, both for purposes of implementation and for convincing investors.
Often, it’s the quality of storytelling that underpins the valuation. With a detailed operations plan in place, the selling business founder or proprietor can build a persuasive story about future growth and potential. Here, emotion plays a big part. Can the business owner communicate how intensely the need is felt by potential customers? Can he or she communicate the passion they feel to deliver a solution to those customers? And the deep emotional commitment to the years of hard work it will take to attain appropriately ambitious goals?
The story, well-executed, validates the valuation.
For businesses like CPA firms, medical practices, and construction, 2 major factors have an outsize influence on valuations. When an investor buys a mature service business, especially a local one, they are generally seeking hassle-free cash flow. They’re not looking to buy problems to fix.
Two factors stand out for these kinds of buyers. One is reliable recurring revenue from loyal customers. It must be revenues that are fully attributable to the service, and unlikely to be cut when there is a change of ownership.
The second is automation or established smooth-running and self-maintaining operations mechanisms. Bharat’s advice to sellers of these kinds of businesses is to automate everything you can, with reliable control software wherever possible.
These kinds of service businesses may have high levels of reputation and trust based on surveys and qualitative data, but those intangibles must be backed up with the behavioral reliability of the customer base.
In today’s markets, followers are a highly valued asset. In many ways, recurring revenue is a metric to quantify followership. Ryan Reynolds has a followership. Nike has a followership. Tom Cruise has a followership. These followers are all monetizable as buyers of goods or services or movie tickets associated with these personalities and brands. Your personal brand has value if you have followers and if the followership can be monetized.
Every asset can be assigned a valuation — even the State of Hawaii and the Brooklyn Bridge. Bharat has been called upon to give valuations of the Brooklyn Bridge, the Atlanta airport, and the state of Hawaii, among many other famous places or things. Sometimes, the valuation is for insurance purposes, sometimes for accounting. In all cases, there’s a number (or a range).
Once the what and the why are established, there is a mechanism for valuation that can be applied to any asset or stock or flow.
Additional Resources "Pathways To Business Valuation" (PDF): Mises.org/E4B_141_PDF
"How to Double Valuation?" (Video): Mises.org/E4B_141_Video1
"What’s Pre-IPO Worth?" (Video): Mises.org/E4B_141_Video2
Family businesses play a major role in the US economy. According to the Conway Center, family businesses comprise 90% of the business ventures in the US, generate 62% of the employment in the nation, and deliver 64% of US GDP.
And, they’re good at venture capital. Samuele Murtinu, Professor of Law, Economics, and Governance at Utrecht University, visits the Economics For Business podcast to share the findings and insights (see Mises.org/E4B_140_PDF) from his very recent analysis of venture capital databases.
Key Takeaways and Actionable Insights Corporate venture capital is a special animal. There are many types of venture capital. Professor Murtinu focused first on the distinction between traditional or independent venture capital (IVC) and corporate venture capital (CVC). Independent venture capital funds are structured with a general partner in the operational, decision-making role, and investors in the role of limited partner.
Corporate venture capital funds are fully owned and managed by their parent corporation. The CEO or CFO of the corporation typically appoints a corporate venture capital manager, who selects targets, conducts due diligence and so on from a subordinate position in the corporate hierarchy.
The important difference between IVC and CVC lies in objectives and goals. IVC goals are purely financial — the highest capital gain in the shortest possible time. CVC funds often have strategic goals in addition to, or substituting for, financial goals. These strategic goals might include augmenting internal R&D capabilities and performance, and accessing new technologies and new innovations, or entering new markets.
Another form of CVC licenses patented technologies to startups in cases where the corporate firm does not have the capacity to exploit the IP, but can oversee the implementation at the startup with a view to further future investment or acquisition. This is the method of Microsoft’s IP Ventures arm, for example.
Typically, IVC investments are easy to measure against financial performance benchmarks or targets. CVC’s strategic investments are harder to measure. Goals such as technology integration are too non-specific to measure, and normal VC guardrails like specified duration of investments are not typically in place and so can’t be used as benchmarks. On the other hand, CVC investments often expand beyond the financial into strategic support via corporate assets such as brand, sales and distribution channels and systems.
Corporate venture capital out-performs traditional venture capital in overall economic performance. Professor Murtinu’s performance metric in his data analysis was total factor productivity — performance over and above what’s attributable to the additions to capital and labor inputs. IVC’s performance for its investments was measured in the +40% range, and CVC’s was measured at roughly +50%. IVC performs better in the short term, while CVC performs better in the longer term. This difference reflects the lower time preference of CVC. It extends to IPO’s: corporate venture capital funds stay longer in the equity capital of their portfolio companies in comparison to independent venture capital.
Family CVC is another animal again — and even higher performing than non-family CVC. Professor Murtinu separated out family-owned firms (based on a percentage of equity held) with corporate venture capital funds for analysis. Some of his findings include:
They prefer to maintain longer and more stable involvement in the companies in which they invest.They prefer to maintain control over time (as opposed to exiting for financial gain).They look to gains beyond purely financial returns, including technology acquisition / integration into the parent company and/or learning new processes.They are more likely to syndicate with other investors, for purposes of portfolio risk mitigation.They target venture investments that are “close to home” both in geographic terms and in terms of industries closely related to their core business. The resultant outcomes are superior: a higher likelihood of successful exits (IPO or sale to another entity), and a greater long term value effect on the sold company after the IPO or exit. Further, there is evidence from the data of a higher innovation effect for Family CVC holdings, as measured by the post-exit value of the patent portfolio held by the ventures.
Family CVC is resilient in economic downturns. During the last economic downturn, family CVC invested at double the amount of corporate venture capital, reflecting family businesses’ preference for long-term investing and for control.
The lower time preference of family businesses and family CVC is crucial for the achievement of superior financial performance, especially in the longer term. Family CVC’s lower time preference and longer investment time horizons result in beneficial effects. Ownership in the venture companies is more stable, and the value effect after IPO (when family CVC stability continues because these funds stay in the post-IPO company longer) is significant.
Professor Murtinu relates this phenomenon to Austrian economics. The longer time horizon permits a closer relationship between investor and entrepreneur — it develops over time — and their subjective judgment about the future state become more aligned. Frictions and information asymmetries are reduced, and a shared view of the future emerges. This stability can scale up to the industry level and national level when there are more family CVC funds at work. Instead of pursuing unicorns and gazelles, an environment more conducive to duration and resilience is created.
Additional Resources "Types of Venture Capital" (PDF): Mises.org/E4B_140_PDF
"Families In Corporate Venture Capital" by Samuele Murtinu, Mario Daniele Amore, and Valerio Pelucco (PDF): Mises.org/E4B_140_Paper
Entrepreneurship is a method, and it’s also a mindset. Fabrice Testa has written a book that brilliantly integrates the two: he calls the integration "Super Entrepreneurship," and his book title is therefore Super Entrepreneurship Decoded (Mises.org/E4B_139_Book). He has the appropriate credentials as a proven super-entrepreneur who has created and nurtured numerous great companies (and successfully sold a couple of them).
Fabrice knows the true meaning of the phrase, “The day before something is a breakthrough, it’s a crazy idea”.
Entrepreneurs are animated by their purpose. Super entrepreneurs embrace a massive transformative purpose. The motivation for entrepreneurs is to help others — to solve problems for others, as we sometimes phrase it. Super entrepreneurs, in Fabrice Testa’s language, are those who choose to dedicate their businesses to solving the biggest problems. By setting big goals, they attract many like-minded partners, collaborators, and employees. By targeting transformation, they aim to change the world in a significant way.
In making this choice, super entrepreneurs are delving deeply into their own personal story to understand their own drivers and their own passionate commitment. There’s a major self-discovery component.
Having set their MTP, super entrepreneurs develop a systematic approach to the pursuit of their goal. Fabrice Testa recommends that super entrepreneurs combine what he calls CRAZY thinking with a relentless sense of purpose. CRAZY is an acronym for elements of entrepreneurship that Testa calls the Five Secrets. We agreed not to give them away, but they add up to a five-step method entrepreneurs can follow, and a checklist that they can use to assess the market power of their own concepts and business models.
The context for the 5-step method is the exponential rate of growth of available and applicable technologies for entrepreneurship, and the convergence of those technologies that results in a compounding of productivity. When, for example, sensor-based data collection can be combined with A.I. and robotics, whole new fields of automation open up, potentially helping billions of people.
A relentless sense of purpose is a major element in the super entrepreneurial mix. Super entrepreneurs are highly motivated. They display high levels of ambition and drive, and they generate strong momentum. They seek change, and aim for breakthroughs. They love to set the bar high.
There is a spirit to super entrepreneurship, an intangible spark of super energy and boldness that sets the best entrepreneurs apart and powers them to unusual levels of achievement.
There’s a plan, but it’s not fixed. Fabrice Testa identifies a master plan for the activities of high-achieving entrepreneurs, but it’s not the restrictive plan of the business school strategist. One term he used was Roadmap: there’s a goal to get from A to B, but it’s OK to visit C, D and E along the way, and to learn and double back and embrace recursive procedures to reach the targeted end-results. The key to success is keeping the goal in mind with flexibility on the route to get there.
Let the customer be the guide. Testa subscribes to the protocol of involving the customer early and often in the process of designing and building a product or service or a company. Entrepreneurs are always working with assumptions, and, at minimum, must validate them with customers.
He introduced us to the “Starbucks method” of customer validation. Park yourself in Starbucks, order a beverage of your choice, then look around for likely-looking people who might be open to a brief conversation about your idea or proposal or even prototype. It’s easy to engage people, they’re willing to help, and you can offer to buy them a coffee to lubricate the relationship. A few hours investment of your time and a few dollars invested in coffee will result in a deep, broad and rich set of reactions and responses and a meaningful feedback loop.
Success is more about fitting in than it is about timing. When writers and historians are trying to analyze the unusual success of a particular business, they often attribute a lot of the cause of the outcome to timing — the product or service or technology came along at just the right time. This is a misinterpretation. The happy correspondence of a new offering with a receptive context is not timing but fitting in.
According to Fabrice, to fit in in a big way is to fit in with the zeitgeist of the era. The dictionary definition of zeitgeist is the general intellectual, moral, and cultural climate of an era. What Fabrice is pointing towards is a heightened ability to sense the movement of the time, and the direction of its flow, and to step into that river at the right point.
Entrepreneurship is everywhere, and can be achieved at multiple scales. Super entrepreneurship is not limited by the scale of resources, but it can certainly be augmented wherever resources are abundant. That’s why we seek to encourage entrepreneurship for individuals, teams, and firms of all size, including the largest corporations. Big companies under-perform at entrepreneurship for two reasons. First, they spawn bureaucracy, which is a form of organization that is counter-entrepreneurial. Second, they have existing businesses to defend and fear the consequences of self-disruption.
The solution is to change the purpose of big corporations so that they can become super-entrepreneurial. The purpose would be to create new businesses with no bureaucracy and separated from the defense mechanisms of existing business units or divisions.
Additional Resources Super-Entrepreneurship Decoded: 5 Secret Keys to Create Breakthrough Businesses that Change the World by Fabrice Testa: Mises.org/E4B_139_Book
"Super Entrepreneurship" (PDF): Mises.org/E4B_139_PDF
Austrian economics is distinctive in its recognition and, indeed, embrace of continuous change: customer preferences change, competitors’ actions change, markets change, technology changes, prices change, business methods change. New knowledge is continuously created and accumulated. And Austrian economics equally recognizes that entrepreneurial businesses must change in response: capital combinations change, supplier and customer relationships change, organization structure changes, business portfolios and value propositions change. Continuous change is required — which is something business has not traditionally been designed for. How do businesses manage continuous change?
In the current digital age, the rate of change in the external business environment is accelerating, largely as a consequence of rapid technological evolution and the ways in which customer behavior and preferences change in response. We plan to cover the issue of continuous change from multiple angles in the coming weeks and months.
This week, Mark McGrath joins us to review a tool for value creation amidst continuous, roiling change. It has been around for a while and so is proven in multiple arenas and situations. It goes by the name of OODA.
Key Takeaways and Actionable Insights The OODA loop is a deeply sourced tool that draws on eastern philosophy, western science, and aligns with Austrian economics. When a firm as a network of individuals, knowledge, ideas, tools, processes and resources works with clients and customers and their systems, all should be better off as a result of their co-ordinated action. The better the capacity to learn and make adjustments together, the better the capability to recognize and seize opportunities, and to act at co-ordinated speed. Those who can handle the rate of change fastest will be the most successful.
The originator of the OODA loop model, John Boyd, synthesized thinking from multiple sources about this problem. In business, we can call it the Adaptive Entrepreneurial Method.
The loop is triggered by uncertainty, or what is referred to in the model as VUCA:
Volatility — circumstances change abruptly and unpredictably;
Uncertainty — knowledge is incomplete and the future is indeterminate;
Complexity — we are individuals in a dynamic interconnected whole with emergent outcomes;
Ambiguity — multiple interpretations from multiple observers, and multiple conclusions.
VUCA enters the OODA loop as unfolding interaction with the ever-changing external environment or market, as information and data coming into the company, and as unfolding circumstances, whether these are the company’s own sales trends and customer relationships or the activities of competitors.
VUCA is the state of the universe. It’s the normal condition that entrepreneurs should assume as the basis for action. It also creates an exciting state of opportunity in which dynamically adaptive entrepreneurial businesses can thrive.
OODA is a feedback loop. OODA stands for observing, orienting, deciding, acting — a continuous process.
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Orientation is critical to successful operation of the model. For a firm or for an individual entrepreneur, orientation is a mélange of inputs: mindset, personality, our way of thinking and interpreting, previous experiences and how we’ve processed them, our ability to process new information, our ability to handle change, our ability to analyze and break things down while simultaneously piecing things together and synthesizing them into an insight or construct that never existed before.
Orientation houses all our biases, and all our cognitive models. It’s how we perceive and how we experience the world. It determines how we process all the information we observe.
Decisions are hypotheses. From our orientation-determined analysis and synthesis of incoming data, we envision a future state: what could happen if we did something? In Misesian terms, we imagine what it would be like in the future if we were able to address our own uneasiness — if we were to change our current state and trade it for another one. Any action that follows must be preceded by a decision, a hypothesis of what we think might happen.
Action is an experiment to test the hypothesis. In applying the OODA loop, entrepreneurs demonstrate a bias for learning and a bias for action. We learn by testing what happens when we act and making new observations of the outcomes of the action. These outcomes will give us new signals to employ in re-orienting to ensure that our decisions and actions are well-aligned with reality.
The OODA loop model is consistent with the Explore and Expand approach to business strategy. At Economics For Business, we have frequently urged entrepreneurial firms to abandon business school strategic thinking and replace it with an Explore-And-Expand approach, running many fast, low-cost exploratory experiments and quickly expanding investment in those that work, discarding others. In OODA loop, experiments are decisions and actions, and re-orientation results in expanding application of the successful ones.
In OODA, we continuously build and re-build our perception of the VUCA world and attempt to match our perception with reality through exploration and expansion. We aim to ensure our orientation is attuned to the way the world is and not to the way we want it to be or imagine it to be.
The more we learn, the more we build and re-build, the faster we can advance. Speed of learning is important, so long as it is based on well-processed information.
Guidance and control. In the OODA loop graphic, there are two areas designated “implicit guidance and control”: our actions and our observations. Our orientation implicitly guides and controls both. Our orientation as entrepreneurs or as economists will always affect how we perceive things. Where some might see an obstacle, others see an opportunity. That’s orientation at work. On the action side, orientation implicitly guides and controls our actions. There are some things we can do automatically, employing heuristics or procedures that we don’t stop to think about. This also is orientation at work — and at speed.
Continuous testing. The OODA loop, processing VUCA information into decisions and action via continuous reorientation, is a test. An entrepreneur is always being tested. As time moves unstoppably forward, new challenges continuously emerge. It’s the ceaseless flux of human affairs, as Mises put it in Human Action.
If we maintain an open and flexible or agile approach or orientation to this continuous testing, we’ll avoid failure.
Focusing on a well-understood purpose will eliminate wasted time and wasted action. The Adaptive Entrepreneurial Model has three major elements: VUCA, the way the world is; OODA, as described above; and IOT. IOT stands for In Order To: the purpose or mission. As we deal with VUCA, and continuously change our orientation as we learn from our decisions and experiments, quickly finding out what works and what doesn’t, we must never lose sight of our purpose and our intent. What are we trying to accomplish?
Everyone in our firm, or on our team, must share the same purpose and be able to articulate it in the same way. When that’s the case, creative and co-ordinating action can move forward without instruction: we don’t have to tell people what to do when they’re in the middle of VUCA so long as they have the same shared purpose in mind. Everyone focuses on what needs to happen and why. There’s never action for action’s sake; it’s always with a shared purpose. If team members do not share the same understanding of purpose, then they’re creating more VUCA. If they do share understanding, the orchestration of their individual efforts produces harmony.
People, ideas, things — in that order. All action is human action, all decisions are human decisions, all teams are human teams. When orientations are aligned, harmonious co-ordinated action is possible. There’s a high priority on relationships — with teammates, colleagues, customers, vendors, partners.
In a business utilizing the OODA model, people always come first because they are the ones who act. Ideas follow, judged through the lens of helping people to decide and act. Things — technology, property, money — are at the third priority level to ensure they support people and enable their ideas.
"A sound understanding in application of these comments will yield geometric results." Improved results are the repayment for the effort expended to study the Adaptive Entrepreneurial Method.
Additional Resources "The Adaptive Entrepreneurial Model — Core Thesis" (PDF): Mises.org/E4B_138_PDF
John Boyd's "OODA Loop Graphic" (PPT): Mises.org/E4B_138_PPT
"The Epistemology of the OODA Loop" (PDF): Mises.org/E4B_138_PDF2
"Destruction And Creation" by John R. Boyd (PDF): Mises.org/E4B_138_Boyd
The Theory Of Dynamic Efficiency by Jesús Huerta De Soto: Mises.org/E4B_138_deSoto
The Ultimate Foundation Of Economic Science by Ludwig von Mises: Mises.org/E4B_138_Mises
Entrepreneurs solve problems for customers. There are few problems bigger than the horribly perverse medical care system under which patients suffer in the US. The system has evolved over time, with the stimulus of bad decisions, bad actors, and bad incentives. Entrepreneurship can solve the system problem with specific actions at the component level, each of which are practical and do-able, and can interact to create a new outcome at the system level.
Murray Sabrin has studied both the system and the component solutions, and he joins the Economics For Business podcast to enumerate his proposed actions.
Key Takeaways and Actionable Insights Healthcare is a consumer good, and a consumer responsibility. Medical care is a provider proposition. Consumer sovereignty is a cornerstone concept in Austrian economic theory. Consumers determine what is produced as a result of their buying or not buying. Does this principle apply in healthcare?
To answer requires us to differentiate between healthcare and medical care. Healthcare is an individual choice and a personal responsibility: we do everything we can to maintain a healthy lifestyle of eating and drinking, exercise and sound physical and mental health practices. In the internet age, there is plenty of knowledge available to help us in our decision-making. Medical care is what we turn to when sound healthcare proves to be insufficient to keep us off medication and out of hospital.
How do consumers realize value from medical care providers? To do so is very challenging due to (among other barriers) price fixing, price opacity, price inflation, monopolistic and duopolistic market structures, the misuse of insurance, bureaucratic management, perverse incentives, government intervention, and barriers to entrepreneurial entry.
Are there potential solutions in the face of this systemic dysfunction? Yes: solutions that come from the best countervailing source — entrepreneurship.
Entrepreneurial Solution #1: Direct Primary Care — Restoring the doctor-patient relationship. Murray Sabrin recalled the $5 doctor visit of the past, characterized by a personal relationship with no bureaucracy or insurance forms. Entrepreneurs are now re-establishing that relationship via Direct Primary Care. DPC is retainer fee-based access to unlimited doctor visits, including office-based testing and additional services, with no insurance forms. DPC doctors have fewer patients in their practice and can consequently provide more time and attention. Stronger relationships are built, which is the essence of entrepreneurial value-generation.
Entrepreneurial Solution #2: Transparent versus distorted pricing. Pricing is one of the most important bulwarks of free markets. In medical care, pricing is opaque to the point of invisibility, distorted, and inflated. It is unresponsive to the normal choice-based supply-demand mechanisms, and not indicative of value.
Some entrepreneurs are acting to change these pricing conditions via what is termed fee-for-service: transparent pricing for specific services. An often-cited example is Surgery Center of Oklahoma, where specific prices for specific surgical services are openly posted on their website. Other members of the Free Market Medical Association provide similar price transparency.
One of the results is revelatory price comparison: Murray told the story of a DPC practice patient who identified a 75% price reduction at Surgery Center of Oklahoma compared to a local South Florida hospital.
Entrepreneurial Solution # 3: One stop shopping at local non-profit clinics. Murray described the launch and success of several non-profit local and regional clinics, including one for which he was the founding trustee. These are philanthropically established and funded local clinics with volunteer staff, providing a range of services. Equipment and pharmaceuticals may be fully or partially donated by the manufacturing companies. The combination of direct primary care doctors and specialists can make these clinics one-stop shopping solutions for patients seeking quality medical care. With a little philanthropic assistance, they could eliminate the need for Medicaid.
Entrepreneurial Solution #4: Direct Contracting. Insurance companies purposefully inflate medical care prices to fund their business model. Murray told the story of a large (4-500 employees) company that contracted directly with a service that brought a vehicle with an MRI machine to the employers location, and charged $400 per MRI to the employees. The same vehicle was utilized by a nearby hospital that charged $6,000 for the same MRI. Direct contracting saved $5400 per unit cost, or 90%.
Direct contracting has the potential to significantly reduce costs in the Medical Care system, while opening access and increasing convenience.
Entrepreneurial Solution #5: The 3-tier household medical care budget system. Murray has a well-constructed and eminently practical household medical care budget system. There’s a version for families with at least on member in employment and an alternative for those on Medicare today. There are three elements:
Direct Primary Care for a monthly fee, covering unlimited office visits and routine tests.A Health Savings Account to cover costs of specialists, prescription drugs, medical equipment, major tests and brief hospitalizations.Catastrophic insurance coverage for major operations and hospitalizations and long term care. Greater detail is provided in Murray’s book, Universal Medical Care From Conception To End Of Life.
Download our corresponding PDF, which features an adapted table from Murray’s book: Mises.org/E4B_137_PDF
In a system of personal responsibility, we would all manage our household medical care budgets with these kinds of tools.
Entrepreneurial Solution #6: Voluntarism And Mutualism. Voluntarism has a long tradition in America. Mutual aid societies were prevalent before the New Deal. Ethnic, religious and trade groups joined together for mutual support. The Federal Government co-opted these functions and now people look to Washington DC to solve their problems.
But young people today are more interested in voluntarism and non-political social activism. 30 years ago in the Wall Street Journal, Peter Drucker argued for the non-profit sector to replace the welfare state. Creative and innovative people find ways to surmount institutionally-erected barriers in all phases of life, and medical care is certainly one of those. There’s a liberating and energizing sense of acting as the custodian of one’s own life and helping others who need it. It’s the entrepreneurial ethic.
Entrepreneurial Solution #7: Distributed Knowledge. There is so much available knowledge today about healthy life habits and about the symptoms and characteristics of various medical conditions, and about options for treatment. We as individuals are free to explore, and responsible for gathering our own store of knowledge. The outcome of the research may not be definitive, and we may find ourselves making a choice between alternatives. But doctors and hospital administrators make choices too, and they are not infallible. It may be possible for an individual to gather more knowledge about their own specific condition from the internet than any single doctor can know, simply as a consequence of concentrated effort. Each of us can take responsibility for our own life.
Summing up: Murray Sabrin’s prescription: Eliminate employer-based insurance.Make a single exception for the case in which the employer pays the direct primary care fee for the patient.The resultant employer savings are deposited in employees’ health savings accounts.Employees determine their best medical care options.Phase out Medicare and Medicaid.Let young people create super health savings accounts so that they don’t need Medicare in the future.Hospitals price at realistic market pricing, not insurance-inflated prices.All prices are transparent.Get the government out of medical care — it’s none of their business.Free up resources from the medical-pharmaceutical-insurance complex and redirect them to savings, investment and philanthropy. Additional Resources Read Murray’s book, Universal Medical Care from Conception to End of Life: The Case for A Single-Payer System: Mises.org/E4B_137_Book It’s self-published and all proceeds go to charity and non-profits.
"Individual Single-Payer Alternative For Employer-Based Insurance" (PDF): Mises.org/E4B_137_PDF
Surgery Center Of Oklahoma: surgerycenterok.com
Forward: goforward.com
Direct Primary Care Coalition: dpcare.org
Volunteers in America: vimamerica.org
Entrepreneurs are developing a new world of innovative business models far from regulated markets, crony capitalism, and corporate control. It’s a new world of cyber security, free software, value-for-value exchange, integrated with bitcoin. Max Hillebrand operates in this new world, and he shares both his vision and his expertise on the Economics For Business podcast.
Key Takeaways and Actionable Insights The praxeology of cyberspace. Praxeology is timeless, with equal application in this era of cyberspace and the internet as in any other era. Individuals are in a state of unease, and they can perceive a better future in which their unease is relieved. They allocate resources to achieve that end.
Those resources can be scarce or non-scarce. Non-scarce goods are non-rivalrous; I can share them with you and not give them up for myself. Information goods are non-scarce. They are patterns of words and symbols that can be shared. This is the world of free software.
It’s also the world of cyber security. Cryptography is just a math formula. If I wish to express myself freely to one other person or a small group of people, I can enable my non-scarce expression for only that small group, giving them the private key to decrypt the message.
The value of free software: scratch your own itch. A growing cadre and movement of internet entrepreneurs is engaged in the preparation and distribution of free software. Free doesn’t mean it’s not valuable. New technologies and new free software are created to solve customer problems more efficiently and more effectively. One of the beautiful attributes of free software is that it is open to user contribution — anyone who can read the software can change the software and publish those changes, so that future users can enjoy an even better experience. Everyone in the free software community — producers and consumers — is incentivized to ensure that the tools that they all use are running at their best.
This is sometimes referred to as the “scratch your own itch” ethos. The creators of the software are also the users of the software. Customers know the problems that they want to have solved, and give the ultimate feedback of fixing it themselves.
Free software in business. Producers of free software create the highest quality technology tools. Entrepreneurs looking for the best technology have an incentive to seek out these producers and their products. There is no lack of demand. How do the producers get paid for their development efforts?
One way is via a service exchange. Users of free software often like to add customization, personalization and locally specific integration features to free software that they use. Producers can be contracted and compensated for these customization services. Red Hat followed this business model of servicing Linux users all the way to a $US34 billion valuation in an acquisition transaction with IBM.
Value-for-value exchange: a new business model? The second way to get revenue from free software production is via donations — users recognize the value of the experience of using the product and voluntarily send payment to the producer, even though no “price” was asked.
This emergent concept of voluntary payments made for freely distributed valuable content and products is beginning to bloom into a new form of exchange, which has been given the name of the value-for-value (VFV) model. It’s especially prevalent on the blockchain and on bitcoin networks.
Take a freely distributed podcast as an example. The producer can put a Bitcoin lightning network public key in the RSS feed and listeners can voluntarily send any amount of bitcoin back for every minute they are listening to the podcast. This happens automatically in the background when the listener hits Play and stops when he or she hits Pause or Stop. One-time payments can be made as well, if preferred. Payment can be boosted if the listener here’s something they deem especially valuable to them and wish to extend an extra reward. It’s the ultimate market feedback mechanism.
Bitcoin as free software Bitcoin is another tool of cyberspace, engineered and designed to solve the problem of money. Many innovators over time have made attempts to create digital money to make internet transactions fast, infinitely cheap, stable and private. But none of the attempt, until bitcoin, were able to solve the problem of verification of transactions and enforcement of rules without a trusted third party. Bitcoin solves the important problems, not just of verification but of “who verifies?”
Verification is always and ultimately human. Bitcoin entrains entrepreneurs who download the bitcoin software and confirm they are running the agreed monetary rules on their own hardware. When another entrepreneur connects and asks for rules-based verifications of valid transactions, bitcoin merchants on the network are running the software and checking the transactions of others. They are entrepreneurs producing verification according to established and agreed rules. It’s an entrepreneurial merchant network.
Get paid in bitcoin, hold bitcoin, invest with bitcoin. Max emphasizes 3 aspects of the bitcoin enabled life that can insulate and protect entrepreneurs from the inflationary fiat future.
Get paid in bitcoin To get paid in bitcoin means to have a “censorship resistant” method of receiving payment from customers. People who do not have access to a bank account can become entrepreneurs. People whose bank accounts might get shut down can remain entrepreneurs. Anyone who fears for the future of the fiat system can insulate themselves against future payment system uncertainty.
Hold cash reserves in bitcoin Saving should mean holding an asset without counterparty risk. Bitcoin serves that purpose — it’s counterparty risk-free money. Holding a reserve without counterparty risk frees the individual to make a trade with an entrepreneur at any time in the future. There I no risk of inflation. Your saving can’t be diluted.
Denominate your contracts in bitcoin When more and more entrepreneurs denominate their contracts in bitcoin, a stable monetary asset that cannot be inflated, the detrimental cycles identified by Austrian Business Cycle Theory can be eliminated. This is the exciting long term prospect of bitcoin.
It may be a long path, and it will take time and courage to complete the journey, but it is possible. There are entrepreneurs today (Max is one) who get paid exclusively in bitcoin and hold their cash reserve in bitcoin.
Additional Resources Max’s website: TowardsLiberty.com
Some examples of free software tools:
btcpayserver.orgwasabiwallet.iovalue4value.io Professor Mohammad Keyhani’s Entrepreneur Tools: Mises.org/E4B_136_Tools
Cryptoeconomics: Fundamental Principles of Bitcoin by Eric Voskuil: Mises.org/E4B_136_Book
Entrepreneurial action occurs in time. This brings uncertainty, because of continuous change. We can’t know what will be our future result, yet we must produce now in order to discover it. Are there answers to this conundrum? Yes. They’re found in action, and the timing of action (see Mises.org/E4B_135_PDF1). Mark Packard joins the Economics For Business podcast to share his research.
Kay Takeaways and Actionable Insights There are three ways we can think about time. Eternalism: Time goes back in the past to infinity and forward in the future to infinity. It’s a real thing, e.g., we can identify “points” in time. This is the time of physics.
Presentism: Past time does not exist, it is a memory pattern; the future is undetermined, it’s just a mental image. The only time that exists, and is real, is now. This is the time of Austrian economics.
Growing tree: The past is real, it has been determined, and there is one real historical truth (think roots and branches). The present is real and unfolding (new leaves growing every day). The future is undetermined.
Presentism is the view of time that best aligns with Austrian entrepreneurship and subjectivism. Entrepreneurs act based on their own sense of time, which can be both objective (the clock is ticking) and subjective (how I act in time and how I feel about it).
Entrepreneurial action occurs in time, which brings uncertainty. Why must entrepreneurs deal with uncertainty? Because production takes time, and there is continuous change, so the outcomes of the production process in the future can’t be known. Even if the entrepreneur knows what demand is today, it can change over time, and can’t be known in the future. Businesses choose entrepreneurial action long before they know how it is going to turn out. Entrepreneurial uncertainty is a consequence of the existence of time.
Time is scarce, but it’s not a resource. We can legitimately refer to time as being scarce. We often feel as though there is not “enough” of it. We’d like to be able to try to pack more effort and action into the time available to us.
When we talk in terms of scarcity, it’s tempting to think that time is a resource, akin to other scarce resources. We manage those other resources, we allocate them, we combine them, we use them efficiently.
We’d like to think the same way about managing time. But we don’t have control of it. Time just flows. It’s not at our disposal to use and allocate as we see fit. We can’t defer judgement on how to allocate our time, for example, because time keeps flowing and by deferring judgement we just did allocate some present time to not acting.
The resource over which we do have control is our effort. We can choose how to allocate our efforts in time. Our efforts are not scarce in the same way that time is scarce. Our efforts are limitless; we can put effort into a wide range of applications. It’s because time is scarce that effort must be allocated as if it were scarce.
As time flows, customers’ perception of value changes, and entrepreneurs must follow this change process closely. The effects of the flow of time are not exclusively limited to the allocation of entrepreneurial effort. They are also manifested in the customer’s Value Learning Process. (Mark Packard describes this in detail, and gives us some management tools: Mises.org/E4E_44, Mises.org/E4E_55, Mises.org/E4E_62, and Mises.org/E4E_73).
As a result of the flow of time, customer value is a process. Customers prefer the best satisfaction they can presently identify. As time flows, and they gain more knowledge and experience, what they value changes. Their preferences are different in the future than in the present. There is continuous change.
Since consumers are sovereign to the entrepreneur, it is mandatory to keep up with these changes. The continuous process of value learning never stops, and entrepreneurs must follow closely, gathering feedback, empathically interacting with this feedback, and making adaptive changes in their value propositions in response.
Sometimes, customer preferences may stabilize. Entrepreneurs may come to believe that there is a loyal cadre of reliable customers, and may invest in nurturing this loyalty and in relationship building. But they can not permit themselves to become too comfortable in these relationships. Customers are not loyal to a product or service or brand or supplier. They always seek the best satisfaction, and once new knowledge is available to them, they will change their behavior.
All entrepreneurial choices about action are made in the context of time, with significant consequences for outcomes. Because customer preferences are continuously changing through time, entrepreneurs are faced with an uncertain decision about when to act. At what point in time do they have enough knowledge to go to market with a new value proposition, or a new or improved product or service? They know that, as soon as they act, customer preferences are going to change further (perhaps as a consequence of the action). If the entrepreneur decides that acting as the first mover in introducing an innovation gives them an advantage, they also know that competitors have an opportunity to process the new changes and overtrump that advantage as a second mover. Both are competing over the customer’s shifting sense of greater satisfaction.
When does the entrepreneur know enough? How does a business identify the narrow window in the customer’s value learning process that provides a signal to act? Timing is a big, important piece in the entrepreneurial puzzle.
There are several areas of time management where entrepreneurs can improve their skills. While time isn’t a resource to be allocated, it provides a context for action in which entrepreneurs can subjectively make changes for the better.
Recalibration Is your internal clock moving too fast or too slow? Do you find that you are always running late, or, alternatively, arriving too early and consequently “wasting” time (i.e., burdened with time periods you can’t fill with appropriate action)? If so, it’s time to recalibrate. Change the pace at which you do things. The world proceeds objectively at clock time, but your internal clock is subjective. You may need to align the clocks better. Change your schedule or rearrange your tasks to make your internal clock better aligned with real clock time.
Better time planning Sometimes we simply err in assessing how much time to allocate to each of our various tasks. Each one takes longer than we planned, and by the end of the day, we’re several tasks “behind” and some will remain undone. If that happens over and over again, if there is regularity in your mistiming, you should change your mode of planning. Allocate different — more realistic — amounts of time to the completion of each task. Allow for delays. Don’t “lose track of time”.
Fix your prospective memory Do you put tasks on your to-do list for the future and then forget them? This is a failure of prospective memory — your memory of the future. Prospective memory is your recall of the schedule you had planned out for yourself. One answer is to use mechanical or digital aids. Write down your to-do’s on a calendar. Enter them into your phone. Set an alarm as reminder.
Whatever, happens, don’t be the bottleneck. Time management is not trivial. For entrepreneurs, being late, missing meetings, missing deadlines, or experiencing delays is likely going to cost you dearly.
Don’t be the bottleneck, don’t be the one causing the problems, for your colleagues, your partners, your customers, or any collaborators. Fix your own timing issues.
Additional Resources "How to Master Time" (PDF): Mises.org/E4B_135_PDF1
"Value is a Learning Process" (PDF): Mises.org/E4B_135_PDF2
Understanding The Unrealized requires us as entrepreneurial businesspeople to think better, and to resist settling for what is merely feasible in a regulated, risk-mitigated world. We must ask what could be possible in a different world, and act on that basis. Sound economics supports such action. Per Bylund takes us through his thinking about The Unrealized.
Key Takeaways and Actionable Insights First, see beyond what’s there. From Bastiat’s famous parable about the broken window comes the economist’s instinct to think about 2nd, 3rd, and Nth order consequences of actions. These are typically unseen by those who don’t think like economists, and never even considered by politicians.
Entrepreneurs always have 2nd or 3rd alternative actions in mind if the consequences of their first choice are unexpected, and they will always adjust further if required by customer feedback, with the constant aim of producing high customer value and satisfaction. They see beyond what’s there.
Government regulators and legislators make promises on the basis of forecast 1st order consequences only. Regulators promise that the consequences of their actions will be beneficial, at least to some groups. For example, in minimum wage legislation, they promise a pay raise for the lowest paid workers. What is not seen are all the jobs that disappear — are never offered — as a 2nd order consequence of making minimum wage labor unaffordable to the profit seeking entrepreneurs, the ones who create jobs.
Beyond the unseen is The Unrealized. In reality, regulations are not what politicians promise. They are not actions to help people. They are restrictions on entrepreneurs’ economic behavior. Entrepreneurs are aiming at satisfying customer wants as much as possible. Regulations aim to restrict this customer-satisfying action by forbidding certain innovations, or declaring that they must be designed and implemented in ways that have value for the regulator and not for the customer or entrepreneur.
Entrepreneurs are forced to abandon some of their efforts to generate new value by satisfying customers, or to redirect their efforts into less value-producing channels. The potential output of their creativity goes Unrealized.
Society accumulates and compounds losses when entrepreneurial creativity is curtailed. What could have been the case if entrepreneurs were unbound, if the regulatory chains were cast off? We can’t know. But we can know that The Unrealized is a cost to society.
And the cost is cumulative. Technology and innovation thrive and grow in response to observations of how customers experience value from it. Entrepreneurs introduce a new application of technology by building on what’s available today and adding to the value experience that they observe customers enjoying today. If innovation is restricted by regulation (or any other barrier), these observations can’t take place. The next big thing that builds on today’s big thing won’t happen. We keep falling behind what is possible because of these regulatory restraints. Consumers become cumulatively worse off. Society is permanently and increasingly damaged.
We are placed on a different value trajectory — one that limits our options. What if Henry Ford had been restricted from introducing assembly line manufacturing of automobiles? It’s not hard to imagine such a case in the OSHA environment of today. What if the innovation cloud of new roads, better engines, gas stations with coffee and hot dogs, and all the other ancillary results of assembly line manufacturing had not been allowed to form?
Such a thought experiment demonstrates how regulation places society on a different trajectory than what is possible from unlimited entrepreneurial innovation. Will Uber’s technology launch us on a trajectory of ever-more-ingenious applications of on-demand service, stimulated by consumers’ unlimited imagination of greater and greater convenience? Or will taxi medallion regulation permanently limit that imagination to keep it within the boundaries of bureaucratic compliance and control?
Per Bylund’s term for the effects of bureaucratic control is limited optionality. Quality of life is elevated when we have greater optionality. Regulators don’t want us to have that experience. Less optionality means less value.
Continuous reinvention can’t be planned. The second and third and Nth order consequences of unrestricted entrepreneurial creativity and consumer imagination are not subject to planning. Emergent new inventions and innovations are not predictable. The probability of positive outcomes from the creative process can be enhanced by entrepreneurial intent and aspiration and effort. But on the other hand, the range of positive probabilities is greatly reduced by restrictions on that intent and aspiration. What could be is bounded by what is attempted, and regulations narrow the field in which attempts are made.
Make sure you do not restrict your own creativity with self-imposed regulation-like limitations. Regulation limits innovative possibilities. What if the same is true of your own entrepreneurial practice? What if The Unrealized is concealing itself in your own business? Are you sure that your imagination about possible futures based on your understanding of customer wants is expansive enough? Are you sure that you have considered all possible approaches to satisfying those wants, even the ones that are most unlikely? Have you examined every possible pathway to a unique position in the marketplace? Have you found every possible way to cut out cost and time from your production process? Are all your processes designed and engineered to remove all barriers to successful outcomes?
If you are inside a corporation, are there corporate restrictions that act like regulations, channeling your creativity into pre-ordained pathways and towards pre-selected attractors? Are there unnecessary constraints on emergence?
The Unrealized lurks everywhere. The entrepreneurial task is to root it out.
Additional Resources Per Bylund's book, The Seen, The Unseen, And The Unrealized: Mises.org/E4B_134_Book
Mises U 2021 presentation, "The Seen, The Unseen And The Unrealized": Mises.org/E4B_134_Lecture
"The Broken Window Fallacy" by Robert P. Murphy: Mises.org/E4B_134_Article1
"Compounding Shortfalls in Innovation" by Hunter Hastings: Mises.org/E4B_134_Article2
"Mark Spitznagel: At What Price Safety?" — another take on The Unrealized from an investing perspective: Mises.org/E4B_134_Article3
Austrian economics has a lot to say about how to organize firms for maximum value generation. Austrian principles point to the delegation of entrepreneurial judgement to the front-line employees who interact directly with those who actually create value: users.
The military organization models of the twentieth century, involving command-and-control in hierarchical structures, are slow to change, and the management literature evidences an unwillingness to abandon the hierarchy. But there is a fast-growing industry that’s the locus of prodigious value generation where the hierarchy has already been abandoned and flat networks of distributed judgement are taking its place. Ulrich Möller is one of several Austrian economists who are studying the firms in the video game industry and demonstrating how their findings can bring positive organizational change to the rest of the business world (see our E4B Knowledge Graphic at Mises.org/E4B_133_PDF).
Key Takeaways and Actionable Insights Organizational innovation has a long and successful track record in the video game industry. A lot of value has been generated in the video game industry in a short period of time. Video games surpass movies and music in revenue. Without a long history of corporate hierarchies and bureaucracy to shed, firms in the industry embraced the organizational innovations of open source software, including anonymous collaboration among highly distributed self-organized teams, peer review systems, and agile processes.
In addition, the industry created its own laboratory for testing revolutionary organizational theories in virtual economies set in virtual worlds.
Valve is a company in the video game industry that took organizational innovation to its logical conclusion: the end of hierarchy. Valve — a very successful, industry-leading company — pursued a value-generation logic to frame its approach to organization:
Creativity is our core resource — the most important skill in game development.Creative employees are key to our capabilities.Creative people are most productive when left to express their own creativity in their own way.Hierarchy blocks creativity, as do planning and routine.How do we design a company to attract and retain the sort of people who are able to take the boldest creative steps? The answer? Let employees decide what to work on. Let them exercise entrepreneurial judgement. Let them, in effect, do both strategy and implementation. Give them all the decision rights. Let them identify customer preferences — since they know the customer best; let them decide how best to address those preferences; let them decide how to achieve competitive differentiation; let them allocate resources, choose costs, and manage profitability; let them control quality and decide when software is ready to ship.
Employees work in self-organizing teams, and are free to migrate from team to team, and free to change their roles. There are no fixed job descriptions.
In place of command-and-control, a few simple rules or constraints have emerged for the exercise of governance. F.A. Hayek wrote about norms that emerge in social groups to shape behavior. These are not legislation, i.e., written formal restrictions. They are what he called rules, constraints that everyone accepts in the shared commitment to collaboration and the pursuit of the most favorable outcomes.
The most significant of these rules at Valve is the “Rule Of Three”, a simple agreement that at least three individuals must agree on the initiation of a new project, or on other major decision points. The emergent standard was that this is just enough to prevent maverick behavior, and a low enough number to facilitate agile action that’s not bureaucratically constrained.
Another rule or constraint goes by the name of Social Proof. This is a broader and looser peer review standard. If the original team wishes to recruit more members, they must persuade others of the value generating potential of the project (in competition with other projects in the firm); successfully doing so constitutes “social proof” of value.
Rules-based peer review process replaces management structure. Conventional approaches to organizational design focus on structure. This might be command-and-control hierarchy, or structured networks, or strategic business units or functional departments. Valve abandoned structural thinking and replaced it with flow analysis. How can we attract the most creative people to our venture? How can we encourage the most productive flows of bold creative thinking? How can teams best assemble and collaborate for the most productive output? How can we integrate with the user community in the best way? How can the most value-generative projects attract the best resources?
These are all questions about flow. Austrian economists are distinctive in viewing capital as a flow rather than a structure, and this view holds true for human capital just as much as physical capital. Emergent rules for self-organizing human systems can perform all the managerial functions that were historically left to control structures.
Actionable Insight Summary Design your organization for flow not structure.Design to attract the most entrepreneurial people in the most entrepreneurial roles (self-selection).Let them self-organize.Let rules and value codes emerge.Teams as business units.Eliminate the boundaries between the firm and customers and other partners. Additional Resources "The Future of Organizational Design" — our E4B Knowledge Graphic (PDF): Mises.org/E4B_133_PDF
"Levels without Bosses? Entrepreneurship and Valve’s Organizational Design" by Ulrich Möller and Matthew McCaffrey: Mises.org/E4B_133_Paper1
"Entrepreneurship and Firm Strategy: Integrating Resources, Capabilities, and Judgment through an Austrian Framework" by Ulrich Möller and Matthew McCaffrey: Mises.org/E4B_133_Paper2
Saifedean Ammous is a knowledge entrepreneur. He creates new knowledge that’s valued by his customers, because it helps them to think better and better informs their actions. He carefully appraises the knowledge provided by great thinkers of the past, and re-presents in a newly compelling fashion. He develops effective memes and ideas. He innovates in channels and distribution. He demonstrates how knowledge entrepreneurship can work in the 21st Century's globally-connected and digitally-connected economy. He joins the Economics For Business podcast to share some of his learnings and experiences
Key Takeaways and Actionable Insights. Collect available knowledge then develop a new perspective. Saifedean took degrees in economics and engineering, at bachelor’s, master’s and Ph.D. levels. His accumulated knowledge was valid for the university professor track. Then his spontaneous knowledge accumulation efforts took him to Austrian economics and a new perspective: that the economics he had learned to date didn’t make any sense, and that regime higher education was best understood as just another malinvestment. Most importantly, regime higher education was customer-less: it did not provide value for customers, because that was not its purpose. From that point on, Saifedean followed the path of customer sovereignty and of exploring what customers identified as valuable.
Teaching is value generation. Saifedean’s first customers were students in his university classes. He was able to generate value for his students by teaching them the economics they wanted to learn, along with giving them the optionality of seeing the knowledge through his distinctive perspective. When students engage and say thank you, it’s a signal of value.
A transformative event precipitated a shift into independent knowledge entrepreneurship. In Saifedean’s case, the transformative event was Bitcoin, the study of which opened up a deeper understanding of hard money and low time preference. He “upgraded” to the Bitcoin Standard by exiting academic teaching and switching to entrepreneurial knowledge sharing. The first step was writing and publishing a book called the Bitcoin Standard (conventionally published by Wiley) and then leaving academia for the joys of hard money.
He switched his platform for teaching from the university to the internet, and now is able to reach many more customers — citizens of the world who want to learn more about Austrian economics and to understand Bitcoin and hard money. How did he know they were out there? They self-selected via Saifedean’s twitter feed.
The “factory” for knowledge production and distribution is a website. A fairly basic website (i.e., not requiring any technological expertise or gear that is not available to everyone) is the platform for the new level of knowledge entrepreneurship. At saifedean.com, customers have been able to:
Receive and read book chapters as they are written;Access video and audio online courses in Austrian economics;Buy books;Subscribe to podcasts (which he runs like a seminar);Find a “complete central bank replacement pack”. Saifedean told us he is just getting started, and there are more knowledge innovations in the pipeline.
The Entrepreneurial Method. This unfolding timeline is an excellent example of the entrepreneurial method at work.
Start with what you know.Find motivation in what you are passionate about.Utilize available resources.Let collaborators and customers self-select in.Use networking and influencers rather than conventional advertising and marketing to drive expansion.Let spontaneous order unfold. In addition, Saifedean associates the Austrian concept of lowering time preference with entrepreneurial success. Low time preference — willingness to save/sacrifice in the short terms for benefit in the longer term — is an essential part of the entrepreneurial method. One of the entrepreneur’s “bird-in-the-hand” resources is their individual utilization and allocation of their personal time and effort.
A new age of entrepreneurship is emerging and surging. In The Bitcoin Standard, Saifedean looks back to the nineteenth and early twentieth century as a period of technological innovation by entrepreneurs under the gold standard, bringing us indoor plumbing, electricity, the internal combustion engine, airplanes and elevators, among many more. Entrepreneurs were able to accumulate capital in the form of wealth stored in hard money to finance their innovations.
He believes that the emerging Bitcoin Standard era will precipitate a new entrepreneurial flourishing, further accelerated by free software, network access, blockchain and hard money savings.
Our goal at Economics For Business is to be a knowledge and tools provider for this entrepreneurial surge.
Some knowledge links: "Knowledge Entrepreneurship" — our E4B Process Map (PDF): Mises.org/E4B_132_PDF
Saifedean.com
The Bitcoin Standard (in over 20 language translations): Mises.org/E4B_132_Book1
Principles of Economics: Mises.org/E4B_132_Book2
The Fiat Standard: Mises.org/E4B_132_Book3
Twitter for Saifedean.com: @Saifedean
Twitter for Saifedean Ammous: @SaifedeanAmmou6
The scientific method has served us well to date. The entrepreneurial method, informed by the principles of Austrian economics, can take society much further. Dr. Saras Sarasvathy joins the Economics For Business podcast to distill the essence of the value generating and wealth producing method.
Download our knowledge graphic for the Entrepreneurial Method: Mises.org/E4B_131_PDF
There is an entrepreneurial method — a systematic way to achieve the unpredictable. The scientific method aims to discover universal laws that make the future predictable. If we have enough scientific understanding we can, for example, build bridges that we can predict will not collapse. We can construct an entire scientific infrastructure in our society.
The entrepreneurial method aims higher, at human flourishing. It aims at discovering how we can all work together to achieve our human purpose, including new purposes that we all agree are worth achieving. We can construct an entrepreneurial structure to build a better human life and a better society.
Entrepreneurs choose a control strategy that’s appropriate to uncertainty. Some people fear entrepreneurship because its outcomes are uncertain. But this is worrying about the wrong things: outcomes are outside your control. Entrepreneurs are more discerning about what can be controlled: means.
Dr. Sarasvathy lists several control strategies:
The Bird-In-The-Hand Principle: work with what you’ve got and can control, which she sums up in the questions: Who Am I? What Do I Know? Whom Do I Know? What resources do I own or control now? This is the first principle of control.
Affordable Loss Principle: Entrepreneurs can control their downside, making it affordable and limiting uncertainty, by asking “What one value generation project would I undertake even if I risk losing everything I invest In it?”
Crazy Quilt Principle: How do entrepreneurs control the uncertain process of identifying the right partners, including hiring the right people? They don’t try to predict the results of hiring and pitching. Instead, don’t hire, don’t ask. Just talk to people — those who fit best will self-select into your project.
Lemonade Principle: Don’t fear the unexpected. Welcome surprises. All unexpected happenings are opportunities and can become resources. Leverage contingency, and make lemonade out of lemons.
The Pilot Is The Plane Principle: Everyone on the plane is a pilot, co-engaged in shaping history. The plane will reach a destination, the exact nature of which is unclear, and everyone on the plane contributes to getting there.
There are some guidelines that entrepreneurs have established over time.
Non-Predictive Action Is The Driver Everything in the entrepreneurial method is driven by action. Or, more completely, action, interaction and reaction. Things you care about, things you can actually do, things we can do together, and how we handle surprises. Interacting with the environment with a sense of purpose, and thereby changing it in some way.
Even-If Thinking Our aspirations and the outcomes we experience may not be symmetrical. Not succeeding is not the same as failing. Even if a new idea does not work out, what is the worst that can happen? We shouldn’t make decisions just because we can’t predict the future. Embrace the unpredictable but make sure the downside is under your control.
Intersubjectivity The great productivity of entrepreneurship comes from intersubjectivity — two or more people can interact and come up with something neither one had actually thought about or dealt with or considered or contemplated before. Intersubjectivity is more than interpersonal and beyond negotiation. It’s a question: “I am doing this. What do you think?”
The Entrepreneurial Method leads to social good and a new role for business in society. A side effect of everyone in society learning the scientific method was the emergence of the middle class, defined by income. Science brought productivity which enabled a large swath of society to earn enough money to escape poverty. Everyone was able to harness science.
Let’s teach everyone the entrepreneurial method. Let everyone start companies, grow companies, invest in companies, all with no thought of prediction. A middle class of business will emerge, defined not by income but by venturing. This middle class will produce more jobs and more enduring, more stable companies, embedded in strong communities, with greater well-being and less churn. The fruits of creativity take root in endurance and durability — not in Schumpeterian creative destruction — and contribute to stability and the taking on of bigger challenges. Decade after decade, the middle class of business will generate value and produce wealth, employing lots of people and educating successive generations to take the entrepreneurial method with them into a better future.
Additional Resources "The Entrepreneurial Method" (PDF): Mises.org/E4B_131_PDF
Among the innovations planned for the Economics For Business platform is a series of encapsulations of important research papers. Here is a sample:
"The World-Making Scope Of The Entrepreneurial Method — An Encapsulation" By Gabriele Marasti (Original paper: "The Middle Class Of Business"): Mises.org/E4B_131_PDF2
Some links:
Effectual Entrepreneurship (PDF): Mises.org/E4B_131_Book
"What Makes Entrepreneurs Entrepreneurial?" (PDF) Mises.org/E4B_131_Paper
"Entrepreneurship As Method: Open Questions for an Entrepreneurial Future" (PDF): Mises.org/E4B_131_Article
Entrepreneurship is the great force for social good — in fact, the greatest force for good in the history of civilization. It’s the system of continuously improving the lives of others so we can improve our own lives. Through entrepreneurship, we can achieve greater and greater levels of community, collaboration and societal advance. Eamonn Butler, Co-Founder and Director of the Adam Smith Institute, has written what he calls a Primer for understanding and appreciating the wonderful institution of entrepreneurship (Mises.org/E4B_130_Book1). He highlights some of the key points on the Economics For Business podcast.
Innovation and improvement. To continuously improve people’s lives, we need new things. We need people to invent things that haven’t been thought of before. And we need innovators, people who improve those things and find new purposes for them or new ways of producing and distributing them. And we need entrepreneurship, the marshalling of resources to produce these better things faster and more efficiently and get them into more people’s hands.
Entrepreneurs are those unique people who organize the marshalling of resources, and who risk their own capital and their investors’ capital in this pursuit of a better future for all.
Cascading Development. When entrepreneurs undertake this act of discovery, and especially when they succeed, they trigger cascading development. One innovation and entrepreneurial initiative leads to another. They are all aimed at making people’s lives better — easier, healthier, more convenient, more affordable, more efficient. And, eventually, knowledge spreads, and people’s lives are transformed, so that Indian peasant farmers can check produce prices on their smartphone and get the best offer from the market. Development cascades from individual to individual, firm to firm, market to market and country to country. It’s never-ending improvement.
Long-termism and ethical behavior. The outcome is long term uplift and benefit for all. Entrepreneurs are long term thinkers. They are focused on the lifetime of their company and their products, and perhaps to passing them on to the next generation (Politicians are the opposite — they can only think in election cycles).
Entrepreneurs don’t want to just make a short term profit and then leave the market. They want long term revenues and long term profits. That means creating reliable, returning customers who love the entrepreneur’s product. That requires delighting those customers, serving them impeccably, never letting them down or breaking a promise. There are few other, if any, institutions that are constituted in this way.
This Long-termism is ethical. Entrepreneurship is ethically driven.
Internationalism A small firm can trade on a global stage, and if they can, they will. It’s easier than ever before in the digital era. New and better ideas quickly spread around the world. But it has always been the case, since the earliest of times. Politicians establish borders to divide people, and then violate them in invasions and wars. Entrepreneurs see no borders between people. Political borders can’t divide markets.
Social good. Entrepreneurship achieves more for social good than any other institution. Entrepreneurial innovation in goods and services enhances life and opens up new possibilities. Customers flock to entrepreneurs because of the tremendous service they deliver. The constant improvement delivered by entrepreneurs constitutes civilizational progress. The competitive pressure to improve quality and utilize resources more efficiently generates more and more value for the world.
It’s an error to see business as extractive — extracting and using up resources. Business is generative, putting life-changing inventions at the disposal of the global population. What’s seen is the dirt and smoke left over from mining or manufacturing. What’s not seen, and is often unappreciated, is the huge amount of good that comes into the world via entrepreneurship.
Entrepreneurship is the application of property rights at every scale. It’s another error to think of entrepreneurship as small business or young and immature business. Ray Kroc of McDonald’s was a great example of an entrepreneur who worked out how to operate a hamburger restaurant at global scale with continuous improvement. Entrepreneurship requires property rights; people need to have control over their property in order to transform it into marketable innovations and services. But that does not limit the scale of entrepreneurship. Property rights are a principle that supports global scaling.
The entrepreneurial method. Probably the best way to define entrepreneurship is as a process or a method. It’s akin to — and as important to civilization as — the scientific method, but different. They both involve trial-and-success, coming up with ideas and testing them. The scientist tests against reality, looking for a law, a repeatable outcome that will never vary. The entrepreneur tests against consumer approval, looking for acceptance that might be repeatable until conditions change, such as new competition arriving. Entrepreneurs can’t predict the future as scientists can, and they can’t exert control in the form of unchanging laboratory conditions. Yet they still are challenged to build a business that lasts.
Can we nurture this institution? Yes. In school, via literacy and entrepreneurially-oriented education, teaching young people about profit, and uncertainty and the requirement for supportive environmental elements such as property rights and flexible labor laws, and the value of trying multiple different initiatives before discovering a winning proposition. We might not be able to teach successful entrepreneurship, but we can create the conditions for learning.
A selection of books by Eamonn Butler Entrepreneurship: A Primer: Mises.org/E4B_130_Book1
Austrian Economics: A Primer: Mises.org/E4B_130_Book2
Classical Liberalism — A Primer: Mises.org/E4B_130_Book3
Ludwig von Mises — A Primer: Mises.org/E4B_130_Book4
Friedrich Hayek: The Ideas and Influence of the Libertarian Economist: Mises.org/E4B_130_Book5
The Condensed Wealth of Nations: Mises.org/E4B_130_Book6
Governments would like to take credit for the level of entrepreneurship in their countries. Entrepreneurship leads to value creation (happier voters) and economic growth (more to tax). But, as Per Bylund points out in the Seen, The Unseen And The Unrealized (Mises.org/E4B_129_Video), governments’ actions restrain entrepreneurship.
Dr. Samuele Murtinu joins the Economics For Business podcast to explain both how and why governments fail in their best efforts to help entrepreneurial businesses succeed.
Key Takeaways And Actionable Insights Europe has an entrepreneurship problem. European economies exhibit lower growth rates than the US. At the firm level, there are fewer unicorns, and fewer new technology-based firms or innovative startups and innovative ventures in general. Venture capital markets are very thin, and most venture financing is debt, which is (as Sergio Alberich described in Episode #123: Mises.org/E4B_123), a poorer choice for startups and young firms than equity.
Consequently, European countries see a lower level of innovative startup behavior. Existing firms have low levels of R&D spending. And, generally, there is an inability to turn the innovative inputs that are available into innovative outputs — new markets and industries tend not to emerge in Europe first.
And the European mindset tends to favor the idea of the entrepreneurial state — the state is thought to be where good ideas and good initiatives come from.
Governments see launching their own venture capital funds as a new means. The key idea of the entrepreneurial state is deep involvement in economic affairs, including funding basic research, financing, shaping and directing R&D investments, and thereby creating new markets. The centrally coordinated state is seen as the driving force for the development of innovation and technological progress. For this mindset, government venture capital seems to be an available means. So governments start and implement venture capital funds — the terminology is Public Venture Capital.
These are companies and funds that are fully owned, fully funded (no limited partner structure) and fully managed by government bureaucrats, with the purpose of investing in innovative startups.
Firstly, Governments get the concept wrong at a fundamental level: they have the wrong goals. Private venture capital funds and even hybrids like sovereign wealth funds have clear goals: rapid, high-level capital appreciation by investing in startups at an early stage and exiting as quickly as possible in a liquidity event such as a commercial sale or an IPO.
Government venture capital may have “social” goals such as encouraging industry sectors, favoring regional technological development, boosting economic growth, and providing jobs. These are vague and unclear, and may contradict individual company business plans (such as automation and minimization of labor costs). With the wrong goals, it’s impossible to succeed.
For example, the selection process for private VCs choosing firms for fund portfolios is rigorously goal-directed and VC firms have honed their candidate identification and due diligence processes in order to maximize their chances of winning from the very first steps in the investment process. Government funds lack this clarity and therefore can’t develop the requisite expertise.
Governments have difficulty letting go of control. Private VC’s have also honed the role of the contract between them and the firms in which they invest, and with the limited partners who provide the investment capital. The contract with the startup firms is as “hands-off” as possible (see, for example, the SAFE contract — Simple Agreement For Future Equity — available for free download and free use from the Y-Combinator website: YCombinator.com/Documents) and the contract with Limited Partners gives them no role in the management of the fund. Private VC’s understand that high levels of control are not appropriate to the adaptive management of immature firms in rapidly changing environments.
Government bureaucrats directing investments in startups are averse to this kind of hands-off management.
Governments can’t get incentives right, and consequently can’t hire the best executives. Private VC managers are highly incentivized. In the largest and most successful funds, they receive high salaries and a 20% participation in fund appreciation. The best individuals from the most prestigious business schools are hired to compete with their peers for promotions and partnerships. The most successful funds attract the most capital from the deepest pocketed sources, and the cycle of success rolls on.
Public VCs can’t attract the same quality of human capital. Typically, managers are paid a fixed salary, which can’t be seen as out-of-bounds from the perspective of bureaucratic rules and standards. If there are bonuses, they are calculated in what Professor Murtinu called a “gloomy” way. No-one is going to break any income-equity norms.
Professor Murtinu’s rigorous data-rich analysis proves beyond any doubt the failure of Public Venture Capital. In order to analyze Public Venture Capital performance, Professor Murtinu utilized the VICO database, a comprehensive data set about venture capital backed companies in high tech industries in seven European countries. He reinforced it with additional data sources, and was able to run a comparison of the performance of firms that received public venture capital backing and those that received no venture capital. The data sets covered 25 years.
The result: no statistical difference between the performance of the two sets of firms. Public Venture Capital had no effect. It was a waste. This was true across all possible variables: productivity, whether total factor productivity or partial factor productivity like labor or capital, sales growth, employment growth, innovation outcomes, exits.
The opposite is the case for private venture capital backed firms. In the same kind of analysis, private venture backed firms are statistically superior on every dimension. The overall impact of private venture capital is very clear and highly positive.
There is one possible step in the right direction: government becomes a limited investor. Public venture capital can syndicate with private venture capital, and so long as the investment is less than 50% of the fund total, and has no say on selection of investments, on due diligence, on governance, on monitoring, and on timing or type of exits, it is possible that the investment outcome can be positive. The European Commission is currently considering this role for Public Venture Capital.
Additional Resource "Public vs. Private Venture Capital" (PDF): Mises.org/E4B_129_PDF
Austrian economics helps entrepreneurs to develop and implement more effective business strategies, and to open up streams of continuous innovation. As Joe Matarese, CEO of Medicus Healthcare Solutions, said about Austrian economics in relation to business: It just works (see Mises.org/E4B_126).
In episode #127 (Mises.org/E4B_127), Matt McCaffrey outlined the Austrian strategy process of Explore and Expand, and its logic development. This week, he helps us dig deeper to identify the principles of Austrian economics that underpin our distinctive approach to business strategy.
Key Takeaways and Actionable Insights Realism: real people, real markets, real entrepreneurs in real firms. Mainstream economics has never been able to help business, because of its focus on math, models, and prediction. Real people and their decisions and interactions and motivations and emotions can not be captured in equations and mathematical functions.
Austrian economics has carved out a particular area of focus in the behavior of real people in its study of entrepreneurs and entrepreneurship. Austrians examine real entrepreneurial decision making day-to-day; they highlight real people experiencing value and entrepreneurs’ role in generating that value. From this base, Austrian economics investigates how individual actions and choices and interactions lead to the formation of markets.
Dynamism: The market is a process. Austrian realism sees the market as a dynamic process, continuously unfolding in interaction and innovation and change. Mainstream economics, with its preference for the greater mathematical tractability that comes with abstraction, has no capability of dealing with this real world dynamism. The embrace and study of dynamic processes gives Austrian economics much of its applicability in business. The business world is never static. It can’t be understood in abstractions. It’s real and messy and changeable and unpredictable.
Uncertainty and complexity: embrace emergence.
Uncertainty is a keyword for Austrian economists. It’s a term that describes the real world in which entrepreneurial businesses operate. They can never know for sure what comes next; they can’t anticipate all of the interactions between competitors, changing customer preferences, technological advances and social and economic trends. There is no sure-footed way to plan for the future. Austrians recognize uncertainty, and help businesses think about how to cope with it, how to narrow it, how to accumulate knowledge to lighten it, how to weigh decisions in the environment of uncertainty.
The new scientific term for uncertainty is complexity: in any system, the interactions are so many and their results are so unpredictable that modeling and forecasting are impossible, and outcomes are defined as emergent (i.e., outputs happen in a way that is not predicted by merely combining inputs). Austrian economics helps businesses deal with emergence.
Subjectivism: People are people, both as consumers and as providers. One of the realistic principles of Austrian economics is to deal with people as people: we are all subjective in our valuations and judgments and emotions. We are not homo economicus: perfectly rational (in the mainstream economists’ definition of rational) in objectively weighing benefits and their opportunity costs. If all we are doing in producing goods and services for consumption is trashing the planet, then we can’t be rational, in their eyes.
In order to understand business and understand entrepreneurship, it is absolutely necessary to begin with subjectivism. Consumers’ subjective values ultimately determine what is produced; if consumers don’t value something, producers won’t make it. On the producer side, entrepreneurs’ subjective valuations of the resources they have available to them to assemble in a production process affect the value of their business.
It is entrepreneurs’ subjective evaluation that results in the identification of new uses for a resource, and the introduction of new innovations. Subjective values lie underneath every new business relationship with customers, from streaming movies to google searches to online travel booking. Subjectivism is everywhere in the economy and in business.
Time: How to plan in the present to satisfy customers in the future. Austrians are unique in their understanding of the economic role of time in business. Entrepreneurs deal in future time. They imagine better futures in which customers enjoy greater satisfaction, and then they imagine how to bring it about and act on their imagination. Production — getting from imagination to consumption — takes time. Entrepreneurs are dealing with buying decisions in the present (such as hiring and buying inputs) for selling decisions in the future. They can’t know future prices or future customer preferences, so it’s a bet.
The consumption decisions customers make today reflect entrepreneurial decisions that were made weeks, months, years or decades in the past. Austrian economics helps entrepreneurs manage the contingencies of time.
Time makes the customer the boss.
Austrians utilize the concept of consumer sovereignty as an analytical tool. It means that consumers are the ultimate decision-makers in all economic systems, because what they buy or don’t buy determines what is produced. Their power is a result of the time it takes to produce. The value of resources that entrepreneurs assemble today depends on what consumers think and feel in the future.
Forecasting is tricky and best avoided, but patterns can be recognized. A consequence of time and consumer sovereignty is the fragility and inaccuracy of forecasts. How is it possible to forecast consumer tastes in the future? There are some exceptional entrepreneurs who get it right. What’s their secret? Austrians’ understanding of dynamics and complexity can help point to the processes most likely to be associated with success, without attempting to forecast it.
One alternative to forecasting is pattern recognition. Jeff Bezos said that consumers are unlikely in the future to ask for higher prices, lower quality or slower delivery. That’s pattern recognition. It’s generalized and broad based and lacking in precision and specificity. But there is a consistency to some patterns that entrepreneurs can recognize and act upon, adding their own idiosyncratic insights and guesses to shape the actual value propositions they will make to consumers.
Out of all this emerges the Austrian entrepreneurial method. We’ve all been educated in the scientific method. It’s utopian: experiments conducted with strict controls will yield the truth.
The entrepreneurial method is different, but with equal status, and greater applicability in open — i.e., human — systems where control is not an option.
It’s a bit messy and hard to characterize with precision, but it’s nonetheless real. It starts with imagination — imagining a future in which customer dissatisfactions are addressed and resolved. Their world is made better. This is proactive creativity on the entrepreneur’s part, triggered by existing highly dispersed knowledge, including tacit knowledge, held by the entrepreneur and others.
The entrepreneur designs a business model that might be able to resolve the identified customer dissatisfactions in the future and assembles resources that he or she believes, in the right combination, could accomplish the task. There’s no correct way; the entrepreneur draws on the realism of Austrian economics to best understand the challenges and how to address them.
The entrepreneur then advances with her or his own form of experiment. It’s not controlled in a closed environment. It’s a hard commitment of resources in a definite format to make a value proposition to customers. The experiment consists in ascertaining the customer’s response: like or dislike, buy or not buy, use and enjoy or use and reject? The experiment does not end there. It is continuous — receive the result, decide on how or whether to change the proposition, and try again.
Gut feeling or intuition or personal subjective heuristics all have roles to play in entrepreneurial decision making. Austrian economics captures these phenomena in the concept of judgment under conditions of uncertainty.
Organizing for the exercise of judgment. Since judgment is the ultimate generative energy in producing value for customers, and since it’s personal and individual, how do firms grow? If judgement rests with a single entrepreneur, such as a founder, growth can’t scale, and will quickly reach its limits. Austrians have the organizational design solution: delegated judgment. Austrian leaders are able to design and implement non-hierarchical organizations in which every employee is empowered to exercise entrepreneurial judgment.
They do so by substituting value codes for authority. Value codes are the unwritten codes (although they might be found in the employee handbook) and conventions of “how we do things around here”, how we generate value for customers, the mission and purpose and internal methods of the firm.
Additional Resources "Austrian Entrepreneurial Principles" (PDF): Mises.org/E4B_128_PDF
Austrian Perspectives on Entrepreneurship, Strategy, and Organization by Nicolai J. Foss, Peter G. Klein, and Matthew McCaffrey: Mises.org/E4B_127_Book
Download the slides from this lecture at Mises.org/MU21_PPT_15.
Recorded at the Mises Institute in Auburn, Alabama, on 20 July 2021.
Strategy is not the formulation of a plan. It is emergent from a process of exploration and discovery. Austrian economics is the best guide for entrepreneurial firms to put in place the methods and organization that unleash the power of emergence. Matt McCaffrey joins Economics For Business for a detailed exposition of the Austrian approach to Business Strategy.
Key Takeaways and Actionable Insights A firm is a vehicle for entrepreneurial action to generate value. All businesses and all firms are entrepreneurial. They start from — and continue with — an aspiration to generate value for both customers and the firm, and they act on this intention by assembling assets (resources, people, cash, machines, software, etc.) that are required to realize and deliver value. The goal is to bring a good or service to market that is valued by others. Value is the ultimate goal.
There are clear conditions for this action to take place. There must be a decision-making authority for the firm, because someone (or some collaborative group) must decide how to select and assemble just the right combination of resources and make a specific product or service from the assembly. We call that decision-making authority the entrepreneur.
A second condition is that someone or some group must bear the uncertainty of the action. It may not turn out the way that was expected. It may not be profitable. Less value may be generated, or none at all. This bearing of uncertainty is also the role of the entrepreneur.
It's hard to get the operations of the firm just right, because of complexity and change. Why is all this so hard, and the outcome so uncertain? Two reasons: change and complexity. The subjective valuations of customers, who decide what is more valuable and what is less valuable, are changing and reshuffling continuously, depending on situation, mood, the choices of others, and a myriad of other influences. These changes can become trends, fads, segments, and competitive advantages and disadvantages.
Continuous change contributes to the complexity of the resource assembly puzzle: there are innumerable ways in which resources can be combined and recombined in a firm, and getting the assembly just right is a difficult challenge that is never perfectly resolved.
Therefore, the Austrian view of capital as a flow is a fundamental contribution to rethinking firm strategy. The resources assembled in an entrepreneurial firm are not valuable in themselves, but because they produce a good or service that the customer values and is willing to pay for. This value — translated into revenue through the customer’s willingness to pay — flows back to the firm as income. The flow of income is affected by each element in the firm’s capital combination and by the degree to which the combination is well-integrated for the value generation task. Customers drive the capital formation task. The entrepreneur is engaged in a never-ending process of combining different capital goods to find the combination that is the most serviceable in generating value. Treating capital as a value generating flow helps entrepreneurs in practice to manage the persistent process of applying resource combinations in the market to ascertain what value they generate. It’s dynamic process with no pauses.
There are four implications for firm strategy — and they all contrast starkly with the traditional business school view of strategy. The business school view of strategy takes the form of sophisticated data-fueled top down planning models. Only a few special minds can take on this intellectually and computationally difficult challenge. Historically, the list of models has included Michael Porter’s Five Forces Model (a model of industry structure and how to create barriers to entry and competition); SWOT analysis (a model of strengths, weaknesses, opportunities and threats from the firm’s point of view, with strategic implications for the management of each element); PESTEL analysis of the business environment (political, economic, social, technological, environmental, legal factors) and how they affect firm performance. The common thread for these models is that they are implemented top-down: the strategists apply the tools, draw conclusions, and instruct the rest of the organization how to act.
Matt McCaffrey’s contrasted this top-down strategy approach to the Austrian strategy approach across four dimensions.
Learning versus Rational Design The top-down models attempt rationalization: they view strategy as a rational design problem, to shape a distinctive internal competence to seize an external opportunity and evade external threats.
This approach overlooks the crucial problem of learning. In circumstances of uncertainty, unpredictability, complexity and change, learning is the essential method of making progress. Changing conditions can never be known fully enough or fast enough by people at the center (in the strategic planning department) compared to front line employees. Firms must find a way to make use of this front line knowledge, through learning.
Dispersion versus Centralization To enable the freedom to learn and to apply learning, decision making must be dispersed through the organization. A single mind or single planning unit can not centralize all the knowledge and can’t centralize decision making. A strategic plan is not feasible. Organizational design and decision-making processes must be decentralized and dispersed.
Implementation versus Formulation. A comprehensive plan is impossible. Firms must seek a more adaptive framework. Processes and methods and forms of organization must be capable of adaptation to unforeseen events and new information. Continuous deliberate adjustments must be made in the light of new circumstances, which may arise every day. Therefore, Austrians see strategy as emergent not formulated via a planning process. Adaptive firms implement entrepreneurial actions, and then adapt to the learning, new knowledge and new circumstances that present themselves as a consequence.
Structure versus Strategy The business school approach is that strategy must be fully formulated, and only then can it be used to shape the structure and processes of an organization. Austrians take the opposite approach: the structure of the firm (its organization, processes and interfaces with the external environment) shapes strategy. Hayek used the term “structure of production”. This structure can be changed, but not instantly or seamlessly. Structure and strategy influence each other to some extent, but business schools tend to make strategy prior: that a firm is organized in response to the CEO’s vision. Austrians understand that this is not realistic because it’s not possible to restructure an existing organization every time a new vision comes along. There’s a high cost to structural change, and strategy must adjust.
Emergent strategy is based on business rules. What, then, replaces top-down strategic planning? Austrians use the term “rules”. Rules are an internal device to help managers and employees make decisions on the spot in response to learning and new knowledge. Matt McCaffrey gave an example: whenever there is a break in the supply chain, repurpose old capital goods and bring them into the production process as a low cost way to fill the gap. It’s a broad and simple rule, and it enables decision making to go forward at the point of the supply chain break. People close to the action can use their local knowledge to solve the problem within the guideline of the rule.
Another example was given by Bob Luddy, CEO of CaptiveAire, who set the rule for his firm to always have the best price in the marketplace. It’s a simple rule that requires tremendous local knowledge about prices of systems and components, of competitive offerings, and about turnaround time (a cost element of price) among many others. Sales and marketing people as well as engineers can make decisions following this rule.
Rules sustain firm uniqueness. Business school strategists often focus on competitive advantage as the goal of strategy. But the concept of competitive advantage comes from neoclassical economics and the depiction of markets as bounded cage-fights for market share between similarly-resourced rivals.
Austrian strategy focuses more on firm uniqueness. A firm’s distinctive rules can result in a unique mode of delivering value, and a unique perception in the eyes of customers. A brand is a set of rules that generates such a unique perception.
The ultimate distinction: strategy is exploration. Strategy is emergent, not planned. Strategy is entrepreneurial. It’s a continuous process of learning through action and discovery. Sometimes, firms discover things they really wish they hadn’t. That’s part of the process through which, eventually, strategy evolves. It’s emergent. Over time, a firm can adopt some simple rules that seem to bring some order, but adaptation to new circumstances is always required. Profit is the signal that adaptation is successful.
We use the term explore and expand to capture the Austrian approach to strategy. Firms are always exploring, seeking ways to improve performance. When some experiments yield promising results, they can be expanded. Explore and expand is a trade-off: how much of the available resources should be allocated to each type of activity. Entrepreneurs manage the trade-off in order to succeed. There’s no strategic plan from on high to make the trade-off for them.
Additional Resources "Emergent Strategy Process Map" (PDF): Mises.org/E4B_127_PDF
Austrian Perspectives on Entrepreneurship, Strategy, and Organization by Nicolai J. Foss, Peter G. Klein, and Matthew McCaffrey: Mises.org/E4B_127_Book
"Entrepreneurship and Firm Strategy: Integrating Resources, Capabilities, and Judgment through an Austrian Framework" by Matthew McCaffrey and Ulrich Möller (PDF): Mises.org/E4B_127_Paper1
"'When Harry Met Fritz': Rules as Organizational Frameworks for Emergent Strategy Process" by Nicolai J. Foss, Matthew C. McCaffrey, and Carmen Elena Dorobăț (PDF): Mises.org/E4B_127_Paper2
Firms that can unlock the deep secrets of subjective value can unleash powerful, long-lasting value streams. When these flow in a confluence with well-identified market drivers, revenue and profit growth can be greatly accelerated.
Joe Matarese tells Economics For Business how he conjoined these two forces for his medical staffing service firm (MedicusHCS.com), creating a dynamic market leader from a three-person startup.
Key Takeaways and Actionable Insights Market Drivers are strong, lasting forces capable of projection. Austrians are skeptical about prediction, but it is reasonable to project some forces into the future. Demographics is one — the progression of age cohorts through the demography of a country can be mapped quite accurately. Increasing longevity is another, based on ongoing increased investment in health care and advances in the associated technologies. When Joe Matarese identified a shortage of doctors, he was able to confidently assume the shortage would continue.
When customer problems result from these forces, a market segment opens for solutions. One customer problem fed by these forces is staffing for critical roles in hospitals — doctors, anesthesiologists, nurses, etc. Staffing complements need to be assembled, absences caused by holidays, maternity leave, etc. need to be covered, and the natural churn of individuals taking new jobs, retiring, or moving requires flexible response. Not only staffing but scheduling is required — the right medical team for the specific operation at the appointed time.
The problem-to-solve is functional. The deep value is subjective and intense. Joe’s core insight was about the intense emotional need, not just the functional need. He observed his client — an operations executive in a busy hospital system — stressing out about the problem. Operating room staffing is life-and-death. Unfilled team roles would often arise at the last minute, threatening the healthcare mission of the hospital.
Temporary staffing service providers would sometimes fail to deliver the scheduled stand-in. Stress for the executive intensified.
The solution for a deep-seated and intensely felt emotional need is to transfer the burden to the service provider. Think of the intense burden the administrative executive bears when she’s not confident that her staffing plans are secure, and her routines and methods are not foolproof. What if there is a failure at the time of a scheduled operation and it can’t go forward? Or patients can’t get nursing care because of under-staffing? How much value is there in a service that can relieve the stress?
Joe Matarese conceived of the emotional solution: take the responsibility off the shoulders of the executive and take it on as a service of his firm. How is that achieved? Bulletproof processes and routines. Comprehensive databases of people and their skills and attributes, and of client facilities and their needs. The latest technology for profile matching and precision scheduling. Impeccable implementation. And, most importantly, intense listening to continuously monitor customer feelings, combined with the responsiveness to act on those feelings.
Growth follows when these market drivers, functional drivers and emotional drivers are aligned. Medicus Healthcare Solutions quickly gained market share in its initial geography. Growth comes from adding new customers, expanding territory and the underlying forces of an aging population consuming more healthcare.
But growth is a management challenge. One area of great challenge is managing people. Those who signed on for the early stages of growth and development may not have the skills — or the interest — for the later stage tasks of management like strengthening processes and systems. Making sure the team is perfectly tuned to the demands of the current stage is difficult but critical.
Further acceleration of growth is driven by innovation. Medicus Healthcare Solutions has always grown faster than the market. How? Through an intense search for new knowledge and its application in the form of unrelenting innovation — never resting in the search for better ways to provide client service. For example, in addition to continuous improvement in precision tailored scheduling, Medicus added a consulting service. Scheduling solves the client’s immediate short term problem, and does so again and again. Consulting can examine the client’s systems and solve the problem in the long term by designing and installing internal systems as good as Medicus’.
Joe has a long experience with innovation and how to manage it, and promised to come back to the Economics For Business podcast in the future to share his knowledge.
Additional Resources "Driving Growth With Core Customer Value Insights" (PDF): Mises.org/E4B_126_PDF
"Medical Staffing and the Revolutionary Innovations We Need," presented by Joe Matarese at the Mises Institute's Medical Freedom Summit: Mises.org/E4B_126_Video
Medicus Healthcare Solutions: MedicusHCS.com
Entrepreneurs seek to provide markets with new value through innovation wherever they can identify an opportunity. Their vision is broad enough to include free market institutions such as contracting, where they identify new and better ways to expand the mutuality of value and better relationship models than those in the traditional legal approach.
Key Takeaways and Actionable Insights Traditional contracting starts from an adversarial mindset. Traditional contracts are written in anticipation of conflict. They aim to anticipate everything that can go wrong. Then they try to put every contingency in black-and-white. Clauses are inserted to give one party the upper hand over the other. This approach fosters negative behaviors that undermine the relationship and the contract itself. Often, little room is left for flexibility when conditions change in unexpected ways, leading to costly problems like litigation, mediation/arbitration, renegotiation, churn, and shading (withdrawal of effort by one party due to lack of trust).
A new form of contract called a relational contract aims to address the problem. A relational contract approaches negotiation not from a transactional perspective but from a relational perspective: what are the best provisions to ensure a lasting and mutually beneficial relationship between the two contracting parties? Instead of focusing on how the value pie is divided between two parties, the shared goal is to maximize the total amount of value that can emerge from the partnership. There is a genuine good faith effort to align the two parties’ interests and to develop a fair and flexible framework to handle unexpected changes and events in the future.
The relational contract is designed to try to solve what economists call the hold-up problem. Contracts refer to future events, and specifics (such as delivery times) can never be determined with certainty beforehand. The contract is said to be incomplete — not every contingency can be specified. The hold-up problem occurs when one party uses this situation to extract concessions from the other party, knowing that it would be costly for that party to change the arrangement.
Defense contractors, for example, are notorious for under-bidding costs and then adding to their revenue and profits via change orders. A contract may call for “best efforts” but this can never be defined specifically or completely.
The new approach is said to produce healthier and more sustainable partnerships. In the article A New Approach To Contracts, the authors call for a “what’s in it for we” partnership mentality in contracting, where both parties have a vested interest in the other party’s success. Included relationship-building elements such as shared vision, guiding principles, and “robust governance structures” to keep the parties’ expectations and interests aligned.
Our guest, Steve Phelan, has written extensively about expectations management in negotiations (see Mises.org/E4E_22), and concurs that contracts can perform as instruments of expectations management. However, they can’t be perfect, and the authors’ integration of trust building mechanisms into contracts (e.g., regular scheduled trust-building meetings) seemed to him to be a bit artificial.
A better approach is to focus on identifying good faith actors — those who work hard to follow both the letter and the spirit of the agreement. As is always underlined by the “Think Austrian” approach, subjectivism (in this case good faith actors) brings better business solutions than hard and fast rules and mechanisms regarding how to build contractual trust.
It’s important to get there by the best route, since trust lowers transaction costs.
The new approach to contracting extends to psychological contracts. Psychological contracts are unwritten relationships in which an individual holds a belief in mutual obligations between themselves and another party. An often-cited example is an employment relationship. There may be a written employment contract but, beyond that, an employee may have tacit expectations about job security, personal development, recognition, promotion, growth, personal well-being and respect. If these are not met, they may withdraw effort. Employers are well-advised to empathize with the unwritten expectations of the psychological contract in order to optimize employee motivation.
A brand promise can be a similar psychological contract. Brand make overt promises regarding the benefits they claim to bring to users. In turn, users create their own expectations — as we always emphasize, value is subjective and customers engage in a value learning process when they interact with brands. Their subjectively-defined expectations undergo continuous change, especially as they make comparisons with alternative offers and alternative sources of satisfaction. It’s imperative for brand owners to monitor the evolution of customer-perceived mutual obligations. Customers hold a strong perception of how much consumption work they have to do to receive the benefits that the brand promised, and if the equation gets out of balance, they’ll withdraw their effort.
Additional Resources "Contracting In The New Economy" (PDF): Mises.org/E4B_125_PDF1
"A New Approach To Contracts" (PDF): Mises.org/E4B_125_PDF2
Value-as-experience is an insight from Austrian economics. Value is not inherent in objects or even in services. Value is not derived from functional use, but is the good feeling the consumer experiences during consumption. Consistent with the Austrian understanding of the market as a process, value is a process. It plays out in time in the consumer’s mind. Consumers learn what is valuable to them in the process of choosing and consuming and evaluating.
These insights add some under-appreciated marketing considerations to a firm’s capabilities, such as an appreciation of situational traits and of the importance of context. Irene Ng provides the E4B podcast audience with a set of contemporary tools to design new experiences and even create new markets in the era of the "Internet of Things" (IoT).
Key Takeaways and Actionable Insights. To design experiences, start by thinking in terms of ecosystems. Ecosystem thinking pays attention to how knowledge, people, technology, processes and the environment are connected and work together. Systems awareness is becoming wider and wider, observing the interaction and value creation among multiple service systems. Consumers’ value experience occurs within a service system, and thus the service ecosystem worldview is increasingly important for entrepreneurs in an ever more connected, digital and data-driven world.
The subjectivist viewpoint is fundamental to designing consumer experiences. We are taught from the youngest age to have an object view of the world. We describe situations using nouns: for example, in a room, there is a chair and a piano. Meaning and purpose are identified via the nouns we use. Economics shares some of this noun-based view of the world: assets, knowledge, material things, property.
For the design of consumer experiences, verbs are more relevant, not just as descriptions but as connections between objects and people and behavior and thinking. If I play the piano or drink tea, I am connecting objects and people in action. The world becomes a matrix of verbs and interactions. What individuals do impacts on objects and on other individuals. Design becomes a matter of what a system of objects and people and connections and actions and flows can do.
IoT brings new capacities and new affordances to service ecosystems. Irene listed 4 new capacities of IoT that contribute to new ways to design experiences:
Liquefy information: A physical object’s information can be sent across space and time. When several information flows are combined for greater information density (e.g., from multiple objects in a kitchen used during cooking) we have more knowledge on which to base an experience design.Turn objects digital: Software and sensors embedded in an object give that object new capability. For example, a running jacket can communicate location and speed, measure temperature and heart rate, and provide programmability.Assemble individual objects into a service system: Objects and devices connected and working together exhibit abilities that they don’t have individually. A door lock plus a camera plus a tablet plus the internet can perform as a remotely monitored security system.Enable transactions between separate task spaces: A task network (such as cooking in a kitchen) can be linked to another task network (e.g., grocery shopping) and a transaction between the two enabled (deliver fill-up ingredients when inventory runs low). Now a designer can think about a new set of affordances: properties of a system that show users what actions they can take. Ideally, the consumer will perceive the new affordances without the need for complex instruction.
Marketing changes its focus from consumers’ personal traits and segmentation to situations and contexts. The design of an experience shifts from the use of objects to connected things with information flows in a system. A customer’s perception of the experience within the system may be affected less by their personal traits (as is often assumed in segmentations such as “early adopters” or “social approbation seekers”) and more by situational traits and context.
For example, the situation of “taking my morning coffee” affects an individual’s perception of how well a coffee mug meets their needs (how well does it fit under the spout of the coffee maker), along with a chair to sit in or a news service (paper or digital?) to read. How well do all these artifacts and services work together in this situation?
Similarly, context affects system perception. An individual might like a certain style of streaming music at home, consumed through a sound system while eating dinner, and an entirely different style for working out in the gym, consumed through a portable digital device and earpods.
The design of experiences considers situation and context, and can potentially accommodate a very broad range of people through personalization rather than cater to a narrow market segment.
The human being remains the best sensor in the system, and all design must support and enhance this role. There may be a temptation for digital designers and technicians to become immersed in the capabilities of an IoT system and forget that it is the human who judges the value of the system through the experience it enables and supports. The human is not outside the system, but is the master sensor, providing both inputs, outputs and judgment. IoT systems provide support, using data to enhance the human experience. Empathy is still the designer’s number one tool to identify the market drivers — the dissatisfactions to be addressed — that underpin favorable human perceptions of the value of IoT systems.
Additional Resources "Designing New Consumer Experiences in the Era of IoT" (PDF): Mises.org/E4B_124_PDF
"The Internet of Things: Review and Research Directions" by Irene Ng and Susan Wakenshaw" (PDF): Mises.org/E4B_124_Paper1
"Service Ecosystems: A Timely Worldview" by Irene Ng (PDF): Mises.org/E4B_124_Paper2
"Mimicking Firms: Future of Work and Theory of the Firm in a Digital Age" by Irene Ng (PDF): Mises.org/E4B_124_Paper3
Value & Worth: Creating New Markets in the Digital Economy by Irene Ng: Mises.org/E4B_124_Book
The proper selection of a firm’s financial source does not guarantee its success, but the wrong one assures its failure.
Austrian capital theory delivers actionable insights for business. Austrian theory emphasizes capital’s economic role in generating customer revenue flows. Since these flows are variable, entrepreneurial capital must exhibit a capacity for agile and flexible combination and re-combination to keep revenue flows refreshed and current, Since capital structure plays an important role in entrepreneurial judgment, decisions, and action, it must support fast, flexible and unconstrained decision making. Businesses can benefit from their understanding of capital through this Austrian lens. Sergio Alberich helps the Economics For Business podcast listeners, and business practitioners in all kinds of businesses at all stages for their development (see Mises.org/E4B_123_PDF1), to Think Austrian in matters of capital structure.
Key Takeaways And Actionable Insights. Entrepreneurs designing a firm’s capital structure should view their choices through the twin lenses of ownership and control. Ownership and control are tradeable assets for the entrepreneurial firm. In order to obtain capital financing, one or the other or both might be offered up by the entrepreneur or requested by the financier.
How will shared ownership play out now and in the future? Will ownership imply only a share in any future returns? How great a share is the entrepreneur willing to trade? What will it feel like to receive only a portion of the return the entrepreneur worked for? How much more ownership will be given up in future financing rounds?
Can ownership be traded without any loss of control over decision-making and future investments? Alternatively, how much control should be traded? A board seat? An investment committee? The financier wants the entrepreneur to be free to make the decisions for which he or she is best-informed and most capable, and yet wants to be protected from managerial error.
There are many factors that can stand in the way of capital flexibility, and organizational issues of ownership and control become paramount.
Debt and equity are the basic choices as building blocks of capital structure. Debt and equity are basically different kinds of contracts between the individuals managing / operating a project and those funding it. Debt is a fixed claim with a known annual return to the debt holder. Typically, the debt holder has no control over management decisions and is not involved in managing the company (although there are some covenants that can be written to provide some distant control).
The return on equity for the financial investor is residual, after debt repayments are made, leaving entrepreneurs relatively free to allocate costs and direct operations. But equity holders typically hold voting rights, and can therefore exercise some control in some circumstances. They may also exert strong influence on management decisions based on relationships. For example, family and friends investors may exert special relationship influence.
There are some debt-equity hybrids — most notably convertible notes, debt that is convertible into equity at some future stage or event. The negotiation of this instrument brings more complexity to the ownership-control debate, while giving the entrepreneur leeway to consider issues of valuation in the future rather than at the current financing.
Entrepreneurs must also consider human factors, especially the number of people in the capital structure. Another major consideration for entrepreneurs is whether to raise debt or equity from a few people or many (e.g., via IPO or a bond that hedge fund investors can buy). Raising capital from large numbers of investors creates categorically different situations for the entrepreneur. An IPO, for example, can not be a highly tailored instrument. Institutional conventions and regulatory rules impose many requirements about how entrepreneurs and their managers communicate, how they frame financial risk, and about the nature of widespread shareholder engagement they take on. Just think of the interaction of Elon Musk on Twitter, with the SEC, and with short sellers.
In general, the fewer the number of investors, the greater the operating flexibility for the entrepreneur. There are fewer people to convince when business seeks to make a major change, or to pivot.
Sergio Alberich outlined 4 levels of consideration for the financial investor providing capital to the entrepreneurial firm. Level 1: How are the factors of production combined in the firm, and how might the combination change in the future? Elements of this level of consideration include the stage of business in its growth journey and the assessed maturity of its business model, industry, and competitive set; the nature of the business’s relationship with partners, suppliers, channels and customers; and the state of knowledge regarding product, service and market development.
Level 2: What is the nature and scale of cash flows now and in the future? Are there mature, reliable cash flows? Is one part of the business a drain on cash resources? Is cash coming in from investments for operating expenses (which are not really flexible).
Layer 3: What are the possibilities for returns? Both entrepreneurs and investors seek profit - not just accounting profit on the P&L but returns on equity. At an early stage, a company may worry about generating future cash flows and less about the cost of equity (in terms of sacrificed future returns) to finance growth. A more mature company with cash flows in the present pays much more attention to the cost of equity, and to cost of capital in general, seeking to preserve as much return as possible.
It is often the case that entrepreneurs give up too much equity in order to secure early stage venture capital funding, whether directly of via convertible loans. To keep the entrepreneur motivated with equity that promises future returns, it is best for them to deal with just a few investors who understand this motivation.
Organizational design is relevant, too. For example, a law firm with 100 partners, each of whom own 1 share, and limit their business model collaboration to sharing real estate costs and IT expenses, while effectively running 100 projects, might be creating a politicized nest of vipers. A partnership with shared equity in one business, where everyone stands to lose a lot if there is a bad decision, is likely to be much more collaborative, conducting a unified business, rather than acting as a co-operative of individuals sharing costs.
In the end, subjectivism in entrepreneurship prevails. As we emphasized in episode #108 (see Mises.org/E4B_108), businesses perform best when entrepreneurs are free to make subjective decisions. The proper source of capital is one that most enables this subjective freedom, which may not be the optimum source based on spreadsheet calculations. Subjectivity and entrepreneurial judgement are not math. The best economic role of capital finance lies in helping entrepreneurs make better human subjective decisions. This is the essence of the means-ends calculation for both entrepreneurs and investors. Austrian economics gives by far the best guidance on this economic role of capital.
Additional Resources "Austrian Capital Financing" (PDF): Mises.org/E4B_123_PDF1
"Austrian School vs. Neoclassical School" (PDF): Mises.org/E4B_123_PDF2
There’s a middle class of businesses that are the backbone of the economy. Professor Saras Sarasvathy coined that term, and we’re pleased to adopt it.
These businesses sit between the big corporations of the major stock indexes and the VC-funded gazelles and unicorns of Silicon Valley and Silicon Hills. The watchwords for these backbone businesses are duration and durability. They last and prosper because they are well-run, following the entrepreneurial method.
Entrepreneurship is usually portrayed from the perspective of ends: identifying unmet customer needs, creating new and innovative solutions, taking them to market, making a success.
That’s all true. However, there is another perspective that comes from actually running a business, ensuring that operations are smooth and efficient, monitoring daily cash flows and monthly P&Ls, and managing people’s performance.
Often, running a business requires an intensified focus on means. Cash flow, operations, employee performance — these are means, and running a business is a science of managing means. Business advisor Andrew Frazier helped us focus on means in this week’s Economics For Business podcast.
Key Takeaways And Actionable Insights Knowledge is an entrepreneurs most important means. Accumulate it purposefully (but not by losing money). The more you know, the more you grow. That’s a mantra from Andrew Frazier. He advises thoughtful accumulation of knowledge. One way to learn is to lose money — you learn what doesn’t work, and what not to do. Avoid this form of learning by purposive knowledge gathering. This includes truly knowing your purpose — at least part of which is to build the business resiliency that delivers durability and duration.
Knowing your numbers is a critical component of durability and duration, and of shepherding your means. In his advisory and consulting roles, Andrew encounters many business owners who don’t know their own numbers intimately — their daily cash inflows and outflows, the precise identification of fixed and variable expenses, the condition of the P&L and the balance sheet. Some, he says, fear the numbers. They delegate accounting to an outside service, or even to an internal “back room” employee. Don’t delegate “knowing your numbers” to anyone. Be on top of them every day. They tell you your means.
Sales and marketing are the most important means of lasting business growth, and not necessarily expensive. There is no business without the sales and marketing activities that identify the right customer niche and tell your story to those customers in a credible, warm and persuasive fashion. Many business owners and entrepreneurs see sales and marketing as an expense to be incurred only if there is cash leftover from other variable and fixed costs that take precedence. This is wrong-way thinking. Sales and marketing are job #1.
Hiring employees is the biggest change you will make to your business and to your role in it. You want to hire employees for the growth of your business. As you do so, you are changing your business. You change its structure: it now needs organizational design. You change your role: you are now a leader. You change the business’s operational flow because it now needs detailed processes and systems. You change the culture: it becomes more indeterminate and therefore requires more of your attention. You stop working in your business and start working on it.
Duration and durability require sacrifices from you. One aspect of the entrepreneurial ethic is personal sacrifice today for market reward in the future. Sacrifice is part of your means. You’ll work harder and longer hours. Your business and social and family lives will become inextricably intertwined. Your business will become your identity. Realize this and embrace it.
A lasting business requires an exit plan. A business that prospers over an extended period needs an exit plan for its owner or founding entrepreneur. This can range from an IPO or sale to an acquirer to leaving it to your kids or turning it over to employees. Whatever the case, the owner needs to plan ahead for exit, almost from the beginning. For example, if you have a professional services business, what will make it saleable when you want to exit? Is there asset value over and above revenue flow? Will customers stay after you leave? Are your kids even interested?
Additional Resources "Running Your Business" (PDF): Mises.org/E4B_122_PDF1
Visit Andrew Frazier’s Website: RunningYourSmallBusinessLikeAPro.com
Running Your Small Business Like A Pro by Andrew Frazier: Mises.org/E4B_122_Book
"The Masterpreneur Playbook Summary" (PDF): Mises.org/E4B_122_PDF2
Value facilitation is a creative act of imagination, design, assembly, communication and agile responsiveness. Our Economics For Business model applies these actions in the pursuit of new economic value. Bill Sanders, an expert in contract negotiation in business, applies them in dealmaking and business relationship management. His book, Creative Conflict: A Practical Guide For Business Negotiators (Mises.org/E4B_121_Book), provides a highly actionable model for value facilitation in contract negotiations.
Key Takeaways and Actionable Insights Business negotiations are searches for shared value. Both parties in any negotiation are seeking value, and specifically subjective value. Each sees the eventual agreement on contract terms as a source of future value. Contract negotiation has often traditionally been viewed as a struggle for one side to capture the most value at the expense of the other.
But value facilitators view it differently. They first try to identify the total amount of value in a potential agreement, before thinking about the division of value.
Divergent thinking is a source of value. In his book, Sanders refers to Creative Conflict as a positive, to be embraced. There’s no predetermined solution, and no absolutely perfect price. There are many possible solutions, and good negotiators are able and willing to continue exploring the ambiguity, and welcoming contending ideas. They are open to uncertainty. It may lead to a solution that neither party might have seen on its own.
Value potential can be mapped in preparation for negotiation. Sanders introduces the concept of value mapping. Economists are somewhat familiar with this approach at the market level, but perhaps not at the level of individual exchange. Value mapping in contract negotiation is the mental connection of one side’s assets to the other side’s needs. The value map would include a list of concessions desired from the other side (with a subjective estimate of their importance) and a list of what can be given up by your side to generate more value for the other party. In some cases, the values can be quantified.
When presented, these lists become a value proposition for the shared outcome of the negotiation. Sanders provides a value mapping checklist as a tool to help negotiators think about all the assets they might have to bring to the negotiation, and all the areas where concessions might be sought in return.
Value mapping points to the productive end of the negotiation continuum. Bill Sanders presents types of negotiations on a continuum (see Mises.org/E4B_121_PDF2). On the left-hand end is bargaining, the traditional zero-sum exercise to capture value, a purely distributive process. At the midpoint is creative dealmaking, where value mapping is applied (see Mises.org/E4B_121_PDF1) to surface extra value so that both sides feel they gain more than they relinquish. On the right-hand end is relationship building, where the two parties enter into a partnership in which each works hard for the other party to succeed. The spectrum is one of ascending creativity from left to right.
Austrian economics has a big role to play. Many of the techniques Sanders proffers in Creative Conflict are firmly based in Austrian economics, as he himself emphasizes. Some of the relevant concepts are:
Subjective Value: Each party experiences value in their own mind, and anticipates future value in the form of expectations, based on their own evaluative criteria. While subjective value can’t be quantified, the concept of an expanding pool of value can be considered by both sides, each from their own unique perspective.
Empathy: The tool for understanding the other party’s mental model for evaluation is empathy, the exercise of which we often stress as the entrepreneur’s primary value facilitation skill. This is as true in contract negotiation as in any other exchange.
Trust: Negotiation takes time and requires the declaration of parties’ wants and needs, preferences, capabilities and capacities, and the full functioning of the goods and services being traded. Trust is the required underpinning for these declarations.
Distributed knowledge: There are always things that the seller knows that the buyer doesn’t, and vice-versa. This is the normal (non-equilibrium) position, to be recognized and welcomed.
Uncertainty: Uncertainty is the quintessential condition of entrepreneurship. The future is unknowable. Sanders recommends the full recognition of uncertainty and indeterminism in contract negotiations. Explore possibilities rather than imposing mandatory conditions.
Heterogeneity: Negotiators are different, firms are different and have different priorities, every deal is different. There is no standard way of business negotiations. Sanders does not try to lay down “rules”.
Real time: Time is the context in which change takes place. Every advance in time brings new knowledge and more change. Since negotiation takes time, it must be flexible enough to accommodate change and avoid rigidity.
Processual perspective: The market is a process, value is a process and negotiation is a process. Austrian economics recognizes the role and influence of time — time as the context of change — at a high level of impact. Contract negotiators take the same perspective, using the time taken for the process to unfold as a means of facilitating greater value whenever possible.
Additional Resources E4B Tool: The Negotiation Value Mapping Checklist (PDF): Mises.org/E4B_121_PDF1
E4B Knowledge Map: The Negotiating Continuum (PDF): Mises.org/E4B_121_PDF2
Bill’s Book Creative Conflict: A Practical Guide For Business Negotiators: Mises.org/E4B_121_Book
Economists recognize the phenomenon of increasing returns. Knowledge markets such as those for software, operating systems and platforms, tend to tilt in favor of a product or service or brand that gets ahead, even to the point of lock-in. There is a growing body of theory — often under the heading of complexity theory, and supported by computational simulation — underpinning the concept of increasing returns.
Mark Schaefer is expert at bringing economic theories of this kind into vibrant contemporary life. He coined the term Cumulative Advantage, and wants all entrepreneurs to know how to harness it (see Mises.org/E4B_120_PDF).
First of all, it’s not new. It’s in the Bible: For whoever has will be given more. Sociologist Robert K. Merton therefore called it The Matthew Effect.
How can entrepreneurs and their firms take advantage of increasing returns to achieve cumulative advantage? Consistent with the processual approach to value of Austrian economics, Mark has a five-step process.
Key Takeaways And Actionable Insights Identify an initial advantage. How do entrepreneurs identify a small initial advantage that sets momentum in motion? There are unlimited sources within complex economic systems. Mark tells us to look for collisions of events, ideas, people and circumstances from which entrepreneurs can derive their unique advantage. He calls them “click moments”. They are happy, random, emergent phenomena. He gives the example of Bill Bowerman’s experiment with latex in a waffle iron to create a new type of running shoe — the click moment for Nike.
Importantly, these random outcomes are spurred by action — acting on curiosity, and pursuing an energetic quest to establish how ideas and imagination can be exploited to solve customers’ problems.
Discover a seam of timely opportunity. Mark rejects the concepts of strategy and planning. Business success can’t result from 50-page documents and elaborate spreadsheets. Momentum is a consequence of action. Entrepreneurs replace strategy with their own subjectively defined opportunity to exploit speed, time and space. A seam is a fracture in the status quo through which the entrepreneur sprints. Relentless searching for an open seam is the core activity of entrepreneurship. Seams are always opening as a result of the continuing, ongoing change of business and the economy, best understood through the dynamic lens provided by Austrian economics. Often the timing of the opening is the key factor in the success of an entrepreneurial initiative. Timing cannot be predicted, and so continuous experimentation is the best approach, to create the maximum possibility for “click moments”.
Create significant awareness through a “sonic boom” of social proof. Once a business has entered a seam, it’s the occasion to search for amplification. Mark Schaefer proposes the leverage available through influence and influencers, those who can provide social proof to a broader audience that a new entrepreneurial offering is sufficiently worthy to command widespread demand. The customer is the marketer in this construct of social proof — which is a development, of course, of the Austrian theory of consumer sovereignty. People believe each other more than they believe advertising, promotion or PR.
Gain access to a higher orbit by reaching out and up to powerful partners and allies. Once awareness and social proof of the entrepreneurial offering begin to build, the next process step is to seek partners and allies who can provide access to higher-level resources: powerful connections, better channels, financial capital, value-multiplying alliances. Network theory applies: denser and more active connections through bigger and more strategic network nodes can result in accelerated business expansion.
Maybe it’s distribution in Walmart or Target, or endorsement by a celebrity athlete, or presence on a FinTech trading platform, or access to new resources. Reaching up is an exercise in finding partners to expand an entrepreneur’s market potential.
Build momentum through constancy of purpose. Ultimately, says Mark, the killer app is constancy of purpose. Discipline, resilience, purpose and persistence accompany entrepreneurs on the path to achievement. There’s flexibility and adaptiveness and agility of course, and these can bring changes in direction, but the goal and the purpose always retain their primary role in the narrative of success.
Additional Resources "Cumulative Advantage — The Theory of Increasing Returns" (PDF): Mises.org/E4B_120_PDF
Cumulative Advantage: How to Build Momentum for your Ideas, Business and Life Against All Odds by Mark Schaefer: Mises.org/E4B_120_Book
Mark Schaefer’s website: BusinessesGrow.com
B Squared Media: BSquared.media
Cronyism is not Capitalism We often hear that capitalism is under fire: in contemporary politics, in journalism, in popular discourse, and even in some business schools and among some management scholars and their students. But the criticism, upon examination, is not about capitalism but cronyism. The two are entirely separate systems, and the corruption and corporate political activities of cronyism are not exhibited in capitalism, and will never appear if we can adhere to capitalism’s purest form, entrepreneurship.
I had a great conversation with @petergklein on the absolute distinction between cronyism and capitalism - one that not all management scholars are willing to make. Listen to @econ4business podcast tomorrow May 25, 2021 to hear the entire conversation. pic.twitter.com/dGCxWTgLva
— Hunter Hastings (@hhhastings) May 24, 2021 Defining Capitalism Capitalism is a system in which factors of production are privately owned, resources are allocated through markets, i.e., voluntary co-operation among individuals, and individuals and groups are free to engage in economic activity without centralized control or interference from the state.
Capitalism includes the monetary system that enables entrepreneurs to engage in economic calculation, and the institutions that support property rights, and the rule of law. There are high levels of individual freedom of people to form groups and act without state coercion or compulsion.
Defining Cronyism Cronyism is a system in which the state takes charge of, or has a high degree of influence in, allocating resources to firms, and some firms derive advantages over other firms based on their relationship with and influence with government officials, rather than their ability to satisfy customer wants via superior capabilities. The supporting ideology favors high levels of state interference in the allocation of economic resources, with institutions and practices favoring the manipulation of public policy as a strategy for increasing profits.
The benefits of capitalism and the vices of cronyism The advocacy for capitalism in the paper we discuss with Professor Klein in this episode of the Economics For Business podcast ("Capitalism, Cronyism, And Management Scholarship: A Call For Clarity": Mises.org/E4B_119_Paper) is not pure theory, but rather the greater benefits for everyone in society that result from capitalism compared to alternative systems.
Current critics vent their dissatisfaction with some aspects of the status quo, such as issues related to the natural environment or reactions to measurements of income inequality. It is not only an illogical leap to believe that taking decision authority away from private individuals and firms and giving it to government will result in greater benefits for society. It is also moving the system towards cronyism, so that unscrupulous people, whether they be executives, investors, labor unions, politicians or government bureaucrats can benefit themselves at society’s expense.
The nuances of cronyism and the maleficent influence of size Bribery, blackmail, extortion and other forms of criminality are widely deemed inappropriate. The problem of cronyism lies in practices that are legal and encouraged by the intelligentsia and business school academics as sources of commercial advantage via the manipulation of the political system. These include activities such as lobbying, political contributions, or awarding board seats to retired government officials.
Peter Klein noted that there was a time when Microsoft, as an up-and-coming high growth tech company, did not even have a Washington DC office. Politicians couldn’t help them and didn’t understand their business. But the politicians reminded Microsoft who was really in charge, via an expensive, threatening and long drawn out anti-trust suit. Now Microsoft and the rest of the mature high tech industry have extensive Washington DC offices and very large lobbying budgets. Levels of cronyism parallel the scale of the modern corporation.
The costs of cronyism The costs of cronyism are both direct and indirect. The direct costs are misallocation of resources and the production of goods and services that the free market would not want but politicians favor. The skills of executives and managers are applied to the influencing of government officials rather than to seeking the rewards of the marketplace via consumer acceptance and consumer value. Firms develop in much different ways than they would under capitalism.
Some of the misallocation of resources are most highly visible in the build-up of bureaucracy in corporations. Bureaucrats are not strategic decision makers and not producers of goods and services. They are devoted to compliance, government relations, and working with regulators and lawyers. Their salaries and office space and equipment are all misallocations of resources.
An indirect cost of cronyism is the undermining of institutions. A well-functioning market has institutions for integrity of contracts, resolving disputes, and protecting private property. The institutions are neutral: they enforce general rules that apply to all. The effect of cronyism — its whole point, in effect — is to override general rules in favor of privileging those in power over those who lack power. Confidence in institutions consequently erodes.
Business schools and management scholars are part of the problem Trendy developments in management practice such as stakeholder capitalism, ESG (Environmental, Social, and Governance considerations for investment) and DEI (Diversity, Equity, and Inclusion requirements) are forms of cronyism, diverting business activities away from meeting the wants of customers in voluntary free-market exchanges to aligning with government directives, some current and some anticipated.
Business schools have been party to encouraging this non-market behavior, and to developing the associated indexes and scales and processes, all of which are murky and ambiguous, as well as very costly to implement. Executives welcome the ambiguity that makes accountability more difficult.
Business schools and universities are, in fact, vulnerable to the practices and measures they have encouraged, and their staffs are now bloated with middle managers, administrators and compliance departments. It’s all highly costly and a waste of resources.
Corporations exhibit similarly destructive economic behavior with their “woke” advertising campaigns and corporate training programs. Gramsci’s long march through the institutions seems to have reached the corporate HR departments who are the source of much of this uneconomic, anti-capitalist behavior.
Entrepreneurship is the pathway to lead us out of the cronyist morass The budding entrepreneurial movement is the way out of cronyism and corporatism. Entrepreneurial businesses focused on consumers and customers, on innovation and betterment, and on producing ever-improving goods and services, have no time for cronyism. They are not looking for political protection.
Newer firms, newer business models, and those harnessing newer technologies are less invested in lobbying and corporate political activity. They don’t have the time or the resources for it, and slow and sclerotically reactive government can only get in the way.
Entrepreneurial innovation can trigger the separation of business from government and reverse the processes of cronyism, encouraging an open, dynamic, vibrant economy in which firms of all sizes engage in the full-time pursuit of innovation and new economic value, and devote no resources to lobbying or government relations.
Additional Resources "Capitalism, Cronyism, And Management Scholarship: A Call For Clarity" (forthcoming in Academy Of Management Perspectives) by Peter Klein, Michael Holmes, Nicolai Foss, Siri Terjesen, and Justin Pepe (PDF): Mises.org/E4B_119_Paper
What use is economic theory in business? It’s indispensable. It’s the necessary starting point for all businesses, brands and projects. Only when you have mastered theory can you master the navigation of specific situations, and be confident in your good decision-making and judgment. Per Bylund explains.
Key Takeaways And Actionable Insights Good business starts with good theory. Any type of study of people — how they act, how they interact, what they are trying to achieve, how they make decisions — requires a theory. That includes business, by definition. There must be a conception of what it means to be a human actor in the marketplace, what it means to act and to choose. We can’t understand merely through observation. Businesses must, therefore, have a theory of human action.
Austrian economics provides that theory in the action axiom: human action is purposeful behavior. Via action, human beings are trying to accomplish something. When they choose means to achieve that accomplishment, we can observe their choice. But we need theory to understand the ends they have in mind. Since they don’t always succeed, we can’t always observe the ends. Theory provides us with a framework of understanding: we can interpret what they were trying to accomplish, and why they went about it the way they did, and the situational variables influencing their action, and how they might respond to the outcome.
Empirical observations and measurements are not only often impractical, they can also be deceiving. We can’t always know what people are aiming for. Moreover, theory tells us that they are acting with respect to whatever they are perceiving — i.e., subjectively — which is not observable to a third party. It’s the same phenomenon if we try to observe the actions of a firm, perhaps a competitor, because firms are not observable. Institutions are not observable.
Yet, there are patterns of behavior that can be deduced from theory. And that is the great power of Austrian economics for business: to uncover what is actually happening that observation can’t tell us.
With a framework of theory in place, businesses can add data to explain specific situations. Theory can’t fully explain any specific situation. And pure inductive observation of data can’t provide any understanding without theory. Therefore, a balance between those two is called for.
This was the advice of economist Frank H. Knight, and Per Bylund calls the balanced position between pure theory and pure data “Frank’s Way”. There’s a continuum from pure theory to pure history (i.e. facts only). Pure history starts from facts and tries to make sense of them. Pure theory explains the structure of a market or the economy and then fits actual phenomena into the theoretical structure in order to understand them.
The balanced position between the two extremes applies particularly to entrepreneurial economics. Entrepreneurial economics aims at an understanding both of customer choices and actions and of entrepreneurs acting on their own judgment. It’s not abstract. Entrepreneurs develop a theory so as to be able to apply it effectively in order to build business, and they judge the sufficiency of the theory by business results.
Entrepreneurs have an Austrian understanding of how the market works. They have a good theory — subjective value theory (see Mises.org/E4E_13) — about what customers value, and how they determine that value. Entrepreneurs have an Austrian understanding of capital as a flexible and variable source of consumer revenue streams. There are several more components of entrepreneurial theory that we cover in the Economics For Business series (see Mises.org/E4B_113_PDF2).
With their theory in place, entrepreneurs gather feedback from customers in specific situations. They gather responses to a value proposition. They test different prices to apply the theory of Exchange Value. Business is not a theory. It’s based on theory, applied in a specific situation, and it is the specific situation that must be well-managed in order to make a profit.
A sampling of some theories of entrepreneurial economics. The Means-Ends Chain. Customers choose means to achieve ends. Different customers have different ends. Means-ends theory (see Mises.org/E4E_01_PDF) helps entrepreneurs understand the ends their customers aim at. Some customers in the car market seek admiration of others by signaling social success. They might choose a Ferrari or Bentley as their means. A construction company owner might be seeking efficacy and efficiency in hauling materials, and chooses a pick-up truck. Both customers make choices via the same means-ends model, and their specific situations point to different choices on their respective routes.Diminishing Marginal Utility. This theory posits that in certain markets, a customer, having purchased a product or service, may perceive a lower value in the next unit. Having bought one Ferrari to meet the need for social approbation, to continue our analogy, the customer may not find a second one equally as desirable as the first. The construction company owner, on the other hand, may see equal value in adding another pick-up truck as business grows. Where that same pick-up truck buyer may find diminishing marginal utility is in the proliferation of accessories and bundled features in which he or she does not perceive value. Too many features bundled together may deter a purchase for reasons of diminishing marginal utility. These considerations are important to entrepreneurs in the design of loyalty programs and multiple-purchase discounts.Uncertainty Theory. Entrepreneurs exercise judgment under conditions of uncertainty. Austrian economists employ uncertainty theory to focus their theorizing about entrepreneurship in action. In specific situations, entrepreneurs must apply the theory by choosing the tools to use to overcome uncertainty, such as the explore and expand tool, which identifies the many experiments to run (explore) and then the broad deployment of those experiments that work (expand).Network Theory. Economies and markets are networks, and theory looks into the attributes of densely and loosely connected networks, and those that are wired in different ways. The theory can identify the possibility of “structural holes” in networks, where there are nodes that can be productively connected, yet stay unconnected. Entrepreneurs in specific situations can establish whether such a gap exists in their own network, and work actively to fill the gap and increase their productive capacity, e.g., by connecting to a new vendor or a new customer or a new resource.Entrepreneurial Process Theory. Entrepreneurship is a process, and theory can identify the most productive processual methods, and can employ entrepreneurial history to reconstruct how productive processes have worked well in the past. Entrepreneurs operating in the present, and designing processes for the future, can utilize process theory and its illustrative histories (Per Bylund calls these “biographies of processes”) to help them make the best design choices for the most robust processes. As an example, our N-A-B-C process for innovation (see Mises.org/E4E_37) is a theoretical framework that every entrepreneur can apply in their own specific circumstances to arrive at unique innovative solutions for their business and their customers. Take time to think and time to theorize. Theorizing is hard, rigorous work. It requires identification of the theories you are actually using (consciously or not) in your own mental model, and then relentlessly questioning them and examining them for internal consistency and external validity. Are there gaps or soft spots? Is there something that doesn’t quite sit right with you? If so, you then work to change your assumptions or figure out better elements to add, or extending the theory further.
It requires thinking, and thinking requires the allocation of time. Per Bylund urges us all to be good thinkers. "Think better, think Austrian," as he says.
Additional Resources "Let ’ s do it Frank ’ s way: general principles and historical specificity in the study of entrepreneurship" by Marek Hudik and Per Bylund (PDF): Mises.org/E4B_118_Paper
"Entrepreneurship in Theory and Practice" (PDF): Mises.org/E4B_118_PDF
For the entrepreneur in a market economy, nothing is a sure thing. Every business is only a short step from bankruptcy. No business possesses the power to make people buy what they do not want. All success is potentially fleeting.
Original Article: "The Faith of Entrepreneurs"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Few people can be said to be the originator of a new science. Jim Spohrer is one of those rare beings. The science he originated is Service Science. You can read about the origination process at IBM Icons Of Progress (Mises.org/E4B_117_Icons). Jim currently is the Director of IBM’s Cognitive Opentech Group (COG). On the E4B podcast #117, he shares some of his knowledge and insights, especially on the subject of the wonderful new directions in which the combination of service science and artificial intelligence is going to take entrepreneurship in the near future.
Key Takeaways And Actionable insights A new science of service. Service science is combinatorial innovation: it combines service innovation, technology innovation and business model innovation. At the time of its origination it was also a challenge to the then-dominant logic embedded in the product mentality; that is, what is produced in the economy is products. As services began to take over the economy, the kinds of assumptions inherent in goods-dominant logic needed to be changed. The famous 1994 paper by Steven Vargo and Robert Lusch (Mises.org/E4B_117_PDF) was one of the sparks that lit a fire of change.
Looking at the world through the Service Science lens means seeing things differently, seeing all the knowledge that is embedded in products and services and people and exchange, and seeing that what is produced is a value experience for customers. This view opens the door for service innovation, serving people in better ways by facilitating more preferred experiences.
Service systems. Just as Austrian economics is a systems-based view of the economy — with a diversity of interdependent consumers and entrepreneurs interacting and adapting to each other in the co-creation of value — so Service Science is a systems-based view of service. A lot of people, processes and technologies have to come together and interact to generate service value. Service is no longer viewed as one person helping another. Service systems consist of responsible entities interacting across networks to co-create value.
Service systems are people. Service systems are businesses. Service systems are governments. These are value networks. But these systems can become smart, and ever smarter, by the application of new technology.
Technological agency. Just think how many service offerings might be limited by the number of employees with the requisite skills that can be deployed. And now think about how A.I. and automation and new technology could supplement human capacities.
One of the most significant new and accelerating capacities of technology is to act. Given a certain input (such as a service request) a technology or software can act in response, and deliver the requested service to the customer. We don’t need a librarian to retrieve a book for us, or a checker to check us out of the store. Perhaps in the future, we won’t need a doctor to diagnose our condition, or a driver to drive our Uber. We’ll rely on technological agents.
And, in turn, the technological agents will change people’s skills.
All kinds of innovation. But technological innovation is not the only source of service innovation. Business model innovation is just as important. How do we pay for something? How do we recruit employees? There are existing models for these systems that can be innovated.
Institutional innovation is also going to be taking place, including in the operations of government.
At all levels — services, business models, institutions — systems are going to become smarter, which means using resources more efficiently, and getting results with less material, less effort, less time, and less use of space.
Smart systems can become wise systems. If we add artificial intelligence to systems and human beings get dumber as a result, is that wise? No it’s not. For entrepreneurs, this means thinking through the delivery of betterment to the customer on a long term basis, thinking through all the secondary and tertiary effects, and aiming at long term benefits.
This thinking also embraces ethical considerations and the impact on future generations. Systems should become both smarter and wiser.
Cognitive assistants and cognitive mediators. A.I. brings us cognitive tools. A tool typically does one thing, but an assistant can do many things. And perhaps the cognitive assistant can become a coach, and then perhaps a collaborator. Perhaps the best collaborator is one you can debate with, in order to sharpen your ideas. IBM is investing in debating technology so that, in the future, you can have a good debate with your cognitive collaborator.
One way to think about this is that the hundreds of apps we have on our smartphones grow up and become digital assistants, and the human owner of the smartphone is the manager of all these assistants.
The next step, perhaps 20 years into the future, perhaps more, will be to a cognitive mediator, an artificial intelligence you trust to make good decisions on your behalf. Perhaps it can negotiate better than you can. Perhaps it will know you better than you know yourself. Some innovators refer to the idea of a cognitive mediator as a “digital twin”. It’s possible today to have a digital twin for a piece of equipment. Tomorrow there may be a digital twin for all responsible entities, including people, businesses and even government.
All of these developments will have profound effects on service science, and the kinds of services we can imagine, design and deploy. And they’ll have a profound effect on identity — who we think we are, and how we think of ourselves.
Trust, Emotion and Empathy. Trust in a digital twin takes us into the world of emotion and empathy. We all wonder if artificial intelligence can ever have empathy. Empathy is a way to unlock the ability to see the problems others are experiencing and to identify ways to solve them. A.I. will be able to build models of any particular individual, using data about the individual and data that the individual has generated. Amazon is already building a model of your preferences and Facebook is building a model of your social interaction.
Perhaps individuals will build data twins of themselves, and perhaps there will be a way to monetize the digital twin. There will be many, many new opportunities in evolving service science and the kind of value co-creation that is possible. So empathy comes down to digital twinning. Empathy is having a better model of others. Innovative entrepreneurs will tap into the best digital models they can of their prospective customers.
Parallel entrepreneurs replace serial entrepreneurs. When we are all managing 100 digital workers on our smartphones, we’ll be able to initiate multiple innovations in parallel. This suggests we are on the verge of profound entrepreneurially-driven change. To do this wisely will require trust in artificial intelligence and trust in our digital twin. It will require an understanding of our own biases. And perhaps the digital twin will be able to point out these biases and correct them. If we trust it to.
Billions of responsible entities, trillions of strategies, higher aspirations. W. Brian Arthur talks about complexity economics (Mises.org/E4B_117_PDF2) and a future in which the multiple strategies of billions of individual entities can be run in a simulation to see how they interact and what outcomes emerge. Such capabilities enable us to raise our aspirations to higher levels. What innovations can one entrepreneur introduce? How about 1,000 entrepreneurs or 100,000 entrepreneurs, or 500,000 entrepreneurs each with 100 digital assistants? We shouldn’t be thinking of mundane trivial things in this context. We must find higher aspirations. We should be thinking about augmented reality, new energy systems, biological innovation, institutional innovation and new mindsets to go with our new skillsets.
Our best selves can become better. For each of us, our future self is our customer. How do we make the future better for ourselves? How does that kind of thinking change the decisions we make every day? How does a business become a better future version of itself? How does an institution do so? How are businesses creating new customers by making them better future versions of themselves?
The best way to answer these questions is to be an entrepreneur and start, grow or re-purpose a company to do so.
Additional Resources T-Shaped Professionals: Adaptive Innovators by Jim Spohrer: Mises.org/E4B_117_Book
"T-Shaped Individuals" on Slideshare: Mises.org/E4B_117_Slides
Service Thinking: The Seven Principles to Discover Innovative Opportunities by Hunter Hastings and Jeff Saperstein: Mises.org/E4B_117_Book2
IBM Icons Of Progress: Mises.org/E4B_117_Progress
Welcome To The Cognitive Era (PDF): Mises.org/E4B_117_PDF3
We can gain useful insights by winding business models back in time to see how they emerged and evolved. In the case of competing business models, we can analyze the different outcomes and perhaps assign some cause and effect analysis to interpret why one model variant performed better than another. How do we do that? Through the technique of entrepreneurial business history.
Alan Payne conducts just such a historical business model re-enactment in his excellent book, Built To Fail: The Inside Story of Blockbuster's Inevitable Bust (Mises.org/E4B_116_Book). It’s the dynamic story of two competing business models in one industry, a comparison of outcomes, and the resulting emergence of a new, third model.
Key Takeaways And Actionable Insights. Business models are discovered by experimenting entrepreneurs. The video cassette recorder (VCR) and playback device was a technological emergence in the 1970s. Movie studios saw the opportunity for new sales but worried about diverting revenues from the theater channel and therefore priced movies-on-cassette quite high from a consumer perspective (about $65). The experience of viewing movies at home was valuable to consumers but the exchange value was not aligned with the price. A few enterprising entrepreneurs discovered the rental option (don’t buy the cassette, rent it, and return it). The unit rental price emerged at around $3. The video rental business was born. Individual rental stores were profitable and some of the entrepreneurs started to open multiple stores and build small chains.
Capital-advantaged shareholder value-focused owners recognize emergent business models that are scalable. Alan Payne’s story of business model evolution in the video rental industry describes a great leap in industry growth led by another kind of entrepreneur. Wayne Huizenga was an entrepreneur experienced in a certain kind of growth model. He had built Waste Management, a Fortune 500 company, from a one truck garbage collection route, largely through acquisition and subsequent expansion of local operators. He knew how to finance and run high growth expansion of a templated operating system. He bought Blockbuster for $18.5 million and sold it nine years later for $8.4 billion. That’s a huge amount of shareholder value generation.
Under Huizenga, the consumer value experience did not get better. It was frozen. We know that consumer experience is dynamic, not static; Huizenga’s Blockbuster let more and more consumers into a static experience (through geographical expansion) but was not generating new value for those or any other consumers.
More consumer-oriented businesses evolve more responsive business models. In Alan’s story, HEB Grocery was a different kind of entrepreneurial business that approached consumer value in a different way. Alan describes the company as “obsessed with being the best” at meeting the ever-changing preferences of food shoppers. An effective grocery retailer must be highly responsive to changing consumer needs and adept at providing selection and value at low cost, with operational excellence in inventory management and customer service.
HEB decided they could offer video rental service in-store and brought their grocery operations skills to bear on designing a consumer-preferred experience. They tested different value propositions – Alan called their stores laboratories for the video rental experience – and let the consumer decide which were the best. They experimented with inventory (number of movies available), the in-store selection of new releases versus classics, different pricing schemes for different movies, different return dates for different products, and offering snacks alongside movies, among other variations. The result was a differently-tuned business model, one that built a more satisfied and loyal user base and generated more revenue and more profit per store than Blockbuster.
Business models are tools for economic exploration and advancement, so long as there is managerial and organizational flexibility to learn and improve. When Alan Payne went to work for Blockbuster as an executive to run a panel of franchised stores, he transferred the learnings from the HEB video rental business model. He demonstrated that the model could be applied successfully in this new environment, achieving similar levels of growth, profitability and consumer satisfaction and loyalty in his panel of stores.
The issue for Blockbuster was not business model transferability, but the managerial, organizational and decision-making environment into which it was transferred. Blockbuster was a top-down hierarchy in which knowledge flowed one way — from the top of the hierarchy to the stores in the form of commands. When there was learning at the store level about new and better ways to organize, to manage, to operate, to please consumers and to make profit, it was impossible to transmit it upwards and share it. Blockbuster lost money and entered bankruptcy even while a significant number of stores in Alan’s franchised panel were operating profitably and were growing.
Alan eventually raised the money to buy the franchised stores from Blockbuster and operate them independently, which he did successfully and profitably for over 20 years. Blockbuster never was able to learn any of his techniques, nor modify its business model to the more successful version that was in plain sight.
Sometimes, an outsider from the industry comes along to seize the opportunity of the next business model evolution. Alan makes it clear that technological change did not kill Blockbuster or the video rental model. When DVDs were introduced to (eventually) replace video cassettes, Alan’s franchised stores thrived by offering both side-by-side and thus appealing to two sets of consumers in one store.
Netflix was able to anticipate a future in which the digital data stored on DVDs became streaming data downloaded at home by consumers. This was not so much an act of prescience as one of exploration. The next new video-at-home experience began to emerge and Netflix captured much of the consumer value.
There is more value to be captured today because the consumer finds new experiential benefits in streaming, and the accompanying data analytics deliver insights that a consumer-centric firm like Netflix can utilize to further improve the experience. The same opportunity would have been available to Blockbuster, but their lack of business model agility and their failure to build learning channels from the consumer back to the corporation meant that they could not take it.
Additional Resources Built To Fail: The Inside Story of Blockbuster's Inevitable Bust: Mises.org/E4B_116_Book
"Consumer Value vs. Shareholder Value Models" (PDF): Mises.org/E4B_116_PDF
Bart Jackson is a CEO, and has studied the job and the people in it via thousands of survey responses and hundreds of interviews and multiple collaborations all over the world over many years. He’s distilled his findings in two books, The Art Of The CEO (Mises.org/E4B_115_Book1) and CEO Of Yourself (Mises.org/E4B_115_Book2), as well as his radio show The Art Of The CEO (Mises.org/E4B_115_Pod).
From all of this data, processed via his empathic diagnosis, Bart takes two perspectives: the job and the person in it.
Key Takeaways The CEO job threatens to take more of one individual’s time than is available. The firm’s value proposition guides the CEO to the right priorities and allocation of personal resources. How do CEOs organize their time among the multiple priorities of the job? The answer is: by embedding the value proposition of the firm into their mind. With a clear view of the customer and of the customer service mission of the firm, every competing priority can be ordered. The CEO can design a framework for every day, week, month and year. They can continuously review their mission and goals and assess their own contribution, and the stamp they are putting on the firm, through the value proposition lens.
The set of priorities importantly includes “time to think,” both on your own and with others.
Leadership style can be adapted to each individual’s strengths. Bart asks, “Are you a king or a prime minister?” Are you the one who inspires your team to demanding feats of achievement, or the one who provides them with the tools to encourage the emergence of their own capacities? Or both? When the CEO is totally devoted to the firm’s mission, this devotion becomes the lens through which others’ efforts will be focused. No team member will withhold effort when the purpose and mission are clear and shared. Leadership style is devotion to mission.
Communication is a key CEO tool, and there are many ways to accomplish great communication. Devotion to the mission requires clear communication of that mission to employees. There is no one way for the CEO to communicate. Bart told the story of one CEO who committed to travel to meet every one of his employees in small and large groups, armed with a whiteboard and a personal presentation. Communication is inclusive — address by name all the people who are going to be involved in the mission, approach all the departments, inventory all the internal strengths available as resources, and describe all the innovations that will open up new ways to leverage those strengths.
CEOs make communication a four-dimensional flow. Communication does not just flow in one direction to the employees. It must travel in two directions, so that the CEO can receive a continuous flow of ideas and information from the frontiers of the company. Bart talked about 4 dimensions: horizontal across the company from the center to the edge and back, through every department; vertical from top management to front line employee and back; then the third dimension of reaching outside the company box to vendors and suppliers and other external knowledgeable sources; and the time dimension of identifying ideas early, evaluating them, giving them a chance to bloom and thrive and the enthusiastic energy to move them along quickly.
CEOs press knowledge into action. In Austrian theory, entrepreneurship is a knowledge process. Bart calls it “pressing knowledge into action”. The information flow can be overwhelming, and the CEO manages it by taking action more than by analyzing. The entrepreneurial instinct to “just do it” is valid for CEOs of any size undertaking. Once there is enough information to support an action, take that action. Then all new information can be channeled into furthering the action, adjusting or correcting, or even terminating it in favor of a new and more preferred action. Knowledge is not for its own sake, it’s for the sake of action.
The CEO is an incessant questioner and interviewer, ascertaining the knowledge that is available for action.
CEOs don’t create a company culture. It emerges. Bart defines culture as how individuals feel when they are at work for the firm, and how they behave as a consequence. CEOs can try to create an atmosphere in which more desired feelings and behavior are nurtured, but they can’t control or guarantee it.
The best tool for the creation of such an atmosphere is concern for each individual. Respect is not enough. Genuine concern will motivate people to put their shoulder to the wheel at all times.
Hiring becomes a core CEO skill. Assembling the best team is a most difficult challenge. It’s hard to hire the right individual for every position, but hiring is a skill that a CEO can actively cultivate in order to develop greater mastery over time. CEOs train themselves to hire well.
One key to success, according to Bart, is not to fill a slot but to look for a person. Identify character, look for intellectual curiosity, look for people of high merit who can potentially fill many slots on the organization chart. Utilize the pursuit of diversity to investigate a broader pool of human resources from which to draw.
Great CEOs build their personal brand in order to achieve company goals. They make individuality the whole point. Bart approaches the process of building a personal brand in the same way as he would approach building a product or service or corporate brand. Start with the customer. A corporate brand, he says, is built in the production and service departments, not in the PR and marketing departments.
For personal branding, therefore, look to the resources you have for production. What’s in your personal “warehouse”? Great CEOs inventory their personal strengths and interests. They listen to what people praise them for and thank them for and find their strengths in that data.
Then they examine their own principles. What do they truly believe in? Bart recommends we write down our own inventory of strengths and interests and principles
In the end, he says, individuality is the whole point. Each of us is a marvelous person. We’ve got to be able to see that. Being the CEO of yourself opens up the pathway to doing the best possible job of CEO of your firm.
Additional Resources “CEO: The Position and the Person” (PDF): Mises.org/E4B_115_PDF
The Art Of The CEO: Mises.org/E4B_115_Book1
CEO Of Yourself: Mises.org/E4B_115_Book2
The Art Of The CEO Radio: Mises.org/E4B_115_Pod
Veteran venture capital investor Pete Farner distills experience from four decades of entrepreneurship and investing on the Economics For Business Podcast #114. Passion, perseverance and intelligence are the three critical attributes he looks for in investable entrepreneurs, an insight drawn from a broad survey that we summarize here.
Key Takeaways 1. The entrepreneurial mindset develops in youth. It is averse to the restrictions experienced on the subordinate levels of the corporate hierarchy. In an early experience that several E4B podcast guests have shared, Pete grew up in an entrepreneurial household and absorbed the approach. He created several independent job opportunities in high school and college, including house painting and taxi driving and trading classic cars. When he joined a corporation, he quickly understood that a life in the hierarchy requires you to do as exactly as ordered by superiors, an experience incompatible with the entrepreneurial mindset.
In that brief corporate experience, Pete was able to observe that even the highest levels of the executive ladder are occupied by mere humans, with all their quirks and flaws, and not by superhumans. This observation can translate into the self-confidence of being able to tackle any business undertaking oneself.
- Taking the entrepreneurial route is not risk-taking. In fact it’s the opposite. Pete suggested that entrepreneurs are not risk-takers. They are, in fact, risk-averse. They typically do not take great personal risk or financial risk. If their business does not achieve the success they imagined, they seldom “lose all”, and their financial risk is often shared with others or syndicated in some way.
Entrepreneurs deal with business uncertainty. They embrace it. They are comfortable with what Pete called the ambiguity of entrepreneurship. That’s not risk.
- Develop a knowledge space from which to begin your entrepreneurial journey. Pete’s corporate experience was in the beer industry. That knowledge space included the use of neon signs for advertising and display purposes. He was also able to observe the use of etched mirrors in bars along with other forms of decoration and display such as sports memorabilia.
He launched his first entrepreneurial venture with a technological improvement on the conventional (and also expensive and fragile) neon sign. He merged this venture with a mirror and sports memorabilia company to give it greater breadth and market penetration. His first investor was a beer company.
We all curate a knowledge space as we go through life, and that space can provide the foundation for entrepreneurial initiative.
- Entrepreneurial success lies on a time-and-place continuum. What are the determinants of success for an entrepreneurial business? For a venture capitalist who is financing the business, the appropriate metric is a sale to an acquirer, who validates the worth of the entrepreneurial initiative. Surveying his experience of such acquisitions, Pete emphasized the relevance of time and place: being in the right place at the right time. Acquirers are ready for their own reasons at their own time. He discussed the sale of Minute Clinic, a walk-in in-store clinic staffed by nurse practitioners, to the CVS drug store chain. Minute Clinics were under-developed and unprofitable on their own, but a great marketing device to drive traffic to CVS’s highly profitable pharmacies.
On the other hand, Webvan, one of the most spectacular venture-financed startup bankruptcies, was ahead of its time in 2001, but could have been a standout success in 2021.
Business brilliance has a role to play in entrepreneurial success, but so do luck and timing.
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Entrepreneurs widen and deepen their own knowledge space by making far and wide knowledge connections. Entrepreneurship is a knowledge process. One entrepreneur, one team, one firm can have only partial knowledge. There might be a surrounding network of investors and partners to supplement the available knowledge. Successful entrepreneurs reach further, making connections in as many directions and to as many knowledge sources as possible. Syndicated investments with a wide range of partners can yield a lot of knowledge sources.
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Specialization must be balanced with a broad-based understanding of business. Differentiation can come from a specialized body of knowledge that the entrepreneur and partners bring to bear. In addition to this deep specialization, there must be a broad interest in starting, running, growing and managing a business. Entrepreneurs are T-shaped people — able to combine their specialist knowledge with boundary-crossing interest and capabilities in everything from accounting to HR to marketing, and especially the development of motivational purpose.
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Personal qualities — and especially integrity — play an important role in success. In Pete’s summary of success factors, “People are the real key”. As an investor, given the choice between a great business plan, a great idea, and a great person, “I’d choose the great person”. Integrity is a core attribute: the strength to go through growing pains, pivots, disappointments and adverse situations, and maintain belief.
Certainly these personal qualities can be more important to success than what Pete called “pedigree” — the degree from the right school, or the resume with the right corporations, or the well-credentialed board of directors.
- Different personal qualities are appropriate for different stages of the entrepreneurial journey. Pete observed that it is rare that the same individual who launches a business or manages it in its earliest formative stages is the same one to manage it to and through maturity. From start up to 8- or 9-figure revenues is a difficult transition for most people to make. It requires both decentralization of decision making and rigorous, detailed and disciplined operational management that are not always the strengths of originating entrepreneurs.
Nevertheless, the founder’s continued presence — in a significant role, not just a symbolic one — is a very important factor in the maintenance of mission and purpose for a young firm.
- Revenue is king, especially when efficiently generated. Revenue is the most important indicator of marketplace acceptance for an entrepreneurial service — proof that customers will buy what the business is selling. It’s a harbinger for the future: if there is a revenue stream, it can be grown.
Revenue — assuming cash flow is well managed — is the guarantor against the worst sin of entrepreneurial businesses, which is running out of cash.
Austrians know that the value of capital is the NPV of the flow of customer revenue it generates. Venture capitalists respect capital efficiency — a high ratio of revenue to capital.
- Empathic customer understanding underpins revenue generation and capital efficiency. It is the deep understanding of the customer and market that ultimately is the key to revenue generation. Pete talked about the medical device market where a misunderstanding of the incentives for surgeons — that they might not adopt a superior-performing device if they don’t make as much money using it as they do with the incumbent device — as an example of the battles that have to be fought and won for market acceptance, and might be lost with poor customer understanding.
Revenue generation is the primary indicator of customer understanding at work.
Additional Resource "10 Attributes of Investable Entrepreneurs and Businesses" (PDF): Mises.org/E4B_114_PDF
This week on the Economics For Business Podcast we were gifted the opportunity of reviewing and assessing a completed entrepreneurial journey, courtesy of Jacqui Boland, founder, CEO and now alumna of Red Tricycle, following the acquisition of the company by the corporate owner of tinybeans, a family photo sharing and journaling app.
Red Tricycle is a brand — "a lifestyle brand that fuels the parenting universe with daily inspiration for family fun." In the "Economics For Business Value Proposition Template," the Red Tricycle proposition would be:
FOR: Fun Moms
WHO: Search for and utilize ideas for family activities for parents and children to enjoy together.
VALUE PROMISE: A unique daily source of ideas and inspiration for family fun
VALUE RATIONALE: Every day, Red Tricycle finds and presents all the best local and in-home family fun opportunities and makes them easy for Moms to research, evaluate and act.
BENEFIT > COST: In one daily web visit, Moms have easy access to a unique curation of new ideas and inspirations, simply formatted, and requiring a minimum of their precious time.
Jacqui was generous in helping us map her entrepreneurial journey to the stages of the Economics For Business GPS.
Key Takeaways And Actionable Insights. Imagination The pre-design phase in which entrepreneurs develop the imaginary construct of their business idea.
Jacqui was a new mom in a new and unfamiliar city. She wanted to identify all the opportunities for fun with her family. She became an avid online searcher. A few conversations with some other moms revealed that many moms are searchers — with intensity and determination and a commitment to find and evaluate all the relevant information in their field of search. The idea of an online one-stop location for information about local family-friendly fun activities was born.
A useful tool for the Imagination phase of entrepreneurship is "Entrepreneurial Empathy": Mises.org/E4B_113_PDF3
Design The phase where a validated imagination is transformed into a more formal business model.
Jacqui capitalized on her existing knowledge field. She knew magazine publishing and the power of content, and how to source it. She knew the advertising revenue model for magazines. She was able to design a crisp business model of content creation, content presentation, consumer engagement, and attractiveness for local and eventually national advertisers.
One of the tools in the Design tool set is the "Means-Ends Chain," helping entrepreneurs to align their business design with customer values: Mises.org/E4E_01_PDF.
Assembly The phase in which design is operationalized by selecting and combining assets: people, technology, content, operating processes.
Assembly for Red Tricycle began with people: content producers, editors, salespeople. Jacqui found investors, initially angel investors, then angel groups, and, later in the business’s evolution, institutional venture capital. In turn investors and investor groups like 500 Startups were very useful in providing connections and recommendations for technology and software resources. Comparisons between different operating models that the investor groups were able to provide were useful guidance in making resource selections.
Consult our "Austrian Capital Theory" tool for capital assembly of resources: Mises.org/E4E_19_PDF.
Marketing The phase in which the designed and assembled entrepreneurial offering is presented to the market for consumer consideration.
Red Tricycle adopted a city market-by-market rollout strategy, starting in Seattle, proceeding to San Francisco, then systematically adding more cities. The killer app for market introduction was “Mom Word Of Mouth”. Moms have friends in other cities, and travel between cities, and are excited to share family fun ideas with others. The best sharers were subscribers to the Red Tricycle newsletter, so the brand worked hard to build up a subscriber list.
Red Tricycle KPIs were traffic, subscribers, and revenue. As a result of a system of creating and testing content, Red Tricycle could seed new markets with say 20 or 30 stories that drove good SEO traffic. And then the job was to convert that traffic to subscribers to the newsletter.
Building brand uniqueness is fundamental for the Marketing Phase. Use our "Brand Uniqueness Blueprint": Mises.org/E4E_30_PDF.
Customer Experience The phase of the value learning process in which customers try the offering, experience its benefits, and assess the subjective value.
Red Tricycle designed a very specific customer experience, which Jacqui described as: "Quick, get an idea and inspiration to spend time with your kids, and then go offline and do it, and then come back two days later and do it over and over again." The model was distinctive in not asking for too much time (“the infinite scroll”). Red Tricycle helped Moms focus on the lighter side of parenting and having fun with their kids.
Social media came into play as an aggregator of subjective value anecdotes. Moms would share a picture of themselves at the zoo and use Red Tricycle’s recommended hashtag, "Best weekend ever." And not just everyday moms, but even celebrity moms, like Randi Zuckerberg, Pink, Ivanka Trump, sharing that they found a great idea for a campsite or a restaurant. These were subjective value data points.
Facilitate great customer experiences with our VUCA tool: Mises.org/E4E_41_PDF.
Management and Growth The phase where the business model is scaled and the marketing and customer experience reach is expanded, with continuous innovation accelerating growth.
The major growth pivots for Red Tricycle were the transition from local to national advertisers, and hiring and assembling and empowering the new team members best suited to lead the way in the new business environment that this entailed.
The goal for the management and growth phase was to roll out multiple local markets, and build a strong foundation of local advertising revenue until Red Tricycle had enough scale to interest national advertisers. The transition was a 5 year process. As Jacqui described it: "We put a plan in place and then we adjusted and adjusted and adjusted."
A core element of the transition management is hiring. Skilled national advertiser salespeople are expensive, and sometimes it might take a year of that salary before a new salesperson can close a big national deal. There's a lot of foundational work that needs to be done. Scaling the business was a delicate process. A fully staffed company would have a sales team across the U.S. in every market, but if you can't afford that, you have to stretch and think, "Can this person sell local and national? Could this person cover Chicago, and L.A.?" And then once you start to get a little bit bigger, and you can hire an L.A. staff, what happens to that Chicago rep?" It's a constant adjustment.
How does growth feel? “You're always looking for the next milestone. And you have about a minute after you hit a goal or a milestone to celebrate, and then you run into the next quarter and you have another goal that's even higher. So it's a constant stretch.”
"Upsizing a Customer Need" is a useful tool for the Management and Growth Phase: Mises.org/E4E_47_PDF2.
Disposition When the entrepreneur decides to sell the business, merge it into a larger business and relinquish the founder / owner role, or to turn it over to the next generation.
Selling a business is just as much a marketing task as establishing it and growing it. And that means seeing the business through the eyes of an acquirer — empathic diagnosis of their needs, their preferences, their goals and desires, their constraints.
Jacqui had made the economic calculation that the best path forward was not to raise additional venture capital for continued high growth, but to demonstrate solid and sustainable profitability and look for either a strategic partner or an acquisition partner. She didn’t use a banker (whose process she compared to a dating app) but conducted her own search for a firm that would recognize a complementary asset that could be a marketing engine for them. She found a partner in an adjacent field (family photo sharing) that was strong in technology and would benefit from Red Tricycle’s content creation and sales expertise. The deal was made quite quickly.
Additional Resources Map of Jacqui Boland’s Entrepreneurial Journey (PDF): Mises.org/E4B_113_PDF1
eGPS Handbook (PDF): Mises.org/E4B_113_PDF2
Innovative entrepreneurship is the segment of the entrepreneurial economy that is especially highly focused on innovation via new products and services. Within innovative entrepreneurship there is an even brighter spotlight on NTBF — new technology-based firms that are cutting edge, scalable, and fast-growing. They represent only one form of entrepreneurship, but one that is very interesting. Indeed, they attract the interest of government and government policy-makers. A recent special issue of the Strategic Entrepreneurship Journal, a top journal for which our friend Peter Klein sits on the editorial board, examined the impact of policy on entrepreneurship itself and on the institutional and social challenges of these policy interventions (see Mises.org/E4B_112_SEJ).
Key Takeaways Government policy-makers take an interest in innovative entrepreneurship when they are trying to grab some credit for economic growth and improved goods and services. Both micro policies and macro policies aim at stimulating successful entrepreneurial and innovative outcomes. Policies to encourage the growth of green energy supplies, for example, are a micro policy; they apply only to firms engaged in particular activities. Changing bankruptcy laws (so that the reallocation of assets can proceed faster and more smoothly) or an educational initiative to support entrepreneurship teaching in school would be classified as macro policies: trying to create a new set of conditions that apply to all firms, all entrepreneurs, all technologies.
Government doing nothing to intervene is another — highly desirable — kind of macro policy: maintaining a social order in which entrepreneurs can operate with the least uncertainty about the future regulatory environment.
At minimum, government interventions in favor of entrepreneurship fail to properly consider trade-offs. Analysis of policy starts from trade-offs. Every policy has trade-offs. Economists are the ones to point this out. Politicians just want one button to push to achieve one specific goal. All that is needed, they presume, is a piece of legislation that provides a tax break or a subsidy to the firms they want to succeed. But there are always trade offs. Directing funds or capital to one group of firms diverts it from another group. The consequences are unknown and can’t be known. What if the current crop of battery technologies, for example, do not include the one that will emerge as a more efficient alternative in the future? By subsidizing today’s technology do we constrain the emergence of a better one in the future?
Evidence suggests that neither macro policies nor micro policies are successful or effective. One example of ineffective micro policy is intellectual property protection for selected technologies or firms. One of the papers in the Strategic Entrepreneurship Journal special edition looks at fast tracking patents for particular technology areas. One of the outcomes identified is the diversion of resources to overinvestment in legal protections and excess litigation with all its attendant economic costs.
Regulatory systems are another form of macro policy. An example is the number of days it takes to get the permits to open a new business. Reducing this would be a macro policy that could be effective. Peter Klein made the comparison between Singapore vs India on this variable, pointing out the correlation with greater speed of innovation in the former, encouraging new and unintended applications of technology.
But often, regulatory permissions favor well-funded and well-connected firms over the young and agile, and certification signals may not be completely accurate about underlying quality.
Micro interventions are targeted to boost outcomes by helping a particular firm or technology. Bureaucrats claim they can make better decisions than the market about resource allocation. They identify so-called “market failures” to be corrected (like fossil fuels causing pollution), and market decisions that they believe should be over-ridden. They don’t want to let consumers buy the gas-powered SUVs they prefer.
There’s no reason to believe these policy makers will get their decisions right. They certainly don’t have the incentives to do so, since they are not governed by profit and loss. They can easily pick the wrong projects.
Some interventions may be dismissed as irrelevant, but they may still produce distortions. The papers in the Strategic Entrepreneurship Journal special edition point out that many of the cash payments / subsidies / tax breaks are given to firms that would have launched any way and been successful anyway. One paper (not in this collection, but cited by Professor Klein) found that the major effect of research grants in STEM is to increase the salaries of scientists rather than encourage scientific experiments that wouldn’t otherwise take place. The result is not better science, but a better life for scientists (that is, those who know how to win grants).
The private sector can stimulate basic science and government subsidies are not needed. For example, pharma companies encourage basic research at private companies via the incentives they provide via M&A strategy — an exit plan from the lab for basic science. In general, firms trying to develop new products and services for the market do a lot of the scientific discovery in the early stages of production. The government is not needed.
When government does provide venture capital (more frequently in Europe and Southeast Asia than in the US), the researchers reporting in this journal edition identified the receipt of such funds as mostly a marketing signal, enabling firms to enroll bigger partners, or get a prestigious underwriter for their IPO as a consequence of the positive imagery derived from being a subsidy winner.
Non-policy is a more promising and potentially more effective approach to encouraging entrepreneurship. Culture is an example of non-policy. A culture that encourages experimentation and creativity, and assigns a low level of stigma to boldness whatever the result, is likely to attract more investment and accumulate more capital than a culture of more traditional norms favoring continuity. Cultural evolution like this is less likely to occur in a system where the state directs investment and chooses industries and sectors for support. One outcome is a negative view of business when business success is determined by getting close to government: in those cases, individuals tend to think badly of all business, including entrepreneurial businesses.
The verdict: maintain a healthy skepticism about the case for interventions to support entrepreneurship. Overall, the evidence is not in favor of either macro-interventions or micro-interventions to stimulate innovative entrepreneurship. How should the individual entrepreneur think? It may be an ethical issue: whether or not to accept government subsidies or support. Nevertheless, the entrepreneur must make the best use of available knowledge, which includes knowledge of the regulatory regime. One of the papers in the collection finds that entrepreneurial businesses can make better connections with the right kinds of capital and partners as a result of government involvement. At some level, this kind of knowledge is a defensive mechanism for the real world.
And at least the regulators and policy makers are recognizing entrepreneurship as a positive force for growth and for good.
Additional Resources Read the management summary of the Strategic Entrepreneurship Journal special edition (PDF): Mises.org/E4B_112_SEJ
"Effects of Institutions and Policies on Entrepreneurship" (PDF): Mises.org/E4B_112_PDF
Austrian economics provides new insights into value: what it is, how it is created, and who creates it. The insights are summed up by Professors Per Bylund and Mark Packard in our E4B podcast episode #108 (see Mises.org/E4B_108). One of the most vivid images they paint is the picture of entrepreneurship as “the two-sided navigation of radical value uncertainty, both by producers and consumers, in that never-ending quest towards higher value states”.
The market for healthcare provides us with a pertinent example of co-navigation of radical value uncertainty. For consumers, there is no certainty available — they can’t know which doctors or providers will give them the best experience, they don’t know the right means to choose to attain their end (health), and they can’t use the usual market price signals in the search for value since the price of healthcare is not visible to them. The don’t purchase the product, they purchase insurance, a different financial product than the healthcare experience they really need.
Thus, the healthcare market is a natural medium for the co-navigation of value uncertainty that Professors Bylund and Packard described. In E4B podcast episode #111, Shawn Needham, a healthcare entrepreneur dedicated to helping the consumer in their navigation task, lays out 6 principles for entrepreneurs.
Key Takeaways & Actionable Insights 1. Help consumers to be proactive about their own health. The healthcare system wants consumers who are sick. Chronic sickness is their most profitable line. A good way to help consumers is via what Shawn calls Pro-Health: encouraging the consumer mindset and commitment to actively make good health and lifestyle choices in diet, exercise, quality sleep and stress reduction. Entrepreneurs can share valuable knowledge and tools to help good decision-making, and to facilitate health creation by consumers.
- Enable consumer sovereignty via cash, pay-out-of-pocket options. It’s hard to discern the operation of consumer sovereignty in healthcare systems. End-users can become locked-in to a limited set of choices. Entrepreneurs can help by developing more choices, so that expressed consumer dissatisfactions can be actualized as new options.
Examples that are already in motion include Direct Primary Care (DPC), an arrangement whereby doctors charge a set monthly fee for access to primary care, and consumers pay cash in return for an improved experience, including more time with the doctor, easier scheduling and lower cost prescriptions.
DPC doctors are healthcare entrepreneurs who are enabling consumer sovereignty, having alertly discerned the signals of consumer dissatisfaction.
- Entrepreneurial empowerment in employer health financing options. Employers offer ways for employees to finance traditional healthcare insurance, usually via benefits programs. In episode #109, Professor Desmond Ng described the Austrian-inspired movement among employers to empower their employees to be more creative and entrepreneurial and less centrally-directed: he called the movement Entrepreneurial Empowerment.
Entrepreneurial empowerment can be granted to employees to unleash their creativity in searching for financing options for their healthcare. The use of Health Savings Plans provides consumers with an alternative approach to meeting healthcare expenses through dedicated savings. There may be other ways to re-direct the funds devoted to funding healthcare insurance through centrally-directed employer programs, such as freeing employees to opt out of company-paid insurance premiums, and to take the same amount as a deposit into a 401K, leaving the employee with a freer choice in healthcare financing.
- When the consumer pays the bill, the benefits of free markets can emerge. Another pay-out-of-pocket option development is Cash Fee For Service, which is a straightforward payment whenever a specific service is required. We’ve highlighted Surgery Center Of Oklahoma as a pioneering example.
When the consumer pays the bill, lower prices tend to result because of competitive free market processes, and the quality of care tends to increase for the same reasons. In his book, Shawn Needham cites cosmetic surgery and lasik eye surgery as two examples of free market forces at work to generate higher quality and lower costs.
- Entrepreneurial initiative combined with consumer search for betterment can create new solutions. Shawn identifies medical cost sharing programs as an innovation emerging from the consumer-entrepreneur co-navigation of value uncertainty in healthcare. In medical cost sharing, a voluntary community pools funds so that any unexpected major medical cost can be shared across the community. The firm that co-ordinates the community typically also offers services such as bill negotiation, concierge medical services, health coaching, and discounts on health-promoting resources. There’s a greater degree of consumer sovereignty than is typical in healthcare arrangements, such as a freer choice of which doctors and labs to use. Similarly, doctors who participate in these programs are freer to set their own rates and to compete for patient trust in lasting relationships.
The healthcare market is a process. The healthcare market may appear to be an inflexible structure, built over many years to impede organizational innovation. But viewed in an Austrian way, as a process governed by consumer sovereignty and responsive entrepreneurial creativity, it is possible to discern emerging trends in favor of greater consumer choice, market flexibility, and the inevitable role of the price mechanism to disperse blockages and lower barriers to better consumer experiences.
Additional Resources “Navigating Healthcare Uncertainty” (PDF): Mises.org/E4B_111_PDF
Sickened: How The Government Ruined Healthcare And How To Fix It by Shawn Needham: Mises.org/E4B_111_Book
Check out one example of medical cost sharing: Mises.org/E4B_111_Example
Read about Direct Primary Care: Mises.org/E4B_111_DPCare
Does economic knowledge help you manage complex IT projects? Yousif Almoayyed thinks it does. He combines management knowledge with careful project management and principled economic thinking.
Economic thinking utilizes foundational principles to integrate knowledge management and business task management for all kinds of projects. IT projects provide a representative example.
The economic principles for IT project management include:
Ends-Means analysis.Marginal benefit — marginal cost analysisThe law of returns — savings, investment and future benefit flowsCombinatorial productivityKnowledge-based processesIncentives alignmentTrust and reliability as institutional enablers Ends-Means Thinking Your ends are business ends: to generate new economic value by serving customers with continuously improving and continuously innovative services. Technology can be a means to achieve those ends, if properly harnessed. It can help with value delivery, it can help lower costs, eliminate waste and increase efficiency.
The key to economic thinking is to keep business ends and customer experience primary, and manage technology to serve those ends. Don’t let technology be the business’s master.
Marginal Benefits and Marginal Costs, and The Law Of Returns The so-called Law of Diminishing Returns theorizes that, after a firm or a production process has attained some optimal level of performance, each further addition of an input will tend to achieve a smaller and smaller output increase. This can be true of technology projects and repays careful benefit-cost analysis. You probably already have considerable technology resources in your business, including access to services via the internet. Examine each additional tech input, at the margin, and identify just how much additional business benefit you can anticipate as a result of the new input. A rigorous approach to this analysis can be helpful in ordering priorities and understanding trade-offs.
Combinatorial Productivity Economic thinking recognizes capital as a flexible, continuously changing combination of elements. Some combinations are capable of generating higher productivity than its individual components can achieve separately. This combinatorial productivity may not be intuitively predictable in advance, and so experimental combinations are appropriate, e.g. of old and new systems.
Don’t be afraid of mistakes in your experiments. If you don’t encounter some surprises, you are probably not experimenting enough. Don’t permit technology vendors to constrain your experimentation. Proprietary systems can force you to work within their boundaries; there are plenty of routes to new productivity outside these boundaries. Yousif mentioned his experiments with Raspberry Pi — the single-board computer used by many for experimental applications such as robotics — as an example.
Knowledge and People As Critical Assets. Economic processes are knowledge processes: bringing the right knowledge to bear at the appropriate step. Much of the knowledge is tacit – in individuals’ heads, based on their own individual experience. Consequently, assembling and preserving the right team with the right knowledge — both inside and outside the firm — is the primary task in IT project management.
How much tech knowledge do you need? It’s certainly not the most important knowledge for your project. That position is reserved for business knowledge: your project team, in order to attain the business ends you have established for the initiative, must have complete understanding of your firm’s business mission and purpose, and of the customer service context of the current project.
If you are clear in communicating business ends both internally and externally, you will be prized customer for IT suppliers, since this clarity is often lacking and can lead to confusion and conflict.
You will always be able to assemble the appropriate tech knowledge when your business aims are clearly stated.
Choose the outside vendors who best demonstrate their ability to understand and absorb your business ends, in combination with mastery of the specific technology means you require.
Incentives Alignment and Scope Specificity Economic thinking pays special attention to the roles of multiple players in a system and the incentives under which each player is operating. For example, a systems integrator salesperson or project manager may be incentivized by his or her company to sell more units, or more customization that requires more installation hours now and more upgrade complexity in the future.
Your internal project management includes the alignment of roles and incentives to guard against this kind of conflict. Best to have your own internal project manager.
A big part of the internal project manager’s role is to think through the project scope in great detail, to give the business ends clear dominance over all other ends, to be as specific as possible on the technology means, and to guard against mission creep and the opportunistic exercise of power by IT managers internally or IT vendors externally who might use their technical knowledge to force choices that are inappropriate to business ends.
Big data analytics projects and A.I. projects can be examples of inappropriate technology choices. Big data projects that include extensive data gathering (e.g. through sensors or via cameras for visual data) can promise new insights through analysis of the newly acquired datasets, but a careful analysis of the potential value facilitation of the output might tell a manager that the marginal benefit is inadequate. Always ask whether the project facilitates new economic value for customers or in the firm’s capacity to serve customers. Make sure the incentives to install new technology are truly business-aligned and not simply to be modern or up-to-date, and staying close to the technological edge.
Trust, Reliability and Institutional Guardrails All economic systems are collaborative networks of individuals, strategies and artifacts. Economists examine systems not only for efficiency but also for integrity, which often comes via institutional factors such as trust between people, and reliability of input performance from people and groups. Without these institutional factors, collaboration can become impeded and frictions can arise, slowing down projects or even rendering them unsuccessful. Great project managers check for these intangibles as well as for the robustness of the technology.
Technology Combined with Economic Thinking Can Open Up New Business Horizons Some of these economic factors sound restrictive but they’re not. They help guide you to efficient and effective choices by thinking through resource allocations, trade-offs, system optimality and the long term consequences of invisibles such as incentive alignment.
Technology is capable of changing the economics of the firm. For example, it can change the constraints of size and resource availability via new connections to a vast array of external resources that were not previously accessible and that can boost your firm’s effective scale. Yousif pointed to applications such as Upwork to add global specialized talent at variable cost, and also made reference to his collection of previously unavailable commodity supply data that was once shielded but now is made available by technology and can provide early warning signals about market price movements, making his firm better informed that it was before, and therefore better placed to serve customers.
Use technology economically to expand your capabilities so that your marginal benefits exceed your marginal costs in reaching expanded and elevated business ends.
Additional Resources A Guide To The Project Management Body Of Knowledge (May 2021): Mises.org/E4B_110_Book
"Economic Thinking About IT Projects" (PDF): Mises.org/E4B_110_PDF
Austrian economics offers a wide range of knowledge and applications for better business performance. One of them is the design of high-value organizations (see Mises.org/E4B_109_PDF).
Austrians understand the function of entrepreneurial businesses in the economy is to pursue and generate new economic value. That value is subjective, experienced by individuals as an improvement in their feelings of well-being. We also understand that subjective value applies not only to consumers but also to producers, including employees in firms whose purpose is value facilitation.
To fully realize the skills and talents of their employees in the pursuit of the organization’s visions and goals, entrepreneurial businesses look for the best ways to empower employees to utilize their Hayekian individual knowledge for the innovation and adaptation that leads to marketplace success.
Dr. Desmond Ng uses the term Entrepreneurial Empowerment to describe this approach to designing an organization that best unleashes the creativity of its entrepreneurial employees.
Austrian economics is particularly suited to addressing the organizational challenges faced by today’s entrepreneurial firms. Businesses understand that they need to be more responsive to customers and the market. Firms are moving from a top down decision-making structure and searching for ways to move to a more decentralized firm structure. They are aiming to take advantage of all the different knowledge experiences that may be inside the firm, to be more adaptive to changing market environments and to acknowledge the importance of empowering employees.
Austrian economists like Friedrich Hayek fully recognized the benefits of decentralization in adapting to changing market processes. Today, Austrians can apply that same understanding at the firm level, in the pursuit of unleashing the subjective experiences and individual knowledge of each employee to greatest economic effect.
The organizational design tool to achieve maximum decentralized value generation is Entrepreneurial Empowerment (EE) A firm that organizes using Entrepreneurial Empowerment focuses at the leadership level on clearly defining the ends of the company (which can be packaged in the form of vision or mission or goals or objectives) and on ensuring that internal communications are strong enough and effective enough to ensure complete and fully distributed understanding and buy-in among the employee base.
The means for each individual to contribute to the achievement of these ends are left open to employees; they are not dictated or bound with managerial or administrative constraints. Leadership in an entrepreneurially empowered firm is non-interventionist, free of the strictures of central planning.
EE has two components: the first is structural empowerment (SE). The structural empowerment element of EE refers to the communication structure that delivers employee empowerment. Se informs them about their opportunities for taking action and making decisions, and provides support for them to utilize their own knowledge in doing so.
Professor Ng used the example of design firm IDEO, which provides a fully-available repository of all the firms designs and ideas from all its engineers and teams, along with information about how past teams tackled the solutions to design problems, with what outcomes. Designers on today’s teams can utilize this shared knowledge, learn from the pooled experiences, and enjoy the freedom of embarking on new design paths by combining their own knowledge and skills with the corporate knowledge repository.
Structural empowerment also requires a policy to regard failure as an acceptable part of the innovation process, in order to foster greater risk-taking behavior among employees, and a greater willingness to experiment with new and unproven ideas. SE is a process that leaders and managers must actively and persistently support. The danger is that leaders may succumb to the temptations of power and control, and to seek to centralize their authority. This can be fatal to entrepreneurial empowerment and negate all its benefits.
The second core component is psychological empowerment (PE). Employees perform best, innovate best and contribute the most creativity when they enjoy psychic rewards from their work. One important aspect of psychic reward is the search for and successful achievement of meaning and purpose. Research is clear that these high values are found in work when it is conducted in an environment that encourages their development. Professor Ng used Chick-Fil-A as an example where, because the company subscribes to a set of values, employees in what might appear to observers as the simplest and most repetitive service and production jobs can find meaning in their work. The result is unrivaled customer service ratings. Psychological empowerment comes from leadership conveying a set of principles.
Monetary incentives, rewards and the awarding of titles can not match psychological empowerment in effectiveness for motivating employees. The Austrian perspective delivers some quite revolutionary policies and approaches for organizational design.
Rethinking the concept of leadership. In recent years, business schools have commanded a lot of attention by marketing and selling leadership studies, with products ranging from executive education to books and online courses. However, Austrian economics suggests skepticism about the underlying concept of leadership in business. Firstly, structural empowerment and psychological empowerment are the antithesis of business school style leadership — they suggest non-leadership, letting go of control, and abandoning hierarchy.
Secondly, as Professor Ng pointed out, the centralized authority suggested by business school style leadership tends to lead to the corruption of seizing power and control, clouding the ethical considerations that are at the heart of entrepreneurship, and undermining the trust of employees lower down the hierarchy. The results can be both a loss of legitimacy for the bosses and a loss of business performance for the firm.
The Austrian perspective on organizational design and management can lead us to a higher performing firm, a more innovative firm, a firm that facilitates purpose and meaning for those individuals who work there, and trust and legitimacy for founders and executives.
Additional Resources "Entrepreneurial Empowerment" (PDF): Mises.org/E4B_109_PDF
Professor Ng’s Research Paper Entrepreneurial Empowerment: "You Are Only as Good as Your Employees" (PDF): Mises.org/E4B_109_Paper
In a recently published paper titled "Subjective Value In Entrepreneurship," Professors Bylund and Packard apply the principle of subjective value to generate significant new avenues of thinking for entrepreneurial businesses to pursue.
Watch the "Value Generation Business Model" video at Mises.org/E4B_108_Video.
Key Takeaways and Actionable Insights Re-think value. Business schools teach value creation. But their definition of value is faulty, based on a profound misunderstanding. Value is not objective and measurable, as in the business school paradigm of generating more of it. Value is subjectively understood and experienced. It’s a motivation for action (people have a desire to achieve experiences that they value) but it’s immeasurable. It is emergent from complex social systems and patterns of interaction between individuals, not something “created” by businesses.
Re-think the economics of value and value creation. Value is created by consumers via their experiences. Producers are servants to consumers and their preferences; producers seek to convince consumers to allow them to provide for their wants. Since consumers have alternative courses of action, producers must scrutinize and revise their plans continuously to conform with consumers’ changing choices. This is consumer sovereignty, an essential element of a value-centric business model.
Re-think the role of the consumer in the economic system. Consumers facilitate their own consumption. They pursue their own individual well-being, including by expressing their wants and needs to producers. The demanding of solutions is the task of the consumer, as is the choosing between available and expected alternatives. They experience value uncertainty (their preferences may end up dissatisfied) and they actively assess and learn about entrepreneurially produced alternatives that are available. They learn cumulatively as they amass consumer experience. Thus the role of value innovation and solution discovery is, actually, the consumer’s and not the producer’s. Innovations are generated by consumers in their never-ending pursuit of higher-valued satisfactions. Consumers’ own imagination and understanding shape their subjective experience.
Re-think the role of the firm. The producer’s role can be divided into value proposition creation, value facilitation and value capture. Producers respond to consumers’ dissatisfactions with the status quo by devising and assembling new value propositions – features and benefits responsive to consumer wants, aiming to generate feelings of well-being and satisfaction. Producers become partners in the consumer’s value learning process, providing a comparatively better offering than others, so that the consumer prefers it.
The consumer generates a willingness-to-pay, when they feel that the use value of an entrepreneurial offering exceeds the price they are asked to pay. The offering now has exchange value to the consumer. This money magnitude does not indicate the actual subjective value to the parties, but it does generate profit (if it covers production costs) that can be used in the market.
Re-think business models. A business model captures the fundamental idea of consumers and innovative businesses jointly navigating a shared experience of value uncertainty, in a never-ending quest for higher value states from which they can both profit. This co-navigation process must be built in to business model design, and business model innovation consists of new co-navigation pathways and new ways of sharing. For example, the concept of generative business models we explored in E4B episode #104 gives a greater role in co-navigation to consumers as a way of generating new value.
Management without measurement. Subjective value represents a challenge to theories of business that adopt a “make the numbers” approach to performance. When value is immeasurable, business processes must be assessed via variables such as the quality of understanding of the consumer and their preferences, the quality and accuracy of empathic diagnosis, and the trust generated with consumers to adopt the business as a co-navigator of value uncertainty. It is possible that survey data can be helpful. More fundamentally, Austrian economics can provide a set of principles for management without measurement.
One approach is qualitative models, which can be designed and subsequently calibrated with marketplace activity. One form of such models is simulation, using agents that represent the emotions and uncertainty felt by consumers in markets. This is a direction that technologically-augmented entrepreneurship may take.
Re-think output metrics. Similarly, in a world of subjective value and qualitative assessment, concepts such as KPI’s (key performance indicators) can’t realistically be applied. Concepts such as profit and free cash flow continue to apply, given full recognition that they are reflections of accounting conventions, because they indicate the sustainability of the firm and its business model. But new output metrics for subjectively-experienced consumer value and for satisfaction and well-being remain to be invented.
Re-think organizational design. Subjective value applies not only to consumer activities but equally to entrepreneurial activities. Professors Bylund and Packard present entrepreneurship as an individual journey, one that is primarily mental. The journey is a series of imaginations, judgments and learning over time regarding what problems to solve, what resources are available, what those resources can do, what can and should be done with them (in combination), how to do it and why (i.e. what are the goals and ends the prospective entrepreneur aims for).
Entrepreneurship is chosen. In an entrepreneurial business, many individuals are engaged in — choose — entrepreneurship. Much of their motivation lies in unleashing their imagination, processing their own learning, and finding purpose and meaning. Organizational design becomes the search for the best structures to free the individual to make entrepreneurial choices, to apply their individual imagination and explore the co-navigation of uncertainty with consumers. The firms that do this best will be the ones that succeed in value facilitation and value capture.
Re-think motivation and incentives. Why do individuals choose entrepreneurship? As Professors Bylund and Packard point out, money magnitudes do not express much of entrepreneurial motivation. Subjective values of purpose, meaning, achievement, personal fulfillment and others are primary. These can not be captured in salaries, bonuses, awards, promotions and titles. The firms that master subjectivist motivations will be able to attract the best talent.
Re-think the social contribution of business. Entrepreneurial capitalism is under fire in America today. Profit is seen as exploitative, and employment is often viewed as restrictive and oppressive. The ends of business are sometimes portrayed as conflicting with those of society.
An understanding of subjective value would generate a perspective of business as the facilitator of satisfaction and well-being in society. Business creates jobs and incomes for consumers, enabling them to facilitate their own value both in the form of psychic reward in their work and user satisfaction in their consumption value experiences. Individuals, families and communities are all beneficiaries of this value generation.
Businesses provide consumers with continuously improved goods and services at ever-lower costs, providing the means for consumers to achieve their desired experiences and satisfactions. This provision of means is generated entirely in response to consumers’ expressed wants and preferences.
Contribution to societal well-being is therefore the sole end of entrepreneurial business.
Additional Resources "Subjective Value In Entrepreneurship" by Mark Packard and Per Bylund (PDF): Mises.org/E4B_108_Article
"The Value Generation Business Model" (video): Mises.org/E4B_108_Video
Corresponding PowerPoint (Mises.org/E4B_108_PPT) and Keynote Slides (Mises.org/E4B_108_Key)
"The Austrian Business Model" (video): Mises.org/E4B_108_ABM
Austrian economics has always been on the leading edge of innovative thinking applicable to business. Back in the last century, there was a group of American economists of the Austrian school who greatly advanced theories related to subjectivism; that is, the role of human beliefs and preferences, and of the market as a process. Here are some of the insights (Mises.org/E4B_107_PDF) they gave us about entrepreneurial business.
The function of entrepreneurship is the generation of new subjectively perceived value. These economists got the name The Psychological School, because they understood that value is a function of human feelings, preferences and beliefs. The secrets to the successful pursuit of new value are not found in data and mathematics, but in human motivation.
The activity of entrepreneurs is the development and implementation of value-generation business models. The twentieth century economists we talk about on the podcast this week would probably never use the term business model. But their concept of the market as a process governed by subjectivism would embrace this modern term. A business model is a recipe for identifying value potential — an analytical outcome of understanding customer preferences — assembling a value proposition — a creative act of the entrepreneur — and enabling the customer to experience value, some of which can be captured by the entrepreneur via exchange if the business model is well-constructed.
Who are entrepreneurs? Historically, some economists have debated whether entrepreneurs play the role of managers of the assets and activities of firms, or the role of owners establishing the asset base and purpose of the firm, or the role of capitalists providing the enabling financial capital. From the subjectivist point of view, it’s not a difficult question. Entrepreneurs are those engaged in the business of pursuing and generating new value. They might play one or more roles (manager, owner, capitalist) at different times in the pursuit.
Those in business firms who do not have an entrepreneurial role are the bureaucrats engaged in governance actions with no customer value, imposed by external influencers, usually government.
How do entrepreneurs generate value? These economists understood the market as a process of individuals interacting to exchange. Therefore, they were able to establish that entrepreneurial value generation is a process and that it can be systematized (which is the essence of our Economics For Business project). A process has a beginning — in this case the identification of value potential, which requires a deep understanding of subjective value) and an end — the facilitation of value to the point where the customer can easily exchange for it, activate it, and experience it. It’s not necessarily linear, rather it’s recursive and dynamic, a continuous creative flow of knowledge gathering and learning and responding via innovation.
How are entrepreneurs compensated? These economists realized that it represents a poor reflection of real life to identify the compensation of entrepreneurs solely with profit. On the monetary axis, they can just as well be paid in wages or dividends or other forms of monetary compensation. On the non-monetary axis, these subjectivists fully understood the concept of psychic profit: that entrepreneurs can do what they do for their own individually-perceived motivations, including achievement, fulfillment, the reward of serving others, and the purpose and meaning found via the entrepreneurial journey.
Additional Resources "Entrepreneurship Drives Markets, Innovation, and Value Generation" (PDF): Mises.org/E4B_107_PDF
Professor Jankovic’s Book, Mengerian Microeconomics: The Forgotten Anglo-American Contribution to the Austrian School : Mises.org/E4B_107_Book
The driving force behind the stakeholder capitalism philosophy is precisely that it creates opportunities for political actors to assert disproportionate control over the economy’s resources.
Original Article: "Why "Stakeholder Capitalism" Is a Disaster for Entrepreneurs"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Entrepreneurship is the best pathway for all people out of unsatisfactory economic circumstances. Mauricio Miller, who arrived in the US as a poor immigrant from Mexico, and who also experienced living in some of America’s worst neighborhoods, spent over 20 years running social services for people growing up and living like he did. His conclusion: social services are the worst policy for such people. It is entrepreneurship that will open up the pathway out of the neighborhoods and out of the traps of low income and limited prospects. Entrepreneurship lifts up individuals, families, and communities.
Job creation programs are not the answer. In the US, people can get jobs, but they are often on a dead-end track that doesn’t generate learning or leverage-able experience — waiter, assistant, security guard, etc. Outside the US, even these jobs might not be available. Often, people with these jobs are entrepreneurs “on the side”, exchanging in the informal economy. This is just another indicator how important entrepreneurship is to upgrading people in low income situations.
Entrepreneurship is inherent in people. Is entrepreneurship hard? Is it too daunting for some? Does it require skills that only special people possess? Absolutely not. People have the capacity, the capability and the creativity. They are typically smart and determined. The requirement is simply to let that come out — to remove the constraints. The entrepreneurship is already inherently there.
Furthermore, people are motivated for entrepreneurship. Everyone has a particular talent, or at least their own interests, and they always perform better when they’re working on what interests them. And people want to run their own life, and make their own decisions.
Release the constraints. The constraints that face them trace to being stereotyped and labeled, and these are barriers to credibility. Reduced credibility makes it hard to institute relationships, establish partnerships, to get loan financing, and generally to build the network support and capital required to advance their businesses. Mauricio says that if we don’t label them, and simply let talent and commitment shine through, all kinds of people can demonstrate entrepreneurial potential and achievement.
Entrepreneurial achievement and success will emerge when people are unconstrained. How does the entrepreneurial movement get started? Naturally, and without intervention. In any community, there will be one or more individuals who become “leading lights” in the sense of trying something unusual or unprecedented, and succeeding. The definition in sociology and innovation diffusion theory is “positive deviants” — those who deviate from the norm or from history with a successful outcome. Leading lights is a better term.
The leading lights are followed by early adopters, who see a strategy that is successful and copy it or follow it. Then comes community support, which Mauricio characterizes as mutuality — everyone in the community eager to help anyone who can demonstrate success.
In his book The Alternative (Mises.org/E4B_106_Book), Mauricio tells the story of Ted Ngoy, a Cambodian immigrant to the Los Angeles area of California who got a job at Winchell’s donut chain. He quickly absorbed the techniques of donut making and decided to open his own shop. Members of the community pooled savings to provide equity capital to buy equipment. The single store became successful and Ted opened more. The mutuality of the neighborhood was activated and neighbors became delivery drivers and ingredient wholesalers and came together as a supply chain and value creation network.
The word spread across California and Cambodian immigrants in San Francisco and elsewhere started reproducing Ngoy’s strategy. In a more general sense, the learning is: people, whoever they are, can start and run a business and make some money and become independent.
A new mindset: No plan, no policy, no structure, no institutionalization. Mauricio’s key insight is that any intervention by government or charities or social services that aims to provide a plan or a process or a structure or to configure institutionalized support is not only not needed, it is destructive. It distorts and undermines the natural human motivations and drives that people draw on in entrepreneurship. The opposite approach — or no approach — is the best. Honor the natural preference of communities for self-help and sharing — mutuality as Mauricio has named it — and let them discover the pathways for themselves, find the knowledge, pool the savings, get access to the technology, use their network to connect to the needed skills.
Entrepreneurship is catching. Once the bright lights shine, once the positive deviants emerge, once the early adopters find follow-on success, once the natural mutuality builds the supply chain and the support network, no intervention or encouragement or policy is required. Stand back and admire.
Additional Resources The Alternative: Most of What You Believe About Poverty Is Wrong by Mauricio Miller: Mises.org/E4B_106_Book
Family Independence Initiative: FII.org
Community Independence Initiative: CIIAlternative.org
Mutuality Platform: Mises.org/E4B_106_Mutuality
For any size and any type of business, the generation of value requires more than strategy, planning, and executional excellence. It calls for the establishment, communication, and internalization of value-generation principles (see Mises.org/E4B_105_PDF), solidly founded and consistently applied.
This concept of the long term, dynamic application of unchanging principles is the essence of the Austrian approach to business.
In a podcast conversation, Professor Per Bylund reviewed and critiqued the popular business book The Science Of Success, and focused on these principles or guidelines.
A Vision For Long Term Value Vision in this context is not the transcendental futurism of a CEO-with-superpowers often envisaged in business school texts. This is Austrian vision: a deep understanding of what constitutes value and how to act to realize value over time, rejecting short-term opportunism.
Value, of course, is subjective, determined by consumers, and so businesses that generate long term value can be seen as creating value for society, a laudable ethical contribution to social well-being.
Virtue and Talents It’s unusual to encounter the word virtue in a discussion of business. In this context, it applies to the selection and hiring of a team that will collaborate on the long term creative task. This requires dynamically melding people with the right values, skills and capabilities, and the capacity to develop skills and capabilities even further. Hiring becomes one of the most important and most value-generating business functions.
Knowledge Processes Entrepreneurial value creation is a knowledge-based and knowledge-intensive process. Knowledge is actively pursued, curated, combined, and processed. Knowledge advantages may be available, where firms are able to craft uniquely superior processes, methods and technologies. Crucially, these are never permanent. They can always be competed away, and rendered redundant by changing markets and evolving consumer preferences, although some forms of knowledge advantage, such as brands and culture, can be more long-lasting. Knowledge processes must include not only knowledge management but also the creation of new knowledge.
Decision Rights Business books often talk about organizational design, but less often about the details of the processes of decision making. Whether the organization is hierarchical or flat and networked, it must still be able to make decisions and have them accepted and supported and implemented. Putting people in the right roles with the right degree of authority and accountability is the business challenge. This is different from the mythical business school idea of “leadership”; it’s a more a matter of productive collaboration among multiple individuals and teams, all of whom have some authority. The concept of decision rights breaks the ties and the logjams and enables corporate dynamism.
Incentives The idea that behavior is responsive to incentives is core to the science of economics, of course. The same is true in business, and it’s important to use economic reasoning to get incentives right and avoid adverse incentives. The proposition given in the Science Of Success is that people are rewarded according to the value they create. Thus, we come full circle, back to the vision of value that constitutes the first of these 5 principles. If a business is clear on its definition and understanding of value, then it can be successful in incentivizing its people to generate that value.
Additional Resources "Long Term Value Generation as a Science of Business Success" (PDF): Mises.org/E4B_105_PDF
QJAE Special Double Edition on Entrepreneurship: Mises.org/E4B_105_QJAE
Centrally planned economies often stick with terrible ideas for many years. But markets can take bad products, learn from them, and turn them into great products that give the public what it wants and needs.
Original Article: "How Markets Turn Lousy Products into Great Ones"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
Our metric for business is value generation. The scope of Economics For Business is not determined by business size or type — we don’t label firms as small, medium or large, or by the stage of their development, or by industry.
We see business through the lens of entrepreneurship, defined as the intentional pursuit of new economic value. A reasonable proxy metric we can use is growth. Business growth is consequence of generating new economic value. That value is determined by customers, and a growing company is creating more customers and/or adding to its share of customer dollars spent in value exchange.
The changing dimensions of business growth. The economic route to growth is changing. In today’s markets, we often see speed of growth that goes beyond historical expectations. Business models can expand their reach and accelerate their performance over networks faster than ever before.
An Austrian perspective on business enables entrepreneurs to perform in a high-growth environment: Austrian entrepreneurs recognize the boundaryless-ness of markets, the flexibility of capital combinations, and re-combinations to respond to the rolling flow of value learning signals from consumers, and the benefits of shedding control in order to accept complexity and emergence. Austrian entrepreneurs are well-placed to enjoy success in today’s markets.
Professor Mohammad Keyhani sums up the Austrian entrepreneur’s advantage in the term Generativity. The generativity of a system is the capacity to produce unprompted, unanticipated change through unfiltered contributions from a large, broad, and varied audience. The concept of generativity is closely aligned with the Austrian ideas of spontaneous order and emergence.
By way of an example, the concept has been applied to technologies, where the characteristics of generativity can be identified as the increase in participation as an input and the increase of innovation as an output. One of the results of this thinking has been open innovation: anyone can participate (e.g., when corporate research is not limited to a corporate R&D lab, ideas can come from anywhere outside the corporation), and more and better innovation is an outcome.
One of the potential effects of generativity is to overcome knowledge constraints. Open innovation is an example: even the biggest corporation with the best minds in its employment can not possibly have a majority of good ideas. They don’t even know what answers they should be looking for. With generativity, the part of the agency for the search for knowledge and entrepreneurial action is carried out by the product itself. Importantly, whereas open innovation is an organizational technique, generativity is a product characteristic. It gives the product itself some entrepreneurial agency in the Austrian sense of the word.
Detaching the search process from the searcher. When we face knowledge constraints, we search for answers. But a searcher only knows to search in certain places. Generativity can separate the search from the searcher, unleashing the search process to look in places that would be blind spots for the searcher. Similarly, generative design can generate product ideas that the human designer could not.
The incentives of the market can take control of the search process. The demand side (via broad, unfiltered participation) defines the problem to be solved and the supply side (via equally broad and equally unfiltered participation) creates solutions.
Generative characteristics can be built-in to a product or service. 5 characteristics of generativity in products are:
Leverage: the product can be put to many uses, and users can do many things with it, including those that the product designer could never anticipate.
Adaptability: the product can be further modified to broaden its range of tasks even further; new code can be contributed by users, accessories can be added, and so on.
Ease Of Mastery: there are no or low barriers to broad usage and broad adoption due to unusual or hard-to-acquire skills.
Accessibility: the product is accessible to everyone and its usage is not limited to a specific set of users.
Transferability: The advances in and changes to the technology made by some users are transferable to all users; new users can build on what previous users have contributed.
Generative products are tools for entrepreneurs. Generative products are a little hard to describe or categorize. They’re more like toolkits rather than specific use products. Professor Keyhani started a website to curate some of these kinds of tools / toolkits for entrepreneurs: Entrepreneur-Tools.Zeef.com/Keyhanimo
Some examples he mentions:
Zapier.com and Integromat.com link web apps and digital tools together via API’s to assemble automated workflows.
Airtable.com — flexible and powerful cloud-based relational database for regular users.
No-code software development tools like Adalo.com (build your own app), Voiceflow.com (build your own voice app) and Bubble.io (anyone can be a software developer).
There is a broad future growth path in generativity. Let users generate innovations; let them accumulate (new users can build on the innovations of earlier users); focus on capturing as much of the value as is appropriate for the entrepreneur-as-orchestrator.
Additional Resources "How Generative Is Your Business?" (PDF): Mises.org/E4B_104_PDF
"A Theory of Digital Firm-Designed Markets: Defying Knowledge Constraints with Crowds and Marketplaces" by Mohammad Keyhani, et al (on JSTOR): Mises.org/E4B_104_PDF2
Professor Keyhani's website: MohammadKeyhani.com
The concern over concentrated influence of corporate special interests is valid, but not because corporate special interests will prevent economic regulation. The problem is corporate executives consistently agitate for more government control.
Original Article: "How the Progressives Conquered Corporate America"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
If business owners were hoping to catch a break in 2021 after having been completely victimized by government lockdown procedures and left-wing rioting, they may want to brace themselves for more pain as the Biden administration gets going.
Original Article: "Biden Seeks to Finish off Struggling Business Owners"
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Michael Stack.
A rapidly advancing strand of theory has enabled great advances in the understanding of complex adaptive systems. Austrian economics is quintessential complexity theory; Austrians recognize that economic systems exhibit emergent outcomes as a result of the myriad interactions of consumers and businesses, value propositions and value perceptions, technologies and channels, and the innumerable transactions and exchanges that take place. The future is unknowable — we can’t know what will happen, and we don’t even know what can happen — and the system can sometimes feel turbulent and chaotic.
How should businesses manage complexity? They shouldn’t. It’s not manageable. No plan survives the first contact with customers is the way Steve Blank famously puts it.
What’s the answer? Don’t plan. Implement an Austrian Business Model (see Mises.org/E4B_103_Video) and embrace the complexity of the marketplace.
How do you do that? Professor Steven Phelan uses the complexity theory metaphor of the dancing rugged landscape. Think of the market or business sector in which you are operating as a landscape of peaks and valleys. You can see some of them but not all of them. Your view may be improved if you have more knowledge about where you are and where you are trying to get to, but knowledge is never complete. And the landscape is not stable — new peaks form, old peaks move and crumble, valleys become deeper. The pursuit of new economic value is the search for peaks, locations of high value that your business can capture, if you can get there. A plan won’t get you there, because you can’t see a pathway and the destination is going to move and change anyway. And you might identify another, better peak as you explore, and you’ll make an unplanned change in your journey to switch destinations.
Professor Phelan sums up the many choices open to entrepreneurs in complex environments under two approaches.
Approach 1: I believe I can see a peak, and identify a pathway to reach it. You will never be right. But there are smart actions:
Be humble: be conscious that you may be proven wring.Act fast: test, test, test to prove the peak and the path.Be agile: prepared to change or pivot when circumstances and data change.Be aware of competition and fast followers and adjust accordingly.Refine / redefine your niche to further differentiate.Build fortifying uniqueness around any peak you find.CultureBrandBuild-in continuous change and innovation.Assemble multiple peaks, reducing dependence on any single one. Approach 2: I don’t know where the peak is, but I believe I am in an opportunity-rich landscape. Don’t get trapped — and waste all your resources — in blind random searching.
Run multiple experiments — small, medium, and large.High speed of sorting through outcomes.Example: Big Pharma seeds multiple biotech startups, acquires winners.Choose customers to serve first, rather than choose products or services to produce.Customer need is the beacon to guide the searchThe customer need is never fully understoodAnd it’s always changingThe work of identifying it is never completeBut it is the guiding lightThere are no events (like product launches) only the continuous flow of searching, responding to customers, and changing in response. As Professor Phelan states: the work is never done. No landscape is unchanging. No peak lasts forever.
Additional Resources "The Entrepreneur In A Dancing Rugged Landscape" (on Twitter): Mises.org/E4B_103_Twitter
"The Complexity of Opportunity" by Steven Phelan (PDF): Mises.org/E4B_103_Paper1
"Austrian Theories of Entrepreneurship: Insights From Complexity Theory" by Steven Phelan (PDF): Mises.org/E4B_103_Paper2
Can entrepreneurship be a collaborative undertaking across multiple firms? Entrepreneur Zones are an idea from Dale Caldwell to boost the economic performance of cities, and represent one form of collaborative entrepreneurship. The business platform the Mises Institute is building — Economics For Business — represents another: an online collaboration of entrepreneurs to share knowledge, experience, and practices, while competing individually to be the best at serving customers.
How will this work? We can answer this question using our "5 Cs Framework" (Mises.org/E4B_102_PDF1).
Key Takeaways & Actionable Insights 1. Consumer Sovereignty / Customer First The first principle of entrepreneurship is that value is subjective, and one way to express that principle is that consumers determine value. Entrepreneurs facilitate value for consumers. That principle is never relaxed. Deviation from it is fatal for entrepreneurial businesses. Therefore, even in circumstances where we see opportunities for entrepreneurial collaboration, it is never in violation of consumer sovereignty. Any collaboration is directed towards the facilitation of consumer value, and does not detract from it.
- Collaborative Efficiency. In an Entrepreneur Zone, as envisioned by Dale Caldwell, there is the opportunity for a group of entrepreneurs (geographically co-located in a city in his case, but potentially grouped along other dimensions) to search for shared advantage. To speculate, the shared advantage in an Entrepreneur Zone might be found in shared services, reducing unproductive overhead for all firms and releasing resources for exploration, innovation, and customer service. It could be found in shared or pooled marketing.
In the case of Economics For Business, we aim to provide shared knowledge (reducing search and knowledge acquisition costs and overcoming knowledge constraints), processes and tools that can be applied by all for greater effectiveness, and shared experience that can speed up learning.
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Competitiveness "Collaborating to compete" sounds contradictory on the surface, but is the essence of capitalism. While firms look for shared advantage where it is available, they equally search for individual advantage through innovation, better ideas, better customer service and stronger relationships. The rivalrous drive to serve customers better and therefore enjoy the resultant revenue streams is primary. It’s the energy of economic growth. Success can be replicated by imitators, which is one of the ways the system works for all. By that time, the innovators have advanced to the next stage of competitive advantage. The system never stops and progress never ends, because of the competitive drive.
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Creativity Behind competitiveness is creativity. New ideas and new knowledge, the result of new experiments, provide the fuel for continued growth. The collaborative entrepreneurial group can share ideas, bounce ideas between them, pursue their own ideas, ask for help, and merge ideas into new combinations. Creative ideas remain the original source for all entrepreneurs.
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Cumulative Improvement Entrepreneurship is a journey, with many twists and turns. It calls for learning, which might often require abandoning a path that once looked promising and taking up another. Success comes over time, via more and more learning, more and more feedback from the marketplace, more and more experiments run and recorded, more and more customer experiences logged. Improvement accumulates over time. For a collaboration such as Entrepreneur Zones or Economics For Business, participating entrepreneurs can anticipate long term success without any certainty about the length of the timeline.
Additional Resources "The 5 Cs of Entrepreneur Zones" (PDF): Mises.org/E4B_102_PDF1
White Paper: "New Jersey Entrepreneur Zones" by Dale Caldwell (PDF): Mises.org/E4B_102_PDF2
"Dale Caldwell Believes that Jobs Can Drive Societal Change": Mises.org/E4B_102_Article1
"Healing Divided Country with Entrepreneurship": Mises.org/E4B_102_Article2
"Opportunity Zones… We Need Entrepreneur Zones": Mises.org/E4B_102_Article3
"Trauma in Employment" (PDF): Mises.org/E4B_102_Article4
Key Takeaways and Actionable Insights Our goal at Economics For Business is to help entrepreneurs and their businesses succeed. Per Bylund and Hunter Hastings discuss the true implications of the current furor over the anti-market behavior of some of the Big Tech companies of Silicon Valley. They are destroying value and consuming capital. Why? How can this happen?
Read Per Bylund’s tweet stream: Mises.org/E4E_101_Twitter
Where Is the consumer? The Austrian business model emphasizes that the consumer is in first position. The goal of entrepreneurship is the creation of new value, and Austrian entrepreneurs understand that value is an experience, and evaluation is in the consumer’s mind. Entrepreneurs facilitate value experiences, via an understanding of what consumers will value, and of gaps or shortfalls in the value propositions from which they choose today. Business success lies in filling the gaps and solving the shortfalls.
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Technology-driven means not thinking about the consumer The histories of many Silicon Valley tech firms reveal that they started out to build a technology, one that performs efficiently, automates effectively, and exhibits cool features. There’s a pride in engineering, as there should be. But even the most beautiful technology can’t succeed without consumers in mind. The technology-driven approach to innovation must not contravene the principles of the consumer-driven approach to value.
When consumer value is not the business model Facilitating consumer value is a business model. Value is a learning process for consumers, of which exchange value (paying in dollars for value anticipated) is a component part. The revenue model for the entrepreneurial firm consists in earning this exchange. It’s all integrated. Some Silicon Valley companies (Google, for one) accepted investor funds and began operations without a business model in place. When consumer value is not integral to the firm, it’s quite possible that they lose their grip on the concept. They don’t create value for consumers, or for the economy. Or for investors, for that matter — they’re using investor funds in ways the consumer does not value.
In many Silicon Valley models, consumers are creators of content for the technology company to control, analyze and re-sell as data to the advertiser. Consumers are creating value for the platform, not vice versa.
Monetization as an afterthought We often hear the word “monetization” in descriptions of Silicon Valley business models. The word itself is quite revealing. It certainly doesn’t connote a commitment to serving the consumer. Monetization is the search for a revenue model after the technology is launched. Many of the monetization schemes are advertising-based, which can be problematic. They are often value-destroying for consumers, especially in the “interrupt and annoy” formats that are common on the internet today. Advertising is certainly not innovative — it’s been around for a very long time, long before Silicon Valley came into existence. When firms are selling consumers to advertisers, their commitment to consumer value becomes secondary.
It’s not that B2B business models are any less valid than B2C. The key is to remember the Austrian principle that value in any stage of the production chain is made possible only if there is consumer value at the end of the chain. Microsoft, for example, is a technology company primarily focused on B2B value propositions in areas like business productivity. They always have an eye on the next stage in the value chain: improved business productivity and efficiency enable Microsoft’s customers to, in turn, produce lower-cost consumer services and enhanced consumer experiences. Microsoft has its eye not only on the immediate B2B customer but also on the next stage of the value chain.
A cultural problem Ultimately, the kinds of Silicon Valley companies to which these observations apply face a cultural problem. Consumer value and consumer service are not a sufficient part of their DNA. They were founded and developed to nurture technology — in some cases, brilliant technology, in others more mundane; they found technical ways to reach mass distribution based on the new power laws of digital networks; they found bolt-on monetization schemes that responded to mass reach. Culturally, the idea of consumer value has never been central to them.
Perhaps that’s why, today, we see Twitter censoring its users and throwing them off the platform, angering many more.
Generative products versus central control The value promise of today’s digital products and digital markets is exciting for consumers. The term “generative” has been coined to describe the new characteristics of products that give consumers leverage – make their jobs easier; that provide adaptability so that consumers can change them to suit their own purposes; and that are easy to master and easy to access. The spirit of generativity lies in unleashing end-user creativity.
Some Big Tech companies don’t seem to believe in the generativity of their products and their consumer relationships. They prefer centralization and control. They want to collect and control consumer data and turn it into their own closed products. That’s why they need so many engineers to build the algorithms and the data banks. That’s why they need so many content monitors to project their control. They are centralizers in a world of decentralization. This leaves them open to disruption by the next generation of entrepreneurs who start their journey from the point of view of what consumers value.
Additional Resources "Silicon Valley is Bad at Entrepreneurship" (PDF): Mises.org/E4E_101_PDF
Protocols, Not Platforms: A Technological Approach to Free Speech by Mike Masnick: Mises.org/E4E_101_PDF2
Economics is an animating science. Economics is treated by many as an arid field of mathematical modeling. Human beings are treated as data in the model, almost the way physics regards atoms and molecules. This approach to economics doesn’t help people much; it doesn’t help us understand the world, and isn’t helping us build a better future.
Austrian economics is humanistic; it treats humans as people, pursuing their hopes and dreams, frequently changing, seldom predictable, and never acting like data in a model.
That’s why we see our brand of economics as animating: helping people to understand better how to identify the best means for their chosen ends. For businesspeople, that translates into knowledge, processes and tools to help businesses grow and thrive.
The role of the entrepreneur Entrepreneurship is the animation of business. It’s action; the exciting process of turning business knowledge and market signals into commercial solutions with the application of imagination, insight, creativity, resource assembly, and agile adjustment.
A big part of what makes Austrian economics different and better for business application is the understanding of the role of the entrepreneur and the entrepreneurial function in the economy. Jeff Deist articulated this role as a nexus between capital and markets, and the entrepreneur as the individual taking risk, employing their own property and having skin in the game. It’s an exciting role.
Entrepreneurship and value Entrepreneurial business is the intentional pursuit of new economic value. The pursuit requires a deep understanding of the concept of value, an understanding that Austrian economics provides. Ever since Carl Menger established the concept of subjective value, Austrian economists have been deepening their understanding still further. Today, we recognize more than ever the role of the customer in value creation; since value is their experience, they are active collaborators. Entrepreneurs harness this collaboration. Think of an iPhone. Apple designs and assembles it, and then a large part of the value experience comes from the user adding apps, composing and sending and receiving messages and e-mails, choosing videos to watch and podcasts to listen to, eagerly contributing to the value experience that they themselves enjoy.
Value is what users make it.
Individualism and diversity Entrepreneurial economics recognizes the role of the individual. It respects and honors the individual choice. Each individual, in the role of both consumer and producer, exhibits different preferences, personality, and psychology; we live in different places and in different contexts; we each have different needs and wants.
There are many favorable outcomes from individualism. One is the vast global diversity of the marketplace, whether exhibited on amazon or Alibaba or Grainger.com for industrial supplies. Another is economics as an engine of humanity and peace, which is the context for entrepreneurs providing goods and services globally to customers.
Specialization, achievement and satisfaction Economics For Business aims to help all businesses and all entrepreneurs to find their specialization in this global ecosystem. We apply the economic principles of the specialized division of knowledge and division of labor. We all have knowledge that is unique to us, and we can all find an application of that knowledge in business.
Bob Luddy, who has been a guest on our podcast, founded CaptiveAire, a company that specializes in restaurant ventilation systems, providing benefits of safety, comfort, clean air and regulatory compliance to a broad range of foodservice customers. Bob stresses the value of specialization to become the leader in a category - a share leader and a knowledge leader and an innovation leader. And he’ll tell you that the non-material rewards of economic specialization are delightful, including satisfaction, achievement, earned respect.
CaptiveAire is a great example of considered specialization – it’s not in a high tech category (although there is a lot of tech incorporated in CaptiveAire’s product and service bundle), or an internet business or a software business. Find your customers, find a need that is not being filled, and build from there.
Big data versus big empathy and big insights We live in an era where more and more data is being collected, compiled, processed and analyzed by producers (as well as non-economic actors such as governments, of course). As the sources of data, many of us have concerns about this trend. The economic principle that is more important for businesses, however, is that, no matter how “big” the data sets are, they do not have value (they are not causal data) until they provide or reveal some qualitative understanding of customer feelings, motivations or attitudes. These are the data that are genuinely useful to businesses. The Economics For Business method to develop this understanding is empathy, and we have a full toolset to help entrepreneurs apply it.
MBA-ization versus products, people and active learning Jeff quoted Elon Musk on the subject of MBA-ization of business: too much focus on financial modeling and spreadsheets, and not enough on deploying engineers on the factory floor to develop, introduce and continuously improve great products that provide the customer with a delightful experience. Jeff concurred that MBA programs and business schools have become bogged down with a lot of dead weight, and have obscured some of their market-facing functions. They don’t provide the value they ought to provide for the tuition charged.
Economics For Business can provide the 20% of business school knowledge that’s actually valuable, and add new content – informed with Austrian insight - that’s even more relevant, plus the methodology and tools to apply the knowledge in business practice.
This approach is based on the educational science of active learning. In this view, learning is not achieved via books and lectures (which are necessarily backward-looking) but via the receipt of tools and methods and techniques, applying them oneself in real-life situations, and learning from the feedback received from people and markets and business results.
Building experience and sharing experience. Active learning is the accumulation of experience. It is the unique experience of entrepreneurs and their teams gained from the operation of their businesses that constitutes the division of knowledge flywheel that continuously reinforces their advantaged position in the marketplace.
There is a time value to experience; it takes time to accumulate. On the Economics For Business platform, we’ll aim to identify ways to share experience to speed up the experience-gathering timeline. Q&A and discussion within our entrepreneurial community is one way. Another is mentoring, whereby experienced business people can share what they’ve learned over time.
Economics as a route to work and life satisfaction. In his book Dynamism, Economic Nobel prizewinner Edmund Phelps tells us that, according to individually reported life satisfaction scores (e.g. Pew Research Center surveys and other similar surveys), the greater part of life satisfaction results from production activities rather than consumer activities. The purpose and meaning of taking on challenges, achieving results, making discoveries, self-reliance, and success in meeting goals are found in participation in the production side of the economic system. We hope to play our part in the stimulus of those satisfactions via the Mises Institute’s Economics For Business project.
Entrepreneurial GPS Economics For Business utilizes a journey metaphor for the entrepreneurial process. Take a look at our visual summary at Mises.org/E4B_100_PDF.
Why isn’t everyone an entrepreneur? Perhaps we don’t explain it well enough or in language that lets everyone in on the wonders and the thrills of the pursuit of new economic value.
Scott Livengood chooses reframing — thinking in new and different ways about an established concept — to widen the audience for entrepreneurship.
Reframing entrepreneurship in the context of popular culture. Scott recently published a multimedia e-book called The Startup of Seinfeld (Mises.org/E4E_99_Book1). In the book he articulates a comprehensive survey of concepts and principles of entrepreneurship, including the entrepreneurial mindset, risk and uncertainty, intellectual property, business models, planning, finance, and many more.
The cultural frame Scott selected is everyday city life as illustrated by the characters and situations and market interactions in 180 episodes of Seinfeld. In Scott’s hands, this is not a show about nothing, but about entrepreneurship.
The multimedia approach is facilitated by a series of links in the e-book to YouTube video clips of short scenes from multiple Seinfeld episodes that are illustrative of entrepreneurial concepts and principles. You’ll find the concepts of economic calculation, opportunity, product design, arbitrage, intellectual property, judgment, planning, uncertainty, and several more. The text accompanying the videos is an exposition of economic principles underlying these concepts.
There’s a lot to learn, and it’s fun! A major point to take away is that entrepreneurship is everyday life: people imagining new ways to serve others and meet their needs, and employing design and economic calculation, judgment under uncertainty and marketing and communications to facilitate a valuable exchange.
Reframing the teaching of entrepreneurship and strategy. The philosophy underpinning the teaching method in the e-book has been forged in the university classes and seminars that Scott teaches, and for which he prepares meticulously and conducts comparative research into learning and teaching effectiveness.
He has found that embedding the principles of entrepreneurial economics and business strategy in cultural iconography illustrated via multimedia technology results in a significant increase in student engagement, participation, learning, and understanding. Humor, for example, is a language and a style that can draw students in, engage them at a deeper level of curiosity, and help to deliver the serious economic message.
This kind of approach helps students think of entrepreneurship as more of a normal life choice for themselves — a life of creative problem-solving. Students can think about their ends and the means open to them in a different way. If they are inclined to “social entrepreneurship”, they can learn that that simply means a distinctive identification of ends, without any attempt to operate outside the profit-and-loss system of sound entrepreneurial practice.
Reframing entrepreneurship for the disadvantaged. Scott’s ultimate test for reframing entrepreneurship for a different audience in a different culture has been presented by his teaching for Education for Humanity. This is group associated with his university, Arizona State, and dedicated to helping displaced refugees. These students who are displaced from their homelands by war and conflict and find themselves in refugee camps in countries that are alien to them, like Uganda and Lebanon. Their prospects for further education are narrow. What are the pathways out of the poverty and restrictions of refugee camp life?
Scott’s chosen task is to teach them entrepreneurship. Where to start? The basis is empathy — digging deep to understand their situation, circumstances, and context, and understanding them as individuals and identifying their needs and wants. Language becomes critical — using concepts and examples they can relate to.
It’s contextually impractical to teach entrepreneurial finance in terms of bank loans and venture capital. But Scott can teach individual and family budgeting: how to calculate and manage income and expenditures, how to save, how to build up sufficient savings to make a capital purchase, and how to generate an income stream from that capital. The particular capital artifact may be a second cow for a head of household that uses the first one for feeding the family. The family has knowledge and skills in milking and animal husbandry that can be put to use in their new entrepreneurial business of selling milk and dairy products to other families, or bartering for other kinds of nourishment.
Eventually, the family may advance to the use of micro-loans or other forms of micro-finance and expand their entrepreneurial holdings. Scott can now teach about the trust nexus of paying interest and paying back loans, and about return on investment and capital accumulation. Progress comes quickly as a result of starting in the right place.
Entrepreneurial communities. One of Scott’s realizations has been the power of entrepreneurial communities. In the refugee camps, family entrepreneurs collaborate, learn together, assist each other, and seek to raise the prospects of the entire community. Failure to pay back a loan, for example, would be a setback for the group, and group norms and institutions arise to guard against such a loss of trust.
Scott sees direct application of this learning about normative entrepreneurial community action in other parts of the world, including rural communities here in North and Central America, and in the inner city initiative of Entrepreneur Zones in the US.
By embedding entrepreneurship in culture, the collaborative service ethic emerges more clearly and emphatically.
Additional Resources Enjoy Scott Livengood’s book about the culture, concepts, and principles of entrepreneurship: The Startup Of Seinfeld: A Multimedia Approach to Learning Entrepreneurship: Mises.org/E4E_99_Book1
Read the work of Nobel prize-winner Edmund Phelps, mentioned in the podcast introduction, on Mass Flourishing (Mises.org/E4E_99_Book2) and economic Dynamism (Mises.org/E4E_99_Book3).
Empathy, properly employed, is a robust business tool that smart entrepreneurs use to design winning value propositions.
Here’s why empathy matters for entrepreneurs. Entrepreneurs’ success depends on what others do — those others being customers. The entrepreneur has the goal of customers buying, as a result of listening to their preferences and meeting them.
But there’s a little more work to do than just listening. As we discovered in Dr. Mark Packard’s previous podcast episodes, the customer is engaged in a continuous, dynamic, and ever-changing value learning process: learning what they, subjectively, really want. So they can’t tell you what they prefer when they are still engaged in the learning process. So listening, while useful in gathering factual knowledge, isn’t quite enough for the entrepreneur to embark upon designing a solution.
The entrepreneur must develop a special kind of “needs understanding” for their chosen customer group. As Dr. Packard stresses — and as is foundational to the application of Austrian economics to business — the customer determines value, and that value takes the form of an experience: how customers feel about the experienced benefit of an economic exchange like buying a car, driving it, getting it serviced, and sensing the esteem of others for the choice they made.
There are two kinds of knowledge, factual and tacit. Your customers can communicate factual knowledge to you. They can’t communicate tacit knowledge, because it is derived from experiences that only they can feel.
So entrepreneurs must find a tool to represent the tacit knowledge that’s locked in the customer’s mind — a tool for “needs understanding”. The tool Dr. Packard proposes is a mental model the entrepreneur can use in the empathic process.
Importantly, empathy is not emotional mirroring — feeling what another person feels. It’s an active implementation of the entrepreneurial imagination, a cognitive act that the entrepreneur can plan and perform.
The process of modeling “needs understanding” starts with factual knowledge, purposely gathered and organized. What entrepreneurs must pursue is deep learning about why customers feel the way they do about their experiences The goal is to gain insight in order to be able to improve consumers’ future experience. This requires knowledge-based inference from your empathic imagination about the causes of the current experience.
To do that, entrepreneurs need substantial background information—especially the personal and situational context surrounding the experience: the specifics of who, what, when, why and how. It’s not about imagining the experience of random people; it’s about learning a lot about a specific person in order to be able to successfully empathize with them.
Factual knowledge can be run through the entrepreneur’s mental model. Once factual knowledge of the customer, their context and their current experience is gathered, the entrepreneur makes two runs of this information through their mental model. Think of it as running a simulation — a mental simulation.
The first run of the mental model is based on the entrepreneur’s own experience. Pick an experience that you’ve had and can self-analyze, so that you have a model of what that experience feels like. Now run the information you’ve gathered about the customer through that model — what does it suggest that they might feel? For example, think of an experience that you’ve had where you bought a product you expected to enjoy, and it disappointed. What did that feel like?The second run of the mental model is the empathic mental model based on the entrepreneur’s understanding of the customer’s current or recent experience as told during knowledge gathering. You can understand what you felt like when a product disappointed. Now you imagine what the customer feels like or felt like as a consequence of a comparable experience. The final step is to project the empathic mental model into the future. The ultimate goal is to imagine what the customer’s feeling would be like in the future, following an experience with a new product or service value proposition offered by the entrepreneur. This is a projection — one that can be carefully constructed from the two previous runs of the mental model.
Create a mental model from your own experiences.Run that mental model for an experience that a customer has reported to you that they have felt in the past.Then run a projection of that model for the new experience you are planning to offer. The more developed this skill becomes, the more confidence you can develop in your empathic projection, and the better you will be able to evaluate the business opportunity you are imagining you will design and create, and the value the customer will experience.
Just as the customer learns what to value, the entrepreneur can learn to project future value. Dr. Packard emphasizes that the customer is continuously engaged in a learning process — assessing value propositions, making decisions as to what to buy and what to try, then evaluating the resulting experience — was it better or worse than expected?
The entrepreneur must keep up with this learning process, monitoring the customer’s dynamic subjectivism, their ever-changing preferences amidst an ever-changing context.
By keeping up via continuous monitoring, the entrepreneur will be able to make multiple runs of the empathic mental model, and test the model results for increasing predicted value.
Additional Resource "Empathy as a Process" (PDF): Mises.org/E4E_98_PDF
With the development of the Austrian Business Paradigm and the Austrian Business Model, and tools such as the "Value Learning Process," businesses of all kinds can utilize the deep insights of Austrian economics to further enhance how they facilitate value for their customers.
John Boles — an avid listener of the Economics for Entrepreneurs Podcast — provides an example of how he applies these insights at his accounting firm. Here is a summary resource and a step-by-step outline: Mises.org/E4E_97_PDF.
1) Improved customer understanding. The Austrian business paradigm places the customer in first position. This contrasts with traditional business thinking that puts the firm or the product or service in first position and searches for ways (“strategies”) to sell or market that offering to a set of customers who are to be identified during the selling process.
The way to put the customer in first position is to make your top priority a deep and intimate understanding of the customer, demographically (who they are), functionally (what they do and how they do it) and emotionally (how they feel — about key issues and challenges, about vendors and service providers, about competition and every aspect of business).
The first question Austrian business practitioners ask themselves is: how deep and intimate is my customer knowledge, and can it be improved?
2) Calibrating the customer’s perception of value. Value is a feeling that exists only in the mind of the customer. The entrepreneur’s task is to facilitate that feeling of value — ease the way for the customer to arrive at that happy state of mind. It’s imperative for entrepreneurs to try to feel what the customer feels — to sympathize with their perception of value, rather than to focus only what the firm is delivering. We must know what the customer is buying, not just what we are selling.
The tools to use are monitoring of customer behavior (what they do — for example, shopping around for alternatives — is more important than what they say); making sure you understand their rankings of features, attributes and benefits, that is, what’s most important to them; and conducting interviews about the value experience. Ask the question: is the customer’s perception of value experienced aligned with the firm’s perception of value delivered?
3) Are value adjustments indicated? The Austrian view of the market as a process helps us think about continuous change. Customers are continuously interacting with other customers, competitors, ideas, new value propositions, environmental conditions, regulations and a plethora of marketplace changes. Consequently, their perceptions of value are in constant flux. It should not be a surprise that entrepreneurs need to make value adjustments. It may be necessary to change perceptions of absolute value (via an adjustment in the value proposition), of relative value (via an adjustment in comparison with alternative propositions), or of exchange value (via adjustment in pricing, bling terms, or discounts / rebates).
4) Communicating adjustments. It’s easy to overlook a critical component of value adjustments: communication. The Austrian business model advocates frequent in-depth conversations with customers at every level. These conversations, while always two-way of course, can be primarily designed for outbound communication, describing the adjustments made, and why they were made and ensuring the customer understands the responsiveness of the firm; or for inbound data gathering, primarily listening in order to further increase understanding of the customer and their preferences.
Customer communication is a component of perceived value.
5) Ongoing evaluation. The customer is always evaluating the service provider / vendor and their value proposition, through the lens of experience: did the value experience match the anticipated experience; and, if not, in what ways was it deficient? The service provider / vendor must also undertake continuous evaluation. Did the value adjustments succeed? Are more called for? What are the indicators of change?
Additional Resources The five steps of "Continuous Value Perception Monitoring" are described and annotated in our free downloadable graphic process map: Mises.org/E4E_97_PDF
For reference, match this monitoring tool with the customer’s "Value Learning Process": Mises.org/E4E_55_PDF. The two processes are complementary, composing a complete yet never-ending cycle of value.
Researchers into entrepreneurship have a powerful incentive to identify new insights about how businesses grow and thrive.
Happily for everyone involved in business and innovation, entrepreneurial research is thriving, blossoming, and flourishing. Professor Vishal Gupta’s book, Great Minds In Entrepreneurship Research, surveys thirty or more years of research papers that were awarded what is colloquially known as the Nobel Prize in Entrepreneurship Research (formally known as the Global Award for Entrepreneurship Research: GAER). The research field is deep, rich, dynamic and expanding.
Research identifies and examines entrepreneurship in every business size and type as a fundamental economic activity. In its earliest days, entrepreneurship research focused a lot on small business but, today, business size and stage are not the constraints. The research identifies entrepreneurship in corporations, non-profits, and many more business sectors.
Much of the research focus is on entrepreneurial contribution — to growth, to job creation, to innovation, to progress. Entrepreneurship is identified as the great economic contributor to betterment and well-being, measured via GDP growth in countries large and small, the creation of new and better jobs for people worldwide, new innovations and new business directions, and individual progress in general. As Mises stated, entrepreneurship is the driving force of the market system.
New entry, properly understood, is one way to characterize entrepreneurship. The search for a single characteristic of entrepreneurship risks missing critical insights. However, one that garners broad support is “new entry” — entering new markets, entering existing markets with new value propositions, entering established product fields with new innovations, or entering into existing customer mindsets with new ideas.
Economic productivity is another. A rich vein of entrepreneurship research has measured the efficiency that entrepreneurs bring to the use of resources — producing more with less. For example, research has measured innovation efficiency as the number of innovations per employee, and has found that smaller, more nimble firms are far more efficient on this metric than big corporations, even if the latter launch more new products in total (and generate more PR).
The research has uncovered a new type of firm and business model, and new business ratios that result. NTBF is the acronym for New Technology Based Firms, those that innovate with new business models and new ways to facilitate service experience via dematerialized delivery. One of the results of these new models is new sets of business ratios — for example, revenue per employees which, with software based companies on the internet, can now reach never-before realized levels. This evolution has forced researchers to re-think some of their models. For example, the biologically-derived product life cycle (PLC) model of business maturity — birth, life and death — has to be revised because dematerialized companies can easily be re-born, even after near-death experiences. Think Apple — the founder died and, at one time, it was thought that the company might, but it was reborn.
Research opens up entirely new ways to think about business. New research fields such as complex adaptive systems (or complex creative systems as Professor Todd Chiles prefers to call them) represent a new way to think about business — focusing less on individual firms and more on the value networks and service systems of which they are a part.
New ways of evaluating business potential are also emerging from research. Professor Gupta discussed characteristics of firms such as knowledge absorption and absorptive capacity. Extending the Hayekian concept of distributed specialized knowledge, researchers have identified the ability to quickly absorb and apply new knowledge as a critical capacity of successful adaptive firms, and have shed light on many of the internal constraints this absorptive capacity.
Research recognizes the role of entrepreneurial imagination and subjectivity, although it doesn’t always get it right. Austrian economics highlights subjectivity and views entrepreneurial opportunity as a subjective phenomenon, based in the imagination of the entrepreneur. Not all entrepreneurship researchers have been able to become comfortable with this idea, continuing to see opportunity as objectively identifiable. Austrians seem to be in the ascendancy on this controversy.
Importantly, entrepreneurship research is becoming interdisciplinary. Systems thinking requires an interdisciplinary approach. Researchers in sociology, psychology, finance and even anthropology are examining entrepreneurship via their own research lenses. This development can only help the advance of entrepreneurship across a broad front of society and culture, as well as economics.
Additional Resources "What Entrepreneurship Is (and Isn’t)” (PDF): Mises.org/E4E_96_PDF
Download our eBook, Austrian Economics in Contemporary Business Applications, featuring a chapter from Vishal (PDF): Mises.org/E4B_eBook
Abstract: The word entrepreneur originally meant someone who is active, risky, and even violent. In the sixteenth and seventeenth centuries it was used to denote a contractor who built large structures and fortifications for the government or provided supplies for the military for a contracted price but largely uncertain future costs. In contrast, Cantillon (1755) defined the entrepreneur as someone buying goods and resources at current market prices to be sold in the future at uncertain prices. His definition was adopted by the leading French economists of the time, and as a result it eventually became the common usage of the term, as will be seen in a sample of French dictionaries over time. In this remarkable and largely unrecognized transformation, Cantillon essentially turned the word upside down. Cantillon’s entrepreneur was self-regulating on the basis of profit and loss, and thus became the foundation on which he was able to construct theories and models of the market economy, which we know as economic theory. His definition is essentially that of Frank Knight and Ludwig von Mises, so it has important implications for the development of the Chicago and Austrian schools of economics.
JEL Classification: B11, B31, B41, D81, L24, L26
Dr. Mark Thornton (mthornton@mises.org) is senior fellow at the Mises Institute and serves as the book review editor of theQuarterly Journal of Austrian Economics.
I. INTRODUCTION A central question regarding the concept of entrepreneurship in both the academic literature and public discourse remains the meaning of the term. It is now generally accepted that Richard Cantillon (1680–1743) first introduced the entrepreneur into the economics literature. Since that time the meaning of the term has undergone many changes and the list of duties, roles, and traits of the entrepreneur has grown ever longer. There are even archetypal forms, such as the grand Schumpeterian entrepreneur and the ever-elusive Kirznerian entrepreneur. However, the most important and dramatic change in the meaning of entrepreneur occurred nearly three centuries ago.
This is when, circa 1730, Cantillon is said to have first introduced the term. However, before that time, the word entrepreneur existed and had very different meanings. Most prominently it referred to someone who worked for the government as a private contractor. This government contractor, or what we might call a political entrepreneur,A political entrepreneur is someone in business who seeks to profit from government contracts, subsidies, and various forms of protectionism, such as tariffs, through political influence. It is a necessary aspect of corporate welfare, or what is now referred to as cronyism. would typically bid on building a structure for the government and would thus have predetermined revenues, but uncertain future costs. Cantillon redefined the entrepreneur to be any individual who bought goods or resources at current market prices to be sold in the future at uncertain prices. So, his meaning switched the term from a political to a market orientation. It should be noted that Cantillon had extensive experience as both a government contractor, or political entrepreneur, and as a market entrepreneur.
Cantillon’s new meaning turned the concept of the entrepreneur upside down. The focus shifted dramatically from the public sector to the private sector. The functional concepts of the nature and sources of uncertainty are now their opposites. From being few in number, entrepreneurs are now ubiquitous in society. The customer, formerly the government, is now the general public, including the government. Most importantly, the government’s various problems with contract bidding and management are now largely swept away by the invisible hand of competitive markets.
Turning the concept of the entrepreneur upside down created what has become the most generally accepted meaning of the term: someone in private business, trading in the marketplace, and uncertain of profit or loss. In doing so, Cantillon took an ordinary noun, redefined it, and created a theoretical concept that is still very much in use today. More than just a term, Cantillon’s entrepreneur provides the conceptual mechanism that automatically regulates market behavior and thereby provides the foundation for the theoretical constructions presented in his book, Essai sur la nature du commerce en général (circa 1730, published in 1755), which in turn became the foundation of theoretical economics.See Brown and Thornton (2013) for examples of why entrepreneurship is essential for economic theory.
It is now well established in the economics and entrepreneurship literatures that Cantillon was the first to introduce the term entrepreneur as a functional economic concept. The word had previously existed, but it had a different meaning. He radically transformed it. It will be shown that many of the economists who were directly or indirectly influenced by Cantillon adopted his conception and helped disseminate the new meaning. A sample of French dictionaries will be reviewed to demonstrate the change in meaning and the timing of that change, which later became the commonly accepted definition.
The second section chronicles the evolution of the word entrepreneur, while the third section traces these developments in French dictionaries. The fourth section explains that the adoption of Cantillon’s concept by leading French economists, even prior to the publication of his Essai in 1755, helped spread the new meaning, eventually, into common usage. The fifth section concludes.
II. THE EVOLUTION OF THE TERM ENTREPRENEUR According to Redlich (1949, 1), the term entrepreneur evolved from the French word entreprendre, which refers to someone who undertakes an activity, is active, or gets things done. According to Hoselitz (1951, 235), by the sixteenth century the term was used to refer to people who were engaged in “some violent warlike action.” By the seventeenth century the term was used more generally to refer to people who take on risk—not merchants and manufacturers, but contractors who build large infrastructure projects for the government or the church, or who provide supplies to the military. Thus, the entrepreneur of this time was a military or government contractor-entrepreneur, or a political entrepreneur who works for a contracted price. Hoselitz (1951) also notes that in the legal literature of this period the entrepreneur is a government or military contractor. He also points out that the term was sometimes used to refer to explorers and colonizers, where the “violent warlike action” concept is combined with the government contractor concept. So, the original conception was largely political.
According to Hébert and Link (1988, 16) the classic case of the government contractor-entrepreneur is the tax farmer. On the one hand, the tax farmer is more like an entrepreneur, in the modern sense, than a government contractor, because he is someone who bids on the right to collect taxes in a certain jurisdiction for a given period of time, for a fixed fee, but is uncertain how much he can collect. A profit occurs if tax collections exceeded the amount of the bid. On the other hand, the tax farmer is more like a government contractor than a market entrepreneur, because the incentives of this ancient system often led tax farmers to be corrupt and to abuse taxpayers in various ways, such as undervaluing the goods collected as tax payments. This was the shame of Matthew, the tax farmer-turned-apostle of Jesus.
The ultimate statement of the entrepreneur as government contractor occurred in Bernard F. de Bélidor’s La science des ingénieurs (1729). Bélidor was a prominent French engineer and his book was a leading textbook for engineers. He was elected a fellow of the Royal Society in 1726. Later he would be the first person to use integral calculus for solving the technical problems of hydraulics. A street in Paris was named after him in the nineteenth century. According to Bélidor, in contrast to Cantillon’s market entrepreneur who is self-regulating due to the system of profit and loss, the government contractor-entrepreneur is devious and undependable and must be subject to government oversight and regulation.See Gupta et al. (2001) on the corrupt nature of political entrepreneurs.
Hoselitz (1951, 240) finds that Bélidor’s view of the entrepreneur was the “exact counterpart” to Cantillon’s entrepreneur in that the former’s entrepreneur is a government contractor who sells at a contracted price but has uncertain input prices in the future, while Cantillon’s buys inputs at market prices and sells goods at uncertain prices in the future. Technically, both types of entrepreneurs risk losses, but more importantly, the nature of their risk is different and their incentives and behavior differ as well. Ekelund and Price (2012, 54) concluded that the different approaches resulted in “two different types of competition.” According to Bélidor, the government contractor is always cutting corners and undermining quality and safety to cut costs in an effort to make a profit, whereas the market entrepreneur has to be more concerned about quality, safety, and reputation, i.e., long-run profit maximization. The critical difference is that Bélidor’s political entrepreneur is likely undependable and in need of oversight, while Cantillon’s entrepreneur is more dependable and self-regulating, and therefore can serve as a capable basis for economic theory and a self-regulating market economy. The concept of a self-regulating economy was largely unknown prior to Cantillon.
Bélidor’s book was published in Paris in 1729 just prior to when scholars believe Cantillon was writing and finishing his own manuscript. Murphy (1986, 246) presents evidence which suggests that the manuscript was being written from 1730–31 and was completed sometime before Cantillon’s death in 1734. There is no evidence that Cantillon knew or read Bélidor, but based on the contents of the Essai we can say that he was widely read in scientific matters. The men were contemporaries, and both were minor celebrities of the time. As a former government contractor, as well as a banker and investor in real estate, the widely read Cantillon would have been interested in the contents of Bélidor’s book. Therefore, we cannot discount the possibility that Cantillon was aware of and possibly read it.
Bélidor’s book would have been a sharp point of departure for Cantillon. Cantillon’s ubiquitous entrepreneur would have contrasted sharply with Bélidor’s conniving and untrustworthy government contractor-political entrepreneur. Conceivably, the text may have even provided some inspiration for Cantillon as a contrast for how he defined his entrepreneur. The most definitive consideration, however, is that the entrepreneur, as a government contractor, or political entrepreneur, was the well-established concept circa 1730.
III. REDEFINING THE ENTREPRENEUR The changing definition of entrepreneur, from the government contractor or political entrepreneur of Bélidor to the ubiquitous private sector entrepreneur, can be seen over time in French dictionaries. The sample of French dictionaries from the seventeenth to twentieth centuries, available online at the ARTFL Project of the University of Chicago, were consulted and translated for this purpose.ARTFL Project, https://artfl-project.uchicago.edu/content/dictionnaires-dautrefois.
According to Jean Nicot’s dictionary, Thresor de la langue francaise: Tant ancienne que moderne (1606), the word entrepreneur referred to a susceptor or redemptor, with susceptor referring to a person who undertakes some role, especially the guardianship of another, while redemptor referred to someone who works as a contractor. This early seventeenth-century dictionary entry therefore provides the very general notion of any undertaking, including caretaking and contracting that benefits others.
At the end of the seventeenth century, the Dictionnaire de L’Académie française (first edition, 1694) indicates that the entrepreneur is someone who undertakes large construction projects for a specified price. Later, in the fourth edition (1762), the Dictionnaire defined the entrepreneur as a contractor who undertakes substantial projects, such as building fortifications, bridges, or paving city streets. The fifth edition (1798) and sixth edition (1832–35) describe the same thing, although the sixth gives an example of an entrepreneur in the production of textiles. Jean-Baptiste Say (1767–1832), who was long credited with introducing the term in this period, owned a textile factory. The eighth edition (1932–35) also broadened the definition to include contractors of all sorts. The Dictionnaire notes that when the term is used in the feminine it explicitly refers to a textile manufacturer. Hence, the term entrepreneur evolved from indicating someone who is very active to a government contractor or political entrepreneur, and then into the prototypical modern market entrepreneur over this period.
In Jean-François Féraud’s Dictionnaire critique de la langue française (Marseille, 1787–88), the entrepreneur was not mentioned, but entreprenant (the adjective “enterprising” or the verb “undertaking”) was defined as bold business behavior. Émile Littré’s Dictionnaire de la langue française (1872–77) also indicated that the term was used to denote a contractor or someone who undertakes a business project. Littré’s Dictionnaire in particular referenced Étienne Bonnot de Condillac and Jean-Baptiste Say, whose work generalized and broadened the definition of the entrepreneur to include manufacturing, banking, farming, and trade, and even designated entrepreneur as a term from political economy.
This is important because, as Thornton (2009a) shows, Condillac (1997, 134n) was heavily influenced by Cantillon. In a rare footnote, Condillac heaps high praise on Cantillon:
I have drawn the basis of this chapter from this work [Essai sur la nature du Commerce, Cantillon, 1755] and several observations of which I have made use in other chapters. It is one of the best works I know on this subject, but I am far from knowing them all.
Condillac follows Cantillon on many economic concepts and phenomena, but rarely excels beyond him. For example, on interest and usury he follows him quite closely only to admit, contra Cantillon, that some very high rate of interest, unspecified, might qualify as usury. The entrepreneur for Condillac is restricted to the commercial entrepreneur, farmers, and large undertakers of every kind, but he fails to extend the term to Cantillon’s ubiquitous uncertainty bearer.
Thus, the definition of the entrepreneur changed from the imprecise meaning of a risky person in the sixteenth and seventeenth centuries to become a government contractor, or political entrepreneur, in the seventeenth and eighteenth centuries, before coming to represent any person engaged in some form of business activity after the late eighteenth and early nineteenth centuries. The actual evolution of the word is much more complicated and inexact. Hélène Vérin (1982) describes this complex historical evolution; however, when Vérin (2014) distills it into a comprehendible synopsis, a very similar story emerges.
The concept evolved alongside the progression from precapitalistic times toward the heyday of European colonialism and war, and toward the emergence of capitalism and the Industrial Revolution. The most basic change that occurred over this evolution is that the subject changed from a political entrepreneur to anyone who engages in a private business, including farming, manufacturing, and trade, in which there is uncertainty about future market prices. Landström (2010, 9–10) chronicles a comparable transformation of the English term undertaker along a similar timetable.
IV. HOW CANTILLON'S CONCEPTION SPREAD The evidence tracing the changing meaning of the entrepreneur does find Cantillon at the historical pivot prior to the new meaning gaining widespread acceptance and usage. The most knowledgeable scholar on the subject, Murphy (1986, 246) believes that Cantillon completed the Essai in manuscript form around 1730, although it was not published until 1755. So, how would the redefinition by an obscure anonymous writer spread to eventually become accepted usage?
The acceptance of Cantillon’s concept of the entrepreneur was due to his influence on subsequent writers. Most notably, the popular writer Mirabeau the elder had a manuscript copy of the Essai for fourteen years prior to its publication in 1755. Likewise, the famous dictionary publisher Malachy Postlethwayt drew on the Essai both prior to and after it was published. Also, Murphy (1986, 308) shows that Vincent de Gournay, a leader of the Physiocrats, must have read it before it was published.
One of the first noteworthy uses of Cantillon’s concept of the entrepreneur as the leader of a private business appears in the famous reference work of the period Diderot and d’Alembert’s Encyclopédie, ou dictionnaire raisonné des sciences, des arts et des métiers, published from 1751 to 1772. In an article written by a leader of the Physiocrats, François Quesnay (Gendzier, ed. 1967, 814), on the topic of “grains” Cantillon’s entrepreneur is interwoven with the social vision of the Physiocrats:
We do not now look upon the rich farmer as a worker who personally tills his land. He is an entrepreneur who administers and increases the value of his enterprise by his intelligence and wealth. Agriculture managed by rich cultivators is a very honest and lucrative profession, reserved for free men who are in a position to advance a considerable outlay of money required for the cultivation of the land that provides work for the peasants and always procures for them satisfactory and assured earnings. These are, in the opinion of M. de Sully, the true farmers or the true financiers whom we must create and support in a kingdom possessing enormous territory, because it is from their wealth that must arise the sustenance of the nation, public affluence, the revenues of the sovereign, those of landowners, of the clergy, great expenditures distributed to all the professions, a large population, and the power and prosperity of the state.
Quesnay was the leader of the Physiocrats and the school’s chief theoretician. He described the farmer not as a field hand or supervisor, but rather as an “entrepreneur who governs and manages his enterprise by his intelligence and his wealth” (Gendzier ed. 1967, 814). Higgs (1897, 30–31) reminds us that Quesnay explicitly references Cantillon’s “fundamental truths” in this article. Cantillon biographer Antoin Murphy (1986, 307–08) concludes that the group associated with Vincent de Gournay and Quesnay was responsible for the publication and promotion of Cantillon’s Essai in 1755.
Condillac, whom Émile Littré’s Dictionnaire de la langue française (1872–77) references on this topic, also viewed the farmer as an entrepreneur who oversaw cultivation and supervised those who carried out the work. Whereas previously farmers had not been thought of as entrepreneurs in any sense, now the entrepreneur was seen as being in “each profession,” including farming and manufacturing. Condillac ([1997] 1776, 147) points out that all types of entrepreneurs conduct their business at risk of failure:
Indeed, an entrepreneur can only maintain his trade in so far as the money, with which he makes advances, comes back continuously to him with a return in which he finds his subsistence and that of the workers he employs, that is to say, a wage for them and a wage for him.
Condillac also examined factors that increase and decrease the number of entrepreneurs. His discussion occurred in a chapter on interest and usury, a placement that according to Redlich (1949, 6–7) was not common before or after this time. This placement also suggests the influence of Cantillon, who had a similar but longer treatment of this issue in his famous chapter on interest and usury in the Essai. As shown above, in a footnote in his own chapter Condillac (1776 [1997], 134) acknowledged that he was heavily influenced by Cantillon.
Another significant economist with connections to Cantillon was Anne-Robert-Jacques Turgot. According to Hébert and Link (1988), Turgot referenced Cantillon and followed him on a large number of issues, but the strongest influence is indirect, from Quesnay, Gournay, and other Physiocrats. For example, in agriculture, manufacturing, and any other field of production Turgot, like Cantillon, said that there are two basic classes of producers in society: the entrepreneurs and the hired wage workers. Turgot’s theory of entrepreneurship is often thought to be more advanced than, or at least different from, that of Cantillon (Rothbard 1995, 395) because the former’s focus was on the more Schumpeterian leading capitalist-entrepreneurs while Cantillon’s entrepreneur was ubiquitous in the marketplace.
The capitalist-entrepreneur must first accumulate saved capital in order to advance payments to laborers while the goods are being produced. Turgot pointed out that advances of capital are vital in all enterprises. It makes no difference whether such savings are supplied by someone else or by the entrepreneurs themselves. For example, in agriculture, capitalist-entrepreneurs must save funds to pay workers, buy cattle, and pay for buildings and equipment until their crops are harvested. Only after the harvest can they sell the crops and recoup their advances and possibly make a profit. The same process occurs in manufacturing and in every field of production. Entrepreneurs seek to gain profits and to avoid losses.
However, Brown and Thornton (2013) show that Cantillon did not ignore the capitalist-entrepreneur in the least. Indeed, the capitalist is completely integrated into Cantillon’s theory of entrepreneurship. Either the entrepreneur provides his own resources or he borrows them, in which case the lender, not the banker, also becomes a kind of entrepreneur in Cantillon’s approach because of the risks, not uncertainty, of return. The lender manages these risks by either requiring collateral, only dealing with known dependable borrowers, or in the case of high-risk borrowers by charging high rates of interest to a large number of such customers, so that by playing the percentages the lender is neither fully enriched or bankrupted by defaults. This fits perfectly well with the approach of Frank Knight and Ludwig von Mises. In the final analysis, Cantillon’s entrepreneur includes the capitalist-entrepreneur.Cantillon does hold that a penniless beggar is an entrepreneur, but this is not the resourceless Kirznerian entrepreneur, because the beggar must contribute his time to beg money and food. Turgot and Cantillon also share the insight that entrepreneurs will only invest in risky enterprises if they expect greater profits than the loan rate of interest. They both emphasized uncertainty as an important aspect of entrepreneurship. Therefore, Turgot, like Quesnay and Condillac, had many views in common with Cantillon, accepted many of his views on entrepreneurship, and subsequently helped disseminate Cantillon’s basic definition of entrepreneurship, both through his own writings, textbooks, and through popular reference works.
Scholars, at least up through Cole (1942, 120), had long mistakenly thought that Jean-Baptiste Say introduced the term entrepreneur into economics. It was Schumpeter (1954, 222), writing that “nobody before Cantillon had formulated it so fully,” who corrected the historical record when he found that Cantillon was the first to have a clear conception of the entrepreneur as one who makes purchases at current prices but sells in the future at uncertain prices, and who therefore risks losses in pursuit of profits.
According to Say (1971, 83), entrepreneurs use their “industry” to organize and direct the factors of production to achieve the “satisfaction of human wants.” Instead of being merely managers, entrepreneurs are forecasters, project appraisers, and risk takers as well. Like Turgot, Say saw that entrepreneurs use their own financial capital or borrow it from others to advance funds toward labor, raw materials, and capital goods. Entrepreneurs only recoup these payments if they succeed in selling their products to buyers at prices that exceed costs.
For Say, entrepreneurial behavior embraces several kinds of economic activities, such as planning, organization, supervision, innovation, and the supply of capital. He therefore added various aspects of entrepreneurship to Cantillon’s general theory. Say’s approach is very modern in the sense that modern entrepreneurship scholars rely on both a general definition of the entrepreneur as an uncertainty bearer but are also very interested in the additional features, roles, and characteristics of entrepreneurs that contribute to their success or failure.
For example, Salerno (2018, 193) shows that Rothbard developed the concept of a “decision-making rent” as a return on a kind of labor performed by the entrepreneur as owner and ultimate decision- maker that could otherwise not be hired by the firm. This rent to the owner is separate from profit and loss. It is a function that is concerned with the “productive organization and technique, which is distinct from the function of forecasting uncertain future market conditions.” Decision-making, however, is a necessary aspect of entrepreneurship, while many of the features of entrepreneurship studied by modern scholars are not necessary ones but are merely highly correlated with successful entrepreneurs.
Comparing the two approaches to entrepreneurship, Say provides a more elaborate description of what an entrepreneur does, similar to the modern understanding. However, this approach also deflects our attention from uncertainty bearing, and Hébert (1985) finds no evidence that Cantillon regarded any of these additional features as fundamental to the entrepreneur. Say also narrows the scope of entrepreneurship to manufacturing which was a common theme of the time due to the emergence of the Industrial Revolution.
Hoselitz (1951) finds that Say’s theory of the entrepreneur cannot be tangibly connected with Cantillon’s and concludes that Say’s theory represented a retrogression from Cantillon and the Physiocrats. However, Schumpeter (1954, 222) draws our attention to a connection between Cantillon and Say: “Though there is nothing to show that he actually influenced J. B. Say, it is none the less true that ‘objectively’ his performance on this point…is the link between the two.” Of course, we do know that Say was influenced by the Physiocrats and that the Physiocrats were heavily influenced by Cantillon. Additionally, as Salerno (1985) finds, Say was possibly influenced by Cantillon, particularly on methodology, and both Cantillon and Say modeled the economy as a mechanism regulated by entrepreneurship.
IV. CONCLUSION This historical theme of connections and influences is complex, but the main points seem clear: 1. The original meaning of the word was different from modern usage and referred to government contractors or political entrepreneurs as late as 1729. 2. Cantillon used the term circa 1730 to refer to a market entrepreneur acting under uncertainty. 3. French dictionaries chronicle the replacement of the original definition with Cantillon’s over time. 4. Influential French economists spread Cantillon’s new meaning and brought it into common usage. Most significant for our purposes here is that although Say had a more elaborate view of the entrepreneur than did Cantillon, the Dictionnaire quotes Say only on Cantillon’s narrower view of the entrepreneur.
Cantillon redefined the entrepreneur, transforming him from a government contractor or political entrepreneur who works for a contract price and has uncertain future costs into a pervasive one who purchases inputs at market prices only to make sales in the future at uncertain market prices. The element of uncertainty creates the potential for profits and losses, great riches and bankruptcy. Cantillon used this conception of the role of the entrepreneur as uncertainty bearer to great effect in creating an economic theory of the market economy (Thornton 2007, 2009b, Brown and Thornton 2013). Economists such as Mirabeau, Quesnay, Condillac, Turgot, and others adopted Cantillon’s concept to great effect, and by the time of Jean Baptiste Say, it was considered common usage and was employed without further attribution throughout the next century.
Establishing the core meaning of entrepreneurship as uncertainty bearing in the pursuit of profit as the commonly understood one does not mean that the theory of entrepreneurship has remained static. Indeed, Hébert and Link (1988) remind us that there were many twists and turns, redirections, dry holes, and elaborations during the interlude between Say and modern theories. When more modern economists examined the concept of entrepreneurship, they gravitated back toward Cantillon without knowing of his existence. Beginning with Hawley (1907) and Davenport (1913) and ending with Knight (1921) and Mises (1949), the core theory of the entrepreneur returned to its origins in Cantillon. In turn, the latter two economists became founders of the Chicago school and the modern Austrian school of economics, respectively.
Of course, since that time there have also been some big new ideas in entrepreneurship theory, including the grand Schumpeterian entrepreneur and the ever elusive Kirznerian entrepreneur, as well as what is analogous to a big bang in empirical entrepreneurship research and the establishment of entrepreneurship as a separate academic discipline. The core, however, remains in Cantillon’s entrepreneur.
Consumer sovereignty is a principle of Austrian economics. Here’s how entrepreneurs apply the principle in business, as told by Martin Lünendonk, co-founder of FounderJar.com, as well as Finance Club and Cleverism.com.
How to Make the Customer your Boss Download our "How To Make The Customer Your Boss" graphic at Mises.org/E4E_95_PDF.
"There is only one boss. The customer. And he can fire everybody in the company, from the chairman on down, simply by spending his money somewhere else." —Sam Walton Though they are several decades old, these words by Walmart founder Sam Walton are still very relevant, especially in today’s highly competitive world.
This is particularly true for those trying to make money online. You are already in competition with hundreds, perhaps thousands of other businesses, and if you do not put your customers first, they can easily move to the competition. It’s as easy as tapping a few buttons on their smartphone.
Great business leaders understand that businesses exist for one sole purpose — to serve the needs of their customers. If you want your business to not only survive, but to thrive in this hyper-competitive world, it’s time you started treating your customers like the boss.
Below, let’s take a look at the steps you need to take to place your customers in their rightful seat — the boss’s seat.
- Identify the Key Problems Customers Want To Get Solved To effectively serve your customers, you need to first identify what key problems the customer is trying to solve.
Very often, entrepreneurs set out to solve problems they think the customer has, without trying to look at things from the customers’ point of view and confirm whether the customer has this problem, and whether it is a problem they are trying to solve.
For instance, Blackberry assumed that what its customers wanted was a laptop that could fit on the palm, so they focused on improving the physical keyboard.
Apple, on the other hand, realized that what customers actually wanted was a device that was amazingly easy to use, and when they introduced a device with a touch screen and no physical buttons, they took Blackberry out of business.
So, how do you identify the problems that customers are trying to solve? There are two ways to do this:
Listen To Your Customers The easiest way to identify the problems your customers are trying to solve is to actually listen to them. They know what they are struggling with and why they need this problem solved.
If you listen to your customers, you are unlikely to find yourself in a situation where you are solving a problem no one cares about.
There are two main approaches you can take to listen to your customers and identify the problems they are trying to solve. Here are a few…
Interview your customers: Your first option is to get proactive and ask the customers directly. You can do this using surveys on your website, by getting on the phone and talking to customers, through focus groups, and so on.Look at customer reviews: Your customer reviews present another great opportunity for you to learn about the problems your customers are trying to solve. Here, you should place more focus on the negative comments, since these are the ones that highlight customer needs that are not being met. However, even positive comments can give insights into customer problems that you’re solving effectively. Listen To Your Salespeople The second approach to identifying the problems customers are trying to solve is to listen to your salespeople.
Your salespeople are in direct contact with your customers, and they, therefore, have better insights into your customers’ thought processes.
They know the pain points that drive customers to purchase your products and services, they know the things that customers like or dislike about your products, they know the reasons that keep some customers from purchasing, and so on.
By administering surveys to your sales teams, you can gain insights that will help you figure out your customers’ key problems, which will in turn help you to serve them better.
When trying to gain insights about customer problems, either from the customers themselves or from your salespeople, it’s good to try to get to the root cause of the problem. Sometimes, what you think is the problem might not actually be the problem.
For instance, at one point, Disney was experiencing lots of criticism because visitors felt the queues for the rides were too long. At first glance, the problem seems obvious – visitors spending too much time waiting for their rides.
The solutions to this problem are obvious as well. To shorten the queues, Disney would either have to invest in more rides, or reduce the number of visitors getting into their parks. Both of these solutions would cost Disney millions.
Disney hired a group of designers to help them solve this problem. After interviews with Disney visitors, the designers realized that the problem wasn’t the long queues. The problem was that visitors were getting bored because they had nothing to do while waiting in the queue.
To solve the problem, they had Disney add themed music and videos that visitors could listen to and watch while waiting for their rides. By getting to the root cause of the problem, they were able to come up with an effective solution that saved Disney millions.
Similarly, do not take your customers' feedback at face value. Try to identify what the root problem is before you start developing a solution.
- Make Sure Your Offering Solves Those Customer Problems Now that you have identified the problems that your customers are trying to solve, it’s time to come up with solutions to solve those problems.
The best way to ensure that the solution you are developing solves the actual problems your customers are struggling with is to involve your customers in the development process.
One approach is to develop a minimum viable product (MVP) of your solution and show it to a group of customers with the problem you are trying to solve. You then collect their feedback, and use insights to improve your next iteration and ensure that your final solution solves the customer problem in the most effective way.
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For instance, when creating DropBox, founder Drew Houston didn’t want to spend months, perhaps years, working on a product that no one was interested in, so he started with an MVP.
Drew’s MVP was a simple 3-minute video demonstrating how his product was meant to work. He shared the video on Digg, an online community of technology early adopters.
After sharing his video, over 70,000 people joined the DropBox beta waiting list within a single night, which was enough validation that his product was solving the right problem.
Another way to involve customers in the development of your solution is to form a small community of beta testers and give them access to your solution during the development process.
This works even if you are developing a service-based product. For instance, if you are a digital marketing consultant, you could create a package — say a content marketing package — and test it among a small group of customers before you launch it in full scale.
The aim here is to have a group of actual customers continually testing the solution you are developing to make sure that it addresses their key concerns in the best possible manner for them.
This way, you don’t have to worry about spending months or years coming up with a solution to your customers’ problems, only to discover that it is not the kind of solution they were looking for.
Another way to ensure that what you are offering solves your customers’ actual problems is to conduct A/B tests. This basically involves creating two versions of your offering, giving two small groups of customers access to each version, and then tracking the results to identify the version that solves customers’ most effectively.
- Track Customer Satisfaction Ultimately, what matters is keeping your customers satisfied. If your boss is unsatisfied with your work, you can bet that you will be out of work soon.
Similarly, if your customers are unsatisfied with your business, they will fire you – by spending their money on your competitors.
Actually, while 96% of unhappy customers will not voice their dissatisfaction, 91% of them will never make another purchase from you. This is definitely something you don’t want.
To know whether your customers are happy, you need a way to track and measure customer satisfaction. Here are five of the most effective ways of measuring customer satisfaction:
Customer Satisfaction Surveys This is one of the easiest ways of tracking customer satisfaction. With this approach, you simply need to put up a survey asking your customers how satisfied they are with your services.
Depending on the medium you are using to administer the survey, you can add one to three open-ended questions to learn more about what they think of your services.
Customer satisfaction surveys can be served through email, through your website, or through your app.
Customer Satisfaction Score (CSAT) The CSAT is the standard metric for measuring customer satisfaction. Here, you ask customers to rate how satisfied they are with your products or services on a scale. The scale could be 1 – 3, 1 – 5, or 1 – 10.
After receiving responses from various customers, you then find the average rating to determine your customer satisfaction score. The higher the score, the more satisfied customers are with your services.
Net Promoter Score (NPS) This is another popular metric for measuring how happy customers are with your business and your services.
Unlike the other metrics covered here, however, NPS does not measure how satisfied customers are with your business. Instead, it measures how likely they are to refer someone to your business. This is especially useful for those in the freelance business, which depends heavily on referrals.
The NPS will ask a customer to rate on a scale of 1 – 10, how likely they are to recommend your business to their friends and acquaintances.
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The NPS categorizes your customers into 3 groups:
Promoters: These are customers who give you a rating of 9 – 10. They are willing to spread the word about your business and recommend your products and services. These customers are already satisfied with your business.Neutral/Passives: These are customers who give you a rating of 7 – 8. They are indifferent to your business. They aren’t disappointed with your business, but they aren’t satisfied either. They are unlikely to talk about your business to others.Detractors: These are customers who give your business a rating of 6 and below. They are unhappy with your business, and will spread negative word about your business in a bid to discourage others from doing business with you. The Net Promoter Score is a very useful metric. If someone is willing to recommend your business to others, then this means that your products or services are good enough that they would stake their reputation on them.
Customer Effort Score (CES) This metric measures customer experience, particularly how hard it is for your customers to get what they want from your business. Customers are typically asked to rate their effort from 1 (very little effort) to 7 (very high effort).
A high score means that customers have to work very hard to get what they need from your business, which translates to poor customer experience.
Social Media Mentions Keeping track of what people are saying about your business on social media can also help you figure out how satisfied your customers are with your business.
Satisfied customers will take to social media to praise your business, while unhappy customers will share their dissatisfaction with their social media followers.
Monitoring the conversations about your business happening on social media will allow you to step in and respond to comments in time and control your brand perception, especially when people are sharing negative comments.
Here are three tools that you can use to track social media mentions:
Google AlertsMentionSocialMention 4. Put Customer Value First, Profits Will Follow A lot of entrepreneurs believe that the core purpose of a business is to make profits.
Smart entrepreneurs, those with the right entrepreneurial mindset, on the other hand, know that the core purpose of a business is to serve its customers. Therefore, their core focus is on delivering customer value.
Of course, this does not mean that businesses that put customer value first don’t think about profits. They do. What differs is their approach.
These businesses understand that when you keep your customers happy (by delivering great value), these customers will bring more business, and spread positive word about your business, leading to more business, and ultimately, greater profits.
Actually, the findings of research by Deloitte and Touche show that companies that put customers first are 60% more profitable compared to those that don’t.
So, what exactly does it mean to put customer value first?
Putting customer value first means that every single business decision made within your organization should have a positive impact on customer experience.
For instance, when upgrading its systems, a customer-centric company will choose systems that allow it to deliver the best customer experience.
Similarly, when hiring, customer-centric companies go for employees who show a knack for putting customers first. Basically, every decision is evaluated based on its impact on customer experience.
Here are some tips on how to make your company customer-centric and put customer value first:
Understand your customers deeply. It is impossible to put customers first when you don’t even know who they are. To get a good understanding of who your customers are, you need to develop highly detailed buyer personas. Actually, gaining a good understanding of the customer segments you’re targeting is a key component of the business model canvas.Make sure that all your team members are engaged and have a good idea of the impact of their work on customer experience.Make it a habit to collect customer feedback, and then use this feedback to gain insights on how to improve the customer experience.Don’t just focus on getting customers to make the purchase. Focus on building relationships that will turn them into loyal customers and brand ambassadors.Be easily accessible. Make it easy for customers to get in touch with your business when they have an issue, or when they need any sort of help. Ready To Put Your Customers In The Boss’s Seat? As an entrepreneur, you are in business to serve your customers, which means that your customers are your boss. If you want your business to thrive, you need to start treating them as such, by putting their needs first.
In this article, we have gone over 4 key points on how to make the customer your boss. Here’s a recap:
Identify the key problems customers want to get solvedMake sure your offering solves those customer problemsTrack and measure customer satisfactionPut customer value first and profits will follow Additional Resource "How To Make The Customer Your Boss" (PDF): Mises.org/E4E_95_PDF
Six ways — selected from many — that businesspeople can derive more insightful knowledge and perspective from Austrian economics than from traditional Business School teaching.
Download our "A-school vs. B-school" summary PDF at Mises.org/E4E_94_PDF.
More Human Austrians believe in business as an uplifting human endeavor, focused on how people as producers can best help people as customers to do well, feel better, and thrive. To do so, entrepreneurs cultivate their power of empathy: to understand others, feel what they feel, and understand their hopes and dreams. Entrepreneurs utilize this understanding to cultivate new ideas, design new solutions, and present new value propositions for customers’ consideration. It’s the human project.
When business schools approach business building as an engineering problem, to design and run an assembly of operating machinery — whether physical or digital - at maximum levels of efficiency, and to manage via mathematical models embedded in spreadsheets and software, they occlude the human factor.
More Subjective Emotion and subjectivity are important elements of human decision-making, both for producers and customers. Data and so-called rationality are important, but how people feel, how they perceive, how they interact, and how they subjectively weigh up options are dominant in shaping decisions. Austrians understand this, especially in the subjective imagination entrepreneurs apply to future customers and their potential preferences. No data or predictive models can reproduce this capability.
More Individual Austrian economics always starts analysis at the individual level. Every economic phenomenon can be traced back to one buyer exchanging with one seller. What are the motivations and incentives and processes that promote the completion of the exchange? What are the barriers that might prevent it? Can the resulting knowledge be applied in more instances, and even at scale?
Austrians are not atomists. We understand — more deeply, perhaps, than the minds behind the business school disciplines — interconnection, community, and the interaction of individual beliefs, values, and preferences. It is the study of these interactions that lies at the core of the Austrian approach to business. Groups and segments are abstractions — only individuals decide, choose, and act.
And today, technology is moving in our direction, enabling more fine-grained action to reach individual customers with tailored value propositions.
More Imaginative Professor Peter Klein has been, and continues to be, a leader in unwrapping the role of entrepreneurial imagination in the dynamism of business. He emphasizes that humans are fundamentally creative actors, and that entrepreneurs apply imagination to create new possibilities, new solutions, and new combinations of resources the world has never before seen. Opportunities are not “out there” to be discovered. They’re imagined by the entrepreneur.
Yes, there can be planning, e.g. in the choices between alternative patterns of resource allocation. But even these are subjective, based on individual entrepreneurial assessments. There can be projection of trends, although empathy with future customers is a counterweight to projection. Overall, imagination dominates.
More Action-Oriented As Peter Klein also teaches, entrepreneurship is characterized by acting to reap the rewards inherent in imagined possibility. This action orientation makes the Austrian approach to business much more realistic and straightforward than the business schools’ insistence on the mysteries and opacity of strategy.
Austrian entrepreneurs form their own beliefs, act on them, and gather the results. The results are a feedback mechanism, energizing the entrepreneur to make adjustments and try again. Business is very straightforward. The Austrian action-orientation to business is empowering and inspiring.
A Role for Theory Professor Klein told the story of his first foray into executive education. He was nervous about presenting Austrian economic theory to experienced and successful business people. He quickly learned that theory is what business needs and what traditional business instruction lacks. Managers often know everything about their industry, but do not always have theoretical perspective, or frameworks to help them see the forest and not just the trees. Without a theory, all they have is a mess of data.
Theory provides a path to interpretation. That’s what’s so valuable about Austrian economics: it emphasizes theory. One example we discussed for business was pricing theory. Austrian economics provides a pathway for entrepreneurs to map out how pricing for specific goods and services emerges via the interplay of customer preferences and context with entrepreneurs’ value propositions. The price that is right for an exchange can be discovered by following this pathway.
But the entrepreneur still needs to combine the theory with action and experience: set the price for an offering, and test the customer’s willingness to pay in the context of all their alternatives and their previous experiences. Theory provides an invaluable generalized assistance with understanding of the customer’s ultimate decision, but can’t predict the contingencies of the moment and of the individual’s idiosyncratic personal situation. With Austrian theory, an entrepreneur is more likely to get pricing “right” (via theory) but not every time (that’s experience).
Additional Resource "Austrian School vs. Business School" (PDF): Mises.org/E4E_94_PDF
“Small business” is just a government classification. Entrepreneurial businesses serving well-defined communities via creative specialization exhibit enormous economic productivity, energy and dynamism.
Such businesses can not be defined quantitatively as small, medium or large. They’re defined by their qualitative impact on their customers’ lives.
Entrepreneurial businesses care differently, and care more. Big businesses must pay attention to size and scale, to their huge revenue and profit streams, to their many, many shareholders, to journalists and bureaucrats and financial analysts. They are, typically, managing to maintain progress or status on a well-established pathway, and have limited time and resources to devote to customer care.
The triple option of the entrepreneur. Small businesses are designed and constructed to care for customers and communities. As Ramon Ray puts it, small business entrepreneurs choose to:
Create what we want;Serve whom we want;Collaborate with whom we want. As a consequence, business owners care differently about their customers, their colleagues, and their collaborators and partners.
Small business entrepreneurs create communities of fans. Ramon sees small business owners serving their chosen communities as Celebrity CEOs (see Mises.org/E4E_93_PDF). This does not require millions of Twitter followers or a pack of paparazzi. It results from being known and trusted as the specialist supplier of a highly desired service personalized to a well-chosen, often local, customer base. It’s the deli owner with the best sandwiches, or the mechanic to whom to trust one’s 1958 Edsel.
Customers become fans, deeply emotionally bonded to the entrepreneur and the service. Business owners become more deeply intimate with customers-as-fans, and the synergy is complete and lasting. The entrepreneur and the firm come to fit the community perfectly, and become indispensable.
The well-served community is a qualitative measure of business success, not quantitative.
Ramon Ray aims to build a community of entrepreneurs along similar lines of helping and caring. Entrepreneurs can thrive by serving well-chosen communities, and they can also thrive by being part of a community. His vehicle is a B-corp formed by fellow-entrepreneur Seth Godin, to support small business entrepreneurs. Akimbo provides knowledge, tools, and courses to help entrepreneurs run and grow a business. Ramon’s latest contribution is a series called Small Business Essentials, a workshop in 12 modules. The modules cover essentials including pricing, cash flow, and hiring, as well as entrepreneurial refinements such as properly defining what problem you are solving and who are you solving it for.
A special feature of the workshop is that participants are joined online by fellow entrepreneurs, so that there is a group experience, group knowledge sharing, and group Q&A. The community helps itself by helping each other. It’s a place to learn and a place to ask questions.
Additional Resources "Celebrity CEO Mindset" (PDF): Mises.org/E4E_93_PDF
Ramon Ray's "Small Business Essentials" Workshop: Mises.org/E4E_93_Workshop
Ramon Ray’s book, The Celebrity CEO: How Entrepreneurs Can Thrive by Building a Community and a Strong Personal Brand: Mises.org/E4E_93_Book
Principles of Austrian economics have immediate applications in business. Clay Miller, a deeply experienced and highly successful global tech entrepreneur, makes the case via five principles drawn from five easily-accessible sources of Austrian economic theory, with many accompanying examples.
Principle 1: The distribution of knowledge requires disaggregated thinking. Source: "The Use Of Knowledge In Society," F.A. Hayek: Mises.org/E4E_92_Hayek
Hayek wrote this paper as part of a research program into the problem that economics tries to solve. He defined it as a knowledge problem. Knowledge “never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess”.
The implication he drew was for central planning by governments and their departments and committees that would attempt to plan production or set prices. Such central planning is impossible because dispersed knowledge can not be aggregated and so the planners never have enough knowledge on which to base a plan.
Quote “The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place…..”
Application In our Economics For Business project, we have the opportunity to help entrepreneurs apply the same principle to business knowledge, or data. Too much aggregation can obscure information that is really important and most useful for improving business performance.
Here’s an example. A frequently used KPI (Key Performance Indicator) is average revenue per customer. It’s calculated by aggregating all customer revenue into one number and dividing by the number of customers. For this to be actionable intelligence, it is necessary to assume that spending by each customer is very uniform. But consider the case where average revenue per customer is $190 for a customer base of 10 users, composed of 9 who spend $100 each and one who spends $1,000. The KPI does not suggest that each new customer you acquire will spend $190. In fact, it’s more likely they’ll spend $100. And, in fact, what you would really like to know is the profile of the $1000 customer and whether that profile, applied in recruiting new customers, would enable you to recruit more $1,000 spenders. You really want to choose metrics that can provide insight into individual customer behavior — like the nature and motivation of the one $1,000 spender.
Similar Austrian thinking would apply, for example, to Google analytics, which can profile the type of customer interacting with your website or app, and observable behavior such as conversion rate by page visited, or abandonment rate for specific pages. These are disaggregated statistics that can help you serve customers better.
Austrian thinking is rigorous in seeking to identify cause and effect, and to ensure that correlation is not mistaken for causation. A simple example is restaurant data that exhibits a 30% increase in customer traffic on Tuesdays. There’s a correlation between day-of-week and traffic increases — but it’s not causation. Tuesday does not cause the traffic increase. What does? It requires digging to find out, perhaps, that a local firm offers a perk to office workers to pay for them eating out on Tuesdays. As Hayek would say, this is specific knowledge of time and place, more likely to be qualitative than statistical, embracing the subjectivity that’s central to Austrian economics.
Principle 2: Consumer Sovereignty requires that entrepreneurs are directed by their customers. Source: Bureaucracy, Ludwig von Mises: Mises.org/E4E_92_Mises
This book focuses on the inefficiencies and ineffectiveness of bureaucratic organizational structures and processes. In a chapter titled Profit Management, Mises defines the Austrian concept of consumer sovereignty. Understanding and applying this concept is central to entrepreneurs’ capability to create effective value propositions for their offering, brand or business.
Quote “Thus the capitalist system of production is an economic democracy, in which every penny gives the right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs, and the farmers are the people’s mandatories. If they do not obey, if they fail to produce, at the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight rein on all business activities.”
Application Consumers are the ones driving production. It’s up to business managers to make sure that every decision is towards bettering the value proposition offered to customers.
For example, the décor in a restaurant should be chosen not because the owner favors it or because an interior designer decrees it, but for the purpose of enhancing the value experience of those consumers the owner wants to attract and to serve. This requires empathy. Consumer sovereignty and entrepreneurial empathy go together.
Because consumers are the ones valuing what is produced, they are the ones ascribing value to the product or service the entrepreneur produces. The entrepreneur needs to anticipate what they value, and to do so requires ever-greater closeness to the customer. Clay described the value provided by simple but tasty barbecue restaurants in his home state of north Carolina, in a décor of plastic and paper and small booths. But that wouldn’t attract the customers who prefer fine dining in a five star restaurant. The customer decides what experience they value.
Startups can usefully anticipate consumer preferences by creating an imaginary perfect customer, and thinking through the value they want and the value the business can facilitate for them. Once in production, get as much feedback as possible on the actual value experience and the customer’s feeling about it. Every decision made inside the business needs to be for the purpose of and directed towards improving the customer value proposition and value experience.
Principle 3: Human value scales are complex and ever-changing and entrepreneurial empathy is required in order to reach an understanding of customers’ value dynamics. Source: Human Action, Ludwig von Mises: Mises.org/E4E_92_Mises2
Human Action is the magnum opus of Austrian economic theory. Every chapter will yield great insights for business. Clay selected value scales as a topic.
Quote “It is customary to say that acting man has a scale of wants or values in his mind when he arranges his actions. On the basis of such a scale he satisfies what is of higher value, i.e., his more urgent wants, and leaves unsatisfied what is of lower value, i.e., what is a less urgent want. There is no objection to such a presentation of the state of affairs. However, one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man's actions.”
Application When a person makes a decision to purchase your product or service, they conduct a quite complex evaluation to integrate your offering into their scale of values. And the values and the scale is constantly changing. Consumers are not static robots. Their circumstances change, their preferences for saving or spending change, their time of life or even time of day demand rearranging of value scales.
A consumer may have a high preference for Krispy-Kreme donuts. But then they go on a diet. Their value scale changes. Losing weight and increasing fitness are now higher values than enjoying a donut. If you are the Krispy-Kreme donut franchisee, it’s important to be aware of the value scale change, and to empathize with the customer. Maybe you could develop a promotion called “Cheat Day” that rewards them with a donut treat after a week of exercise and donut restraint. As Wayne Gretzky used to say, skate to where the puck is going to be, not where it is now.
How can you understand value scales? One interview with a customer — what a researcher would call deep, rich qualitative information — can be worth much, much more than survey data. Mises said that we can only know an individual’s value scales by observing an individual’s actions. Having them answer a survey question such as “How highly do you value this item?” or “What price would you pay for this item?” does not indicate how they would fit the item into their value scale. They may say they would pay $250,000 for a Ferrari, but, when they weighted the experience of owning the Ferrari versus the opportunity cost of foregoing other experiences, would they actually make the purchase? The survey answers won’t tell you.
Entrepreneurs are rewarded for estimating correctly what the customer values and creating the appropriate value proposition.
Principle 4: The market is a discovery process, with uncertainty on both sides of market exchanges. All entrepreneurial actions are tests, with no certain outcomes. Source: Competition And Entrepreneurship, Israel Kirzner: Mises.org/E4E_92_Kirzner
This is a seminal work on entrepreneurship. One of the major themes is that markets are a process of discovery. That insight directs entrepreneurs to think in dynamic, process terms. The entrepreneur experiences uncertainty in what he or she is producing, because they are not sure of what customers will value in the future. The customer is uncertain, too, because they’re unsure of how they’ll value what the entrepreneur produces. Whenever we, as consumers, feel trepidation about “pulling the trigger” on a purchase, we are experiencing this uncertainty. Meanwhile, the producer is anxiously discovering the receptiveness to his or her value proposition.
Quote “The market process, then, is set in motion by the results of the initial market ignorance of the participants. The process itself consists of the systematic plan changes generated by the flow of market information released by market participation — that is, by the testing of the plans in the market.”
Application Kirzner points out that every plan an entrepreneur has, every value proposition, every offering made to prospective customers can only be a test, a trial. Nothing in the market can be certain. Entrepreneurs are trying to anticipate what customers are going to value, and they can never be sure in advance.
That’s why entrepreneurs use empathy, to imagine, if they were the customer, what type of experience the customer would be looking for. Entrepreneurs must imagine what customers might enjoy in the future. They must seek the customer’s agreement that, “Yes, your product or service delivered what you promised and made me feel better.”
One implication of Kirzner’s principle of “market ignorance” is for branding. If a brand has accrued a certain level of market reputation, consumers will feel less ignorant. They will feel they “know” a brand that’s been producing for 100 years, that is symbolized by the 3-point star that can be seen everywhere, and that is trusted and approved by many other consumers. A brand represents the stored experience and the stored reputation of many customers.
Principle 5: All entrepreneurship is for social good, and more social good is achieved by subjecting business to the marketplace test of profit and loss. Source: Austrian Perspectives on Entrepreneurship, Strategy and Organization, Peter G Klein, Nicolai Foss, and Matthew McCaffrey, "Austrian Perspectives On Entrepreneurship, Strategy and Organization": Mises.org/E4E_92_Perspectives
In Chapter 4 of this book, the authors discuss the concept of social entrepreneurship. This is an idea that seems to be gaining traction, especially among millennial business owners and millennial entrepreneurs. The idea is that business should be focused on something more than profit and loss. It should provide some “social value”, making the world better. Klein, Foss and McCaffrey provide some robust Austrian thinking with regard to social entrepreneurship.
Quote “However, these metaphors (“social value”, etc) often imply a false conflict with traditional entrepreneurship. For example, the contrast between conventional market entrepreneurship and social entrepreneurship implies that the former is somehow not social, or even anti-social. This is misleading, however; for example, Austrians would respond that Mises’s calculation argument demonstrates that the entrepreneurial market economy is profoundly social. Entrepreneurs, by bearing uncertainty in an effort to satisfy consumers, work ceaselessly to improve the welfare of all members of society, and their work in turn strengthens bonds of cooperation between individuals and communities, while at the same time disincentivizing conflict and exploitation. This is social behavior in its most fundamental form.”
Application Steve Jobs improved society greatly by inventing the iPhone. The impact on society was considerable — better communication and information sharing, and higher productivity for billions of people.
Every venture — including social ventures — must grapple with basic economic problems. Taking on a social mission does not relieve the firm of the pressures of the marketplace. Social enterprises are business organizations, and if they earn revenues through the sale of goods and services, they must apply judgement to allocate scarce resources in the face of uncertainty. Genuine participation in the marketplace requires them to be subject to the profit and loss test.
Klein, Foss and McCaffrey make the point that “social value” is incalculable. What’s good for one individual is not the same as for another. Individuals value things subjectively. When a business pleases one group, it may be adversely affecting another.
Profit is not evil. It’s impossible to make a profit without serving your fellow man. You are doing good for society by being an entrepreneur, by producing things that people want and value. You forego your own consumption by investing in your business, and so you are making a sacrifice to serve others. And if social entrepreneurs are not subjecting themselves to the profit and loss test — if they are supported by charity or grants — then they are not receiving the signals form consumers that they are allocating scarce resources in the way that consumers — i.e., society — prefers.
The ethic of entrepreneurship is to serve, and to make others’ lives better, and to receive the approval and reward of customers via the profit and loss mechanism of the market.
Downloads and Extras Mentioned in the Episode: "The Use Of Knowledge In Society," F.A. Hayek (American Economic Review, Vol. XXXV, No. 4, September 1945; pp. 519–30): Mises.org/E4E_92_Hayek
Bureaucracy, Ludwig von Mises (Yale University Press, 1944): Mises.org/E4E_92_Mises
Human Action, Ludwig von Mises (Mises Institute, 1999): Mises.org/E4E_92_Mises2
Competition and Entrepreneurship, Israel Kirzner (Liberty Fund, 1978): Mises.org/E4E_92_Kirzner
Austrian Perspectives on Entrepreneurship, Strategy and Organization, Peter G Klein, Nicolai Foss, and Matthew McCaffrey (Cambridge University Press, 2019): Mises.org/E4E_92_Perspectives
Key Takeaways and Actionable Insights Austrian economics sees an economy in motion, perpetually renewing itself. Economic agents (firms, customers, investors) constantly change their actions and strategies in response to outcome they mutually create. This further changes the outcome, which requires them to adjust afresh.
Entrepreneurs live in a world where their beliefs and strategies are constantly being “tested” for survival within an outcome these beliefs and strategies create. It’s complex.
One of the strategies required in this dynamic system is innovation: the enabling of new value propositions to customers, sustained by new resource combinations, new technologies, new go-to-market capabilities, new channels and new delivery mechanisms.
Innovation has often been characterized as presenting the entrepreneur with an unmanageable level of uncertainty. Curt Carlson challenges this idea and believes innovation can be predictable via the utilization of sound process, captured in his N-A-B-C method (see Mises.org/E4E_37_PDF), which we explained fully in E4EPod episode #37 (Mises.org/E4E_37).
In addition, Curt tells us in episode #91 that the right individuals can strengthen the process by acting as innovation champions. Here are their characteristics.
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Originate a value proposition. The route to value starts with a value proposition — accurately identifying a need and developing the appropriately differentiated approach with the right cost structure. Champions are those who can originate innovation projects with an energizing and inspiring proposition. They are customer advocates with creative capabilities. Champions can use Curt’s process map for guidance, or our own "Economics For Business Template" ().
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Collaborate with a complementary partner. Innovation is a team game, and it often starts with a partnership of two. Venture capital funds often look for a team of co-founders rather than on brilliant individual. A combination of an engineer and a marketer is a good one, but there are many more. The key is that the partner is complementary: different skills, different experience, same commitment and passion.
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Build a team over time. The benefit of complementary skills is not limited to co-founders or co-champions. As an innovation project evolves, the need for more skills and different experiences expands. A champion is able to add complementary skills via new team embers over time, while maintaining team cohesion and integrity.
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Learn necessary value-facilitation skills. Recruitment is not the only route to new skills for the team. The champion should be able to recognize skill gaps and fill them via their own learning. For example, mastering the interpretation of qualitative data from customer learning sessions is imperative but not intuitive. Champions work hard at gathering the data (listening and empathy skills) and processing the data (interpretation skills) to project possible future solutions (imagination skills). These new skills are learned over time.
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Iterate with the team and in larger forums. It is impossible to predict how an innovation process will proceed, and what twists and turns will be necessary. A champion is able to iterate the understanding of the need, the approach to solving it, the use of technology, and the management of costs. Change is constant not only in the world, but in the innovation project. Iteration can be conducted in the small team, but the champion should also seek larger — perhaps company-wide — forums for sharing and commentary. Everyone’s input counts. Champions don’t become too possessive of their ideas.
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Champions exhibit enviable human values. Project teams are often under stress. Deadlines loom, experiments fail, ideas clash. A champion demonstrates human value of trust and respect and integrity that bind teams and projects together. People want to work with champions.
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Champions take organizational responsibility. All innovation projects are fraught with risk and uncertainty. Some will fail. Others will take unexpected turns. When the unwanted or unexpected happens, a champion takes responsibility and does not try to deflect blame to exogenous factors. All decisions are subjective, and champions take ownership of their decisions.
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Champions persevere. Innovation project timelines can be long. Curt described some that took 10 years or more (like the development of Siri, which eventually became associated with the iPhone4). Despite barriers that might seem insurmountable, and setbacks that might feel humbling, champion s keep going no matter what. They are inspired, and inspirational to others.
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Champions succeed. Success is not a behavior or a characteristic, it is an outcome. Nevertheless, with the right process and a good team, champions succeed repeatedly.
In our hyper-competitive world, without a champion success is not possible. The only viable path is to aspire to be the best at what we do. That starts and ends with someone committed to success — a champion.
Additional Resources Check out Curt Carlson’s HBR article, "Innovation for Impact" (PDF): Mises.org/E4E_91_PDF
Curt’s website is PracticeOfInnovation.com. Click on "Innovative Indices" to see how to assess the innovative potential of your firm and projects.
"N-A-B-C Innovation Process" (PDF): Mises.org/E4E_37_PDF
"Curt Carlson: There is a Systematic, Repeatable Process to Generate Customer Value" (E4EPod episode #37) : Mises.org/E4E_37
Key Takeaways and Actionable Insights What exactly do we mean by paradigm? In our project to make a useful link between Austrian economic theory and business practice, we earlier introduced the Austrian Business Model. This is a recipe to make a profit — a template adaptable to any individual firm.
A paradigm is precedent to a business model (see Mises.org/E4E_90_PDF). It’s the underlying way of thinking — a set of values, beliefs, concepts and practices that combine to constitute a distinctive entrepreneurial approach to business.
Per Bylund’s exposition of the principle of Facilitation of Value leads to a new — Austrian — paradigm for business. Here is the framework:
The Purpose of Business is to facilitate value for customers. In today’s interconnected, fast-changing world, businesses are formed and managed with the intention of ensuring value experiences for customers. This challenge is fraught with uncertainty, because value is an emergent — and therefore unpredictable — property of the interaction of people, artifacts and behaviors in complex systems.
Customers, whether consumers or businesses, operate in their own system. They must fit everything they consume into their existing system — their life or their business processes and organization.
Customers experience value in their own systemic context. If they own a car, for example, they experience ownership value within a system of taking kids to school, commuting to work, and shopping, as well as in an intersecting system of service, maintenance, fueling, accessorizing, and replacing worn parts.
Businesses interface with the customer’s systems from their own system of design, procurement, resource management, partnering, warehousing, distribution, payments, technological enablement, regulatory compliance, communications and many more elements. A business system facilitates value to realize the customer’s experience within their own system.
The value of any offering is positively perceived by customers when they fit into their system is felt to be a good one and the offering contributes to system improvement or enhancement in some dimension. Uncertainty is always present because the system improvement can not be predicted with certainty in advance.
Austrian economics provides the principles for entrepreneurs, managers, and strategists to establish a unique, sustainable, profitable, and scalable process to facilitate value for customers.
The end-user / consumer takes the primary role. A business can not be an assembly of resources or an expression of core competencies or the implementation of innovation in isolation. It can’t be the result of a strategy to penetrate a market or disrupt a competitive set without first understanding the hopes and dreams and aspirations of customers. It can’t be a simplistic choice from a set of business models on the business school shelf.
A business must stem from giving the customer the primary role. The very purpose of a business is to please customers by serving their needs, and so their perception and preferences must define the business design. Since the needs of customers are subjective, idiosyncratic, changeable, and context-dependent, methodological individualism — making the individual the unit of analysis, rather than groups or segments or markets or industries — is the indicated approach.
This approach is a lot different than ideas of shareholder value or stakeholder value. It is sometimes acknowledged in terms such as consumer-centricity or consumer-first. But those commitments tend to be tactical and implementational. Relentlessly and unfailingly taking the point of view of the customer is fundamental to the new business paradigm. It’s what make business purposeful and ethical, sustainable and responsible.
Value is determined by the end-user or consumer. What consumers seek from business is value. Value is hard to define and challenging to quantify because it is a subjective experience of the consumer, within that consumer’s own individual context. What’s perceived as valuable by one individual consumer will not be the same as another individual, and any individual can change their perceptions or their ranking of what’s more valuable at any time.
Value, therefore, can not be created by a firm or a brand, despite the traditional use of that language. Value is formed in the consumer domain, as an emergent property of the consumer’s choices, behaviors and context. Take a laptop PC for example. The value experience changes depending on whether the user is a gamer, an executive in the financial system, or a video editor. It varies based on the software the user installs, the usage advice he or she receives from peers and experts, the quality of the user’s network, their preferences for in-use performance, and many more variables. You can examine the same value experience thought experiment for any good or service of your choice, e.g. the value of an Audi A8 to a family of 6 living in rural South Dakota compared to a family of two in Manhattan with a one-bedroom apartment and a single parking space. Value emerges in lived experiences within these varied contexts.
For a business to business enterprise, it is sometimes expedient to limit the value analysis to the final purchaser / end user. There are sometimes some special value considerations in these contexts. For example, business customers tend to evaluate every economic choice in money terms - does it lower costs or contribute to higher revenues? But it is also the case that a business customer is often, in fact, multiple users (whether a procurement committee or a department all using the same item), and so a group rather than individual assessment of value is appropriate. Nevertheless, value remains a subjective, idiosyncratic, changeable phenomenon.
Empathy for customer dissatisfaction is the starting point for business development. Dissatisfaction with the status quo — Austrian economists sometimes call it unease — is the raw material for business development. The genius of consumers is to always sense that their experience could be better than it is.
Empathy is the diagnostic skill of observing and analyzing behavioral data and deducing emotional drivers for change and innovation. A customer searching online for more efficient home heating solutions may be dissatisfied with the ambient conditions in the home, or with the level of his or her gas bills. An individual interview can determine which of these — or other alternatives — applies and point the way to a desired solution. The entrepreneurial practice is to focus empathetic attention on the inner drivers which are manifested in observable behavior.
There is no shortage of customer dissatisfactions to be addressed by businesses. The skill of empathy is to advance beyond taking the point of view of the consumer and to feel the experience that the consumer feels, and to identify the feelings that really matter. This is counter-factual — it’s not actually possible to feel what another human being feels — and is therefore an act of imagination. Imagination provides the energy for consumers’ dissatisfaction (they imagine a better future) and for entrepreneurs’ creativity (they imagine what dissatisfaction feels like for the consumer, and they imagine solutions to that dissatisfaction).
Empathic design To advance from imagination to a business plan is an act of design. Design can be captured as a process in which an innovating business creates a blueprint for a good or service or technology or other artifact that presents a practical solution to a customer. There are many design process alternatives. The shared design principle is to start with an identifiable customer with a problem to be solved, and progress towards a solution with which the customer can interact and can evaluate. Early prototype solutions should be adequate to share a resonant imagination between entrepreneur and customer, and to stimulate realistic responses from customers regarding features and attributes they do or do not find valuable, and flexible enough to accommodate frequent iterative adjustments based on those responses.
Uncertainty exists as a barrier to be overcome in the delivery of new solutions to customer dissatisfaction. Adaptiveness is the entrepreneurial response to uncertainty.
Uncertainty is integral to the business paradigm. Uncertainty can be experienced as the impossibility of predicting the future because of the extreme complexity of the interactions of customers, entrepreneurial offerings and potential solutions, opportunity costs, transaction costs, environmental factors and other system elements. The response to uncertainty is adaptation: making a change in a business offering and monitoring the resulting change in customer acceptance, customer behavior, customer interactions or other consequential results. Favorable changes are preserved, unfavorable ones discarded.
Continuous dynamic change then becomes the norm for businesses in an adaptive system. There is no equilibrium, no stasis, no predictive planning, no stable combination of assets or resources. There are no system-imposed or structural boundaries to a firm’s activities, just the subjective entrepreneurial judgment about interaction with customers to facilitate customer value. In complexity theory terminology, customer value is the constraint to the system that can shape change and emergent outcomes (think of Steve Jobs constraining his designers to “no buttons” on Apple devices).
Businesses accumulate capital as a result of the flows of income from customers. The measure of business effectiveness is the flow of income from customers. Insofar as entrepreneurial actions set in motion a flow which is projectable into the future, a business is in a position to make capital investments both to expand its capacity to generate income flows and to create new innovations to stimulate new flows.
Current flows are subject to change at any time when customer preferences change, or their environment changes or there are shocks to the customer’s system. Entrepreneurs must develop accurate appraisals of which of their assets - in what specific combination - are most responsible for generating income flows, and establish them in such a way as to be flexible in rearranging them and recombining them in response to (or in anticipation of) market change.
Future flows from investments in innovation are uncertain and unpredictable. Entrepreneurial skill in identifying productive investments (foresight) differentiates more successful from less successful firms.
Additional Resource "The Austrian Business Paradigm" (PDF): Mises.org/E4E_90_PDF
What is technological deflation, and how can entrepreneurs take advantage of it? By combining already available and easily accessible technologies to facilitate the accelerated information flows that constitute value in the 21st Century: higher quality, faster speeds, lower costs. Jeff Booth explains.
FREE DOWNLOAD: "Value Then vs. Value Now" (PDF): Mises.org/E4E_89_PDF
Key Takeaways and Actionable Insights Technology reduces the labor factor, lowers costs, and frees up time. These are the components of deflation: less labor and effort for any unit of output, faster speed, lower material costs, and re-allocation of time from lower to higher productivity activities.
The speed at which this technological change is happening is “staggering” in Jeff Booth’s words, and will accelerate. More and more time will be freed up to allocate to higher uses.
The result is deflation: higher quality for lower cost at faster speeds.
The only reason price deflation is not pervasive throughout the economy is the status quo governmental system. Federal Reserve money printing, more and more debt, lower interest rates — these are actions designed to drive price inflation. This scheme defies the natural order of technological deflation. It is the great fight of our time, says Booth, to end the inflationary scheme.
But for entrepreneurs, the right action is to embrace and harness tech deflation.
There is tremendous leverage for entrepreneurs in the current economy of technological change. Jeff uses his “folding analogy”. If you could fold a piece of paper 50 times, it would reach the sun. Technological change is at the early folding stage today, but each new fold doubles the growth rate and the impact.
The way for entrepreneurs to put this folding analogy to work for them is by combining technologies. Several folds at once.
One of Jeff’s examples is Elon Musk. In Jeff Booth’s words, Musk forecast three exponentials: the exponential improvement in battery technology, the exponential increase in the role of software in automotive engineering, bringing information flow into the vehicle, and the exponential improvement in A.I. to bring self-driving features to automobiles. Taken together, these three widely available technologies made Tesla a revolutionary venture, surpassing GM in market capitalization.
The same “crazy opportunities” are available to all entrepreneurs. We don’t all have to be Elon Musk. The possibility to increase customer value and reduce costs at the same time are available to all entrepreneurs. One of the keys to success is to direct technology towards increasing data capture: more and more data signals to drive deep learning via algorithms, leading to better and better and faster and faster decision-making. Data collection platforms managed with A.I. algorithms can generate the exponential growth that Jeff refers to. Google and Amazon are the examples everyone talks about; but here on E4E, in episode #84 (Mises.org/E4E_84), Bob Luddy talked about sensor-based data collection in his CaptiveAire restaurant ventilation systems, feeding performance data back to the central platform for increased learning and improvement. The opportunity is available to all types of business.
Value looks different today than in the past, and it will look different again in the future. “What will value look like in the future?” is one of the questions Jeff Booth urges all entrepreneurs to ask for themselves and their business.
He cited one example from history: the Blockbuster video rental business. To Blockbuster’s owners and managers, value looked like the convenience for consumers of movie entertainment of 9000 stores across the country, each with a huge selection of videotapes to choose from. Their idea of adding value was to provide popcorn and candy in the checkout aisles. But when Netflix came along, value starts to look different. It’s the convenience of streaming movies directly to your digital TV or tablet in your home or on the go, with constant additions to the offering, both of original content and content from other channels. The 9000 Blockbuster stores no longer look so convenient. Information flow and digitization make value look different.
Another example Jeff cited is the university education business. Traditionally, its value is based on real estate — an exclusive set of physical buildings in one specific place to which students must travel (or rent a dorm room) in order to access an exclusive faculty of high-reputation teachers. Now, with technology and information flow, the core knowledge is accessible anywhere/anytime, and is tending towards free. Offline educational ventures can hire teachers to make video classes available to the world, and virtual reality will make the experience even more vivid and more enjoyable. The knowledge is the same. Students’ questions are probably the same. The cost structure is totally different.
Three principles for entrepreneurs to facilitate new value in the future. Given these examples, and given the trends of accelerating digitization, data flow, multiplicative combinations, and algorithmic analysis and intelligence, what are the principles for business to follow to be able to facilitate new value for customers?
1) Aim for 10X improvement in the customer experience. The rate of acceleration is so fast, and the exponential potential of new combinations of technology is so great, that innovators must aim for a 10X improvement in customer-perceived benefit to command attention, turn heads and dislodge customers from their current choices (Curt Carlson made the same point in episode #37: Mises.org/E4E_37).
2) Make your thinking boundary-less. One of the great restrictions on entrepreneurial creativity is the institutionally and historically imposed tradition of thinking in silos, and thinking that industries have boundaries. Universities have their faculty departments and corporations have their divisions, and they tend to put silos around thinking. But the Elon Musk example of batteries + software + A.I. crosses industry boundaries, technology boundaries, performance boundaries, and financial boundaries. Boundary-less thinking can open up endless new possibilities. Entrepreneurial economics teaches the re-combination of assets, not necessarily the creation of new ones. Busting silos can lead to new combinations.
3) Forecast the exponential. Where in your frame will exponential change occur? Use your imagination to try to forecast it. The future can’t be predicted but it can be imagined. The challenge is to imagine the next fold of the paper and the next one and the next one; and the next combination of two or three or four or more new technologies. The idea of the exponential can be applied everywhere.
Additional Resources "Value Then vs. Value Now" (PDF): Mises.org/E4E_89_PDF
Purchase Jeff Booth’s book, The Price of Tomorrow: Why Deflation is the Key to an Abundant Future: Mises.org/E4E_89_Book
In many situations, the complexities in managing a diverse and layered team of people are to view individuals as ends and not means. Management and organizational frameworks often treat people as means. The business ends are external: so-called shareholder value, or stakeholder value, which is fashionable today, or simply revenue and unit sales goals, or metrics and KPIs.
Managers are taught to look at people through an economic lens as resources ― human resources ― in the same way as material resources and financial resources, to be utilized as efficiently as possible.
But people are not means. They are subjects, and they have subjective ends of their own. They’re searching for identity, meaning, and trying to meet their own potential. If managers recognize this, their approach to people as team members and employees will be much different.
Individuals need to be able to tell their own story in their own space. We work for money but we live for the story. The most important story is the one we tell about ourselves and our values. People need opportunities to tell their story. Everyone at every level in an organization and in every type of role or job needs this opportunity.
To do so, they need their own space in which to create and embellish their story, a space that is unique to them and gives them a fine-grained perspective of which they are masters, and for which others will prize them.
David Hurst gave the example of Costco, where the in-store personnel have space to use their own discretion to serve customers. If a customer (a guest, in Costco parlance) requires assistance in locating an item, a Costco associate will stop whatever they are doing and escort the guest all the way to the shelf location. They have their own space and their own discretion to design and deliver a unique level of service, and a story they can tell about their customer commitment. This becomes a culture that pervades the entire company.
FedEx has similar spaces, and similar stories about individual employees going to extraordinary lengths to make sure packages are delivered on time.
One way to create these spaces is to give everyone intelligence-gathering roles. David Hurst tells the story of delivery truck drivers in the steel fabrication business. He treated them with deference for their ability to gather real-time intelligence: which competitors had trucks in the customer’s yard; what concerns were customer employees talking about; which customers were friendly and which ones adversarial? These frontline employees are able to gather and feedback market intelligence that was faster, deeper, more local, and more detailed than traditional reports. It’s small data, often much more valuable than big data. And the employees can tell their stories about their intelligence gathering and their important role in company processes, from their unique space.
The word in management usage now is fine-grained. The front line has a fine-grained perspective and fine-grained intelligence. This fine grain is highly valuable, especially when shared in collaborative teams and structures where everyone knows their role, which is not tied to hierarchy.
Hierarchy and structure create a cascade of negative effects for the people in them. As companies grow and become larger, they require internal specializations and experts in narrow, technical fields. Specialization brings hierarchy, where general managers can supervise those in specialized roles. Hierarchy leads to careerism and status when employees are not collaborating with each other, but competing. The result is what David calls a power trap. The firm becomes trapped on the right-hand side of his "Management in a Field of Tensions: model.
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The tension for management lies in a continuous pull of the “hard, scientific” side of the model, away from the humanistic side. Austrians lean towards the left-hand side of David’s model: humanistic, treating people as ends, respecting narrative more than data. For example, the exercise of judgment under uncertainty, so central to the Austrian paradigm of the entrepreneurially-driven economic system, lies on the left-hand side of the model. It’s practical, grounded wisdom, when entrepreneurs make decisions when they don’t have all the data. (And the Hayekian insight is that no-one ever has all the data.) They glean what they can from the individual observations of people involved in the situation at hand (small data), and then decide, knowing that the consequences are uncertain, and that they will need to be adaptive to change in the future.
The right-hand side of the model represents the pull of so-called science: hard data, mathematical calculation, plans, and administrative bureaucracy.
Smaller, private, more entrepreneurial companies can often avoid the right-hand side of the model. Smaller and privately held companies have many advantages. They tend to be more frugal in good times and bad, and act carefully with cash, thus retaining flexibility in difficult markets. They have a high bar for capital expenditures and make fewer malinvestment decisions. They often try to avoid carrying too much debt, so that bankers don’t have power over them. And, importantly, they are often better at retaining talent and keeping experience inside the firm. They can avoid the careerism of competing for status in the hierarchy, and just let people become better and better at their jobs. On the left-hand side of the model, as David describes, it’s all about people.
Additional Resources "Lead Like a Gardener! ― Agile and Design Thinking Will Become Management Fads Unless We Expand Our Concept of Management": Mises.org/E4E_88_Article
The New Ecology of Leadership: Business Mastery in a Chaotic World by David Hurst: Mises.org/E4E_88_Book.
Key Takeaways and Actionable Insights An understanding of the Austrian definition of capital is tremendously useful to all business owners and managers. What is capital? Austrian economics has a precise and distinctive definition — unlike business schools and most business publications, books, and columnists. Among those entities, the term capital tends to be used very imprecisely. You might see sentences like, “Entrepreneurs must ensure they have sufficient capital to get their new product to market”, or “to get to break-even”. Such usages imply that capital is a cash reserve to be “burned off” in the process of launching and scaling a business.
Recently, it has become fashionable to coin terms such as human capital, or brand capital, or relationship capital, or even spiritual capital or street capital. All of these terms are sloppy definitions of capital from an Austrian point of view.
And it’s important to note that capital is not the same as capital goods, which are “produced means of production”. Capital is not a means of production, it is a consequence of production.
What, then, is the precise Austrian definition of capital? On the E4E podcast #87, Professor Matthew McCaffrey gives us this definition:
Capital is the monetary value of a business’s claims to income. This includes all of its marketable assets, whether they are tangible or intangible. It’s a sum of individual values. These values are ultimately determined by consumers, because the value of a firm’s assets and the value of its income streams ultimately depend on how consumers value the final product. Crucially, capital is distinct from what are called capital goods or production goods, which are the physical goods used in production. Those are also vital for understanding how entrepreneurship works in practice, but they are not capital in the sense in which we mean it.
In summary:
Capital is a flow (rather than a stock)Coming into your businessFrom consumersReflecting the value consumers perceive in your company’s services. B2B businesses can substitute the term “final purchasers” for consumers if producing goods and services purely for business customers. But it is important to remember that the value of capital always eventually reflects the valuations of goods and services by consumers. The software or professional services your B2B business provides to a business customer will command less of a claim to income if that business customer faces a change in preferences and a decline in market demand from their consumer population. When forecasting future income flows, every business must bear in mind the climate among ultimate consumers.
What are the implications for entrepreneurs and business managers? Flows can be generated via tangible or intangible assets.Consumers’ valuation of services is the key variable.Entrepreneurs must be able to appraise which assets — in which combinations — are generating the flow.The flow can change — even disappear — when consumer preferences change: entrepreneurs must be able to adjust.Large flows can result from a low asset base — and vice versa.Appraisal — predicting future prices and flows — is the vital skill to determine what to invest in, how to organize, and what to produce.Cash flow is the measurement variable.Use cash flow to calculate asset productivity.Update appraisals continuously based on cash flow. What about capital goods? Capital is NOT the same as capital goods.But capital goods can be generators of capital flows.IF consumers value their output.Austrians stress HETEROGENEOUS capital goods, both tangible and intangible.A jigsaw puzzle to assemble, disassemble, and reassemble in the right combination, based on consumers’ valuations. What actions should entrepreneurs take as a consequence of the Austrian view of capital? Always focus on the value you are facilitating from consumers.They, in turn, will generate your capital flow.Measure the flow in dollars — especially the trend.Be a master appraiser: know your asset productivity.Set up your assets for flexibility — be fully able to disassemble and reassemble capital combinations.Experiment frequently with different combinations.Become comfortable with continuous change in asset combinations. Additional Resources Professor McCaffrey made reference to Frank Fetter’s role in defining capital in his online discussion, "Frank Fetter and the Austrian Tradition in the United States": Mises.org/E4E_87_McCaffrey
Professor Peter Klein explains why metaphors like Human Capital are unhelpful to entrepreneurs in his article, "A Note on Human Capital": Mises.org/E4E_87_Klein
Key Takeaways and Actionable Insights Entrepreneurship is a way of life that can be learned around the dinner table. Allan’s parents were entrepreneurs, although it would never have occurred to him to call them that. They were in the service business, including restaurants and car washes. As a kid, Allan would help around the car wash, everything from washing down cars to emptying the trash to accounting. He internalized the idea that entrepreneurship was always doing two jobs, such as running one car wash while getting another ready for opening. The “two jobs” metaphor stayed with him.
Around the dinner table, the family would talk about how the businesses were going. It wasn’t so much a lesson in entrepreneurship as immersion in a lifestyle.
Entrepreneurship can be the source of a sense of control over one’s destiny. Following this childhood immersion, Allan quickly realized his felt need to control his own destiny. Being an employee would not achieve that goal. He did not want to await permission to try new pathways. He studied design in college and took on clients for design work, and quickly found out that he had a taste for business. He found out that print design work was not profitable and in declining demand as design shifted to the web. From web design, he migrated to internet software design and production. He calls this pathway “slowly adapting to what I find interesting”, which has been his story for 20 years.
Allan applied his “two jobs” mentality to launching a SaaS accounting software business. Allan developed a software design and consulting firm, which generated cash flow. He and his business partner poured the cash into developing a superior SaaS accounting software. They worked on it on nights and weekends — doing two jobs. He describes juggling the clients and leads and sales and payroll of the consulting company with the development of a new business with different customers, leads, sales and payroll. The “two jobs” mindset is typical for entrepreneurs as they grow and ideate and innovate.
Agility is a more effective and productive pathway than planning. Allan tells us that he never had an official roadmap or business plan for the SaaS software company, with known milestones a year or two years or more in the future. Entrepreneurial management lies more in knowing how to be nimble, how to move fast, how to make decisions quickly. The hardest part is knowing what features to work on, when to work on them and how long to work on them.
Orchestration is the entrepreneur’s organizational skill. To be an entrepreneur, and to build a business around you, it is necessary to attract talent, motivate talent and keep talent. It’s like being a conductor in an orchestra. You may not be the best violin player, but you know what another great violin player sounds like. You know how to assemble a team of players and blend them in a harmonious way.
And the attitude of the employees is as important, if not more important than the talent. Churn in employees is typically a business killer. It’s important to be able to recognize both talent and the right attitude. Allan ascribes success to transparent and continuous communication about the company’s mission and values — these will attract the right talented people.
The journey is strewn with mistakes all the way to its successful conclusion. Allan built and steadily grew his SaaS software company over a ten year period and then sold it. His analogy is that of the duck that looks like it is gliding smoothly over the water, while kicking like crazy underneath the surface. Self-doubt along the way is normal. Errors and mistakes that require correction are normal. For entrepreneurs, it’s important to become comfortable with being uncomfortable.
Entrepreneurs are in the human reaction business. The measurement of success is making people smile. All businesses are human reaction businesses. The goal is to make an emotional bond with the customer: they enjoy the experience you make possible for them, whether it is managing their own accounting using your software over a long period of time, or whether it is finding out about one new feature that they discover and find works well for them. Entrepreneurs strive for those moments of understanding. Making people smile is the metaphor — but in software, it’s hard to see them smile, so it’s necessary to find the right KPI’s that will be a proxy for smiling. Empathy is the skill of being able to feel when invisible customers are smiling.
Allan advanced into real estate and other ventures — but sees it all as storytelling. After selling his SaaS business, Allan continued in software design and consulting for clients. He also involved himself in real estate, including a brewery in his home town. The brewery is a platform for telling the stories that make up the history of the town. And it is storytelling that Allan makes the overall metaphor of the entrepreneurial life. You are writing the story that your grandkids will tell about you in the future. What is the story you want to write? What is the story you want to tell about your business to attract and engage customers? The great brands and great businesses tell great stories. Entrepreneurship is a story told about life.
Additional Resources "Allan Branch's Entrepreneurial Journey" (PDF): Mises.org/E4E_86_PDF1
Hunter Hastings mentioned effectuation theory in his prologue to the conversation with Allan Branch. For those interested to learn more, refer to the useful definitional academic paper by Saras D. Sarasvathy, "Causation and Effectuation: Toward a Theoretical Shift from Economic Inevitability to Entrepreneurial Contingency" (PDF): Mises.org/E4E_86_PDF2
Key Takeaways and Actionable Insights Why do business schools exist? Dr. Bylund wonders if business schools are facing an existential problem. Originally, their purpose was to train young people for a trade career. They transitioned into the field of management, preparing young people for the practice of management in large corporations. But the transition also turned the schools into creatures of academia, where research and theory are the dominant currency for professorial careers. Research and theory are not well-matched to the teaching of practice skills. So the professors borrowed from the rest of the university, especially the departments of economics, psychology and sociology, in order to concoct a management discipline. The result has been a disconnect with the realities of business.
Business school models and strategies reflect their academic, non-business sources. One of the consequences of the derivative nature of the management discipline in business schools is the unrealistic nature of their models and strategies. Models tend to be static, calling for a “positioning” of firms or brands in a market or industry framework that is given or pre-existing. Dr. Bylund sees this as an extension of the equilibrium principles of classical economics, where the ideal is an absence of change. Business school models tend to require an assumption that industries and markets and competitive conditions are static, enabling the focus to fall on the variables of a firm or brand or offering, and how it penetrates or invades or “disrupts” the status quo.
Business schools miss the continuous dynamics of the Austrian view of business, markets, and economic processes. The Austrian view of the market as a process unpacks a view of entrepreneurship and business management that sheds all vestiges of statics. Austrians understand that consumer preferences are continuously changing and that a firm’s offerings need to be continuously adjusted to reflect those changing consumer preferences. Austrian entrepreneurs know that the features and attributes of their products and services need similar continuous adjustment; the same goes for prices and promotional offers and advertising messages. Competing firms are doing the same, resulting in a complex adaptive system of multidirectional adjustment. Continuous change in response to marketplace changes is the norm. There is no place for fixed assumptions or static thinking or unbreachable boundaries.
The Austrian Business Model focuses entrepreneurs on value agility. Entrepreneurship is the process of discovering how best to contribute to the ongoing market process, and how to facilitate a value experience for customers at every point in time. This focus on value automatically accommodates the changes in customer preferences and competitive offerings. Value in the perception of the customer is always relative to alternatives – either alternative offerings or alternative uses of their money for entirely different purposes (including buying nothing and saving instead). These relative comparisons, and the context in which they are made, are always changing. This is a totally different perspective for entrepreneurs than the “positioning” of business school models.
The Austrian perspective makes many of the standard business school concepts inapplicable. Dr. Bylund’s overall commentary on business school content (their models and their strategy frameworks, for instance) concerns their applicability in real business situations. For example, their concepts of competition generally are framed against competing firms with substitute offerings in a given industry. But entrepreneurs know they are competing for the customer’s use of their dollars in the most favorable subjective value exchange, not against other firms.
Business schools urge business efficiency through cost reduction, but the real business objective is the customer’s value experience. They teach positioning in and penetration of markets, but there is no market without entrepreneurship; entrepreneurs create markets. They teach disruption and substitution, but entrepreneurs facilitate new ways of doing things for customers, which is neither disruption nor substitution — it’s creative advancement. They teach students to prepare comprehensive business plans, which can be useful exercises in thorough preparation, but they don’t substitute for interaction in the marketplace; customers don’t care to see your business plan. And their ideas of incubation are often to protect ideas from real market exposure.
Business schools can sometimes confuse the “who” of entrepreneurship with the “what”. Austrian economics studies and analyses the “what” of entrepreneurship: the action of serving customers in a changing market in conditions of uncertainty. Evaluations of success come after the action is taken; it can’t be predicted, and no entrepreneur is more successful than any other in the planning stages of taking products and services to market. Only the customer decides.
When business schools elevate characters like Elon Musk or Jeff Bezos to iconic status and analyze their character and individual style, they are confusing the “who” of entrepreneurship with the “what”. Musk and Bezos are heroes because customers bought their offerings. Evaluating how and why the customer discovered and experienced value is more important than studying how Musk and Bezos behave.
Additional Resources "Austrian School vs. Business School" (PDF): Mises.org/E4E_85_PDF
The Seen, The Unseen, and The Unrealized by Per Bylund: Mises.org/E4E_85_Book1
The Problem of Production: A New Theory of The Firm by Per Bylund: Mises.org/E4E_85_Book2
Dr. Bylund’s essay, "The Realm Of Entrepreneurship in The Market in The Next Generation Of Austrian Economics": Mises.org/E4E_85_Essay
"The Austrian Business Model" (video): Mises.org/E4E_ABM2
Key Takeaways and Indicated Actions Bob Luddy is founder and CEO of CaptiveAire (CaptiveAire.com), the US market leader in commercial kitchen ventilation systems. It’s a $500MM+ business with 1,000+ employees and a 40+-year success record. Bob explains to Economics tor Entrepreneurs how these principles of Austrian economics, applied as active processes, played a part.
Say’s Law Say’s Law is a fundamental proposition in support of a production-driven market system as opposed to a consumption-driven view. It’s quite difficult to interpret and pithy summaries like “production creates its own demand” and “production precedes demand” don’t help entrepreneurs very much.
Bob Luddy doesn’t interpret, he applies. His application formula is this: new supply that is brought to market can solve problems that have not so far been solved. In that case, demand will result.
He gave this example: in the 1980s, many of the harmful effluents from cooking in a restaurant were escaping into the kitchen and sometimes even into the dining room. Those effluents could contain carcinogens, and at the very least, they're very unpleasant. That was a problem – but it was the status quo.
So Bob thought, in Say’s Law mode: if CaptiveAire could solve that problem, and bring the solution to market at an acceptable price, demand (i.e., lots of customers) would follow. That turned out to be exactly right.
Implied in this formula, of course, is attention to market signals regarding unsolved problems, a problem-solution design process, and a communications and customer interaction capability to inform the market of the new solution. Say’s Law applies, but not in isolation from other entrepreneurial actions. Those actions, Bob tells us, include accuracy and completeness in solving the problem, since many competitors may be trying to address it at the same time. Small details can make a big difference in applying Say’s Law.
Subjective Value Many podcast listeners have asked whether the concept of subjective value — which holds that it is the subjective and emotional evaluation by customers of an entrepreneurial offering that determines its market acceptance – applies equally in B2B markets as in B2C markets. Isn’t subjective value more relevant to consumers’ choices of fashion and food than it is to business customers’ choice of service es from vendors and suppliers?
Bob’s response: The subjectivity of value is very, very clear, and it's reinforced in the market every single day.
He used the example of bringing an integrated ventilation system to a restaurant. CaptiveAire might be successful in explaining all of the problems it's going to solve, its sustainability, and all relevant features and functions. Completion of a sale still comes down to the user subjectively assessing the exchange value, by asking “Am I willing to pay X amount of money to solve these problems?” The customer very well could say, "No, I'd rather live with some of the problems and depart with that much money.”
Bob emphasized the importance of communications in addressing the challenges raised in calibrating subjective value appraisal. A strategy of “solving all the problems” requires clear communications to the customer of how CaptiveAire solves the problems, so that the user can make a fully-informed decision. “If we don't communicate well, the value of the product in the user's mind may be lower. So part of the issue of getting a higher subjectivity of value is to have a full understanding of what the product does.” Clear communication is a component of value.
Comparative Advantage There’s a big difference between competitive advantage and comparative advantage. Bob explains it this way: competitive advantage lies in striving to provide the same service and same solution in a better way than a competitor. Such an advantage may be achievable from time to time, but it is temporary and quite easily taken away by a hard working competitor. The market signals are clear and unobscured, telling the competitor where they must improve and the incentives to do so are compelling. No competitive advantage is sustainable over the long term.
Comparative advantage is different. It’s an unmatched capability, often built over time by accumulating unique knowledge and experience and applying them in a unique capital structure. Such an advantage is longer term, maybe not absolutely invincible, but very hard to overcome.
Bob cited an example outside of his field: winemaking in Napa Valley, California. “If you decided you wanted to make wine and compete with Napa Valley, it's going to be a hard way to go.”
In the case of CapitveAire, “over time, we've been able to develop those design technologies, techniques, automated equipment and software, and when you marry all those things together and you integrate them, we gain a major comparative advantage. It's very hard to overcome because it's not one thing. It's many things, and they're all well thought out and have been developed over a number of years.”
Bob refers to on important element of CaptiveAire’s comparative advantage as “technique”. An example is “bending metal in real time and dynamically stacking it right up on the assembly line”, resulting in elimination of inventory, and very rapid turnaround time. It’s CaptiveAire’s unique methodology, developed over many years. Competitors can attempt to emulate but they fail. It’s a comparative advantage.
Opportunity Cost The cost of any choice or decision includes its opportunity cost: what option must be declined or given up in order to make the choice you prefer.
Bob explains: Understanding opportunity costs means turning down opportunities that would divert resources, and, instead, focus on getting the best utilization out of your human resources possible, and making the most sustainable solutions, which are going to save time and money over a period of time. We make 10 major categories of products. No more. To keep those products at the right price, at a high level of performance and sustainability requires all of our time. So if we divert any of that time, opportunity costs might result in us failing at our most primary mission.
He gave the example of a line of business that required extensive customization. The benefit of customization is that each customer feels that they enjoy unique value. The opportunity cost is that it’s impossible to be all things to all people — it absorbs too much time and too many resources. CaptiveAire addressed the opportunity cost problem by replacing customization with software-enabled adjustability of certain key inputs like voltage and phase. They found that this solution could effectively address 95% of customer-requested flexibility. While competitors asked, “Just tell us what you want, we’ll figure it out” and spent resources on responding, CaptiveAire was able to stay focused on its core mission and core products and services.
Every opportunity that comes a firm’s way must be examined through the lens of opportunity cost. Austrians see opportunity cost as an active process — the same way they see value and resource allocation and pricing and many other elements of business.
Pricing Pricing is a discovery process. At the same time, it’s an element of business strategy. Bob made a strategic decision at the outset to price “lower than the market,” while aiming for highest quality. The market informs CaptiveAire of what the pricing norm is, and therefore what “lower than the market” is. The discovery part is: how low to go to maximize unit sales and revenues. The second part of Austrian pricing theory is that producers choose their own costs. Bob chose to seek ways to keep costs low enough to sustain his pricing and quality strategy, which led him to the efficiencies, automation, speed, inventory-reduction, high technology, and opportunity-cost sensitivity that characterize CaptiveAire.
Price, cost, and profit are integrated in a strategic formula that’s tested every day by the customer’s willingness to pay the price of high quality.
Additional Resources "Bob Luddy’s Effectuation Process" (PDF): Mises.org/E4E_84_PDF1
"Five Active And Integrated Processes Of Austrian Economics" (PDF): Mises.org/E4E_84_PDF2
Entrepreneurial Life: The Path From Startup to Market Leader by Bob Luddy: Mises.org/E4E_84_Book
Key Takeaways The entrepreneurial instinct can be sparked in K-12 and around the family dinner table. An entrepreneurial culture is highly beneficial to society at the global, national, and local levels. We should examine how well we nurture the entrepreneurial instinct in K-12 schooling and in the discussions we have with our kids at home.
Clay Miller got a Commodore 64 (you can look it up!) when he was 11 years old, and his interest in computing, software and writing code started there. He was a programmer at 11 years old (something that is more common today than it was when Clay was young) and developed a taste for programming and an aptitude and some skills. He learned how to jump over hurdles of software-writing complexity at a young age.
A mentor can reinforce a young person’s disposition towards entrepreneurship, and accelerate their progress.
A local tech entrepreneur took Clay under his wing and hired him for programming projects. Clay built accounting software and other products in this arrangement as a high school student. Observing and participating in this entrepreneurial environment at an early stage in life gave Clay the idea of entrepreneurship as a future pursuit. He started to take on consulting assignments while at college, although he wouldn’t yet identify tech entrepreneurship as a “career”. He was able to begin to make the transition from pure programmer to customer service entrepreneur. Starting early can influence a lifelong entrepreneurial journey.
There are many ways to accumulate knowledge, and entrepreneurship is a fast track to applicable knowledge. Clay chose serving customers as a pathway as opposed to continued learning in school and a conventional corporate career path. Both paths are ways to acquire knowledge. Identifying the process you prefer for knowledge acquisition — school or entrepreneurship — is a valid choice. Entrepreneurship may be the quicker and more direct route. And entrepreneurial knowledge is often more applicable, and more rapidly applicable, for your own individual economic ends.
An entrepreneurial leap forward resulted from identifying and supporting a new emergent industry. Clay took a job as a CTO in an emerging industry: organ and tissue transplants. This enabled him to experience economic growth at a higher level through the application of technology in a high-demand environment. He learned about fundraising and financing and shaping resource allocation based on the funding available. He learned about mass customization for a diverse customer base. He learned the role of the technical advisor vis-à-vis the CEO, enabling the executive suite to achieve its vision. Finding a growth industry can accelerate your individual development.
Transition from tech expert to global customer service entrepreneur. Clay was initially a user of offshore outsourced technological services. He mastered the economics and logistics of this organizational arrangement. Quickly, he founded his own Asia-based outsourcing corporation, and added a significant innovation: the embedded outsourced CTO. Often, firms use outsourced technology services for the flexibility of dialing up and dialing down service intensity on demand. There is a downside to this flexibility, which is loss of continuity and accumulated knowledge, as contractors move on to other jobs. Clay performs the role of CTO for his clients, ensuring them continuity of strategy, and keeps his outsourced tech talent available in his own ecosystem, so that accumulated client knowledge is not lost and can be reapplied later in the cycle.
Perception-Decision-Action Clay’s journey can be seen as an illustration of what psychologists call the PDA cycle — Perception, Decision, Action (see Mises.org/E4E_83_PDF1). Entrepreneurs perceive the world around them in a subjective manner, conditioned by their individual circumstances. In Clay’s case, those circumstances included exposure to technology, and some experimentation with it, at an early time in his life. Later, he made some decisions on best choices — for example, between school and entrepreneurship — based on his perceptions. He acted, became a tech entrepreneur, and then a customer service innovator. Every action changes the world, and so changes the entrepreneur’s (and the client’s) perceptions, leading to new decisions and new actions. Entrepreneurial success emerges from the process.
Additional Resources "The Entrepreneur's PDA Cycle" (PDF): Mises.org/E4E_83_PDF1
You might also enjoy reading this paper from our colleagues Nicolai Foss and Peter Klein on the language of opportunity ("Entrepreneurial Opportunities: Who Needs Them?"): Mises.org/E4E_83_PDF2. They say that opportunities do not exist in any objective fashion. They are not “out there” to be “seized”. Entrepreneurs create their own outcomes. Foss and Klein call their process B-A-R: Belief, Action, Results. See if you think B-A-R differs from P-D-A.
At E4E, we believe that Austrian economics can guide business execs and entrepreneurs to better thinking about how to manage businesses that thrive. Business educator David K. Hurst blames neoclassical, Chicago school economics for the bad thinking that pervades business today. Here’s how he phrased it in our @e4epod Episode #82:
I emerged from Chicago believing, or at least accepting, the basic assumptions which lay behind business education at that time, which was heavily influenced by what I came to understand was neoclassical economics. That is, it believed in greed as the primary motivation. It was all about individual self-interest and utility maximization, I think, was the word. It was heavily rationalistic in that it believes that we ought to behave like little mini scientists with everything based on evidence and data and then lastly, the focus was very much on equilibrium, that markets were self-equilibrating and that the natural condition in organizations was stable. Stability was the norm and change was something that you had to manage and that if things went awry, it was mainly because you weren't following standard procedures. Management was essentially about allocating resources... It was nothing about innovation... and making sure things ran in a steady, linear, rational fashion.
When I got into the real world, I found that these principles were, well, wrong.
The right principles are those that Jesus Huerta de Soto includes in his Austrian theory of dynamic efficiency. David Hurst sums them up this way:
Of course the linear, stable, rational model is the way academics think businesses ought to run, if only they would listen to them, and the fact you can't run them that way because the world is nonlinear. It's dynamic.
Organizational Dynamism To illustrate dynamism at work, David described a frantic time of disarray in a newly acquired company when a major project management problem arose, and sclerosis caused by hierarchy and central planning, multiple process manuals, traditional career paths and rigid job descriptions impeded a response.
Spontaneously, individuals on the front line formed small teams (they’d be called Agile today) to hunt down innovative and collaborative solutions to this and other challenges that arose. They were non-hierarchical, with no process manual, no reporting structure and no fixed operating plan.
Similar small, collaborative, horizontal teams multiplied to solve problems of business recapitalization, debt and cash flow management, innovation, pricing and many more. The business, after divesting unproductive divisions and products, became profitable, grew and thrived. There was improvement and it was, as David put it, non-linear.
New Organizational Theory: Boxes and Bubbles David reflected on this experience and developed a theory to explain it. He observed that, in the dynamic crisis time, traditional hierarchy and procedure had faded into the background, and the spontaneous order of agile teams had taken the foreground. Both continued to exist.
I called them boxes and bubbles, boxes being the formal box structure which productive, large-scale organizations end up using, and bubbles were these soft, informal teams that we formed at a moment's notice. They formed easy coalitions with each other and when they did the job, they burst. They disappeared and went back into the mixture out of which new bubbles could come.
The Theory Of Complex Systems Applying complexity theory, David developed what he calls an organic approach to business management, modeled after natural ecosystems, such as a forest. Forests start off as weeds — small and fast — and end up as big and slow trees. Yet forests are dynamic: they renew themselves through fire, burning the obsolete, decadent growth to create the space into which new growth can come. At that stage, the forest starts to build a new community of fresh growth. It continues in an infinite loop, existing for indefinite periods of time.
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Austrian theory, of course, embraces the idea of complex systems. We know that any economic endeavor, any market, and any firm operates within a complex system of millions and billions of provider-customer exchanges, governed by the idiosyncratic subjective value scales of consumers and the entrepreneurs who strive to empathize with them and serve them. We know that these complex systems can’t be managed in any traditional, hierarchical, procedures-manual sense, and they can’t be predicted. We understand business cycles and adaptive behavior.
How Did Business Schools Come to Teach The Wrong Model? How did the business schools get to teach their totally inadequate model?
They adopted this model in the late 1950s. Their goal was to come up with systems to produce economies of scale, how to produce more of the same. Like the steel business - very inefficient, highly polluting but facing tremendous demand for steel for rebuilding the world in the 1950s and there was no reason to change.
The theory that emerged was how to perpetuate this success. But nothing lasts unless it is incessantly renewed. Firms must innovate to maintain dynamic competitiveness. The organizational structure required to run something with economies of scale, a very mechanical, machine-like, productive hierarchy, is very poor at innovation because those are exactly the dynamics that you've got rid of in the pursuit of efficiency, in the pursuit of low prices.
The theory that businesspeople used to support them in this productive model was of course neoclassical economics. It appealed to them to explain why it was all about rationality and it was all about stability, keeping things the same.
The Uses of Knowledge David tells us that Hayek became his guide.
It seemed to me that The Fatal Conceit applied to the corporate world, the mini socialist structures. I mean, when I graduated from business school, the Fortune 500 were the sort of last refuges of Stalinist bureaucracy. They were central planners, so Hayek's critique applied to them. That's the way they work. People at the top were dictators, that’s the word for it.
Businesses fall into what David refers to as a “power trap”, bureaucratic and rigid.
The boss would come and say, "Well, I want to do this deal so find me some assumptions that make it work." Instead of getting evidence-driven strategy, you got strategy-driven evidence. It was totally inverted. The process was actually a process of power, and the structures are structures of power. It ends up with elites”.
The Organic Approach to Management David described working with an entrepreneur in South Africa.
He was Austrian, but not an economist. He was a tool and die maker in Austria and he had come out to South Africa and he had set up a tool and die business to make fuel tanks for the automotive industry in South Africa. This guy was a wizard on the technology of stamping. It was just know-how, practical knowledge.
He wasn't dealing in abstractions at all. It was all about practice and things emerged on the shop floor, "Oops. Okay, so that's interesting." He was continually experimenting, tinkering, and he was hugely successful because he had this extremely efficient, effective process. And he was not intellectual in the remotest. If you tried to ask him, "What principles are you operating by?" he wouldn't be able to tell you and that was okay. It's the power of practice and that the actions come first, and the words come later.
There is a space in my diagram, on the left-hand side, it’s all about acting your way into better ways of thinking and on the right-hand side, it’s about thinking your ways into better way of acting. The two are melded together. It's a dance, if you will, between the two sides.
The way you come out of business school is thinking about the job of management like an engineer. You had this machine which required to be maintained, lubricated, fixed, parts replaced sometimes, but it was essentially a machine, a smooth running machine, and you think like an engineer.
I see the manager as a gardener. A gardener has engineering aspects, but they also have wilder aspects to them. The gardener creates the conditions in which, in the case of enterprises, people can grow. They grow people. That's what it's all about. I see this gardener as the one being able to conduct this dance. You need to dig up soil and replace it. You may need to tear down existing plants and put them on a bonfire and burn them, break out the chainsaw and saw. At other times, you need to supply structure, a lattice on which they can be trained and pruned and all that kind of stuff. The gardener seemed, to me, to capture this duality to the manager's task.
Measuring Unmeasurables Peter Drucker said that there a lot of unmeasurable things which are absolutely valid and are absolutely critical. Like Mises, he understood that measurement is always about the past. It's always about what happened. He says,
The things that really matter are the unmeasurables that refer to the future." The example he gives is the ability of the enterprise to attract young, high motivated people. He said, "If you can't attract these people, eventually it'll show up in the numbers, but it's not something you'll see in the numbers right now because it hasn't happened yet. It's straws in the wind.
How do you measure unmeasurables? Through Hayekian knowledge theory: getting everybody in the organization talking to each other about what's happening, about what they're seeing every day, because that's where it's happening, on the ground. This is all a part of acting our way into better ways of thinking, getting ideas, seeing the opportunities emerge out of what we're doing, out of the action.
Additional Resources David Hurst’s ecosystem model (JPG): Mises.org/E4E_82_JPG
David’s book, The New Ecology Of Leadership: Mises.org/E4E_82_Book
David’s original HBR article on “Boxes and Bubbles”: Mises.org/E4E_82_PDF2
Jesus Huerta de Soto’s side-by-side comparison of elements of Austrian and Neo-Classical economics: Mises.org/E4E_82_PDF1
Key Takeaways And Actionable Insights Dr. Keith Smith, co-founder of The Free Market Medical Association (FMMA.org), is an entrepreneur and free market warrior who is undaunted by the seeming scale of his innovation task: to bring to healthcare the kind of customer experience only entrepreneurial free markets can deliver (see "Pillars of the Free Market Medical Association" (PDF): Mises.org/E4E_81_PDF).
He is laser-focused on the problem to solve.
The aim is to bring buyers and sellers together. As Dr. Smith explains, simply stating that there is a need to bring buyers and sellers together is an indication of dysfunction in the market for healthcare. Buyers and sellers talking directly with each other is what makes a market: willing buyer, willing seller, mutually agreed price.
Buyers are patients who care what healthcare costs. Today, they have sticker shock. Buyers who care about price can be direct-buying individuals, and their proxy buyers, who can include self-funded employer health benefits systems, more and more of which are emerging. Innovations like Health Savings Accounts and high-deductible insurance policies are bringing more direct buying into the market.
Willing sellers should be complete and comprehensive advocates for the patient, across the whole range of their needs, including financial aspects. The targeted customer experience is for patients to feel confident when they visit a doctor that they have an unapologetic advocate. Today, physicians are medical advocates, but to be a more complete advocate, physicians must think and act like entrepreneurs, bearing some risk in serving their patients. Many say, “I don’t want anything to do with the business side or the money side of medicine.” By doing so, they are abandoning their patients to the financial wolves, many of whom are willing to step in and make a living off the patient. It’s not so much willful neglect of the patient’s interests, as simply caving in to a system that has become extremely difficult to navigate.
A problem in healthcare is the dominant presence of intermediaries between the buyer and the seller. Dr. Smith described the wide range of intermediaries, cartels and proxies that get in the way of a direct, transparent and mutually beneficial relationship between buyer and seller. Insurance companies are “money handlers and money changers”, keeping healthcare prices high, so they can offer false discounts and skim off the difference. There are brokers and consultants to employers, whom Dr. Smith calls “self-dealing”, who add a layer of costs. There is Big Pharma, the pharmaceutical industry that largely funds the FDA, making it inevitable that the regulator will protect the pharmaceutical companies and their business model and their pricing.
In the end, the “ultimate culprit” is the Federal Government. None of the financial abuse of the patient would be possible “without Uncle Sam riding shotgun for all of this thievery”.
A solution lies in decentralization, disintermediation and the application of Hayekian knowledge theory. Dr. Smith alluded to F.A. Hayek’s concept of dispersed tacit knowledge in describing the FMMA’s decentralized approach. The Free Market Medical Association establishes local chapters, who follow a small number of “pillars” regarding price and value and mutually beneficial exchange, including equal pricing to all cash buyers of the same service. The chapters are completely free to respond to customer preferences in their own local market. These chapters create new knowledge based on their transactions and experiences in their local market, and can share it with all other chapters.
Austrian principles of decentralization, free exchange without intermediaries, and the recognition of the value-creating dispersed knowledge of patients and entrepreneur-practitioners are Dr. Smith’s starting point.
Additional Resources "Pillars of the Free Market Medical Association" (PDF): Mises.org/E4E_81_PDF
The Free Market Medical Association's annual conference, "Mission Possible: Healthcare Entrepreneurship as the Antidote to the Broken Healthcare System": Mises.org/E4E_81_FMMA
Key Takeaways And Actionable Insights The entrepreneurial life is a life of meaning and purpose. We believe that strongly, and our belief is anchored in the ethic of entrepreneurship: to serve others, making their lives better, and thereby improve one’s own life, making an entrepreneurial profit, both economic and psychic.
In episode #80, we review some deep research support for this linkage between entrepreneurship, free market capitalism, and meaning in life.
An intersection between psychology and economics. Clay Routledge is a social psychologist, with a focus on human motivation: what gives us the energy to pursue our goals and aspirations.
John Bitzan is an economist who has taught courses on international business and international economics. He fully understands the huge role played by economic freedom in elevating people out of poverty and making lives better. He now leads the Challey Institute (full name: Sheila and Robert Challey Institute for Global Innovation and Growth: Mises.org/E4E_80_Challey) that is focused on looking for ways to unleash the power of the private sector to create economic opportunity.
John and Clay collaborated on the research we discuss on E4E #80.
What is meaning and why is it important? Meaning is defined as people’s perception of the coherence, significance and purpose of their lives. We are all trying to find a place in the world where we function, and we have a desire to be significant, to play a role in society, and to have a purposeful existence.
And people understand this about themselves. They have a good subjective sense of what it means to have a meaningful and purposeful life. They have a greater sense of meaning if they play an important part in the lives of others. Meaning embraces a contribution to someone else — to family, to community, to society — beyond just making a contribution to your own welfare.
The strong link between meaning and motivation. People who see their lives as meaningful tend to live longer and healthier lives. Why? Because they are more motivated to live healthy lives. They make the choices that reduce the risk of mortality. They eat healthier, exercise more, avoid harmful behaviors like drug and alcohol abuse. When people have a purpose in life, they take better care of themselves.
Meaning is a motivational force. And that’s how it connects to economics.
Existential agency, capitalism, and entrepreneurship. According to Clay and John, existential agency is the extent to which people believe they have the ability — it’s in their power — to pursue and maintain meaning in their lives. And people’s beliefs about meaning and existential agency influences a range of economic beliefs.
Clay and John researched the connection between people’s beliefs about existential agency and their views towards capitalism and entrepreneurship, both on the macro or institutional level regarding their role in solving important problems, and on the micro or individual level of their own entrepreneurial aspirations. They researched over 1200 Americans and asked questions including both their general views towards economic freedom and their motivations to become an entrepreneur.
The survey revealed that people who have more existential agency, i.e. a greater belief that they can obtain and maintain meaning in life, were more likely to have positive view towards capitalism, about entrepreneurship, and more likely to be motivated to start or run their own business.
It’s not self-interested, it’s pro-social. Clay also emphasized how much meaning in life and existential agency are associated with pro-social beliefs, attitudes, and behaviors. For these people, motivation is not focused solely on their own wellbeing and their own life outcomes. Part of the motivation is to serve a community and serve society. Entrepreneurs are motivated to solve problems for others: entrepreneurship is pro-social. It can solve the major challenges of society, including macro problems like climate change or poverty.
The existential vulnerabilities of our current world. The opposite of existential agency is the feeling of a lack of ability to play a meaningful role, or to take on a meaningful challenge or to see the opportunity to make a direct contribution via one’s own efforts.
Clay and John worry that young people are being educated to believe they have no control over their lives, and don’t have the ability to overcome obstacles that they face. They are told that problems are systemic, and discouraged from thinking about ways they could make a meaningful contribution, or make a difference. They are indoctrinated with a cultural world view that undermines existential agency. Symptoms include a decline of faith in capitalism and its institutions, and a sympathy for socialism.
A focus on meaning is especially important now, when people are told that they need to rely on the state to improve their situation, and are provided with negative work incentives via supplemental unemployment payments that make not working a better financial choice than working.
And Clay and John emphasized that the meaning-motivation axis applies to all social groups, including minorities. It’s important that we give all people — especially the young and minority groups — the message that they have the ability, through the agency of entrepreneurship and the institutions of free markets, to make a difference, contribute to something beyond themselves, and play an important role in society.
Additional Resources Research Brief: "How are attitudes toward entrepreneurship and entrepreneurial motivation affected by meaning?" (PDF): Mises.org/E4E_80_PDF1
Research Brief: "Does a feeling of meaning and purpose in life affect views toward capitalism?" (PDF): Mises.org/E4E_80_PDF2
Research Report: "Does a feeling of meaning and purpose in life affect views toward capitalism?" (PDF): Mises.org/E4E_80_Report
Clay Routledge on "Why Meaning Matters for Freedom and Flourishing" (PDF): Mises.org/E4E_80_PDF3
Key Takeaways and Actionable Insights Steve Phelan has spent a lifetime in entrepreneurship, as a student, a researcher, a teacher, an investor, an innovator and a practitioner. He found that people today — especially young people — are over-focused on the Silicon Valley / Venture Capital / Become A Billionaire model. That’s pretty rare (and may not even be a good model).
He decided, therefore, to classify all the different kinds and flavors of entrepreneurship, to help people think through all the business and lifestyle options. The result is a book called Startup Stories: Lessons For Everyday Entrepreneurs (Mises.org/E4E_79_Book). It’s full of interesting personal interviews and experiences, analysis, data and insights. We’ve drafted a summary of the six levels of entrepreneurship Steven identified below, and in this downloadable Knowledge Map: Mises.org/E4E_79_PDF.
Level 1: The Personal Entrepreneur We’re all capable of entrepreneurial behavior because we all have resources: our brain, our body and our time. If we apply those resources to pursue valuable experiences for others and ourselves, we are personal entrepreneurs.
A career entrepreneur is one who takes personal responsibility as the custodian of their own human capital — the economic value we derive from our own stock of personality traits, knowledge, skills and experience, all of which can be developed. Career entrepreneurs invest in their own human capital and chart a path through life to achieve the highest long term return. Personal responsibility lies at the heart of entrepreneurship.
Being an intrapreneur is another way to exercise personal entrepreneurship. An intrapreneur is an employee who acts entrepreneurially — identifying customers’ desired experiences, designing innovative services and introducing new offerings into the market. While the incentives may be lower-powered than for entrepreneurs, they can nevertheless be attractive in the form of bonuses and stock options. It’s a good route to fulfillment for many.
Level 2: The Nascent Entrepreneur This is the more conventional classification of an entrepreneur starting a business. An embryonic entrepreneur’s business is pre-revenue. They’re engaged in the exciting phase of customer discovery — which can include value proposition development, securing funding, hiring initial employees, assembling a team, planning launch activities, assembling resources, and testing prototypes. They key is action: ideas are plentiful, action is scarce. Embryonic entrepreneurs are action-oriented doers.
Emerging entrepreneurs’ businesses are post-revenue, pre-profit — they are pursuing a scalable and profitable business model. By definition, this stage is temporary — the emerging firm is designed to search for that sustainable model. Constant tweaking and experimenting is the dominant mode. Eventually, emerging entrepreneurs become growth entrepreneurs.
Level 3: The Lifestyle Entrepreneur Entrepreneurship is a lifestyle choice for many — often driven by the desire for autonomy: to personally direct how to work and how to live. One form of lifestyle entrepreneur that Steven identifies is the craft entrepreneur.
Craft entrepreneurs have a highly developed individual talent, skill or expertise and they find a way to capitalize it and apply it entrepreneurially in the marketplace. They’re always trying to improve the quality of their product or service, and to reinforce their own mastery. If they can add some sales and marketing hustle, business can be very good.
A 21st Century version of the craft entrepreneur is the virtual entrepreneur. This is an individual, team or small business that takes advantage of the modern day digital-driven opportunity to interconnect, build online supply chains and download infrastructure. A virtual entrepreneur can run a business from anywhere where they can connect a device with a screen to the internet. There are plenty of challenges — especially in the fragility of the supply chain and finding trusted partners, but many profitable businesses follow this model.
Level 4: The Employer Entrepreneur There is a major change in responsibilities, operations, management and personal experience when an entrepreneur takes on employees. Startup Stories explores two examples: family business owners and small business owners.
Family business owners have the advantage of built in trust and loyalty with their employees, which can result in greater stability. However, it may come with more complexity and tensions in inter-family member relationships.
Small business owners who are employers must delegate some authority and decision-making to employees, and therefore must become experts in identifying, hiring, managing and nurturing. Hiring employees can take your business to a new higher level, but poorly managed employees can damage your business in areas like lost productivity or damage to brand and business reputation. Successful small business entrepreneurs must overcome these challenges.
Level 5: The Growth Entrepreneur Growth entrepreneurs experience the exhilaration of escaping the confines of small business. They can also start thinking about becoming rich if they can sustain the growth. Expansionary entrepreneurs expand to multiple locations, or multiple products line, or to millions of customers on the internet. There are plenty of challenges with managing growth — it may require business model revision; it may consume cash at such a rate that finance management becomes a problem; it may require continual organizational revisions. It can be personally exhausting, as Steve depicts in one of his interviews. But it can also be tremendously rewarding.
Gazelle entrepreneurs, in Steven’s terminology, are those growth entrepreneurs who take venture capital funding to boost growth rates and business acceleration. VC funding enables firms to fly faster and higher. Venture capital is rare and hard to get. It can also be destructive, especially to founders who can lose control of their companies (Steve explained how in the book). Term sheets set up these potentials. Securing venture capital is an exciting and energizing moment and a milestone of achievement. It’s important to read the fine print and think ahead!
Level 6: Super Entrepreneurs This is the peak of the profession. Steve picks out Mavericks and Heroes. The discussion about mavericks is structured around the question: “Are entrepreneurs born or made?” Researchers have tried to establish whether or not there is an entrepreneurial personality, but the consensus is that there are no common traits that predict entrepreneurial success. But some personality traits may be more common in the entrepreneurial community than outside it. The maverick personality is one of them — willing to think and act differently from others, to pursue a distinctive imagination, to bet on a hunch. And the good news is that personality traits are not fixed — habits and behaviors can be acquired over time, through acting and learning. Entrepreneurs are made through action.
The second classification of Super Entrepreneurs that Steven considers are Hero Entrepreneurs. He makes the link between hero status and PR, and from there to the power of heroes to raise funding. It is possible to craft a hero persona, shaping the perception of others through “impression management”.
At E4E, we believe all entrepreneurs are economic heroes. They aim to better the lives of others, bringing new product and services to the market and responding to the preferences of customers based on their positive or negative response. They sacrifice in the short term, while designing their new solutions, in order to benefit in the long term if they serve customers well. This short term sacrifice for long term gain is not only economic, it’s the essence pf morality. We aim to continue to serve this community of heroes.
Additional Resources Learn about the "Austrian Business Model" — a design guide for your firm’s individual business model: Mises.org/E4E_ABM
"6 Levels of Entrepreneurship" (PDF): Mises.org/E4E_79_PDF
Startup Stories: Lessons For Everyday Entrepreneurs by Steven Phelan: Mises.org/E4E_79_Book
Key Takeaways and Actionable Insights Every business needs a business model, a recipe for generating profitable and sustainable revenues that result from bringing the customer an experience on which they place a high value.
How do entrepreneurs design successful and profitable business models? They combine theory and experience — theory provides the foundational starting point, and experience refines the model based on action-based learning and real-life feedback.
The best theory — the meta-theory — for business models comes from Austrian economics. This is a proposition we intend to demonstrate rigorously and completely in our Economics For Business platform. Dr. Per Bylund joined us on the Economics For Entrepreneurs podcast to provide an exposition and explanation of the core structure of the Austrian Business Model (ABM).
The model can be expressed as 4 core components for the entrepreneur:
Understanding and defining subjective value.Facilitating value for specific customers.Exchanging value with customers in the market.Value dynamics — agility in continuously refining the value proposition. 1. Understanding Value The foundation of the Austrian Business Model is a deep understanding of subjective value. This understanding changes everything: its implications ripple through the entire model from the beginning and throughout all phases.
Value is created only in consumption. The customer (in both B2C and B2B models) creates value. Value is in the customer’s domain. It’s an experience that customers evaluate after the fact against their expectations. The entrepreneur isn’t even present when value is created.
This is a very different premise than we are traditionally taught at business school or even in the everyday language of business discussion. For example, a popular book on business modelsi makes this statement: there is something about some firms that makes them more profitable than their rivals. In the framework of the ABM, we would say: there is something about some customers’ desired experiences that makes facilitating them more profitable than other customers’ desired experiences.
It’s hard to get one’s head around just how different this approach is. It requires some new behaviors:
Obsessive and total focus on the customer — identifying them, understanding them, letting them lead the process of value creation.Selection of a precisely defined group or cohort of customers as your audience, with continuous development of ever deeper and more detailed understanding of their subjective preferences.Development of a value proposition — a hypothesis about how you will help the customer to an experience that they will value. It’s simply that — a hypothesis that you will test as much as possible for verification, but which is never proven until the cycle of market exchange, experience and evaluation is completed. Phase 1 is an understanding phase for the entrepreneur.
- Facilitating Value for Specific Customers Starting from the hypothetical value proposition, the entrepreneur advances to the phase of designing a value experience for the chosen target audience of customers, based on as deep an understanding of their subjective values as it is has been possible to develop so far. The entrepreneur is continually adding to that understanding — creating new knowledge as much and as frequently as they can.
Design consists of imagining every element of the customer’s experience, based on their value learning cycle. What is it about your value proposition that will make them anticipate a valuable experience? What will make them feel that this experience is preferable to any alternative they have, direct or indirect. What will cause them to exchange value — give their dollars for your offering — and what is the price they will be willing to pay? What ensures that they will assess the experience positively after the event?
The key to design is (1) to imagine every possible element of the subjective experience, empathically embracing the customer’s individual context; (2) to understand that every little detail counts and that small differences in delivery can make a huge difference to the perceived experience. In fact, since customer service is so highly developed in modern economies, it is the small details that generate differentiation and uniqueness for your brand.
Then the entrepreneur turns to value assembly, assembling the resources to deliver the desired features and attributes of the experience to market. What is the right organization for market delivery? Since it is impossible to know exactly the costs and quality you will be able to achieve in your firm, Austrian theory advises entrepreneurs to obtain as much of the required capability on the market at market prices — via outsourcing, partnerships, alliances, and external supply chains — and to limit internal capabilities only to those that cannot be obtained on the market, those that are genuinely unique and advantaged for you.
Use a value alignment approach to check for each element that your value delivery is aligned with the customer value preference — that you know what they want and you can deliver it in the way that they want it.
And include communications design and delivery as part of your experience design. It’s not an add-on or a supplement or a marketing budget item to dial up or dial down depending on cash availability. It’s part of the customer experience that you are designing and delivering.
Finally, make measurement part of the experience design. Once in the marketplace, your value proposition goes “wild”. You no longer control it. The customer is creating the value and you are not. The best you can do is to be available if they want to invite you into their process, and to be observant of their behavior. Measurement is observation. Don’t presuppose, but do collect data, preferably qualitative data at the individual customer level. This is your raw input for continuous improvement.
Phase 2 is a customer-led design and assembly phase for the entrepreneur.
- Exchanging Value Does the customer perceive sufficient value to enter into exchange? It’s the ultimate market test. The customer is weighing the benefits they subjectively perceive against the costs, which include money but also any other difficulties or barriers they perceive to making the exchange. Is participating in your offering totally convenient (which is the general standard today) or is there anything in the experience that makes it less convenient and less compelling?
The best way to solve this challenge is to experiment with as many offer bundles as you can in order to observe market results. Does your service sell better online or direct-to-customer? Do customers prefer to subscribe to buy by the unit? If they try, do they convert? Test as many bundles as you can.
Once you have established the right bundle and willingness to pay, calculate your cash flow and choose your costs in order to generate the margins and profits you require. This is the opposite of the margin math taught in business school, where firms calculate their costs and then add a margin. Austrians discover the price the customer is willing to pay, and then chooses the costs compatible with that willingness to pay. The customer determines the price of the exchange, not the entrepreneur.
Cash flow is your most important financial metric. Make sure you monitor it closely and make sure your accounting methods are the right ones to serve your individual ends. Accounting is a tool like any other — use it subjectively to help you meet your goals.
Phase 3 is an experimenting and testing phase for the entrepreneur.
- Value Agility You’ve achieved some marketplace results. You’ve established that the customer perceives value in your offering and they’re willing to pay a price that generates positive cash flow and profit.
That same marketplace is incessantly changing. Your approach to the 4th stage of the Austrian business model is dynamic. You make sure that you have all the feedback loops required to receive marketplace data about the acceptance of your offering, and any changes in customer preferences and competitive behaviors. You manage 360 degree monitoring of the customer experience and you anticipate and expect that your experience design, however excellent, will erode over time. The customer will demand something even better, and competitors will aim to match or improve on your delivery. It’s important to keep your model of customer value preferences fresh, and to be planning and preparing new and improved value facilitations. Agile entrepreneurs continually test and evaluate innovations, and introduce them to the marketplace. Value improvement and value innovation are your goals. The process never stops. The journey never comes to an end.
Your business model must yield sufficient cash flow for substantial amounts of new capital investment each year. Your organizational design must facilitate the addition of new capabilities and the discontinuation or de-emphasis of existing capabilities that no longer are perceived as unique or compelling by the changing customer. Agile entrepreneurs monitor their dynamic capability — how much is being added, how much is being changed or updated. Are you keeping up with the customer, the ecosystem in which you engage, and your competitors?
Phase 4 is a phase of continuous dynamic change for the entrepreneur.
Over the next few months, we’ll be building out the tools and knowledge entrepreneurs need for every one of the four phases of the model and the steps within. Keep up with us at E4EPod.com/signup.
Extra Tools and Resources Mentioned in the Podcast Dr. Bylund’s Mises University Lecture, "Austrian Economics in Business": Mises.org/E4E_78_Lecture1
Dr. Bylund’s Mises University Lecture, "How Entrepreneurs Built the World": Mises.org/E4E_78_Lecture2
"Means-Ends Chain Tool" (PDF): Mises.org/E4E_01_PDF
"Tools for the Value Learning Process" (PDF): Mises.org/E4E_62_PDF
"Identifying Dissatisfaction Interview Guide" (PDF): Mises.org/E4E_Interview
"Insights Generation Tool" (PDF): Mises.org/E4E_67_PDF_A
"ACT! Austrian Capital Theory at Work" (PDF): Mises.org/E4E_19_PDF
"The Austrian Business Model" (video): Mises.org/E4E_ABM
Key Takeaways and Actionable Insights Business strategy and business model design has traditionally been firm-centric. Entrepreneurs are called upon to establish firms, to make the firm the locus of value creation through value proposition design, assembly of resources, and production; and to ensure competitive advantage in comparison to rival firms pursuing the same customers.
There is an entirely different way to approach economic value creation (see Mises.org/E4E_77_PDF). Ralph Welborn discusses this new approach for the 2020s on the Economics For Entrepreneurs podcast, and in his book Topple: The End of the Firm-Based Strategy and the Rise of New Models for Explosive Growth (Mises.org/E4E_77_Book).
The innovation of the new strategic approach is the focus on ecosystems instead of firms. The new approach preserves — and, in fact, elevates and intensifies — the Austrian business model principle of customer sovereignty and the deep understanding of the customer as the first step on the value creation path. But it changes the perspective to the ecosystem level.
Defining the business ecosystem. Ralph defines a business ecosystem as the methods of orchestrating capabilities from diverse organizations to capture new sources of value. Austrians see entrepreneurs as orchestrators, and so we are very comfortable with this starting point. We are equally comfortable with the core analytic action Ralph proposes: studying where value is being created and destroyed within an ecosystem, and taking steps to capture emergent new value.
As an example, think of a consumer’s nutrition ecosystem, and how it might have changed — that is, how new value has been created and old value destroyed — over the past twenty years. In the past, value was created by Big Food firms (think Kraft Heinz) via low prices, convenience packaging (e.g. canned foods and frozen foods), standardization, high volume, and supermarket distribution. But then some consumers sought new value in fresh food, organic food, less processed food, fewer preservative ingredients and fewer additives and new recipes. New brands took advantage of the emergent value opportunities. And even more recently, new value has been created by delivery platforms that can bring the food directly to the home, and escape the “war in the store” for shelf space and distribution slots. You can begin to appreciate how a business ecosystem such as “consumer nutrition” can change, how new value creation can emerge, and how entrepreneurs might take new action.
Ralph mentions another example in his book: the ecosystem in which automobile companies operate has changed from transportation to mobility. The companies must now deliver value in areas such as in-car productivity, entertainment, communications, connectivity and more.
In order to implement an ecosystem-based strategy, Ralph recommends the following steps:
First, shift your unit of focus. Business schools have told us that our point of focus should be our firm, or corporation, or business unit or department: to maximize the performance of that unit in comparison to other firms or units.
The shift is to focus not on the firm but on the ecosystem in which you and your customers engage, in order to develop a new value perspective.
Step one in business is always to identify and know the customer. The added perspective is to identify, and study, the ecosystem in which you and the customer are engaged.
Second, see the ecosystem as a locus of shifting value. Once you’ve defined it, observe the ecosystem as a network of economic interactions where value is being created and destroyed via changing customer preferences and needs. A consequence of these changes will be shifts in the competitive environment, and you can observe these too, as clues.
To continue with our nutrition ecosystem as an example, you can observe the shifts in market share between traditional and innovative food companies, and use these shifts as a signal of changing consumer preferences. Of course, you can also simply observe consumer behavior and conduct traditional research. Plug all of this observation into a dynamic ecosystem perspective: where and how is value being created and destroyed in the ecosystem?
Ralph’s memorable phrase is: value seen is value captured. If you can see where value is shifting and where new value is being created (or will be created in the future) you will be able to capture it.
Third, answer the questions: “How can I fit in to the ecosystem?” and “How can I contribute to the ecosystem?” The changed perspective of the ecosystem approach is the shift from “how can my firm compete with other firms?” to “how can I qualify to be invited into the customer’s ecosystem?” If you have a new line of organic, healthy food products for health- and diet-conscious consumers, how can you engage with the communication channels within the ecosystem to make those consumers aware, how can you utilize those channels to communicate your benefits, how can you engage with ecosystem retailers and distributors to make it convenient for the consumer to buy your physical products, and how can you participate in the consumer’s preparation systems to provide extra service in addition to your physical product? Where is new value emerging? Where is old value being destroyed? How can you take advantage of the shifts?
The answer to the question “How can I contribute to the ecosystem?” requires an analysis and articulation of what are the capabilities required to meet new needs, who has those capabilities (if your firm does not have them all), and how can you orchestrate these capabilities in service of those needs? Perhaps home delivery is required for ultimate customer convenience. Who does that and how can you orchestrate that capability on the customer’s behalf? Perhaps food preparation videos will help the customer get the most value from your product — who can prepare the content (a celebrity chef, perhaps) and which is the best platform to host and deliver the content to the kitchen? Perhaps your packaging can be recycled — how can you orchestrate that to make it convenient for your customer (as Nespresso does, for example, with recycling bags for their capsules, which can be mailed back free, or dropped off at a Nespresso boutique).
To fit in and contribute, choose a bundling or un-bundling strategy. Austrian economics directs entrepreneurs to assemble resources to facilitate customer value in a unique manner. In the book Topple, Ralph Welborn calls this a bundling versus unbundling decision. If you decide to be a bundler, you improve customer value by providing multiple services around the desired benefit — such as amazon does with retailing and delivery, making shopping more convenient. Unbundling refers to a focus on a single benefit-delivering capability, such as manufacturing a new organic food product that is clearly differentiated from the preservative-laden portfolio of the Big Food company. You can choose to be a bundler or an un-bundler based on how you want to deliver value to customers.
Fourth, audit your own capabilities and identify the 20% that deliver the majority of your value. The capabilities underlying your product or service (skill sets, software, distribution, customer relationships, media channels, process) decay over time, often at an accelerating rate. Ralph points out that entrepreneurs should be creating new capabilities continuously, and making those new capabilities into the 20% that drive explosive growth. This is pure Austrian Capital Theory — identifying the business assets that most contribute to customer satisfaction and keeping them refreshed and up-to-date as customer preferences change.
Ralph cites Uber as an example: the new capabilities are mobile connectivity (from carriers), payment transactions (banks and credit card companies) and dynamic GPS and mapping software (from Google and others).
These capabilities are:
Centered around what the customer wants to do.Taking friction out of what it is they want to do, making it extraordinarily convenient.Orchestrating different capabilities from different types of actors and organizations.Reserving the enabling orchestration capabilities to Uber. The implications for business are to: (i) identify your assets and their half-life — the rate of decay; (ii) identify where to play in your newly understood ecosystem and how to develop the new assets and capabilities to do so. This is a continuing process.
Additional Resources "An Ecosystem-Based Development Strategy" (PDF): Mises.org/E4E_77_PDF
Ralph Welborn's book, Topple: The End of the Firm-Based Strategy and the Rise of New Models for Explosive Growth: Mises.org/E4E_77_Book
The Human Action podcast with Jeff Deist continues tracking Rothbard's Man, Economy, and State, this time focusing on the role of entrepreneurs in the production process (Chapter 8).
Hunter Hastings joins the show with great insights into the social benefits of profit vs. interest, entrepreneurial risk, progressing and retrogressing economies, and the bunkum known as the "Paradox of Saving." This chapter presents Rothbard's exposition of the individual's (or firm's) role in bringing goods and services to us—while Keynesian and classical economists see capital as a homogenous blog and try to wedge entrepreneurs into mathematical models. You'll also hear why Jeff Bezos is not the devil, why rich kids tend to waste the fortunes created by their parents or grandparents, and why Marx was dead wrong about the little guy.
Read the book free of charge in searchable HTML format here.
Use the code HAPOD for a discount on Man, Economy, and State from our bookstore: Mises.org/BuyMES
Additional Resources Economics for Entrepreneurs Podcast: Mises.org/E4Epod
Dr. Joe Salerno's introduction to Man, Economy, and State: Mises.org/SalernoMES
Man, Economy, and State: Mises.org/MES
Key Takeaways There is a group of innovative thinkers in economics calling themselves i4j: innovation for jobs. They focus on an economic theme they refer to as the People-Centered Economy. When many innovators are exploring how to automate jobs and replace human with technology — especially the software called A.I. — they are exploring how to design the structures and incentives to make people even more engaged in the economic process of wealth creation, rather than less.
When thinking about the future of jobs and the people centered economy, we should think of entrepreneurs. In the future, everyone will be an entrepreneur. Entrepreneurship is the people-centered economy, or what we call practical economic humanism.
Is our language right? Entrepreneurship is a tough word for young people to deal with. What does it mean? What exactly is entrepreneurship? What might be more inspiring for them is to focus on the ethic of entrepreneurship. That ethic is service to one’s fellow man — service that is designed to improve their lives. Customers indicate whether or not the entrepreneur is successful in improving their lives by buying or not buying. And it is through the lens of ethical service that they can understand the role of profit. Profit is not the reason people become entrepreneurs — it’s the emergent result. Profit is the signal that society judges that the entrepreneur is allocating scarce resources well. Without profit, the entrepreneur does not continue the service. Service without profit is unsustainable. The ethic of service to others and the emergence of profit as an outcome — a signal of approval — go hand in hand.
In this podcast, we experimented with a new language of entrepreneurship via the acronym S-E-R-V-I-C-E.
S stands for Service: practical economic humanism is entrepreneurs serving others and doing so for profit. It’s the Austrian version of service: I serve you because it is good for me, in every way (purpose, meaning and autonomy). Profit is the signal from the marketplace that the act of serving is positively viewed by customers.
E stands for Empathy. In order to serve, one needs to understand the subjective needs of others and to understand how to meet those needs on the user’s terms. Subjective preferences are idiosyncratic, inconsistent and emotionally based. Empathy recognizes this, and treats everyone’s preferences with respect. Empathy is the number one skill of the entrepreneur.
R stands for Resourcefulness — to meet others' needs in ways that are new, different and better, the entrepreneur assembles resources and persuades others to contribute to the initiative — financiers, employees, partners, vendors. An assembler of scarce resources must convince others that this is the best use that could be made of them — make a business case. There’s a self-reliant resourcefulness in the virtuous character of the entrepreneur.
V stands for Value — creating value and facilitating a valuable experience for customers is the point of entrepreneurship. Value is in the mind of the person who experiences it — it’s a feeling, a satisfaction, the kind you get when a promise is kept. Taken together, all the people whom the entrepreneur serves constitute the market and the market is the judge of what is valuable. Firms and entrepreneurs don’t create value or add value, they make it possible for customers to experience value.
I = Investment, the action of sacrificing in the current time period in order to produce greater value in the next time period. Investment is the opposite of hedonism. It requires the long term view — if I make this sacrifice now, or this investment now, I am giving up alternative current uses of that money or those resources, but I am willing to do so because I see the possibility of a return in the future. Society needs entrepreneur-investors to create the future.
C = Collaborativeness; entrepreneurship requires the assembly and molding of a team, and synthesis of team ideas and contributions; finding the right way to collaborate by maximizing individual talents and perspectives. A supply chain is a collaboration. A factory is a collaboration. A beauty salon is a collaboration. A construction site is a collaboration. Man is naturally collaborative in bringing value experiences to others.
E = Ethical: successful entrepreneurship is moral action, with pure intentions. Any other approach will fail. The idea of exploitation in capitalism is so far wrong and it doesn’t withstand scrutiny. The entrepreneur needs the approval of customers and markets, including the market for labor and for partners. It makes no commercial sense to be unethical.
Perhaps we could communicate the acronym S-E-R-V-I-C-E and the cogent set of ideas behind it, the integrated concept of what entrepreneurs do and what entrepreneurship is.
The mental model is that of SERVICE WARRIORS. Energetic committed people, combating need and want and dissatisfaction. Organizing people and resources in the fight to establish new improved value, to raise standards, to lead the way to a better place.
Models to Graphically Communicate Complex Ideas and Concepts Another part of my discussion with Jeff Saperstein concerned the design of simple visual models to clarify complex processes and concepts. One example to which we referred was that of the Individual Economy. With today’s technology, any individual can become a Service Warrior entrepreneur, integrated into the larger ecosystem of economic services through interconnectivity, networks and global exchanges and supply chains. The idea of the individual economy is explained in Chapter 2 of our book, The Interconnected Individual: Seizing Opportunity in the Era of AI, Platforms, Apps, and Global Exchanges (Mises.org/E4E_76_Interconnected). See also the action model of "The Individual Economy" at Mises.org/E4E_76_PDF. It identifies a process and a journey, with a starting point, key structural elements, relationships and dynamics. That’s a complex system about which authors could write white papers and books — but a simple graphic can capture its essence in one page.
Each week at Economics For Entrepreneurs, we offer such knowledge graphics and models as free downloads. Recently, for example, Dr. Mark Packard offered his groundbreaking theory of marketing for the 2020s in a series of five podcast lessons. We captured the essence of his "Value Learning Process" in one process map: Mises.org/E4E_44_PDF.
Trini Amador presented the essence of three decades of learning about how to build and nurture powerful and effective brands for any kind of business: Mises.org/E4E_30. We captured this expertise in our "Brand Uniqueness Blueprint" (Mises.org/E4E_30_PDF).
Additional Resources "The Individual Economy" (PDF): Mises.org/E4E_76_PDF
Hunter’s Author Page on Amazon.com: Mises.org/E4E_Hunter
Jeff’s Author Page on Amazon.com: Mises.org/E4E_Jeff
Where Good Ideas Come From: The Natural History Of Innovation by Steven Johnson: Mises.org/E4E_76_Book
Key Takeaways and Actionable Insights There are many kinds of entrepreneurs. They are all instigators of win-win arrangements in which customers are served in innovative ways by enterprising individuals and firms. Lives are improved for consumers and producers.
On this week’s Economics For Entrepreneurs podcast we dissect the path to success of an individual who chose the crowded and highly contested field of sports content production, navigated a way to the top, and then broke out in a new entrepreneurial distribution initiative.
Jason Whitlock shares with us many principles of his success (Mises.org/E4E_75_PDF); we highlight just a few of them here to whet your appetite for the podcast.
Choose a field that fits your personality and interests. We have talked a lot with our contributing economics professors about assembling a unique and competitively advantaged set of resources. Jason’s unique resources were a love of sports, some original thinking, and a distinctive personality that he was able to express in writing. He wasn’t deeply technically trained for his first profession (journalism) beyond writing for his college newspaper. That wasn’t the point. His commitment to the pathway — starting at the very lowest point in the climb — was the point. This is what the textbooks and white papers call effectual entrepreneurship.
Credentials are nice but hard work and experience advance you. Jason has won a number of prestigious awards over his time on the path to success. He was delighted to receive them. But he stressed that advancement comes not from the credentials but from the hard work and experience-gathering of which they are a reflection. Experience is the most important: learning from others, learning from circumstances and events, learning from setbacks, learning from observing industry trends and what happens to others. At Mises University 2020, Dr. Per Bylund told us that experienced entrepreneurs are the most Austrian (Mises.org/E4E_75_Bylund) — and therefore the most successful in business — because they are able to glean from their experiences what is most important for the success of a business and what is merely incidental or actually detrimental.
Let your values guide you the whole way — define them, write them down, adhere to them. Jason has thought deeply about — and codified — his own values. He includes them in his personal profile (Outkick.com/Jason-Whitlock) on his entrepreneurial distribution platform, Outkick.com. The entrepreneurial life is a values-driven life.
Your intuition and innate ability to read people are your best tools for managing the future. We discussed the entrepreneurial act of embracing change and trying to “stay ahead of it,” in Jason’s words. How do you do that? He elevates the role of intuition and empathy over data gathering and predictive analytics. Again, at Mises University 2020, Professor Peter Klein spoke of the elevated role Austrian economics allocates to those two cognitive skills, and even cited academic studies about the entrepreneurial advantages of intuition ("smart intuitors") among cognitive skills (Mises.org/E4E_75_Klein).
Always, always put your customer first. Be honest with them, be objective, and serve them distinctively. It is the first principle of Austrian economics in business that the consumer is sovereign and that an Austrian business puts the customer in first role in everything that they do. Jason Whitlock confirmed the same principle without any prompting. For a sports content producer, the customer is the reader, viewer or listener. Jason characterizes his audience as the intelligent sports fan who can appreciate an original take and distinctive reporting on subjects that many other content producers are covering.
He commented on how athletes today don’t understand the principle. The customers are fans who attend the events and enjoy the performance. Athletes sometimes misunderstand and think that “their twitter feeds are their fans” and often go to the point of ridiculing or rejecting or offending their customers. We’d call that a failure to demonstrate empathy, and disrespecting consumer sovereignty. Successful entrepreneurs don’t make that mistake.
These are just a few of the incisive and instinctively Austrian insights from Economics For Entrepreneurs podcast #75 with Jason Whitlock.
Additional Resources "Jason Whitlock's 10 Steps to Entrepreneurial Success" (PDF): Mises.org/E4E_75_PDF
Per Bylund's Mises U lecture, "Austrian Economics in Business": Mises.org/E4E_75_Bylund
Peter Klein's Mises U lecture, "Entrepreneurship": Mises.org/E4E_75_Klein
Download the slides from this lecture at Mises.org/MU20_PPT_23.
Recorded at the Mises Institute in Auburn, Alabama, on 16 July 2020.
Download the slides from this lecture at Mises.org/MU20_PPT_12.
Recorded at the Mises Institute in Auburn, Alabama, on 14 July 2020.
Key Takeaways And Actionable Insights Raushan Gross is one of the outstanding writers on the subject of entrepreneurship. In his latest e-book, The Inspiring Life and Beneficial Impact of Entrepreneurs, he establishes the ground rules of the complex system of entrepreneurial innovation in seven principles.
1) Consumer dissatisfaction is transformed into innovation by alert entrepreneurs. The fuel that powers the engine of innovative progress is consumer dissatisfaction. The creativity of entrepreneurs transforms the fuel into the energy of innovative ideas, positive change and economic growth.
2) The engine keeps running because entrepreneurs continuously compete for customer approval. Consumers and customers accept the latest innovation and keep seeking the next one. This relentless search inspires entrepreneurs to out-do each other in trying to bring the next improvement to market. We call it competition, but it’s really the entrepreneurial engine that never stops.
3) Entrepreneurs are empowered by their continuous learning from a constantly changing marketplace. Some call the entrepreneurial process “trial and error”. Error should not be viewed as a negative concept — it’s learning. The entrepreneur gets smarter with every learning occasion. Learning is continuous because the market is constantly changing.
4) Entrepreneurship is the foundation of a productive society. A productive and progressing society is the result of consumers seeking betterment and entrepreneurs seeking to serve them via innovation and improvement. There’s no alternative, if what we want is progress. All regulation and intervention impede the system. The worst kind of intervention — socialism — destroys it entirely.
5) Entrepreneurship flourishes most where there is a supportive history and culture. To preserve and encourage entrepreneurship and to avoid the descent into a sclerotic interventionist economy, we need to weave recognition of the role of the entrepreneur into our culture and institutions. We need to teach it in our K-12 schools and discuss it around the family dinner table.
6) A world without entrepreneurs would be pretty grim. Economics often sheds light via thought experiments. Here’s one: imagine a world without entrepreneurs. No innovation. No progress. No automobiles and no iPhones. It doesn’t take long to realize the losses we would suffer and the quality of life we would lose.
7) The post-pandemic world is the perfect time to observe the impact of spontaneous agility and adaptiveness. There is a tendency for us to focus on the destruction that resulted from the pandemic and the politicians’ misguided imposition of lockdowns. Raushan Gross looks in the other direction: what an opportunity to marvel at entrepreneurial adaptiveness at work in the economic recovery.
Free Download To download Raushan’s latest ebook, The Inspiring Life and Beneficial Impact of Entrepreneurs, visit E4EPod.com/Raushan.
Key Takeaways and Actionable Insights At the time of the introduction of any innovation, new product, new service, upgrade or improvement to a current offering — any change, in other words — there is uncertainty for both the customer and the entrepreneur. The customer does not know how to assess the value of the new offering, and the entrepreneur does not know if the customer will decide in favor of choosing the new offering. That’s a lot of complexity to deal with.
Uncertainty can’t be eliminated from business, and, for the entrepreneur, it’s an anxious state of mind when knowledge is absent. Happily, there are tools to help bolster confidence in facing knowledge absences. Mark Packard introduced several in our E4E podcast #73.
1) Use the most appropriate decision logic. All knowledge absences are not the same. There are some unknowns that are knowable — such as costs of goods or market size. And there are some unknowns that are unknowable — such as the future behavior of individuals making choices in a changing and competitive marketplace.
There is also a cost of obtaining more data or more knowledge to fill gaps even when they are fill-able. If the cost of knowledge is high, and the risk of loss from not having the knowledge is low, then it might not be worth pursuing additional knowledge.
There are two types of strategy available to the entrepreneur. There’s a choice between “predictive logic” in which the entrepreneur undergoes more cost to get better data to make a prediction about the future, or “adaptive logic” in which the entrepreneur decides to stick with the amount of information currently available and proceed anyway, being sure to be doing so only when risk of loss is limited, i.e. going with the gut but not betting the farm.
For example, a very high risk factor in an entrepreneurial judgment would be how much the production inputs will cost. But collecting that information is typically pretty low cost, and it may be easy enough to get a price guarantee. So, while predictively estimating total costs is ‘uncertain’ or unpredictable in a strict sense, an adaptive strategy in dealing with uncertain costs is not worth the trouble. A predictive strategy is probably better.
A counter example would be whether consumers would be more drawn to an orange logo or a red one. You can get that data, but it would cost a bit to do enough market research to get a definitive answer. But it’s such a low-risk factor that it’s probably better to just (predictively) pick one.
Mark has provided us with a decision logic tool (PDF): Mises.org/E4E_73_PDF_1
2) Information marketing. Customers choose goods and services for emotional reasons — their feelings about whether or not the new offering will improve their lives and give them satisfaction. But before they can make the emotional decision, they want to make sure they have all the functional information they need to even make the consideration. Will it work? Will it work for me?
Consequently, the customer’s uncertainty about how to choose varies with the amount of information they feel they have versus how much they need to make a decision.
The entrepreneur may believe that they have provided all the information possible or required. But customers don’t always absorb it, aren’t always paying attention, or can’t always remember it, or receive the information in the wrong context.
Wise entrepreneurs continuously monitor the target customer’s level of information. A simple who-what-how-why tool will suffice (and you can add when and where if they’re relevant to your market).
Who? — Is it for me? What — what benefit does it deliver? How — how does it work? Why? — Why should I believe the claims.
Make sure customers can answer these functional questions before working on their emotional acceptance.
Here’s Mark’s checklist for Information Marketing (PDF): Mises.org/E4E_73_PDF_2
3) Opportunity Cost Calculator Economics tells us that the cost of choice for a customer is opportunity cost — what does the customer give up by choosing in favor of the new offering? Opportunity cost calculation may not always be a conscious process for customers (although sometimes it is, such as in comparison shopping for a new car), but it is always an active one.
The entrepreneur should therefore calculate the opportunity cost that’s in the customer’s mind. What alternatives are they considering? How dissatisfied are they with alternatives? How do they feel about the capability of the new offering to resolve their dissatisfaction? How do they relate that to price and exchange value? What adjustments can entrepreneurs make to change the calculation in their favor?
Every customer’s calculation is different, so the entrepreneur should collect the data from individuals rather than in survey data. We provide a calculating mechanism you can use: Mises.org/E4E_73_PDF_3
The Value Learning Process This is the final installment in Mark Packard’s value-dominant marketing series on the Value Learning Process. Check out previous episodes and the tools Mark provided to complete the picture of the value cycle and how to manage it.
44 Value Learning Process: Introduction and Overview with Process Map: Mises.org/E4E_44
55 High-Knowledge Customer Tool and Mindfulness Tool: Mises.org/E4E_55
62 City-of-From, City-of-To Tool: Mises.org/E4E_62
69 The Two Kinds of Knowledge Entrepreneurs Must Have, and How to Compound Them: Mises.org/E4E_69
Additional Resources "Dr. Mark Packard's Decision Logic Model" (PDF): Mises.org/E4E_73_PDF_1
"Information Marketing To Target Customers For New Products" (PDF): Mises.org/E4E_73_PDF_2
"Customer Opportunity Cost Calculator" (PDF): Mises.org/E4E_73_PDF_3
Key Takeaways And Actionable Insights For entrepreneurs, the future is not risky, it’s uncertain.
Risk is a calculable mathematical probability, like the result of 1000 tosses of a (fair) coin, or the likelihood of you being involved in a car accident in 40 years of driving on US interstate highways.
The outcomes of entrepreneurial decision making are not calculable. They can’t be computed. Yet entrepreneurs need to make decisions, without having all the facts in hand today, and without knowing the odds of the future results. That’s uncertainty.
Therefore they exercise judgment. Judgment is action. It’s business practice.
Judgment is not guessing, or speculating, or hoping. Judgment is action. Specifically, judgment is taking ownership of property and resources, combining and recombining them in different ways, and using them to make a product or service to offer to the market.
Judgment also incorporates spirit: the imagination, energy, creativity and bravery that entrepreneurs apply when they act. Judgment is human action.
And judgment is continuous. Entrepreneurs are called upon every minute of every day to make decisions of judgment.
Judgment quickly becomes team action.
As firms grow, the founder can’t be the sole exerciser of judgment, or the only one making commitments or acting creatively and imaginatively. In larger, more complex, multi-divisional forms, there are many executives, managers and employees who will be called upon to make judgments. And they will be well-qualified to do so, since they have special skills and tacit knowledge that the rest of the firm, including the founder, do not have.
In fact the founders or owners (or Board Of Directors) actively seek the judgment of the whole firm, in order to achieve the highest level of business success. Often, they make sure that everyone in the firm has enough “skin in the game” (in the form of incentives, commissions and supplemental compensation) to motivate them to give their best judgment.
How does judgment apply in complex organizations?
The firm develops a mix of original judgment and derived judgment (see Mises.org/E4E_72_PDF).
Derived judgment is Peter Klein’s term for the delegating of decision-making power and its distribution throughout the firm. Original judgment — the ultimate decision-making power — rests with the entrepreneur-founder, or may reside with a Board Of Directors or an appointed CEO. Derived judgment is granted to others throughout the firm who have special knowledge and skills to act creatively and imaginatively on the specific uncertainty they face in their positions.
The skill of original judgment is selecting the right people to exercise derived judgment, and designing the right combination of motivating incentives and appropriate controls.
What’s the best combination of incentives and control?
Austrian subjectivism and individualism, along with opportunity cost analysis, can point the way to the best mix of incentives and control.
Subjectivism tells us that there is no objective right answer to questions about which decision rights the owner should delegate to which employees under specific circumstances. The answer to those questions depends on the particular circumstances of the venture, its technology, its market, its business environment, the characteristics of the employees and the characteristics of the owner.
Individualism tells us that there are no generalizations about people — each one has different knowledge and skills and characteristics like reliability or trustworthiness, as well as creativity and imagination. The entrepreneur must judge each one individually, and match them as well as possible to specific circumstances.
Opportunity cost analysis tells us to always weigh the potential upsides and potential downsides of each choice and each appointment of an individual to a position in which they can exercise derived judgment. Exercise judgment about judgment.
Consequently there are four considerations:
Be as sure as you can to choose the individual with the most (and most relevant) tacit knowledge for the area in which they are going to exercise derived judgment.Choose the individual who adds the greatest amount of experience as possible to the relevant knowledge.Make sure the derived judgment of managers and employees is guided by a well-articulated mission (why we do what we do) and business model (how we do what we do). Pay attention to how well these are understood and shared.Balance knowledge and experience against the potential for abuse (misjudgment) and the potential cost of that abuse should it occur. Don’t risk “destructive entrepreneurship”. There are no “bossless” organizations.
Peter Klein points out that even in the flattest of organizational designs (think Wikipedia, Zappos, Spotify, or W.L. Gore) there is always some kind of governance, either of rules or of hierarchical authority, to limit the risk from derived judgment gone awry.
Don’t design an organization with an excessive amount of derived judgment relative to the controls that are in place.
How good are you at original judgment and at delegating derived judgment?
Entrepreneurship in action is real people in real-life situations. It’s not theory. Some are going to be better than others, as indicated by results and outcomes.
It will be useful for you — although not definitive — to self-assess your entrepreneurial judgment and how you delegate it. Gallup’s Builder self-assessment promises to help you build a thriving company and a winning team. Personality assessments like the Big 5 are less specifically tailored to entrepreneurial judgment but can nonetheless shed some light on personality traits that are applicable in entrepreneurship, whether in a small business, a growth firm or a corporate structure.
Additional Resources "Uncertainty and Entrepreneurship" (PDF): Mises.org/E4E_72_PDF
Read Peter Klein's paper (with Kirsten Foss and Nicolai J. Foss), "Original and Derived Judgment: An Entrepreneurial Theory of Economic Organization" (PDF): Mises.org/E4E_72_Paper
Organizing Entrepreneurial Judgment: A New Approach to the Firm by Peter Klein and Nicolai Foss: Mises.org/E4E_72_Book
Key Takeaways And Actionable Insights Negotiation skills are vital to your business.
How well you negotiate will directly affect your cash flows, your costs, your margins, your scale, your financing and your resource allocation. It will indirectly affect your brand reputation, your organizational designs and your delegated management capabilities based on the employment contracts you negotiate.
Negotiation can be taught and learned.
As with everything in business, knowledge absence renders your outcome more uncertain. If your knowledge of the appropriate skills is lacking, you might experience disappointing results when negotiating with customers, suppliers, partners, employees and others in your ecosystem. If your role includes negotiating, allocate some time to skill development.
Negotiation is a process — best results come from knowing how to do the right things in the right order. For example, taking time to establish shared trust at the outset is better than having to recover lost trust later in the process. Think through the process from beginning to end — including what could go wrong or what unexpected difficulties might arise — so that you are never thrown off-track. When you know the correct next step to advance negotiations, you’ll be prepared in advance for that step and be ready with the appropriate action.
Negotiation is responsive to many Austrian principles.
Individualism: Austrian economics helps us think about the individual with whom we are negotiating, rather than the organization he or she represents. Every individual in every negotiation has unique identity, unique needs, a unique set of preferences and a unique context. Understanding individualism helps build trust and rapport.
Empathy: We are trained in Austrian economics to go inside the mind of the customer, in our imagination, in order to empathically understand their dissatisfactions and unmet needs. The same is true when working with a negotiator on the other side of the desk from us. Empathy helps us understand their goals and motivations, and to potentially create some subjective value from that knowledge. And it helps us think about the best tone and language.
Roundaboutness: Your actions early in the negotiation process will emerge as consequences later. If you pitch an absurdly high price at the beginning of a negotiation, thinking it will give you flexibility to lower it later, you’ll lose the trust of the other party and make negotiating harder. Small positive signals at the beginning can become major negotiating advantages later.
Entrepreneurial mindset: An entrepreneur thinks in terms of solving a problem — or relieving a dissatisfaction — for others. The market rewards creative solutions. Negotiation is an entrepreneurial undertaking — think about how to solve the other party’s problem.
Understanding value and communicating value are critical success factors.
Austrians have the best understanding of value. This is a huge advantage. At the outset, be sure to spend significant time communicating to the one with whom you’re negotiating the value of your offering. Value is not related to cost; it’s related to the experience your customer / partner / supplier is going to have as a result of collaborating or contracting with you. Be sure your counterparty can properly assess the subjective value you are going to create for them. If they anticipate the same value that you propose, then negotiation will not be a barrier to an exchange.
You can establish a negotiation culture.
Some companies — especially a small one negotiating with a large one (and especially with the procurement department!) — fall into the trap of feeling overwhelmed or under-qualified. Confidence in both content and process is important for success in negotiation. You can develop a negotiation culture of confidence via training, practice and preparation.
Negotiation is a universally applicable skill.
Mastery of the negotiation process is a life skill as well as a business skill. You’ll feel confident about establishing and managing relationships between your company and its customers, as well as with people you contract to provide services at your home, and in any kind of association or organization. You might find yourself negotiating with your spouse. Use your skills!
Negotiators are happy people.
Sanjay’s sign-off advice: negotiators are happy people. They know the value they are offering, they know how to get the appropriate rewards for their value, they are comfortable and confident with the process of negotiated value exchange, and they know how to resolve conflicts.
Additional Resources "Negotiation" (PDF): Mises.org/E4E_71_PDF
Discover negotiation readiness: PurpleSkyPartnership.com
Key Takeaways And Actionable Insights How do creative entrepreneurs design and build new businesses, new products and new services that grow and succeed? You’ll make a big difference for your own venture if you follow Per Bylund’s advice to Think Better, and Think Austrian. One step in the right direction is to clear your head of thoughts about competitors to fight, markets to invade, beachheads to take, or moats to construct around your business and your brand.
The alternative way of thinking is to envision your business enterprise, your brand or your offering as an island of specialization. What you create, launch, build, grow and sustain is something that is so special that your customers experience a deep and rich feeling of value that they can’t possibly get anywhere else. For your customers, it provides the business equivalent of a visit to (and eventually permanent residence in) a comfortable, amenity-laden resort on a beautiful tropical island, where the staff recognizes and caters to their every wish. There’s nothing else like it.
How can you create one? There are four principles that successful entrepreneurs follow to build their island.
Aim To Please. That’s not the kind of advice you’ll find in business school or textbooks. Yet it captures the core of our Austrian approach to business. The customer is the reason for you to be in business. Aiming to please them is the right way to think about strategy. Aiming to please is a process of observing, listening, studying and empathically sensing what will please customers the most. You aim to understand their ecosystem and their logic, their hopes and their dreams. Your offering is the way you indicate to them that you can fit in to their ecosystem and contribute to their goals. Your business model is the way you arrange your activities to please customers once you’ve fully understood their preferences and desires. Competition, cost, resources and other considerations are secondary.
Don’t copy — move beyond. Military business metaphors depict competition as conducting wars over business territory, or fighting for customer attention. In Per’s Austrian way of thinking, there is no new value for customers when a firm merely copies what is already offered by others. There’s no point — no value — in fighting over market spaces. Value emerges from what’s new and better and different. Smart entrepreneurial island builders assess the current landscape, predict where the customer will be in the future, and navigate to that place to build a new island.
Build from strength. Entrepreneurs distinguish what is unique about themselves, their partners and employees, their processes, their brand and their resources that can be of benefit to customers. Much of the uniqueness is subjective — the owners’ or the business’s identity, their unique knowledge and expertise, their relationships and interconnections that can co-ordinate the assembly of specific solutions. It’s not about arraying more destroyers on the battle lines than the opponent; it’s arraying a set of uniquely desirable and attractive brand features and attributes that are attractive to the customer.
Maximize value not output. The island builder keeps on building. Not for scale or market share or maximizing output. The direction of growth is to maximize value. Value is a feeling of satisfaction in the customer’s mind. Maximization, in this view, refers to higher levels of satisfaction, over a wider range of experiences, for more customers on more occasions. Maximization is not a quantitative or mathematical concept, to be compared with rivals to ascertain who is “winning”. It’s a qualitative concept — what quality of value has been experienced, and how can it be improved.
The four guiding principles — aim to please, in unique ways, based on your own identity and strengths, always thinking about the value that’s experienced by customers — lead to beautiful businesses. If you are developing visual island imagery in your mind’s eye as you read this, think of a balmy climate, vibrant flowers and trees, bubbling streams and distinctive animals and birds. Let your imagination run free in conjuring up beauty — that’s what entrepreneurs do as the start, grow and sustain their businesses.
Additional Resources "How Entrepreneurs Build Islands of Specialization" (PDF): Mises.org/E4E_70_PDF
For a full-length essay by Per Bylund ("Make Your Startup an Island"), download our latest free e-book, Austrian Economics in Contemporary Business Applications: (PDF): Mises.org/E4B_eBook
For a shorter essay, see Per’s Entrepreneur.com article, "Forget the Moat and Make Your Startup a Tropical Island": Mises.org/E4E_70_Article
For a full exposition of the Austrian theory of the firm and the concept of islands of specialization, see The Problem of Production: A New Theory of The Firm: Mises.org/E4E_70_Book
Key Takeaways and Actionable Insights Innovation is one of the keys to business success. The world is changing at such a pace, and your customers’ preferences are changing so fast, that your business has to change at the same speed, or even faster. How to keep up is a part of the entrepreneurial challenge.
Mark Packard has a big insight about how entrepreneurs manage innovation. Producers don’t innovate. Customers do. That may sound a little odd, but Mark’s Value Learning Process makes it clear. Customers are always looking for new value. They’re always dissatisfied, seeking to make things better for themselves. They know what’s wrong or disappointing or less than perfect with their current experience. And they’re always looking for new solutions, better ways to do things, improved experiences. If you know how to interpret their behavior and their dissatisfactions, they’ll tell you what to do.
Then, as a producer, you need to figure out how to do what the customer wants.
Two kinds of knowledge and two kinds of thinking are essential. Entrepreneurs need to know about what customers want. Then they need the know-how to deliver the solution. Mark calls these two kinds of knowledge: Needs Knowledge and Technical Knowledge. They require two different mindsets.
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Download "The Two Kinds of Knowledge Entrepreneurs Must Have" (PDF) at Mises.org/E4E_69_PDF.
Mindset 1: Think like a customer. If customers are the ones who innovate, entrepreneurs must be able to think like customers. Really think like them. Be dissatisfied. Demand better. We call the required entrepreneurial skillset “empathy”. It’s sentiment mirroring – your brain and sensory system has to be able to mirror those of the customer. You must feel the same feelings they do. It can be done. Practice it.
A big part of the economy is consumers innovating for themselves. Think like they do. Make a list of what’s most important to you. These are innovation opportunities that you know more about than anyone else. Think about how you’d like to improve your experiences in these areas. What features can you not do without? Why? Think like a customer. Start with your own problem in order to immerse yourself in the problems others want to solve.
Mindset 2: Think like a producer. You love your customers. You want to please them. Develop the technical knowledge to do so. This doesn’t necessarily mean high technology. If you want them, for example, to enjoy a new kind of convenience grocery store with an organic food emphasis and lots of innovative food-to-go options, you need to know store operations, supply chain logistics, inventory management, and flexible / adaptive hiring practices. You need mastery of technical knowledge.
And while you don’t need to be a programmer, you do need knowledge of the latest technologies from a producer’s viewpoint: how do these technologies help you to deliver a better, faster, lower cost customer experience. Geeking out on these technologies is a good idea for producers.
Knowledge Compounding. Many innovative solutions come from combining two existing pieces of knowledge. Combining needs knowledge and technical knowledge can produce a new solution to the market. Mark also talks about combining active knowledge — what we know about that’s prominent in our mind — with semi-active knowledge — what we know about that we don’t use every day or is stored away deeper in our memory that’s hidden by our recency bias.
These and other knowledge combinations can generate big ideas. In fact, Curt Carlson in episode #37 told us that combining knowledge is not just additive, it’s multiplicative. Knowledge compounds when we combine it, leading to faster innovative progress. Utilizing Mark Packard’s knowledge combination techniques is the way to get there.
Additional Resource "The Two Kinds of Knowledge Entrepreneurs Must Have" (PDF): Mises.org/E4E_69_PDF
Key Takeaways and Actionable Insights What is Entrepreneurial Intelligence? For Steven Phelan, “It’s all about the spark” — the moment of inspiration in combining disparate elements together to develop a new solution. Humans draw on “the fringes of consciousness” to create new constructs.
Entrepreneurs also take risks, investing time, talent and treasure in their venture in hopes of gain, yet understanding that they could lose something of value to them in the endeavor.
How do we contrast Entrepreneurial Intelligence and Artificial Intelligence? First, we need to differentiate between the narrow and general forms of AI. Narrow AI is software that can solve problems in a single domain. For example, a Nest thermostat can raise the temperature or lower it in a room according to a pre-set rule. “If this, then that” is the general rule for this kind of intelligence. The parameters are designed by the programmers.
For the unstructured problems of life and business, a truly intelligent computer would have to figure out for itself what is important. Part of the problem is that understanding or predicting human motivations — as entrepreneurs do — requires a “theory of mind”, an understanding of what makes humans tick. Entrepreneurs need empathic accuracy — unavailable to AI — to anticipate the needs of consumers. A sentient computer would need self-awareness or consciousness to truly empathize with humans, and have a set of values with which to prioritize decisions.
What’s the role of machine learning? If you work in a business that generates a lot of data, it can be mined by data scientists for patterns, and those patterns might indicate a better way to respond to customer needs. The richest source of data is behavioral — like choosing songs to listen to on Pandora. Machine learning can detect a pattern of what kinds of sings a user chooses most. A human interpreter can translate those patterns into preferences — in other words, motivations are embedded in behavior and machine learning can help entrepreneurs extract them.
So, the entrepreneur’s best resource is entrepreneurial intelligence. The psychologist Howard Gardner helped us to recognize many types of intelligence, including math, language, spatial, musical and social. There are two types that might be indicative of entrepreneurial intelligence: EQ (Emotional intelligence) might be associated with intensified empathic skills and empathic accuracy; CQ (Curiosity Intelligence) is linked to the kind of creativity that finds solutions by combining elements on the “fringes of consciousness”, as Hubert Dreyfus puts it.
Can entrepreneurs and business owners assess their own entrepreneurial intelligence? There are scales to measure EQ and Creativity. Here’s a link to an entrepreneurial quotient assessment: Mises.org/E4E_68_QA
And here is a more action-oriented self-assessment we developed for E4E: Mises.org/E4E_68_SA
The bottom line: Entrepreneurs need knowledge of how to profitably satisfy customer preferences given the resources at hand. This is not a trivial requirement. It is not possible to pre-state all of the uses for a given resource nor to compute the payoff for a given application. Current computational methods are thwarted without a complete list of entrepreneurially valid moves and the payoffs from such moves. No amount of growth in processing power, data communication, or data storage, can solve this problem.
The late Steve Jobs is often held up as the epitome of a successful entrepreneur. His founding of Apple, ousting by his own board, and subsequent return to rescue the company, and then make it the most valuable publicly traded company in the world is the stuff of legend. One of the apparent secrets of his success was to understand that “people don’t know what they want until you show it to them. That’s why I never rely on market research. Our task is to read things that are not yet on the page.”
This ability to “read things that are not yet on the page” lies at the heart of the concept of empathic accuracy. Empathic accuracy is “the ability to accurately infer the specific content of other people’s thoughts and feelings”. Until AI can do this, Entrepreneurial Intelligence is a better tool for the innovating entrepreneur.
Additional Resources "Entrepreneurial Intelligence vs. Artificial Intelligence" (PDF): Mises.org/E4E_68_PDF
"Entrepreneurial judgment as empathic accuracy: a sequential decision-making approach to entrepreneurial action" by Jeffrey S. McMullen (PDF): Mises.org/E4E_68_Article
"Are you ready to be an entrepreneur?" (PDF): Mises.org/E4E_68_QA
"Entrepreneurial Self-Assessment" (PDF): Mises.org/E4E_68_SA
Every successful business is built on empathic understanding of customers’ preferences. As we know from the theories of Austrian economics, the preference scales of every individual are highly subjective, idiosyncratic, context-dependent, and highly changeable. How does an entrepreneur develop the appropriate level of understanding? Can this understanding be a source of business-building advantage?
We talked with Trini Amador, a returning guest and an in-demand global branding and marketing consultant who has developed an effective process for every entrepreneur to achieve a breakthrough level of insight into customer motivations.
Customers bond with businesses and brands they love and trust. The choices they make have their own internal logic. Entrepreneurs must develop insights into their motivations. Insights are the lifeblood of any brand- or business-owner, says Trini. Why do customers behave the way they do — especially in buying or not buying? Insights tell you. They become the difference between “just a business” and a brand that successfully delivers against the needs of their customers.
Insights are the entrepreneur’s understanding of customers’ motivations, values and attitudes. They’re the “Why” in why people act the way they do. Always emotional, always subjective. Entrepreneurs who understand “Why” can design stimulus or communication or innovation to motivate buying behavior.
There’s an insights generation process. It starts with identifying the people you wish to serve. Trini recommends a focus on your “core target” audience — not a general definition of who might buy, rather a highly specific profiling of your most likely and best prospects. Mark Packard, in episode #62, called them “high knowledge” customers. They know what they want, they know the category and they’re precise about what experience is satisfactory and what is not.
There is no shortage of data for you to utilize. Make sure you select the most important and useful data:
Attitudinal data: how your customer feels, especially if they are expressing dissatisfaction;
Behavioral data: behavior reveals preferences — “motivations are embedded in behaviors”.
The best sources of data are first hand observation and one-on-one conversation.
Organize your data in an insightful way. To avoid data overload (there’s so much of it to collect!) Trini suggested couple of organizational techniques.
One is visualization: build a visual profile of the customer with photos and notes indicating their hobbies, favorite brands, activities — visuals that depict their behavior and preferences.
A second is personalization: write a composite profile as if it were one individual and use it as a “one perfect customer” persona.
The objective is to change behaviors. Insight is the required key to unlock the possibility of doing so. Trini cited the example of his own wine brand from Sonoma County, California: Gracianna. For example, the objective may be to get people to visit the tasting room who have never visited before. That’s a behavior change.
Why do people behave the way they do? One inquiry tool is the 5 Why’s, which is a way to examine the sequential rungs on the individual’s means-ends ladder to identify their highest value, the motivation that is ultimately driving them. Trini used the example of why some people feel better about buying a Tesla than an alternative vehicle. Ultimately, they want to feel that they are better citizens of the planet. Trini entertainingly ascends the rungs of the ladder from “need a new car” and “get from A to B” to arrive at “the feeling of being a better citizen”.
Using these tools, we arrive at a deep understanding of why customers make the choices they make — that is, an insight.
The Insight feeds the Behavior Modification tool. The definitive “Why?” that emerges from the 5 Why’s inquiry becomes the current state in the behavior modification tool. This tool has two components:
Attitude Modification: behaviors are related to attitudes, and so to change an attitude can lead to a change in behavior. Attitude modification documents the FROM (the attitude we want to change) and the TO (the new attitude we want to encourage).
Key Marketing Platform: a marketing platform is a staging point for all initiatives aimed at achieving the desired attitude among target customers: communication, promotion, innovation, distribution, relationship.
Continuing the Tesla example, we want our prospective customer to feel that Tesla is the most progressive electric car that helps save the planet in the coolest, most prestigious ultra-premium way. If we can get them to feel that way, they’ll buy. The entrepreneur imagines the future behavior, and then acts through the marketing platform to cultivate that motivation.
How? Consider all resources that fall under the headings of communication, innovation, promotion, expanded distribution, and enhanced relationships. Experiment, experiment, experiment. Test, test, test. We’ll discuss the techniques in a future episode of Economics For Entrepreneurs.
Additional Resources "Insights Statement Template" (PDF): Mises.org/E4E_67_PDF_A
"Marketing Platform Tool": (PDF): Mises.org/E4E_67_PDF_B
One-Question Survey with Free Wine Giveaway: E4EPod.com/Question
Key Takeaways and Actionable Insights A growth business is what John Rossman, in episode #50, termed a flywheel. Using Amazon.com as an example, he gave us this simple image.
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The flywheel looks simple, but in reality it’s quite nuanced. Lower prices and a great customer experience will bring customers in, Bezos reasoned. High traffic will lead to higher sales numbers, which will draw in more third-party, commission-paying sellers. Each additional seller will allow Amazon to get more out of fixed costs like fulfillment centers and the servers needed to run the website. This greater efficiency will then enable it to lower prices further. More sellers will also lead to better selection. All of these effects will come full circle back to a better customer experience.
John Tamny sees the American entrepreneurial economy as a beautiful and productive flywheel (see Mises.orgE4E_66_PDF).
Why are Americans so entrepreneurially focused? We descend from “the crazies” — the other thinkers who came from around the world, dissatisfied with their lives, and willing to cross oceans and borders to get to a place that offers no security but offers freedom. They took the ultimate entrepreneurial leap. We got the nut cases. Steve Jobs, for example, was of Syrian descent. Could he have started Apple in Syria? No.
Entrepreneurs lead us to a better place. John’s definition of an entrepreneur is someone who has a vision that everyone else thinks is ridiculous, yet they follow it anyway. They have no time for the way things are done today. They want something different. And to win consumer acceptance, what’s different must also be better. So they quite literally lead us to a better place. Horse drawn carriages weren’t enough, so Henry Ford gave people something different. Everyone wanted Blackberry phones when Steve Jobs brought out the iPhone, and he quickly demonstrated its superiority. Every entrepreneurial act is speculation — there is never certainty that people are going to want the new product. That’s what is so important about entrepreneurs.
Entrepreneurs need to attract intrepid finance and intrepid financiers. Silicon Valley is littered with VC’s who turned down Facebook, and turned down Amazon. Founding entrepreneurs think differently and have a vision that is far out of the norm, and they need to be matched with financiers who can be strong supporters and collaborators on the path to a better place. Irrespective of whether it is from Wall Street or Sand Hill Road, or from visionary friends and family, it’s critically important that we figure out a way to get financing to brilliant people. Government restrictions on entrepreneurial activity are certainly barriers to growth, but so is failure of imagination on the part of capitalists.
Intrepid lending takes place far away from banks. Unspent wealth is the source, and the more unspent wealth one person has, the more risks they can take. We tend to complain about the antiquated and sclerotic banking system, but it has nothing to do with entrepreneurs and innovation. Banks make loans to entities they know will pay them back. Entrepreneurs fail 90% of the time. Banks want nothing to do with innovation.
Those with unspent wealth are the most crucial people in the economy when they match their unspent wealth with entrepreneurial talent and vision. The more unspent wealth they have – and the less the government takes away from them in taxes — the more intrepid they can be in investing it. When we tax away the wealth if the richest, we tax away the most important wealth of all — that which has the highest odds of being directed towards new ideas that, while they look promising, have high odds of failure.
More and more of us have the opportunity to become entrepreneurs, if we harness the flywheel of original ideas that attract intrepid capital. One of John’s many books, The End Of Work, describes how we are all now so enabled with interconnectivity to resources that we have the chance to make money by doing what we love. Our passion can become our job. If we are able to imagine a future place that is better — that improves the lives of individuals — we can create a growing business. The more of us who can do this, the more we grow the whole economy — which, after all, is made up of individuals. If we can also attract that intrepid capital that John refers to, growth becomes faster and higher.
Besides The End Of Work: Why Your Passion Can Become Your Job, John’s books include Popular Economics: What The Rolling Stones, Downton Abbey and LeBron James Can Teach You About Economics, and Who Needs The Fed: What Taylor Swift, Uber, and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank.
Additional Resource "John Tamny's Entrepreneurial Flywheel" (PDF): Mises.org/E4E_66_PDF
Key Takeaways and Actionable Insights When we talk about entrepreneurial alertness to opportunity, it can sound pretty vague. What exactly does that mean? How is alertness translated into profitable action?
This week’s guest, David Bienstock, provided us with a very precise example. He had just started his media buying services business when a phone call came in. Do you provide service in the category of political advertising? David’s answer was yes. There was no reason for it to be otherwise because there was no information at the time that would indicate any differences between media buying services in the political advertising category compared to the commercial advertising category.
He was able to transfer existing knowledge from his expertise in media buying and placement, and also develop more and more new knowledge. He thereby identified more and more ways in which political advertising was specialized — factors of timing, competitiveness, geography, pricing, regulation, and many more. David built his own island of specialization and became the foremost expert in a burgeoning field.
What can we learn from following David’s entrepreneurial journey?
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1) The alertness we talk about that entrepreneurs display to opportunities can be triggered by the smallest piece of data. For David, it was one phone call. His instantaneously positive and open response led to a long and successful journey.
2) Wherever there is business expenditure there is an opportunity for an entrepreneurial business service. The business we discussed in episode #65 is campaigning — political, public affairs, ballot measures. How much is spent on campaigns? A lot. There’s the opportunity.
3) The best entrepreneurial businesses are often the ones that clients put you into. David’s inbound phone call was a new client stating an unmet need. That’s all the invitation the alert entrepreneur requires.
4) Opportunities, once seized, expand. David has expanded his original business by adding many related services for current clients to utilize, including multi-channel media, market research and analytics. In addition, he has added multiple new businesses in related spaces. He’s been creative, he’s taken action, he’s been constantly looking for new opportunities that are complementary to the first one that he spotted. However small the start, the next steps will quickly become apparent to the entrepreneur who is not only alert to opportunity but also to expansion and growth.
Additional Resource "David Bienstock’s Logic of Customer-Led Growth" (PDF): Mises.org/E4E_65_PDF
Although many claim "nobody saw this coming," some entrepreneurs planned ahead and also have found ways to cater to customers under new conditions.
This Audio Mises Wire is generously sponsored by Christopher Condon. Narrated by Millian Quinteros.
Original Article: "Some Insightful Entrepreneurs Planned for a Pandemic"
Key Takeaways and Actionable Insights Follow the guidance of the Austrian Business Model. The entrepreneurial business model is built on a set of important economic principles. Wandering away from the entrepreneurial pathway can lead to errors that Per Bylund christened UN-trepreneurship.
Focus on serving consumers and customers. The purpose of a business is to create and keep a customer. It’s a demanding task, because customer needs are continuously evolving and changing, and competing entrepreneurs are vying for their dollars. It is critical to maintain intense focus on service to customers.
There is a lot of distracting entrepreneurial advice. You might encounter instructions to “identify and exploit market gaps” or to “seize opportunities”, for example. But there are no such things as gaps to fill or opportunities to grab. The language makes it sound like these are objective phenomena, unmasked by analytics. They’re not. The right strategic platform for entrepreneurs is to focus on serving customers by identifying their preferences and meeting them.
Every hour you spend, every strategic thought you develop, should be focused on the customer.
Productivity lies in returns on customer satisfaction. You’ll hear a lot of talk of generating returns, especially on funds invested by lenders or VCs. These returns are emergent outcomes of other activities. Even profit is an indirect outcome more than it is a goal.
Ludwig von Mises wrote in Human Action that the task of the entrepreneur is to use capital “to the best possible satisfaction of consumers”. Anything else “hurts people’s well-being”. Customer sovereignty, in the language of economics, means that the customer decides, by buying or not buying, what will be the return to the entrepreneur on their investments of time, effort and money. Productivity results from the most efficient assembly and combination of resources to produce customer satisfaction.
Sometimes, business literature and business practice can deviate from this standard. Often, for example, the pursuit of “scaling” — making a firm big, in numbers of employees, say, or number of transactions, as fast as possible — can divert resources from serving customers to serving the needs of infrastructure growth and bureaucracy. Customer satisfaction should be the only focus.
Understand subjective value. The economic concept of value is challenging to master for entrepreneurs. Value is an experience in the customer’s mind. We’ve also identified that it’s a process — a learning process customers initiate and actively conduct to make a decision as to whether an offering has potential value (“I might like it”), relative value (“I think I might feel better about buying X versus Y”), exchange value (“I am willing to pay Z dollars at this point in time to acquire X”), experience value (“my satisfaction was more / less / the same as I expected”) and assessed value (“looking back on it, my value experience was worthwhile and worth repeating unless something with more potential value is offered to me”). All through this cycle, the customer is active in the marketplace, learning about alternative offers, changing their consumption preferences, interacting with other people with different experiences and preferences that might be influential, receiving advertising messages, and generally rearranging their personal value recipe.
It's a challenge to understand and a challenge to keep up. An entrepreneur’s understanding of subjective value is a critical business success component. Importantly, the business school concept of “creating value” can be unhelpful. Value is created by the customer. The role of the entrepreneur is to understand how to fit in to the customer’s life and contribute to it, making possible (“facilitating”) the mental experience we call value.
View pricing as a discovery process, not as an expression of market power. Another challenge of the economic way of thinking to conventional business writing is the understanding of prices. Prices are emergent market signals, ultimately determined by the consumer’s willingness to pay. Prices can’t be “set” by the entrepreneur. There is no “pricing power”. Margins can not be calculated by determining the price you want to sell at and then subtracting the costs you have imposed on yourself.
Entrepreneurs discover prices — the market reveals them. Attempts to use pricing as leverage to grow market share irrespective of costs and profits are doomed to failure if it is later discovered that customers become conditioned to the artificially low prices and resist returning to a higher price.
Follow the entrepreneurial ethic. Per Bylund has emphasized that there is an entrepreneurial ethic that applies. Entrepreneurship is the service of meeting customer needs. Profit emerges as a result of successfully accomplishing this task. Profit is necessary to maintain the service, but it’s not necessarily the primary goal. In some ways, entrepreneurship is a calling. There are social and emotional benefits for taking on the role of the entrepreneur — we can classify them as psychic profit. There is purpose and meaning in the entrepreneurial life.
This should not be confused with the misguided economics of so-called social entrepreneurship or impact entrepreneurship: attempting to rearrange and redistribute resources in society through the active application of the entrepreneur’s personal preferences. Only the customer’s preferences in the marketplace can direct the best allocation of resources. The entrepreneurial ethic is to follow and serve.
Additional Resource "Avoiding The Errors of UN-trepreneurship" (PDF): Mises.org/E4E_64_PDF
Key Takeaways and Actionable Insights Consider these findings from a 2017 report from the G20 Global Partnership For Financial Inclusion, titled Alternative Data: Transforming SME Finance.
Access to financing remains one of the most significant constraints for the survival, growth, and productivity of micro, small and medium enterprises (SME’s).
Digital SME finance, using alternative data, offers an extraordinary opportunity for addressing…this problem.
The world’s stock of digital data will double every two years through 2020. Every time SME’s and their customers use cloud-based services, conduct banking transactions, make or accept digital payments, browse the internet, use their mobile phones, engage in social media, buy or sell electronically, ship packages, or manage their receivables, payables and record-keeping online, they create digital footprints. This real-time and verified data can be mined to determine both capacity and willingness to pay loans.
A rapidly growing crop of technology-focused SME lenders are putting the use of SME digital data, customer needs and advanced analytics at the center of their business models, setting forth new blueprints for disrupting the SME lending status quo.
The report refers to 800+ innovative digital SME lenders. Colloquially, we can refer to them as FinTech.
Dusty Wunderlich, a subject matter expert and seasoned investor in the FinTech field, discusses this lending landscape.
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Download the full PDF graphic at Mises.org/E4E_63_PDF.
Entrepreneurs need capital in the present to deliver goods and services to consumers and customers in the future. Entrepreneurs take scarce resources and apply them to what they believe the consumer will want at a future date. In order to do that entrepreneurs need capital in the present so they can deliver on those goods and services to the consumer in the future in the hope that their forecasting is correct.
That’s why entrepreneurs need to understand capital financing and modern day capital markets. Access to capital has historically been difficult and expensive. Today, it’s becoming easier and less expensive, aided by the digital data revolution referred to in the report quoted above. It’s important for entrepreneurs to be familiar with the new field of FinTech and how to navigate it.
Dusty Wunderlich suggests that entrepreneurs map out the financing alternatives on the axes of their own business stage versus the cost of capital. Cost of capital refers not just to interest rates and fees, but to the requirements that lenders can impose on entrepreneurial borrowers. At the very earliest stages, “friends and family” lenders, angel investors and seed stage venture funds will all require equity stakes, and ratchet up those stakes via deferred interest and debt-to-equity conversion requirements. These early investors perceive themselves as taking a high amount of risk, and the start-up entrepreneur typically has little or no collateral or leverage in negotiation. The best negotiation stance is to generate competition among investors with the quality of the customer value proposition and the business plan and revenue model.
Fintech financing is now available at the earliest of entrepreneurial growth stages. Today, from the very outset of the business journey, start-ups and small businesses can access a range of financing types – debt, convertible notes, equity and SAFE’s (Simple Agreement For Future Equity) - via crowdfunding platforms like nextseed and others like it. Marketing your business to investors on platforms like these taps into your existing skills in marketing and social media, and doesn’t require you develop capabilities in pitching your business that you might not have mastered.
As you advance along the growth curve, FinTech options expand and may offer you the best-priced capital on the market. As a result of the expansion of FinTech based on alternative digital data sources, the potential for connecting your particular business to a well-matched and well-priced source of capital is greater and more precise than ever. Dusty cited a couple of examples like Kabbage (where, incidentally, entrepreneurs can currently get help with PPP loans). There are several more. Because of the competition in the FinTech market and the quality of the information they utilize, capital from these lenders is well-priced – probably approaching Mises’ originary rate of interest, Dusty observes, in a testimony to Austrian free market principles.
It is when your business represents the least risk to lenders that big banks offer their high-requirements business loans. At a later stage of your business journey, banks will lend money against collateral and will impose additional onerous requirements and loan covenants. The entrepreneurial embrace of uncertainty is not for them! Bank financing is at the top when it comes to cost of capital and is to be approached cautiously. It is with bank financing that entrepreneurs become entangled with the negative effects of Federal Reserve repression of interest rates, that can mislead them into making incorrect investment decisions.
The cost of bank financing for mature companies revolves more around terms and covenants than interest rate percentage points. Banks are transactional, whereas entrepreneurs are operationally minded. This can cause a lot of friction if covenants, terms and triggers are not properly set. Entrepreneurs must pay attention to every detail in the loan contract. Great businesses can be ruined because of draconian covenants and triggers banks put into their loan contracts.
Indicated action: Entrepreneurs will be well-rewarded for fully investigating and understanding the emerging world of FinTech and digital SME finance. Be sure to calculate the full cost of capital – not just interest rates – and weigh all options.
Additional Resource "Financial Capital Options For Businesses At All Stages" (PDF): Mises.org/E4E_63_PDF
Key Takeaways and Actionable Insights Innovation and marketing are the two most important functions of entrepreneurial business: bringing innovative new goods and services to market, and convincing customers of their value. On the E4E podcast, we are providing a detailed exposition of Professor Mark Packard’s deep analysis of exactly how customers arrive at, and act upon, their assessment of value. Mark’s insights provide entrepreneurs with a powerful tool to fine tune value propositions for maximum marketplace results.
Value is a process. Value is a feeling that the consumer experiences. To arrive at that experience, consumers actually follow a process — a learning process. This process is actively conducted by the customer — it’s conscious, subjective, sequential, and continuously fine-tuned. There are 5 process steps:
Predicted value (what will the experience be like?)Relative value (comparing that predicted value to existing solutions)Exchange value (putting a price on willingness to pay for the solution)Experienced value (what was it actually like?)Value assessment (comparing experienced value to predicted value). In other words, it’s a cycle.
The first overview of the cycle was presented in E4E episode #44. Next, in Episode #55, Mark provided two tools for entrepreneurs to manage the process: the High Knowledge Customer Tool and the Mindfulness Tool. The first one ensure entrepreneurs talk to the right customers to gather knowledge, and the second helps them focus on the right things.
In the current episode, Mark helps entrepreneurs to identify and gather the right data for the management of the Value Learning Process.
Value Ethnography Ethnography can sound a bit like it’s the activity of explorers in safari suits. But it’s actually the most modern data collection method for the new digital economy. The term is used to describe the process of embedding oneself in the situation that is being studied — in this case, the actions the customer is taking, and the decisions and choices they are making, regarding your value proposition and your business. Why do they do what they do? Why do they choose how they choose? Can they even explain it to themselves? In many cases, the answer is no. Ethnography doesn’t attempt to ask for an explanation or accept the one that’s given. Ethnography observes — it’s a journal record of behavior. And today, ethnography can be conducted via video and clickstreams as well as physical presence. The data streams are rich and deep.
Mark’s lesson to entrepreneurs is to be constantly observant, to watch and monitor what customers do, how they act, what they choose. At every step, ask them why they did what they did. But they might not be able to explain. Some actions may be made without too much thinking. Some may be habit. But, Mark explains, “The reasons are embedded in the behavior.” The reasons people do the things that they do and make the choices they make are embedded in the behavior itself and the observant entrepreneur is able to dig out those embedded reasons.
Therefore, there’s a next step after ethnographic observation: interpretation. And Mark offers us another tool to help us.
City Of From / City Of To Customers are engaged in a continuing journey. Where they start from is their current experience. Call this starting point “the City of From”. And they are always dissatisfied, always seeking something better, aiming at some improvement in their experience. Call this new experience “the City of To”, the destination they want to reach.
The tool Mark calls “City of From / City of To” maps the customer’s journey. To understand where they are now, the entrepreneur as observer collects data or deduces findings about the customer’s current place — current experience - and their reason for being there. Then the entrepreneur as analyst projects the customer’s desired future experience in the City Of To. Why would they move there? Why do they like it better? What was wrong with the City of From and how is it fixed in the City of To?
Download the CITY OF FROM / CITY OF TO Toolkit at Mises.org/E4E_62_PDF.
CITY OF FROMCITY OF TOAttractionWhy am I here?Why did I move?DoubtsWhat am I unsure about here?How are my doubts overcome?What ChangesWhy is this better than before?What will be even better in the future?DissatisfactionsWhat is missing here?What is better here?Motivations to changeWhy should I move?Why did I move?What would I say?The case for moving.The justification for having moved. Empathy and The Customer Knowledge Generation framework. The core skill for entrepreneurs in the analysis of the customer’s experience in the value learning process is empathy — being able to feel what they feel. In fact, as Mark points out, that’s literally impossible. You can’t feel another’s feelings. But the brain is capable of amazing feats of imagination and projection — what Mark calls counterfactuals. You can imagine what another person feels and project that feeling onto your own experience so it’s as if you are experiencing it yourself. You create a mental model in your own mind of the feelings in theirs. It’s a skill you can practice and one that is crucial to unraveling the customer’s value learning experience — to experience it the way they do.
Mark provided a framework that helps you with sharpening your empathic diagnosis capability: Customer Knowledge Generation. There are 5 components, which are actually 5 pitfalls to avoid:
Talk to the right customer — “high knowledge” customers who can truly help you understand value experiences that are most relevant to your business success. We discussed these high knowledge customers and how to identify them in episode #55.Make sure these customers are intrinsically motivated to share the right information. Don’t pay them to participate in your ethnography, but make sure they know there’s something in it for them - a better experience in their future.Assess your own motivation to learn — you must be sincerely committed to the learning process. Don’t “just ask”. Don’t just go through the motions.Be conscious of and actively seek to identify distortions in the information you are receiving from the customer — misstatements, inexact vocabulary, information loss, inattentiveness, looseness in communication. Interpret with rigor.Be aware of your mental model — the experience that you are imagining the customer is having — at all times to make sure it remains congruent, and that the information you are receiving is important and fits the model. Next: changing the customer’s mental model. If you practice ethnography and Customer Knowledge Generation, you’ll allocate a lot of time and effort to construct a model in your own mind of what the customer is experiencing in theirs. The next step is to flip the switch. You are going to adjust their mental model. You want them to consider your value proposition. That’s new for them. They don’t yet have a model of what it feels like to choose your service, or what it might feel like to experience it in the future. They haven’t formed a picture of relative value versus other options. You must provide them with that new model. We’ll talk about that in the next episode with Mark.
Additional Resources “City of From — City of To” Knowledge Graphic (PDF): Mises.org/E4E_62_PDF
Key Takeaways And Actionable Insights Austrians maintain an active focus on business ethics. Why? It’s simple self-interest. As entrepreneurs, we want to succeed; individuals can’t do it alone, we need to co-operate with other people. In continuing transactions and exchanges between two parties, each side must benefit, otherwise one side will not be open to further transactions in the future, and will terminate the relationship.
Ethical entrepreneurs focus on the long term for their entire business ecosystem. That’s why Henry Hazlitt (in The Foundations Of Morality) emphasized morality as simply a focus on the long term: what he called The Long-Run Principle. Entrepreneurship always maintains a focus on the long term (i.e., beyond individual one-time transactions), and good business ethics is simply good business sense in this perspective. Transactions that are mutually beneficial are ethical.
Yousif Almoayyed extends this perspective to the entire business ecosystem: customers, employees, vendors and suppliers, and the community in which a business operates.
Good ethics generate sound business relationships. As we have emphasized many times, business and brands make a promise to their customers. Those customers must have faith that the promise will be kept. Otherwise there will be repercussions such as termination of contracts, and loss of faith in the future relationship. Customers place more trust in a company that demonstrates a higher level of ethics. They’ll pay more and seek to extend their relationship. Banks will extend better terms.
Unethical behavior destroys trust and co-operation and has a very high cost. As Stephen Phelan pointed out in Episode #56, relationships built on trust operate faster with less friction. Trusting partners co-operate better. Information flows unimpeded. Losing these advantages is highly damaging.
Your good business ethics are important to the individual development, personal commitment and productivity of your employees. The company that is ethical will be able to develop the potential of its employees to a higher level. Ethical entrepreneurs give their employees freedom to take initiative, within the norms and cultural guidelines that emerge naturally from collaborative attitudes.
The tactics of implementation can vary by level and role. Front line workers are paid for their production; managers are paid to enhance the productivity of those they manage. Incentives are aligned via wages and salaries and profit sharing so that every employee is looking out for the best interests of the company. When they are, employees think beyond their immediate task; when they do so they are thinking at a higher level. An ethical firm develops employees’ sense of the bigger picture and finding their highest and best role; employees know they’ll be rewarded for doing so.
It’s not appropriate to try to incentivize employees by paying them above market rates. It’s the wrong incentive. They will become defensive and self-protecting; they’ll avoid hiring people to work in their department who might prove to be smarter and more productive, because they become fearful of protecting their over-compensation, knowing they can’t reproduce it elsewhere in the market. Ethics gets compensation right.
Does your firm prize clever, capable people? Does management keep their promises to help employees develop and flourish?
Ethics are fundamental to a business’s relationship with its community. This comes up often in the context of environmentalism. But ethical business is not the powerless victim of activists. Ethical business is honest and truthful about the costs and benefits of specific business activities – and there are always both when viewed from a community perspective — and weighs them carefully in the balance of long term perspective. There is an ethical logic to the market — if business manages resources well and for the net benefit of all, it will be awarded with more resources to manage.
You don’t need to be a trained ethicist. Just ask yourself some simple questions about any firm. Whether you are an employee, a manager, an owner, a shareholder or a stakeholder, you can ask these questions to ascertain the ethical nature of any firm — including your own.
Additional Resources "How to Evaluate the Ethical Norms of a Firm" (PDF): Mises.org/E4E_61_PDF
Join the discussion on the Mises for Business LinkedIn Page: Mises.org/M4BLinkedIn
Key Takeaways And Actionable Insights In episode 60, we are joined by Rory Sutherland, Vice Chairman of Ogilvy, one of the world’s largest advertising and marketing agencies, one with a long tradition of customer insights.
His latest book is titled Alchemy, which explores how a deep understanding of subjective value can lead to outstandingly effective creative marketing. But he doesn’t use the term subjective value — instead, he calls it psycho-logic. One of the key planks in Rory’s argument in favor of psycho-logic is that it deliberately follows the path of Austrian economics, and rejects the mainstream economists’ unrealistic assumptions about the quantified logic and cold, rational calculation of homo economicus. Please listen to the podcast, in which Rory as a raconteur delivers great fun and entertainment as well as helping entrepreneurs to think more incisively about customer motivations.
There is a “black box” in the human mind between objective reality and behavioral choices. The “black box” is subjective value. According to Rory, only Austrian economists understand that when entrepreneurs change the way a product or service is described or change the form of attention, they are able to synthesize new value by making customers think differently about any offering.
He offers many examples. One is the way we consume technology. Mainstream economists view technology through the reductionist lens of efficiency: it replaces human agency and reduces work. Austrians — and advertising agencies — view technology through the humanistic lens of augmentation: it makes us better, gives us alternatives and improves our satisfaction. Changing the form of attention changes perceived value.
Another, even more human, example is about our perception of waiting. If waiting (e.g. in a hospital waiting room) is viewed as delay, it is frustrating. If it is viewed as special treatment (e.g., “We want to assign you exactly the right specialist, so please step into our special waiting room until the doctor is available”) it may be valued as privileged attention.
The shallow kind of quantified logical explanation mainstream economics gives to customer choices completely freezes out the question of subjective perception and emotion. Austrian economics offers entrepreneurs a significant advantage in a better way to think about the mind of the customer — the “black box”.
Psycho-logic elevates the subjective value of meaning over objective reality. One of Rory’s insights is that “How we behave and how we feel is much more a product of meaning than it is of objective circumstance. Our behavior is mostly driven by emotions, and our emotions are mostly driven by meaning rather than objective information.”
One of the consequences is the endorsement of the Austrian method: to observe behavior and work backwards to deduce the emotions and the subjective meaning and individually-specific contextual perceptions that drive behavior.
You can’t rely on market research because a large part of the reason customers might give for their behavior is post-rationalization. Rory says that customers change their behaviors for emotional reasons, and rationalize them with logic later.
The Austrian method of individual analysis is gloriously scalable for entrepreneurs as a result of its fractal characteristics.
The behavioral science of searching for individual motivations in the emotions of subjective value might appear to be un-scalable. But the opposite is true, says Rory. “It’s gloriously scalable. It’s kind of fractal.”
In this context, fractal refers to the existence of similar patterns recurring at smaller scales that can be infinitely self-similar and iterative in processes and over time. Fractal describes what otherwise appear to be partly random or chaotic phenomena — like the spontaneous order that Austrians discern in economic systems.
For entrepreneurs, says Rory, it is possible to learn lessons from the psycho-logical analysis of one customer that can be applied to many more. You can learn something in one business sector and apply it to another, or learn something in a huge organization and apply it to something tiny.
Context is important to customer choice because perception tends to be comparative versus absolute.
Rory is a student of evolutionary psychology. He quotes Don Hoffman in The Case Against Reality: Why Evolution Hid The Truth From Our Eyes: Evolution doesn’t care about accuracy, it cares about fitness. We’ve evolved to develop perceptual mechanisms that are not necessarily designed to present objective reality to us, but to help us survive. The great mistake mainstream economists make is to think humans are trying to optimize the world as though we are engineers or physicists — trying to map objective reality onto behavior — without understanding the “black box” that comes between perception and behavior.
Customer perception price is a relevant example of comparative logic and context at work. Is Nespresso expensive coffee? Yes, if it is compared to Maxwell House or Folgers. No, if compared to visiting a Starbucks store. The frame of reference for comparison changes the behavioral outcome. There is no objective standard.
The most important comparison customers make is with their own expectations.
Rory cites the effect that Yelp restaurant reviews can have on the expectations of prospective diners who read them. If they choose to go to the restaurant, their expectations are shaped in such a way that the actual experience is evaluated against that expectation, not in any absolute way. Depending on a customer’s frame of comparison and their expectation, the same experience can be perceived as brilliant or terrible.
Entrepreneurs can manage customer’s expectations and frame their comparisons. That’s often the role of advertising and marketing. These provide the context in which customers can appreciate and enjoy their experience. Until both the good and its communication are optimized, there is no value.
When entrepreneurs shape the customer’s expectations through advertising, marketing and branding, they are not just adding value for the customer, they are multiplying it.
According to Rory, “Marketing doesn’t add value, but multiplies it. (And bad marketing, by the way, destroys it.)” The good — the product or service offered by the entrepreneur — and the perception of it are interdependent and we should use multiplicative dynamics not additive dynamics. If you have a product but you can’t work out a way to sell it, you have an invention, not an innovation. Marketing takes invention to innovation, or, as Peter Drucker said, the only two things that create value are marketing and innovation.
Rory describes it this way: “Entrepreneurs can discern what people want and find a really clever way to make it, or discover what they can make and find a really clever way to make people want it.” Either or both are fine as paths to profit.
Brands are an excellent technique for expectations management. They represent an exercise in what Austrians call uncertainty and Rory calls outcome variance. Brand preferences are smart behavior on the customer’s part because of the trust and reliability that they perceive in their favorite brands. Choosing an alternative might risk missed expectations.
In the multiplicative dynamics of marketing, entrepreneurs must aim high. “It’s perfectly possible that what is constraining the United States’ economic growth is actually the level of the speed at which consumers’ tastes can change rather than the speed at which producers can manufacture exciting things for them to buy.’
It’s rational for customers to follow habit, to do what others do, in order to avoid outcome variability — to maintain their expectations. There is a cost to early adoption of new innovations.
Therefore, entrepreneurs seeking new customers must pay attention to multiplicative dynamics to elevate customers’ value expectations to a sufficiently high level that they will change their behavior. As Curt Carlson said, this requires an innovation to offer a 2X to 10X better experience.
Because of multiplication of perceived values, Rory advises that it is often effective to focus marketing on one aspect, or one feature, of an offering so that it becomes the key multiplier. It might be the camera on an otherwise industry-average smartphone, or the Uber feature that manages the expectation of when your ride will arrive.
Experimentation and iteration are important tools in the entrepreneur’s effort to unlock psycho-logic. Counter-intuitiveness is crucial. Because value is subjective and entirely contained in the customer’s mind, it’s hard to unlock. That’s why entrepreneurs are the drivers of economic growth. Entrepreneurs, says Rory, do not have to appear logical to everyone else.
Entrepreneurs’ freedom to make counterintuitive bets means that, when they succeed, they’re disproportionately successful, because they represent a biased correction mechanism.
Rory cites James Dyson as a counter-intuitive entrepreneur: “Who needs a $7000 vacuum cleaner?”
Experimentation and iteration are the right technique to get to the successful outcome. And there is nothing more joyful than when a final iteration succeeds!
The language of magic and alchemy is appropriate to describe the entrepreneurial process, subjective value, and the management of expectations and perception. Mises recognized it (see Human Action, Chapter XVI, "Prices," Section 5). Rory Sutherland captures it in his book, Alchemy: The Dark Art And Curious Science Of Creating Magic In Brands, Business and Life.
Additional Resource "Rory Sutherland’s Black Box" (PDF): Mises.org/E4E_60_PDF
Hunter Hastings asks Sean Ring, Finlingo Co-founder and CEO, for his number one secret for entrepreneurial success. His answer: Iteration.
Sean offers additional insights, as we’ll see below, but the power of iteration is his number one: doing things over and over, with a view to improving. Always learning, always changing, never getting tired of improving and tinkering, whether it’s with your life path, your self-knowledge, your skills, your code base or your business. You can never predict the future, but you can always monitor your felt uneasiness and take action to relieve it by doing better.
Key Takeaways and Actionable Insights Sean navigated his lifepath through specialized areas of the financial services industry and through multiple locations around the globe, accumulating knowledge and insight at every step along the way.
Armed with degrees in finance, Sean found his way into banking, and into derivatives accounting with Lehman Brothers. Then to the "back office" (operations) at Credit Suisse, then the front office, then client management. It was a winding path, finding out what he was good at, where he needed to improve, and what he liked and disliked about corporate life. He worked in New York City and London got a taste of international travel and living that he enjoyed.
He took a pause: time off and a self-assessment to organize his individual resources.
The corporate treadmill can be mesmerizing. Sean took a year off to take his bearings, including a measurement of his personality traits using the OCEAN model, as well as subjectively self-assessing his strengths and areas for improvement.
He began to focus on organization — both the entrepreneurial function and the personal skill. Not only was organization a way to self-improve, it was a step on the pathway to entrepreneurship, the role that Joe Salerno describes, from Mises, as supervising and organizing the various elements of productive property into a coherent structure of means, i.e. the firm.
He identified financial training as his professional field.
Sean found he was excellent in front of the class. His communications abilities enabled him to express complex topics so that young trainees would understand and absorb them. His hard work ensured no gaps or weaknesses in his training materials. His gregariousness helped him to learn from other experts. He found himself highly motivated by helping young people embark upon the path as he had followed, but armed by Sean with more knowledge.
At the same time, Sean himself never stopped accumulating certifications, qualification and badges.
Skills need continuous refreshment. In the financial services industry, there are complex technical issues to master, from financial instruments to trading techniques to compliance to ethics. Sean dedicated himself to accumulating a wide range of certifications, both to confirm his own levels of technical excellence in his field, and to communicate to others his rigorous pursuit of knowledge. He is a big believer in testing and its importance in maintaining quality and integrity in service industries like finance where technical complexity sometimes doesn’t combine well with transparent and high-trust relationship practices — what Sean calls the combination of hard skills and soft skills.
And he found a business partner with complementary skills and a shared mindset.
Between them, Sean and his business partner Andy Duncan combine marketing / sales / communications / finance expertise with coding, A.I., and cognitive psychology. They share founders’ ambitions, work together well, and both enjoy Austrian Economics. Entrepreneurial initiatives are more likely to succeed when two or more partners can combine relevant skills and experience in a collaborative relationship.
All these steps bring Sean to a logical milestone on his life path: co-founder and CEO of a tech start-up employing advanced technology to achieve new levels of testing integrity to his industry.
Finlingo employs AI and advanced coding to write exam questions for technically complex financial certifications and to infinitely replicate those questions, so that no two candidates get the same questions, no questions can be memorized, and the exams can’t be stolen or hacked. Instructors and institutions enjoy a write-once-and-relax experience in composing questions and setting exams, a significant relief of uneasiness.
Sean shares his 5 key learnings for a successful entrepreneur’s journey. Iteration: Entrepreneurs learn that they’re wrong every day. Every fork can be re-taken. Every initiative can be improved. Every left turn can be re-thought as a right turn. Keep iterating.Humility: The mindset for iteration is humility – entrepreneurs know that they don’t know a lot, that every decision is based on imperfect knowledge, and every judgement is subject to uncertainty.Self-awareness: Deal with your own internal pressure; manage your own expectations – success does not necessarily come quickly and you don’t necessarily advance in a straight line at a constant pace.Lean cost discipline: Keep costs low, and don’t bankrupt yourself by spending too much too soon. Afford yourself the opportunity to make the mistakes you need to make.Family: Keep your spouse or partner supportive; communicate well. Sean’s Principles of Austrian Economics What are the principles of economics most useful for business success?
Subjective value: Entrepreneurs can easily get wrapped up in their own (objective) beliefs about the importance and market impact of their product or service. The only thing that matters is how customers feel about it. Truly understanding subjective value and thinking and feeling like the customer is a key to success. Sean asks: what is the wish list inside the customer’s mind at any one given moment and where does your service stand on that list. Top of the list may be the pressing need to pick the kids up from school when you are trying to sell an annuity or insurance policy. Be aware, and empathetic. Customer sovereignty: “The market always asserts itself”, in Sean’s phrasing. It tells you what it wants. The market is the real boss. Listen to the market feedback and interpret it intelligently. The market may want features that you think are unimportant. The feedback may come to you as “not easy to use” when the right interpretation is “build me a better dashboard”. Unique assembly of assets: Entrepreneurial success is often a synthesis rather than the invention of a new-to-the-world idea. If a customer needs both A and B, and you can provide a service that integrates A with B, that might be enough to create a new business. No need to invent the wheel. Iterate, iterate, iterate. Additional Resources "Iterating Towards Entrepreneurial Success" (PDF): Mises.org/E4E_59_PDF
Try the "Austrian Entrepreneur’s Journey" course: Mises.org/E4E_Learn
Sean Ring's company: Finlingo.com
Key Takeaways and Actionable insights Entrepreneurs make orchestration a value-producing service. Entrepreneurs don’t necessarily need to own the capital and resources required to deliver value. What they do is organize capital in a new way to facilitate a new value experience for customers. They orchestrate capital, resources, people, skills and technologies. Their orchestration creates a unique combination of resources, uniquely applied for a highly valued customer experience.
First, the entrepreneur imagines the customer’s future experience and how they will value it. Entrepreneurs create their own opportunities by imagining a future experience that customers will find valuable. John Cox, a tax accountant and lawyer, discovered in his client interactions that his customers had to deal with many different service providers when managing their own finances — investment advisors for stocks and bonds, investment funds for non-public investments, tax preparers, tax lawyers, contract lawyers, accountants, estate planners, and many more.
There were inefficiencies and frictions in these arrangements — time and money for the client to talk to the lawyer and accountant separately, and then for the lawyer to talk to the accountant before agreeing on a unified solution for the client. John imagined a future where there was a single point of contact with a better client experience at a faster speed and a lower cost.
Second, the entrepreneur orchestrates top providers in each field to efficiently channel their services through them as a single client contact point. A single point of contact dedicated to the client’s needs can provide a singularly valuable benefit — quality, speed, efficiency, low cost and high trust all in one place. John’s deal with the provider orchestra was to bring customers, providing the players with a place to demonstrate their unique skills and contribution to the integrated offering, as well as a revenue stream at lower cost (no sales costs and lower overhead).
Relationship capital results in the customer getting an integrated, high-quality plan and good outcomes with an interface of both trust and convenience. John brought relationship capital to the client solution in two ways. His clients knew him as a tax accountant and lawyer of high capability and trustworthiness, so that when he added new outside services to his offering, there were grounds for extending their trust. Second, he brought relationships with the outside service providers that the client did not have to develop and maintain themselves.
Better outcomes, lower cost and established trust — a valuable client experience.
Technology brings higher levels of integration to the orchestra. In the earliest days of his orchestration of services, John was a leading edge user of technology. At the beginning, it was the new Digital Equipment Corporation (DEC) mini-computers and peripherals, of which John’s firm was one of the earliest users. Later, he networked many lawyers together on an Apple network — again, as one of the earliest such users. Today it’s the internet that provides the technical backbone for orchestration. Orchestrators are adept at employing the latest technology for managing distributed resources.
Customer value is enhanced even further when the orchestrator has skin in the game. When John expanded his orchestrated offering to include private investments in apartment buildings he purchased, his client relationships were strengthened further by the “skin in the game” effect. Clients believe that when a provider’s own capital is at risk as well as theirs, there is an even greater focus on shared value.
Skin in the game is not mandatory for orchestrators, but it can be relationship-reinforcing in appropriate cases.
Entrepreneurs who excel at orchestration are systems thinkers. Orchestrators assemble a system of services to deliver a unified client experience. Systems thinking requires understanding of what the client wants from the system (safe asset value growth, for example), how they want to interact with the system (one point of contact, unified reports, etc.) as well as which external services to include in the orchestration and how to be the conductor who gets them all working together in harmony.
In addition to assembling the orchestra, the orchestrator must be skilled in higher level ecosystem thinking about the larger systems into which the orchestra must fit: prevailing financial systems, compliance systems, regulatory and reporting systems and so on.
Additional Resources "The Entrepreneurial Skill of Orchestration" (PDF): Mises.org/E4E_58_PDF
Californians for Honest and Non-Partisan Government Effectiveness: Change-CA.org
Key Takeaways and Actionable Insights Two methods of applying reason to the analysis of changing circumstances can be particularly helpful during cases of external, or exogenous, economic shock, such as the current coronavirus panic.
The first is thinking in terms of economic output. The second is systems thinking.
Applying these methods can help Austrian entrepreneurs to make sound decisions amidst the high speed rate of change of economic conditions.
1) Identify the ecosystem in which you operate and analyze expected changes in output. If you operate in the health care ecosystem, output can be expected to rise. More hospital beds in use, more cleaning services utilized, more deliveries to hospitals, additional workers hired. If you operate in the food and beverage ecosystem, output may stay the same but the location of consumption may shift, for example from bars and restaurants and company cafeterias to homes. If you work in the physical mobility ecosystem of cars, buses and planes, output can be expected to decline. In the digital mobility ecosystem of Slack and Zoom and webinars, it can be expected to increase.
Try to approximate the output potential of your ecosystem over the next few weeks.
2) Next, review the conditions in your own micro-system of suppliers, customers and support services (such as banks). Dr. Bylund advises us first to look upstream to suppliers and vendors. The key economic tools here are communication and information. They will not know your business needs in these changed circumstances unless you reach out to tell them. Call them on the phone, talk person-to-person, let them know what you expect and what you need. You’ll be reducing uncertainty for them and you’ll be strengthening your relationship and building trust, with beneficial long term consequences.
If supply might be interrupted, you will benefit from contingency planning which looks at all possible scenarios, which is a characteristic of the Austrian view of uncertainty. Dr. Bylund suggests we look at a worst case scenario, a best case scenario and one in the middle. This will narrow your uncertainty and the range of possible actions and make them more manageable.
3) Next, look downstream to customers and consumers. If you are a B2B entrepreneur, your customers are in the same position as you relative to your upstream suppliers. Talk to them, build relationships and find out their needs. How can you facilitate new value for them? Offer assistance. If you are able to help them with their cash flow or their inventory management or other aspects of their business, it’s an opportunity for long term business building. Extended terms, discounts and bonuses, if you can extend them, have the potential to pay back in the long term via loyalty and extended relationships.
For B2C businesses, the same mindset applies: how can you facilitate new value experiences under changed circumstances. Some of the same tools might apply, such as extended terms, discounts and savings. Or the answer might lie in new distribution methods, such as home delivery or curbside pick-up outside restaurants. Always keep the value process in mind: consumers still want value from you, but the way they experience that value may change.
Of course, in both cases, you must carefully manage your own cash flow, and this is a critical metric under these circumstances. Weak cash flows are the biggest small business killer.
4) Therefore, it also makes sense to look laterally across your ecosystem to collaborators and enablers like banks. Be clear with them what your requirements are, and make sure they communicate clearly to you what new facilities they are able to extend, both of their own volition and in response to new legislation coming from the Federal government. We Austrians are skeptical about government intervention in the economy at any time. However, it behooves all business owners and manages to be up-to-date in their knowledge of available assistance.
Additional Resources "3 Ways to Safeguard Your Business as Coronavirus Spreads" by Dr. Bylund: Mises.org/E4E_57_Article
"Coronapreneurship" (PDF): Mises.org/E4E_57_PDF
Share your comments, suggestions, and ideas on the Mises For Business LinkedIn page: Mises.org/M4BLinkedIn
All business relationships have downside risk: your counterparty / partner / vendor / customer / investor may not perform as you expect or require. In today’s interconnected economy, more and more elements of your business model are provided by relationship partners. It’s wise to recognize downside risk potential and to know how to mitigate it.
Key Takeaways And Actionable Insights There are two relevant types of risk to consider:
Relational risk, sometimes thought of as character risk: that your business partner may not perform as you’ve agreed to because they are taking advantage of you in some way.Performance risk, sometimes thought of as competence risk: your business partner intends to perform as agreed, but is incapable of doing so for competence, capability or resource reasons. For entrepreneurs, there are two levers for risk mitigation: trust and control.
Trust includes Goodwill Trust and Competence Trust — trusting your partner’s character and capabilities respectively.
Control includes output control, behavior control and social control.
Output control is generally thought of as setting measurable targets and monitoring performance relative to those targets. Did your partner meet the agreed-to sales targets in dollars or units? If they did not, they are not performing. This is a means of performance or output control.
Behavioral control focuses not on output but on behavioral inputs: did all the team members check in at 8am this morning as agreed? There is no guarantee that the desired behavior will lead to the desired output performance, but you think they are correlated and the behavioral commitment sends a signal of positive intent.
Social control is thought of as shared values and norms. If the collaborating teams or individuals have shared values and a highly-networked clan-like environment, they are more likely to have shared commitment to the goal.
Trust is much more positive for business relationships than control. When people in business relationships exhibit integrity and good character, and perceive it and experience it in their collaborators, there is less need for output controls and behavioral controls. They’ll do the right thing without those controls in place.
From an economic point of view, trust reduces transaction costs — the cost of making sure that people are following agreements and doing what is expected of them.
Trust is a business competency. Trust holds relationships together. For this reason, it is a business competency. It’s the kind of competency that fits well into the Austrian economics mindset: it’s a soft skill, not quantifiable, highly individualistic, with a significant moral component to it (doing the right thing).
Viewing trust as a business competency means that entrepreneurs are able to develop trust-building as a skill, one that can be reinforced and strengthened over time. It starts with an individual’s nature: you are someone who can be trusted. Such a nature attracts others who value it. Business speeds up, and runs more smoothly, with less need for high-litigation problem solving and more instances of viable handshake agreements. Start with your own character and seek to identify the same character type in those you deal with. There’s an element of Austrian subjectivism: there is no formula for “how I can trust someone”, but you can develop the skill over time, even learning from entrepreneurial error when you mistakenly trust someone who doesn’t deliver.
Trust is a value. People want to feel trusted and seek relationships that feature trust. Trust is a business skill that’s as valuable to you as operational knowledge or financial expertise. Learn how to build and maintain trusted relationships with other stakeholders.
Trust is a resource. Resource and competency are two sides of the same coin. Trust is a resource that fits into Austrian Capital Theory as an asset that generates revenue from customers. Think of relationship capital and social capital and the culture of the organization that generates trust as assets on the balance sheet, even if conventional accounting can not recognize them.
The 4 Cores Of Trust In The Speed Of Trust: The One Thing That Changes Everything, Stephen M.R. Covey identified 4 cores of trust.
Integrity: Honesty — telling the truth and gaining credibility by doing so. Leaving no gap between what you say and what you do. Humility — being concerned about what is right and not just with being right. And the courage to do the right thing.
Intent: People judge you by your intent, which grows out of your character. If you “declare your intent” and your behaviors are consistent with your stated intent, people will trust you. Your motive is clear and honest, and your agenda is open.
Capabilities: Can you do what you say you intend to do? Do you exude confidence in your own capacity?
Results: What’s your track record? Do you take responsibility for results?
Integrity and Intent relate to character, capabilities and results relate to competence.
In a high trust relationship, everything speeds up. Trusting people give you the benefit of the doubt. Morale is high, people volunteer to go the extra mile, and they don’t resist changes you want to make. High trust liberates the relationship and its potential.
But don’t trust too much, or where it’s not justified. In the long run, we all gain by trusting each other to give and not to take. But at the outset, you may not know if you are dealing with a taker or a giver. You should maintain a contingent element in your business relationships.
When you have many opportunities, you should be very intolerant of people who do not live up to their word. Do not be forgiving at all.
If you have fewer opportunities, maybe you have to be more tolerant of others doing the wrong thing and try to remedy the situation while maintaining the relationship. But giving people more than 2 or 3 chances to do the right thing is about the limit. Be willing to cut people off. Re-evaluate and measure the level of trust continuously. Be on guard especially at the earliest stages.
Trust-building Mechanisms Trust in relationships is a business principle, and, as always, entrepreneurs need mechanisms to apply their principles effectively. Steve Phelan gave us the story of a large and successful General Contractor in the building industry. This GC put an enormous amount of time and effort into relationships with sub-contractors, so that there came to be tremendous trust between the parties. He would start them on small jobs, and gradually increase the size of the job in which they were invited to participate. At each escalation, the sub-contractor had the opportunity to prove that they could handle both the competence and character aspects of the relationship, as well as the capability and results aspects. Trust was built over time — a learning process for trust.
The same was true on the customer side. The General Contractor would decline to bid on very large jobs from a developer with whom he had not worked before. He would always start with a small commitment, and demonstrate mutual integrity and shared intent at that level, before proceeding to larger jobs.
Over time, as a result of this trust learning process, the General Contractor’s reputation and relationships became stronger and stronger, enabling smoother and more efficient operations in good times, and resiliency in downturns.
Summary You can build trust in relationships and you can recover it. Don’t just think in terms of compliance, think about building a network of trust around you with customers, suppliers, employees, investors and partners. You can lower transaction costs and make your business run more efficiently. Make the investment to strengthen your capabilities in trust-building. Build a culture and a set of norms where people manage themselves and don’t have to be watched around the clock 24/7. Shape the organization you want to operate and live within for the rest of your life.
Additional Resource "Trust-Building and Control Mechanisms in Business Relationships" (PDF): Mises.org/56_E4E_PDF
The Austrian economic principle of subjective value — placing value entirely in the mind of the customer — helps Austrian entrepreneurs analyze value creation from a unique viewpoint. One of these is the value learning process, a new way of thinking about how to be a critical catalyst for a customer’s value experience.
Customers learn intentionally over time, endlessly looking for new and better ways to satisfy their various needs. Mark’s research has identified 5 stages in this value learning process, depicted in the graphic below (download the PDF at Mises.org/E4E_55_PDF).
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The 5 stages are: Predicted Value, Relative Value, Exchange Value, Experience Value and Value Assessment. Mark describes each stage at the beginning of the podcast.
Because the customer’s value learning process is intentional, it’s one the entrepreneur can monitor, measure and influence. It’s an example of entrepreneurs learning from their customers, as those customers are conducting their valuation.
The customer is intentional, but not necessarily paying attention, when engaging in valuation. Entrepreneurs have some work to do to track the customer’s learning process. They’re not taking note as they go. Mark talks about representationalism: how experience is a mental representation that our minds create from the stimuli that senses pick up. That could be going on while the brain’s attention is elsewhere. We’re not thinking consciously about wearing clothes or sitting on a chair, but we are experiencing those activities and we might defer our learning from them to the future, when thinking about buying new clothes or chairs.
For the entrepreneur to learn from the customer, it’s important to listen to the customers who are paying the most attention. Don’t do your market research with customers from whom you can’t learn because they’re not paying enough attention to your value proposition or to the value experience you are interested in. Find the customers with the most highly developed need, and who are most dissatisfied with the status quo.
Dissatisfaction is a feeling that draws attention away from other distractions. It’s important to customers because it’s disconcerting, unwanted. It’s a high-learning event. In dissatisfaction, customers are finding something new about their need and how to (not) satisfy it. It’s a good time to ask them.
Dissatisfied customers are motivated to share their learning because they are searching for a better solution. Customers are in the learning process and, if they experience dissatisfaction, they know they need to search for an alternative. Sharing dissatisfaction might result in some new learning for them. They’re willing to talk to you because you are trying to solve their problem.
Focus your research on the highest need, high dissatisfaction customer. They’ll yield the richest research results, most likely to help you develop an effective value proposition.
When talking to these customers, it’s critical to utilize mindfulness: ensuring customers are in full experiential mode and ignoring all other distractions. You might think of mindfulness techniques as helping with meditation. But we are able to adapt them for use in our processes of Austrian entrepreneurship. Mark uses step-by-step instructions to talk customers through a mindfulness technique to get the best information and understanding of their needs and satisfaction / dissatisfaction experiences. Entrepreneurs can use the tool at many stages of the value learning process, both at the early development stage for new concepts, and at the marketplace learning stage to tap into their experience of competitive products and services that are making them dissatisfied. We’ve created a new graphic indicating a couple of stages where they could be employed.
With the High Knowledge Customers Tool and the Mindfulness Tool, we’re providing business teams with important equipment to harness the value learning process and reap the developmental benefits of new customer knowledge. We’ll release Dr. Packard’s teaching course in the coming months, as part of our resources platform for entrepreneurs. These tools and several more will be featured in full in Dr. Packard’s new course. Send us your e-mail address via Mises.org/E4E_VLP if you’d like to receive information about its release.
In the meantime, check out our Austrian Entrepreneur’s Journey course at Mises.org/E4E_Learn.
Additional Resource "Tools For The Value Learning Process" (PDF): Mises.org/E4E_55_PDF
Can entrepreneurship be learned? We’d like to believe it can, since entrepreneurs drive economic growth — creating tomorrow as Per Bylund puts it — and betterment for their individual customers and for society.
Emergent circumstances placed Steve Mariotti in the position of teaching entrepreneurship to boys and girls in the nation’s toughest high school. After some trial and error, here’s what he established.
Key Takeaways And Actionable Insights There’s a universal desire for the fruits of entrepreneurship. Steve classified this desire as a drive to escape poverty.
You are restricted from ownership, and all the feelings of pride and fulfillment that come with it, when you are poor. Ownership — what economists call private property — is an exciting prospect. If entrepreneurship provides a route, people will take it.
Steve’s innovative entrepreneurship curriculum generated intense excitement.
He had difficulty in commanding attention for English and Math, but the same students who resisted conventional learning were stimulated and energized by the subject of entrepreneurship.
The open door to learning entrepreneurship is understanding market pricing.
Steve started the entrepreneurial journey for students with thinking about pricing of an everyday product — in his case, wristwatches. Why are there so many prices for wristwatches? Why are there so many kinds of wristwatches at different price points? Why is it that one person would pay a high price for one kind of wristwatch and another person would refuse, preferring an alternative at a different price? Just thinking about pricing in this way was a revelation.
Thinking about pricing can lead to an understanding of unit economics.
Entrepreneurs need to know two prices — the one the buyer will pay and the one that represents their cost. Steve quickly established that this knowledge is harder to establish. Is there a profit in the priced transaction for the entrepreneur once all costs — of time, money, effort and alternatives — are taken into account. This requires an understanding of sourcing and supply chains, wholesalers and vendors, direct and indirect costs and overhead, as well as personal preferences (do you really want to spend all the time and effort that the business will require of you?)
High schools are resistant to teaching entrepreneurship, and Steve’s students were constrained by regulation and authority.
“You may not talk about money in the classroom.” These and other restrictions were typical of the barriers Steve faced – and faced down. Entrepreneurship is one of the most relevant skills to impart to high schoolers, and yet the subject was viewed with disdain.
Steve emphasizes practicality as the critical foundation for teaching entrepreneurship.
He taught his kids unit economics, profit and loss, simple accounting and the practicalities of starting, growing and managing a business. No theory. Everyone in his class succeeded with a starter business. Many went on to greater entrepreneurial success.
Steve has taught entrepreneurship all over the world, and found that culture matters a great deal.
In post-communist Russia, young people could not grasp supply and demand, entrepreneurial profit and unit economics. The labor theory of value had been brainwashed into them.
In post-communist Vietnam, in contrast, people thronged to his teaching and eagerly pursued all the behavioral changes he advocated, both at the entrepreneurial level and the government administrative level (like adopting low, simple tax schemes). Theirs was a more receptive culture.
Additional Resources The role of knowledge in entrepreneurship—"Steve Mariotti Channels F.A. Hayek" (PDF): Mises.org/E4E_54_PDF
"The Austrian Entrepreneur’s Journey" online course: Mises.org/E4E_Learn
Steve’s book, Goodbye Homeboy: How My Students Drove Me Crazy and Inspired a Movement
Steve’s guide, Entrepreneurship: Starting and Operating A Small Business
Key Takeaways And Actionable Insights Entrepreneurs create the future….. Tomorrow will be different. Tomorrow is created by entrepreneurs. From the high street store owner introducing new inventory to the high tech founder introducing new features, entrepreneurs actively participate in changing the future to the way they want it to be.
….and thereby change the world. Real change happens through value exchange in the marketplace, facilitated by real entrepreneurs. Changing the world is a matter of responding to customer dissatisfactions, and not false impulses like so-called “social entrepreneurship”.
To create tomorrow, follow the entrepreneurial ethic. The entrepreneurial ethic is the belief in taking action to deliver an experience of value to the customer. Customers always feel that things could be better in some aspect of their lives. Entrepreneurs are people who bring that betterment. They do so voluntarily, without fraud or coercion, or deception. Their ethic is to improve the lives of one customer at a time, and then eventually a whole segment of customers, and ultimately of all customers. One entrepreneur serving one customer leaves resources available for another entrepreneur to help another customer. It all rolls up to a better society.
The mechanism of the entrepreneurial ethic is customer betterment. Entrepreneurs decide on principles for their business — how are they going to facilitate value — and then seek mechanisms to implement their principles. They put theory into practice, operationalizing the Austrian economics idea of the economy as a process for getting to customer satisfaction. For example, they apply Austrian Capital Theory by always making sure that any investment they make in their business contributes to customer betterment. If it’s not important for the customer, they don’t make the investment. If it is, they do. Customer sovereignty is the theory; always asking what the customer will think of any action the entrepreneur takes is the practice.
Betterment is decided by the customer. The entrepreneurial ethic is that the customer is the boss. The entrepreneur seeks to understand the need for betterment. It is a feeling on the customer’s part, sometimes inarticulate. Customers can’t tell entrepreneurs exactly what they want, but they can express dissatisfaction with the status quo. The entrepreneur gives form to the customer’s dissatisfaction by developing a new value proposition for a new service or product. Do they always get it right? No. The customer’s inarticulateness makes accuracy difficult, and the customer dynamic is continuous change, always rebalancing preferences. The entrepreneur submits to the customer’s decision.
The entrepreneur solves uncertainty, for themselves and society. Future uncertainty can sound like a burden or a barrier. Entrepreneurs solve this problem. Firstly, they recognize uncertainty. It exists: no-one can know the future. Entrepreneurs break down uncertainty by process. Step-by-step, they set out a pathway to their goal of bettering customer’s lives, knowing that there will be changes along the route as customers change and competitors bring even more change. The mechanism here is learning. Each step reveals new knowledge about whether the entrepreneur has imagined the goal and the path accurately. There will be lots of pivots before reaching the market. The earlier and more frequently the customer value learning can be incorporated, the more accurate the pivots. Entrepreneurs are reflective about every step.
When one individual benefits, there are no losers. When an exchange does take place, and the world changes as a result, there are two beneficiaries — the customer, who experiences value and the entrepreneur who facilitated it. But no-one loses. There is a false anti-business meme that the success of an entrepreneur can somehow be interpreted as a loss for society. Especially if that entrepreneur becomes a billionaire by helping an especially large number of customers. It’s just not logical. A gain by one individual can not be a loss for society.
The entrepreneur experiences their own kind of value. A few entrepreneurs become billionaires. Most don’t. They may or may not make more income than they would if they took a corporate job. But the experience of value for the entrepreneur is subjective, just as it is for the customer. They may be pursuing a feeling of self-reliance, or a sense of achievement. Importantly, entrepreneurial goals are long-term, often intergenerational. Many individuals start businesses that they can pass on to their children or to generate the funds for their children to attend college and become doctors or lawyers or economic professors — positions that the entrepreneurial effort of the parents made possible. Other entrepreneurs set up charitable foundations that can deliver benefits for decades.
Additional Resource "The Austrian Entrepreneur’s Journey" (PDF): Mises.org/E4E_53_PDF
Hunter Hastings and Mark Schaefer discuss how human-centered marketing can fix a business function that has lost its way.
Key Takeaways and Actionable Insights Marketing has lost its way — in its current state, it’s no longer a useful business growth tool for entrepreneurs.
An obsession with technology has eclipsed the focus on people and human values.A mania for measurement has obscured emotional connections with customers.“Marketers hide behind their dashboards” and are not conducting conversations with customers. The solution, says Mark Schaefer, lies in the principles of Human-Centered Marketing. Austrians can easily recognize these principles as our own.
Austrian EconomicsHuman-Centered MarketingPrincipleCustomer sovereigntyThe Customer does the marketingMechanismEmpathic diagnosisLive in their homes / offices / factoriesInsightSupport the customer’s highest valuesFind core human truths – deep, deep needs
The customer-sovereignty perspective yields actionable truths.
Customers don’t need ads — they don’t see them, they don’t hear them, they block them.Customers are rebelling against the interrupt-and-annoy approach of marketers.The customer is in charge. What do customers want from marketers? The answer for Mark Schaefer lies in Core Human Truths — what Austrians call Highest Values.
They want to feel loved.They want to be respectedThey want to belongThey want you to advance their self-interestThey want proof that a firm or brand is contributing to their community These are deep human needs that don’t change. Whatever the speed of change in market, these values are constant. Humanism lets marketers hold on to what is not changing, rather than being overwhelmed by change.
Marketing mantras like “loyalty” and “engagement” are false.
Customers don’t want to be loyal; they want freedom and choice — they like shopping around.Engagement does not result from clicking on an e-mail and downloading a white paper or a coupon.These are dashboard measurements, not human values. Mark’s recommendations are grounded in humanism.
Customers respond to shared meaning and shared values — so long as the sharing is authentic. Businesses must be loyal to consumers, never let them down, always be consistent. Live on their island.Seek trust. Marketers have burned through trust. The Edelman Trust Barometer shows trust in business and brands and advertising going down for 11 straight years. Now brands must transcend the public’s mistrust.Flip your branding. A brand is not what you tell customers. A brand today is what customers say about you to their friends and peers. People trust other people.Let customers create their own value. This is pure Austrian Economics: customer value is an experience that takes place entirely in their domain. Brands and businesses facilitate — but can’t create — the customer’s value experience. Customers hire your brand or business or product or service to help them create value. Marketing is promise management.
Choose the promise you make to customers carefully — is it one they really want from you and will they trust you when you make it?Ensure that you have the capabilities to deliver on the promise. Don’t over promise.Keep your promise every time, with no exceptions ever. BONUS: Small and medium businesses have the advantage in human-centered marketing.
The larger the business, the harder it is to connect to customers on an individual, emotional level.Small business has an advantage in showing its face, demonstrating its personality and exhibiting trustworthiness. Free Downloads & Extras "The Future of Marketing Is Austrian" (PDF): Mises.org/E4E_52_PDF
"Understanding The Mind of The Customer" (PDF): E4EPod.com/Mind
Mark Schaefer’s "Human-Centered Marketing Manifesto" (JPG): Mises.org/E4E_52_Rebellion
For comparison, "Menger’s Manifesto" from Principles Of Economics (PDF): Mises.org/E4E_52_Menger
Read Mark’s book, Marketing Rebellion: Mises.org/E4E_52_Book
Mark’s website is BusinessesGrow.com
When we asked international technology entrepreneur Paul Tenney about the pre-requisites to entrepreneurial business success, he said, “Learn accounting”.
Accounting — or economic calculation — is one of the four pillars of entrepreneurship. And when it’s viewed through Austrian eyes, it becomes a more powerful business tool than, perhaps, you might have realized.
Whether we are talking about retrospective accounting (P&L accounting and financial reporting) or commercial pre-calculation to plan future actions (management accounting or cost accounting), how you use the tool makes a difference to the results you get.
Our guest in E4E episode 51, Dr. David Rapp, is an international leader in the field of Accounting and Management Control, a subject he teaches at one of Europe’s top business schools.
Key Takeaways and Actionable Insights Accounting is a means to help you achieve your desired ends — apply judgment when using the tool.
Austrian economics teaches us to subjectively choose goals and then select the best means to achieve those goals. Accounting is just another tool to help the entrepreneur. There are plenty of explicit and implicit options in how to use it. David calls this attitude “purpose orientation” — one of the most important aspects in the field of accounting. Any computation should be shaped by its underlying purpose.
Financial reporting is subject to local rules — but there are always options in applying them.
If the purpose is to pay as little tax as possible, for example, a firm may apply depreciation or amortization rules in such a way as to reduce taxable profits. If the purpose is to present the firm in the best possible light to secure external funding, the same rules might be applied in a different way to display a different calculation of profit. There are options available for valuation of assets and of inventory that can materially affect the balance sheet.
Entrepreneurs should be rigorous in ensuring that their own managerial accounting does not mislead them.
Some modern finance theories and models are unrealistic — such as the standardized Capital Asset Pricing Model and the Weighted Average Cost of Capital approach. The entrepreneur’s task is to apply real world judgement in deciding on future actions. Austrian Economics guides us towards realism not models, and the insights from Austrian Economics are the best ones to integrate into managerial accounting.
Entrepreneurs should bear in mind core Austrian Economics principles to guide their options in accounting.
Dr. Rapp mentioned these principles:
Subjective valueThe importance of opportunity costsDistinguishing between value and priceUnderstanding that prices determine costs rather than vice versa,Differentiating between uncertainty and risk Does accounting send reliable signals of business health to the entrepreneur? Not necessarily. Entrepreneurs should be on their guard.
Dr. Rapp advises us that general guidance to the firm’s owners and management is not possible via accounting. Accounting is not neutral and not a perfect tool for measurement or reporting. Again, the choice of reports comes down to the goal the entrepreneur is pursuing.
If the goal is a sale to an external buyer, then an accounting focus on EBIT might be the best channel for the most relevant business health monitoring. If the goal is external financing from a bank, a more appropriate signal might be found in a solvency measure such as debt-to-equity ratio.
Can accounting accommodate the Austrian Economics mandate for dynamic flexibility — continuous adjustment to changing customer preferences in the marketplace?
Yes, says Dr Rapp: by emphasizing the P&L to reflect the profit-and-loss outcomes of entrepreneurial actions and to reflect how well changing allocation of resources serves customers. Sub-dividing accounts into shorter time periods and different lines of business can more accurately reflect the dynamism of a business. And extensive use of notes to accounts in reports can provide a qualitative flexibility in reporting.
Accounting plays a primary and noble role in the advance of civilization.
Our complex market economy could not have evolved without accounting. It’s an important part of the system that allocated capital to its highest and most profitable use. Accounting is not boring, dry or dispensable. Rather, it’s a mainstay of human progress.
Additional Resource "Accounting From An Austrian (Misesian) Perspective" (PDF): Mises.org/E4E_51_PDF
John Rossman is an advisor who helps leaders compete in the digital era, by crafting and implementing innovative digital business models and capabilities. He was an executive at Amazon and launched the third party selling platform–in that way,he probably directly helped a number of our listeners become successful entrepreneurs. And he is the author of Think Like Amazon: 50 ½ Ideas To Become A Digital Leader—a tremendously useful book for everyone in business because it delivers a long list of actions you can implement immediately.
John asks that, if you read his book:
You leave an authentic review at Amazon.com.You send him feedback about any of the 50 ½ ideas you have implemented in your own business, and tell him the outcome. Principles and Mechanisms John emphasizes the dual roles of what he calls principles and mechanisms in business growth. Principles are designed and communicated by company leadership: they are the few, fully codified, fundamental ways of operating that the entire company cares deeply about and executes unwaveringly. Amazon famously has 14 leadership principles starting with Customer Obsession.
But principles alone will not get the job done. They can’t implement themselves. So the second part of John’s message is that every principle must have a mechanism to operationalize it. A mechanism might consist of a complete set of generally applicable process steps and guidelines to follow them, adapt them to different circumstances, equip them with metrics and arm them accountability. The mechanism ensures that the principle can be executed again and again, by different teams on different projects across different parts of the organization and across cultures and generations. We illustrate a few of the examples that John shared with us in this accompanying graphic.
Principles Of Austrian Economics and Their Mechanisms John’s insight about principles and mechanisms is the same one we implement at Economics For Entrepreneurs. Our principles are principles of economics. Our mechanisms are process tools we’ve summarized in our series of knowledge graphics.
For example, a core principle of Austrian Economics is the subjectivity of value. Every individual customer experiences value in their own idiosyncratic way, and the entrepreneur’s task is to gain insight into each individual’s sense of value, in order to be able to cater to it.We have provided three mechanisms to date for entrepreneurs to use to gather data about how individuals experience value in different ways, and to act upon that economic data:
Use the contextual in-depth interview tool to gather qualitative data for empathic diagnosis.
Follow the value learning process map in order to be able to facilitate value effectively.
Design and deploy a subjective Value Cycle system in order to be able to repeat the value facilitation process.
Our project is to continue to add to the inventory of mechanisms to help entrepreneurs in the implementation of economic principles.
Additional Resources "Principles and Mechanisms" (PDF): Mises.org/E4E_50_PDF
Connect with John Rossman on LinkedIn: Mises.org/E4E_Rossman.
Storytelling can be a powerful aid to effective business strategy. A good story can identify both a destination and a path to get there, and unite people on a shared journey. That’s why we like to use the Economics For Entrepreneurs podcast to tell journey stories from time to time: to illustrate and inspire.
This week’s guest, Paul Tenney, tells us a particularly illustrative journey story, since it combines an entrepreneurial career of achievement and purposeful geographic mobility.
Key Takeaways And Actionable Insights First, pick a promising industry with a potential for long term growth.
In the 2000’s, Paul identified database marketing technology as a growth industry, with expansive future promise but current low maturity (“e-mail spammers” were disdained at cocktail parties).
Learn and build a track record working for a growth company in the growth industry.
Paul rapidly accumulated executive experience, since growth demands that all employees step up to new responsibilities.
Develop your customer focus.
A fundamental lesson of Austrian Economics is that understanding customers and their needs always comes first in business building. This is especially true in emerging business technology. It’s easy to become focused on “product” (the technology) and lose sight of the customer, who may not understand the tech but view it as a means to an end rather than an end in itself. Paul focused on customer success activities, which revealed customer problems to be solved, and taught him the primacy of customer care in building business relationships.
Accelerate your accumulation of experience.
Experience becomes knowledge and knowledge becomes a personal competitive advantage. A growth business can provide accelerated knowledge-expanding opportunities. In Paul’s case, the opportunity came via an international posting, opening new customer vistas and revealing new customer requirements from the same technology.
Identify a partnering route to launch your business.
Your goal is to establish an independent business to run. The challenge of the transition from employment to entrepreneurship can be modified in a number of ways. One is to find a partnership that can both bear some uncertainty for you, and provide you with a strategic resource advantage. Paul partnered with the company that had previously employed him to provide technology, so that he did not have to build it from scratch. He developed his own customer base using this technology.
Establish an initial value proposition.
The technology partnership supported a strong customer value proposition in Paul’s local geography: experience the benefits of world-class big company tech, with customized / localized service, and the low unit economics that come with the partner’s scale.
Then, take the Customer Success route to deeper understanding of market needs.
Paul had learned how a well-developed Customer Success capability could generate insightful customer problem statements. These represent unmet needs for which Paul’s new company could develop new and unique local solutions.
Gain higher ground with an advanced business proposition.
Paul was able to establish new high levels of customized local service (e.g. language) while maintaining the global list price for technology. Insights gleaned over time led to the realization that simplifying the technology proposition — for example, by reducing the complexity caused by hyper-personalization of e-mail marketing to end-consumers, and focusing on the binary question of whether or not e-mails generated sales — resulted in a better customer value experience.
This focus also resulted in new-to-the-world services (such as the “fatigue curve” and “rehabilitation rate”), further elevating the value proposition.
Paul shared a lot more of his experience: about raising capital, about value theory, about the role of resilience in the entrepreneurial journey, and about the customer success of de-complexifying technology. Don’t miss his inspiring journey.
Additional Resources "Paul Tenney’s Global Entrepreneurial Journey" (PDF): Mises.org/E4E_49_PDF
Innovation often emerges from the combination of existing components in new ways. In Chris Casey’s case, the new combination was his knowledge of Austrian Economics — specifically Business Cycle Theory and Monetary Theory — and of Finance. He invested a great deal of time and effort into mastering both parts of this knowledge combination.
Key Takeaways And Actionable Insights Chris Identified an Un-met Customer Need, A Dearth of Available Solutions, and a Potential for Market Growth.
There were a few — probably a very few — customers for a financial services offering designed with recognition of the relevant principles of Austrian economics in mind. But the fact that there was at least some customer need provided evidence of potential. Then external stimuli such as the 2008 financial crisis and the Ron Paul Presidential Campaigns caused a growth in demand.
A value proposition naturally emerged.
For a narrow but highly receptive target audience, the value proposition that “Austrian Economics is vitally important to designing investment portfolios” proved to be very effective in generating a value anticipation.
Communication skill is a critical element.
A value proposition doesn’t sell itself. Chris utilized — and continuously polished — his communications skills to help customers fully appreciate the direct link to their desired value: a feeling of improved financial security because the uncertainties identified by Austrian Economics are accounted for in portfolio design.
Chris’s implementation was consistent with the value proposition, and capable of delivering.
In portfolio design, the product of Chris’s service firm, the inputs from business cycle theory and monetary theory are top-down elements. Chris added the bottom-up element of personalization of the design process to the individual customer. This is classical Austrian entrepreneurship: understand the customer’s needs, empathize with them, and customize the service so they feel individual satisfaction of idiosyncratic needs. In subjective value analysis, portfolio performance is not the sole criterion for the value experience. Customer feelings are far more significant.
Chris keeps an eye on the competitive frame of reference to maintain the uniqueness of his offering.
Chris’s competition is not other investment advisors. It’s the general demeanor of Wall Street sales-focused firms. “Stay fully invested” and “Don’t try to time the market” are typical sales communications of these firms that don’t truly have customers’ best interests in mind. He can always utilize this contrast as a value frame of reference.
Chris’s success exemplifies the clarity that results from candid entrepreneurial self-assessment and the embrace of the entrepreneurial process.
Self-assessment = In what field am I best resourced to enter and do business?
Entrepreneurial process = Identify opportunity by identifying customer dissatisfactions in that field.
Additional Resources "Chris Casey’s Entrepreneurial Journey" (PDF): Mises.org/E4E_48_PDF
Visit WindRock Wealth Management at WindRockWealth.com
John Chisholm is the author of Unleash Your Inner Company: Use Passion And Perseverance To Build Your Ideal Business.
Entrepreneurship is a process. Taking this view enables successful navigation over time, whatever the interim ups and downs. Sometimes the process can feel like stumbling through a jungle, tripping over rocks and vines, always picking yourself up again and marching onwards. Don’t expect the process map you start with to be the one you continue with. Don’t plan too far ahead. Do be adaptive. Nonetheless, the process view is a source of support during the journey.
Key Takeaways and Actionable Insights Processes require operating tools. John Chisholm’s toolset starts at Need and Advantage.
“All you need is a Need and Advantage.”
Need = "A real, unsatisfied customer need in an area about which you are passionate."
He defines Need in an Austrian way: a subjective value sought or anticipated by a customer. He defines Customer as a living breathing person (or group of people, as with a corporate customer) rather than an abstract “market need”. Unsatisfied means that the need is not addressed by currently available products and services (requiring the entrepreneur to understand customer dissatisfaction). And Real means shared by a sufficient number of customers or sufficiently intense in one or more customers to make it worthy of you to satisfy.
The entrepreneur must have an advantage for satisfying that need. John’s process is aimed at establishing and extending that advantage, in spite of the fact that existing businesses will have more and better resources than you.
John offers a 10-step process for entrepreneurs to follow.
You’ll find John’s process pretty complete, cogent, and consistent with Austrianism. We didn’t cover every step of the process in the podcast, but we did pick out two tools and one principle.
Make a STARS inventory of your resources and strengths and turn them to your advantage.
John recommends making and continuously updating an inventory of your individual strengths. The STARS acronym stands for Skills, Technologies that you know and can use, Assets and Achievements, Relationships and Reputation, and Inner Strengths. He has wise advice on each one of these subjects, and he suggests multiple uses for the completed STARS inventory:
Use it to assess the fit of your strengths with the customer needs you have identified.Use it to identify strengths gaps you’ll need to fill.Use it to build your own self-confidence (most people under-estimate their own strengths).Use it to innovate by making new combinations by pairing STARS elements in new ways. We provide a template with directional examples a Mises.orgE4E_47_PDF1.
Map out a logical and sequential growth path with John’s “bowling pins” methodology.
John’s advice is to avoid tackling too large a market and too large a target customer group at the outset. Focus on a best fit intersection between your resources and customer needs. Label it. Then identify the next most logical adjacent customer need you can fill, ideally leveraging your learning from the first market. Keep on building up the map of adjacent needs to fill. When you’ve got to 10, think of them as bowling pins. Knock them down one by one, starting with the first — that’s your early focus — and ultimately completing them all. That’s your vision — the largest set of customer needs you can possibly fill.
John calls this process Upsizing A Customer Need, and notes that this bowling pin strategy is particularly persuasive to venture capitalists — they like it that you are focused, and also that you have a map to growth.
We reproduce John’s bowling pin map at Mises.org/E4E_47_PDF2.
Make the most of limited resources: Different is better than better.
How do you overcome the fact that existing businesses in a market you are trying to enter have greater resources than you? John’s answer: focus on being different rather than better. If you can identify how to be different — with a different solution, for a different target audience (even if it is small to begin with) you’ll evade competition.
John has additional advice about scalability, network effects, partnering and other tools for growth. Listen to the complete podcast for a rich reward of process tools and methods.
Additional Resources "STARS inventory" (PDF): Mises.org/E4E_47_PDF1
"Upsizing a Customer Need" (PDF): Mises.org/E4E_47_PDF2
Entrepreneurship is action. It’s a process in which the actions of the entrepreneur are decisive. In the final podcast episode of 2019, Hunter Hastings suggests eight action steps you can take for the betterment of your business in 2020 and beyond.
- Conduct an Empathic Diagnosis The entrepreneur’s first job is to understand the customer, their hopes and fears, their goals and wants, and their feelings. There’s a skill for that, and a method. The skill is empathy — the ability to feel what the customer feels.
The method is empathic diagnosis. The secret is not to ask the customer what they want or what they need, but to ask them how they feel. They can tell you that, but they can’t tell you why. That comes in step 2.
To ask them how they feel, use the contextual interview tool.
Think of it as a conversation with a customer whose feelings you are aiming to identify via a discussion in context. Look for responses that have “feeling” words — painful, frustrating, boring, annoying. Success! You’ve hit an emotional seam you can mine. Now dig in to understand their goals, and the means they choose to achieve those goals.
After the interview, you can collate the dissatisfactions, the emotional pain points, and the functional failures. Then you can curate these inputs into functional, cognitive, and emotional components of a potential new solution — that is, new features (functional), new beliefs about what’s possible (cognitive), and better feelings about the experience (emotional). You now have a first building block for the design of a service or innovation that has high potential for facilitating new and higher value for the customer.
- Construct a Means-End Chain to Generate Insights about Hidden Customer Motivations The output of your empathic diagnosis provides the basis for your next step. The goal is to generate an understanding about the motivations of the customer that they can’t quite explain themselves. People do not have introspective access to their motivations. Motivations are unconscious. People don’t know what Rory Sutherland calls the real why that explains their actions. Smart entrepreneurs can find out this real why, using our means-end chain tool.
Take an easel pad or a wall and mark out the links as different levels, starting at the contact point at the bottom and advancing one by one to the highest value at the top. Use sticky notes to populate each level with the appropriate customer responses from the empathic diagnosis. Then join the most pertinent items together that link each level — at this contact point, they perceive these features and attributes, that generate this functional benefit and this emotional benefit, all of which are logically and causally linked to the pursuit of the highest value. Recalculate this sequence a few times until you are confident you’ve identified the strongest route to the highest value the customer is seeking when he or she is in your space. You now have an insight into the customer’s hidden motivations, and you can use it to build a strong brand.
- Build a Strong Brand with Our Brand Uniqueness Blueprint Building a strong brand provides you with a financial machine — a capital asset that can generate customer revenues reliably over time, because it meets customer needs and solves customer problems better than any alternative.
The brand uniqueness blueprint (see Mises.org/E4E_30_PDF) helps you identify the two parts of your brand foundation: who is it for? — that is, whose problem are you solving, whose needs are you meeting? The term for this is relevance. And how are you solving that problem in a superior fashion? — that’s differentiation.
Use our brand uniqueness blueprint by clicking the link. You’ll find an instructions template, an example using a real brand, and a blank template you can use for your own brand. If you want to send us a completed blueprint for your own brand via our Mises for Business LinkedIn page, we’ll be glad to give you our comments.
- Complete a Resource Uniqueness Inventory. Our first three action items have been directed at your customer understanding and embedding that understanding in your brand blueprint.
Let us turn to your firm’s capabilities. You want these to be unique to your purpose, just as your brand is. Austrian economics focuses you on individualism, and that includes your own individual experience, knowledge, and skills. Our fault often lies in underestimating our own unique resources. One answer to this fault is to conduct an inventory or an audit.
In 2019, Dr. Stephen Phelan gave us a resource-based theory of entrepreneurship, under the acronym PROFIT, standing for Physical Resources, Reputational Resources, Organizational Resources, Financial Resources, Intellectual and Human Resources, and Technological Resources. Steve’s list is at Mises.org/E4E_18_PDF. You can use it to organize your understanding of your own resources.
- Imagine a Future Value Experience That Your Resources Can Deliver. Whom shall I serve?
One way to answer this question is to imagine a future experience that customers will value. Mark Packard showed us how to do this by activating customer value as a learning experience in five steps (see Mises.org/E4E_44_PDF).
Predicted value — it’s a picture you generate in the customer’s mind with your value proposition.Relative value — it’s a calculation the customer makes compared with alternatives.Exchange value — getting the customer to actually exchange dollars for your offering.Experience value — the act of consumption in which the customer actually experiences value.Value assessment — the customer conducts an assessment of value retrospectively. Looking back on the cycle, was the experienced value greater or less than the predicted value? Was it better or worse than the alternative, perhaps a brand that the customer abandoned in favor of yours? Does it feel like the experience was worth the dollars given in exchange? This is a place to identify a measurement of the value you have generated — but be careful: it must be a measurement of feelings and perception, which is a tricky measurement proposition. When imagining the new value experience you are trying to facilitate, make sure to imagine every stage in the sequence and how you can best stimulate each one.
- Initiate an Innovation Project to Deliver on the Imagined Value Experience. Innovation is the indispensable fuel of entrepreneurial success. The customer is continuously changing — rebalancing their preferences, seeking improvement in their circumstances, looking to feel better about their current situation. Dynamism on the part of the entrepreneur is mandatory.
Curt Carlson gave entrepreneurs the formula for managing innovation systematically. He uses the formula he calls N-A-B-C.
N stands for identifying the customer need.
The A is your approach — your business model, your uniqueness, your capability of delivering, your technology, your logistics, the complete package of commercially fulfilling the need.
The B is benefits per costs, in Curt’s language — what Mark Packard identified as relative value to the customer.
The C represents competition and alternatives. It’s imperative for entrepreneurs always to understand the alternatives the customer has available to them.
Download the knowledge graphic of the N-A-B-C formulation at Mises.org/E4E_37_PDF.
- Conduct a Time Inventory, Then Cut It. One of the most important ways Austrian economics helps entrepreneurs is with a strategic appreciation of the role of time. Production, the process of delivering a value proposition to the customer, takes time. The entrepreneur assumes the cost of time while the customer values time in their own subjective way and may seek alternatives that offer better time value. We are just beginning to understand how valuable time is to the customer — look at the success of just-in-time restocking systems, same-day delivery and overnight global distribution.
Steve Denning told us that time is now a strategic weapon of the entrepreneur — and a strategic dimension on which competition takes place. The customer wants speed, so the entrepreneur must manufacture speed.
A good step for the entrepreneur is to conduct a time audit. Examine all your processes that take time. Then imagine ways to reduce that time. Look at time from the viewpoint of the customer — where in the service experience would they welcome time reductions or time savings? How could you deliver them? Make time part of your innovation program. Give time back to your customers.
- Identify the Next Innovation That Makes Life Easier for the Customer. Austrian economics always looks at business from the customer’s viewpoint. It sees that the overarching strategy that defines the digital era from a customer perspective is making things easy. Easier by a factor of 10X or 100X. Online purchasing is easier. Overnight delivery is easier. Cloud computing is easier. Subscription models are easier.
Customers today are permanently dissatisfied with the degree of difficulty of getting things done, because they’ve seen how much easier things can be in so many arenas, so many parts of the landscape. Entrepreneurs are competing to make things easier for them.
So, here’s an exercise you can conduct. Imagine a way in which you can make things easier for your customer. Your empathic diagnosis might reveal several ways. Then imagine how your system could deliver the increase in ease — by a 10X or 100X factor. Then imagine a piece of digital intelligence or AI that might be able to implement the improvement for you. Then search for it on Github or elsewhere. You don’t have to develop the technology — you just need to imagine what it can deliver in increased ease for your customer.
Summary In summary, Austrian analysis suggests these eight action items for improving your business by improving your understanding of your customer and your delivery of new and better solutions for them. All eight are practical and depend mainly on imagination. They cover empathic understanding, branding, resource assembly, value learning, innovation, costs, convenience, and time. We hope that we have provided valuable content for you to think about as you make your business more Austrian in 2020. Let us know.
Additional Resource Download "8 Austrian Actions for 2020": Mises.org/E4E_46_PDF.
In an attenuated Christmas Eve podcast, Hunter Hastings highlights four of the useful principles he covered during 2019.
Customer Sovereignty — Which Means Putting Your Customer First. The economists call it customer sovereignty — the principle that it is the consumer who ultimately decides which businesses are successful and which are not, as a result of their purchasing (or not purchasing) entrepreneurial offerings. Stephen Denning calls it The Law Of The Customer. John Rossman calls it Customer Obsession.
Entrepreneurs who understand the leverage of customer sovereignty do everything they can to know and understand their customer’s goals, values and feelings. They seek out negative emotions — disappointments, unease, a feeling that things could be better — because these are the inputs for designing new offerings that customers will welcome to make their lives better and relieve their unease.
The method of Austrian Economics in this regard is empathy. It’s a soft skill you can nurture and develop with practice. Use the empathic diagnosis tool that we provided earlier this year (link below).
The techniques for empathy include the Means-End Ladder (understanding customers’ goals, or ends, and why they select the means they choose to attain them) and Listening From The Heart, a market research technique given to us by Isabel Aneyba.
Peter Klein on Means and Ends
The Means-Ends Ladder Tool
How to use the Means-Ends Ladder Tool
Peter Klein on Entrepreneurial Empathy
Empathy tools for entrepreneurs
Isabel Aneyba: Listening From The Heart And The Techniques Of Empathy
Avoid Competition The mainstream economics concept of competition considers firms competing to sell identical goods to an identical audience. Entrepreneurs take the opposite tack: they choose a select group of customers whom they understand deeply, and they assemble a unique set of capabilities to deliver unique, customized solutions.
The tools we presented during the year include differentiation and branding. Differentiation is the pursuit of uniqueness in your offering. It requires providing your customer with a means to achieve their goals that is different and better than any alternative. That can be faster, or easier to use, or more comfortable, or more personalized, or some other attribute or combination of attributes that the customer prefers. Differentiation is not achieved through pricing. It’s achieved by superior understanding of your customer and their subjective goals.
Trini Amador demonstrated how to capture differentiation in a brand. A brand is a promise — a unique promise only you can keep to help customers achieve their ends. It’s a promise that customers can embrace emotionally, and that you can deliver consistently, every time with certainty and without exception. Promises must be kept. Trini provided us with a templated process for brand building.
Per Bylund: What Is Competition?
Trini Amador on Brand Building
Brand Uniqueness Blueprint
Dynamic flexibility Austrian economics has always been on the leading edge of dynamically flexible resource allocation and capital assembly. Austrians see the worth of capital purely in the future revenue streams that it can generate from customers. If customers change, and the revenue stream changes, the worth of the capital has changed. The capital structure of a firm must change to reflect changes in the marketplace.
This applies to hardware, software, human capital, processes and methods and organization. Old capital must not be allowed to eat up resources that could be better used to serve customers in new ways.
With the arrival of the digital age, dematerialization, interconnectedness that can support rapid assembly and disassembly of global networks and supply chains, practitioners are now able to apply in practice what Austrian theory has been saying all along.
Dynamic flexibility is well-captured in the methods of the Agile revolution, as Steve Denning explained. And the ultimate expression of dynamic flexibility is innovation – the dynamic flexibility to supplant old technologies, old services, old organizational structures with new ones. Curt Carlson gave us his formula for successful innovation, and it’s very Austrian: always start with the customer’s need.
Stephen Denning on Agile resource allocation
Per Bylund on The Laws Of Agile
Curt Carlson on Systematic Innovation
Curt Carlson N-A-B-C innovation system
The Economics Of Value We finished the year with three episodes on the new economics of value. It’s the opposite of traditional economic thinking for entrepreneurs – the economics of scale and cost reduction. The economics of value entail selection of the smallest customer group to serve in the best possible way, so that they can experience maximum subjective value. It involves scaling down – personalization, customization, scarcity, limited availability, and high differentiation. We published a simple guide to the economics of value.
Mark Packard shared his latest research on the economics of value and specifically how customers experience it. They do so as a learning process, one that takes place entirely beyond the entrepreneur’s line of visibility – in the custmer’s perception. Mark explained the neuroscience as well as the economics behind the process, and introduced a 5-part cycle of customer value learning. We published a flow chart and a set of explanatory slides, using pizza as an example.
The power of the value learning cycle is that it replaces the concept of the funnel for entrepreneurs. The funnel has built-in inefficiency – wide at the top and full of costs, with revenue at the end where it’s narrow. There’s a lot of waste. The value learning cycle, when used effectively, engages a small group of customers well-known to the entrepreneur, and guides them logically to an experienced benefit that they assess positively.
Per Bylund on The Economics Of Value
Economics Of Value versus Economics Of Scale
Mark Packard on The Value Learning Process
Value Learning Process Map
To be able to adopt new ideas and successfully apply new techniques, it is sometimes necessary to discard old ones that are barriers to clear thinking. The theory and vocabulary of value illustrate one such barrier.
The language of business schools and many business books is that firms and entrepreneurs create value. That terminology implies that value is somehow embedded in the product or service the firm designs and markets, and that value is formed in the firm’s domain.
The business world has made a little progress in the last few years by opening up to the idea that value is somehow co-created by the provider and the customer. In co-creation, customers’ own usage of the service causes the value to be realized, and their comments, criticisms and suggestions become useful feedback to the provider to further improve the offering.
But we have known since 1871 that value actually lies entirely in the customer’s domain. Carl Menger wrote:
Value is a judgment economizing men make about the importance of the goods at their disposal for the maintenance of their lives and well-being. Hence value does not exist outside the consciousness of men. Now, Mark Packard sheds more light on exactly how value forms and develops “in the consciousness of men” — or, as we would say today, in the customer’s experience.
Key Takeaways and Actionable Insights Mark introduces the concept of value learning. This is the mental process through which the customer advances in response to a value proposition from an entrepreneur or a brand. It’s important for entrepreneurs to understand, monitor and measure the customer’s value learning. There are five stages.
Predicted Value Customers evaluate an offering that’s available to them with a mental prediction: I think that this offering might be valuable to me (i.e. make me feel I am improving my circumstances / make me feel better / help me towards my goal). Predictive value is translated into a price one is willing to pay for that experience. This willingness to pay is then compared to the price of the product. It’s a yes or a no.
Entrepreneurial action: Manage predictions strategically. Persuade customers that the predicted value is worth the cost, but don’t over-hype your product. Identify those customers whose predicted value relative to your price is positive. These are your only current target (unless or until you redesign your value proposition).
Relative Value The customer’s next cognitive action is to identify whether the predicted value is high or low relative to alternatives. These alternatives include not just other products in your industry (if any), but all other ways your customer might also satisfy the need that your product addresses. For example, one alternative is to keep their dollars in their wallet, if they think they can satisfy their own need for themselves at a lower cost (all in). The predicted value of your offering must be greater than all alternatives in their perception.
Entrepreneurial action: Calibrate your offering to the customer’s relative value calculation using price, features and benefits.
Exchange Value If the customer’s Relative Value perception is sufficiently positive, they’ll exchange dollars with you. But remember to account for the customer’s uncertainty. If the relative value is comparable between alternatives, customers will generally prefer the more familiar (certain) value over your uncertain offering.
Entrepreneurial action: Use price discovery techniques to align price and relative value.
Value Experience The customer uses or consumes the product or service. They’re generating feelings and perceptions as they do so, either positive or negative. Many of these are in response to a mental comparison with Predicted Value – is the experience better or worse than predicted?
Entrepreneurial action: Monitor the customer’s perceived experience. Be aware of variables in circumstances (time, place, mood, competitive environment) that can change their perceptions. You may need to guide the customer’s first consumption experience(s) to ensure proper use and optimal experience.
Value Assessment The customer, either concurrently or subsequently, makes a mental value assessment based on their experience. Good or bad? Better or worse than predicted? Does my assessment result in predicted value for a repeat purchase or subscription?
Entrepreneurial action: Measure. This is the stage where measurement becomes useful. Find a measurement that works for you. It could be in sales dollars, purchase volume trends, or customer satisfaction metrics. Such metrics are mere approximations, however, and are neither precise nor set in stone. Be careful how you interpret measured results.
This value learning process is mutual. The customer is always evaluating and re-evaluating and the entrepreneur must keep pace in service, relationship management and innovation. It’s a never-ending cycle of value.
In future podcast episodes, Mark will share some of the new tools he has developed to help entrepreneurs master the cycle.
Additional Resource "Value Is A Learning Process" (PDF): Mises.org/E4E_44_PDF
Immediately after he arrived home from fighting in the war in Vietnam, Vito Bialla started his executive recruiting firm, Bialla & Associates, from scratch. He built it into a professional partnership of the highest repute at the highest level (recruiting CEOs and other C-Suite positions) for the largest global corporations. He also started (and sold) a sportswear company and a Napa Valley winery, launched a venture capital fund, and he holds world records in endurance sports such as long distance swimming, desert trail running and ultra-marathoning. He shared his thoughts about the pathways to success in growing a business, recruiting high-performing executives, and identifying high-potential entrepreneurs.
Key Takeaways And Actionable Insights Grow Your Business No hesitation: Quickly identify your field and your customers. Vito started his own recruiting business just 6 months after starting work for the largest global firm in the field. He knew what he wanted to do, and didn’t wait too long to start the journey.
No compromise: Identify the top customers and the highest standards, and choose those as your targets. No-one wants to buy second best.
No barriers: Vito described how he would get the CEO’s of the top global corporations on the phone (tip: call late at night when their gatekeepers have left) and engage them empathetically. He would build relationships with the best executives at the most successful and admired corporations. He built relationships with the best in business.
Recruit Executive Leaders High Performance: Rather than personality traits or CV’s, Vito looks for performance indicators, especially under difficult conditions. An executive who has “bumped his or head against the wall” — i.e. encountered unexpected difficulties — has acquired experience that will be tremendously valuable in all future situations, however tough.
High trust: These high performance executives are found in high-performing corporations. An important signal is to be in a peer group of high performers and to have won their trust and admiration.
High empathy: If these high performers are to transfer into a new position with a new company, it is imperative that they be accepted into the new culture (rather than try to bring one with them). Empathy is key — to understand the new team and develop their confidence, even when (especially when) acting as the implementer of change.
Identify Entrepreneurs With High Success Potential Un-structured: You can’t learn entrepreneurship in business school, or by working at a large corporation. Structure and process induce a way of thinking that is insufficiently flexible in responding to marketplace changes. The successful entrepreneur knows what to do in a bar fight, when market conditions change radically, cash is running out and the current strategy isn’t working. (Don’t miss Vito’s own “bar fight” story.)
Un-plan: Plans are not particularly useful for entrepreneurs, especially those that are difficult to adjust. Adaptiveness beats planning every time. Vito looks for adaptive personalities (and evidence of previous adaptive behavior) in the entrepreneurs that he finances.
Un-deterrable: Vito’s number one rule is: No Fear. Fear of failure, he says, is unhealthy. Just do it, make something happen, set events in motion and learn from the results.
Additional Resource "Vito Bialla's Patterns to Entrepreneurial Success" (PDF): Mises.org/E4E_43_PDF
Good economic theory predicts effective, cutting edge business practices. For example, the dynamic flexibility of capital resource allocation predicted by Austrian Capital Theory is being realized today via digitization, dematerialization and agile organizational innovations. Entrepreneurs who fully embrace Austrian theory can be leaders in the field of business implementation.
At the same time, economic theory evolves and it’s important to keep up. This week, Hunter Hastings and Per Bylund talk about the economics of value and how this body of theory is superseding old mainstream economic theories from the industrial age. We focused specifically on the industrial-age concept of economies of scale.
Key Takeaways and Actionable Insights Economies of scale can feel daunting to small and medium sized business (97% of all businesses) because of the implication that big businesses enjoy unmatchable efficiencies, advantages in procurement and hiring, and asymmetrical bargaining advantages when negotiating with smaller business as vendors or suppliers.
But this industrial age economic law is not applicable to today’s entrepreneurial businesses. It applies to commodity businesses competing to make the same product and sell it to the same customers. It was historically possible to invest in capital to increase output per worker and lower variable costs to their lowest possible level, thus achieving a price and / or profit advantage, as well as an experience curve benefit of perfecting methods through extended high volume applications. Today, entrepreneurs don’t compete with commodity businesses, or in commodity markets.
Entrepreneurs compete on value, not on cost. Entrepreneurs put the customer in prime position, not production. They select a customer group to serve in the best possible way – so that those customers can experience maximum (subjective) value. Superior service to selected customers to facilitate value for them – not low cost - creates entrepreneurs’ competitive advantage.
Instead of pursuing greater and greater unit volume to lower unit costs, entrepreneurs utilize the customer empathy and feedback cycle to increase the level of value they can facilitate for customers. They process more and more customer feedback to understand better how to improve their experience.
Instead of scaling up, entrepreneurs scale down. Personalization and customization are increasingly effective routes to customer value experiences. Producing less unleashes scarcity, exclusivity, limited availability and uniqueness as value signals to selected customers.
And, when needed, scale can be rented. In the specialized areas where economies of scale are relevant – particularly in shareable infrastructure like the Amazon Marketplace platform or cloud computing – entrepreneurial businesses can “download scale from the internet”, i.e. take advantage of the platform’s scale without building it themselves.
The same customer-first, value-centric model applies In B2B markets. Entrepreneurs identify ways to fit in to the customer’s system in a unique or superior way to re-balance asymmetric bargaining power. Relationship, not scale, brings advantage. Entrepreneurs always put customers and their value experience first, in both B2B and B2C.
Scale is a choice for the entrepreneur. Choose which customers to serve at what scale. The cost connection with scale is far less important than in the past.
Additional Resource "Economics of Value vs. Economies of Scale" (PDF): Mises.org/E4E_42_PDF.
Austrian economics emphasizes the delivery of value for consumers and customers. Only they can define value, because it’s their subjective experience that is valuable to them. Stephen Denning, author of The Age Of Agile, explains how entrepreneurs can exercise the "Agile" mindset, and offers insight into how Austrian principles inform the latest generation of business strategies for the digital age.
Key Takeaways and Actionable Insights The revolution in value:
In the manufacturing economy, value was seen as making goods and selling goods.In the service economy, value was seen as service delivered to, and co-created by, customers.In the digital economy, all value is realized in the customer’s domain, and even they can’t imagine the value they’ll experience when they start using new digital technologies and methods. In Austrian economics, the theories of customer sovereignty and value in experience that sit behind this value revolution are well established. Now, entrepreneurs are finding ways to implement these Austrian principles. They call the new world of value “Agile”.
According to Stephen Denning, the agile value revolution is a mindset, with three guiding principles.
Obsession with facilitating great customer outcomes.Deliver the great customer outcomes at speed (work in small teams with short cycles)Organize the firm as a network not a hierarchical bureaucracy. Entrepreneurs can exercise this mindset in these ways:
Facilitate new value outcomes for customers.
Entrepreneurs don’t create value — value occurs in the customer’s domain based on their consumption, and their context.Entrepreneurs can’t plan the value outcome — it’s emergent.Even customers can’t imagine what value they’ll experience from a new service or new technology.Therefore, entrepreneurs can facilitate value — make it possible — but only customers can realize value. To facilitate value, fit into the customer’s life.
Responsiveness is not enough — you’ll always be behind the twists and turns of customers’ changing preferences and experience.The art is to keep up with customers in real time as they change.Practice customer anthropology — become part of their lives. Time is value — use it well.
Customers prefer faster over slower.Therefore, speed is value.Use time as a strategic weapon: faster wins. Eliminate all waste.
No value is created inside the firm.Many internal activities are pure waste — reversing value outcomes (e.g. decreasing speed).Estimates vary between 20%-50%+ of firm internal activities are waste.Eliminate all the waste you can identify.Export the savings to the customer. Flexible, dynamic capital allocation.
Move resources and capital around quickly, to value-facilitating applications.Be ruthless in eliminating non value-facilitating projects. Design and operate your firm as a network.
A flotilla of speedboats outperforms a big machine.Change processes from linear to networked — from lean to flow.Change organization from hierarchy to network — no reporting lines.Change leadership thinking — place leadership in the teams that are close to the customer Additional Resource "The Agile Value Revolution" (PDF): Mises.org/E4E_41_PDF
Professor Peter Klein teaches entrepreneurship based on fundamental Austrian principles from Carl Menger’s Principles Of Economics. His advice is unlike anything you’ll get from studying mainstream economics, or from business books and business school classes. In our podcast, Peter explains the fundamentals of economics under ten headings, below, and transforms that economic knowledge into entrepreneurial guidance.
Key Takeaways And Actionable Insights Humanism: Business is about serving others, making their lives better. You can engage customers by understanding their hopes and dreams and their highest aspirations. Make humanism the foundation of your business strategy.
Individualism: To understand customers, you must approach them as individuals, not as “targets” or “segments” or “demographics”. Individualism is a methodology: identify one perfect customer and then try to add more that are closely similar.
Means And Ends: Customers choose products and services that they believe will serve them as means to achieve their preferred ends or goals. Use means-ends analysis to identify the pathways customers will follow to embrace your offering. Think of it as the customer’s journey through a valued experience that you can make possible for them. (Our free e-book, Understanding The Mind Of The Customer can help.)
Subjective Value: Value is an experience felt by the customer. It’s subjective and idiosyncratic, and can change with time and context and mood. Entrepreneurs must be empathic in diagnosing how customers experience value or its opposite, dissatisfaction, and humble in following changes in value perception that can occur quickly and without warning.
Customer Sovereignty: The customer is your boss, and determines what is valuable, what they will buy and refrain from buying, and which products, services and businesses will be successful. Changes in customer preferences can sometimes seem arbitrary and hard to follow; nevertheless, the entrepreneur’s job is to follow, respond, and ideally, imagine where the customer will go next in their search for betterment.
Uncertainty: The future can not be predicted. Extrapolated trends and predictive models can not deal with the changing preferences of customers over time. Even the customer is not sure what value they will experience when they use your product or service — it emerges from the interaction. Entrepreneurs understand this uncertainty and deal with it, by imagining what the future could be, based on their customer understanding, and adjusting to new information as it becomes available.
Deductive Method: Uncertainty sounds so intimidating. Austrian entrepreneurs use the deductive method to help steer them. Find some principles you know to be true — we know for example, that customers are always seeking betterment — and use those principles to reason your way to understanding complex phenomena. Your specialized knowledge of your chosen business specialty will give you solid grounding. By all means add test data and evaluation data and marketplace results data to your reasoning. But try to find the bedrock principles you can reason from.
The logic of cause and effect: All things are subject to the law of cause and effect. If you can identify the causal linkages, you will be firmly in command of your business. Write the story of the future evolution of your growth path in cause-and-effect language and match it to actual events as they unfold.
The role of time in production: Austrian economics has a unique sensitivity to time in the production process. Entrepreneurs must commit capital now to start production that will be completed in the future, without knowing the future nature of the market — what prices will prevail, what competitive firms will do, how the customer will be feeling about future conditions. Time is a danger to entrepreneurial success — so be as quick as possible, make fast decisions, shorten production cycles, and use time as a scarce resource.
The division of the production chain into higher and lower orders: The value of every link in the production chain reflects the revenue flow from customers to which it contributes. If preferences change, the value of upstream production resources changes. Wherever you operate, B2B or B2C, always keep an eye on end-customer behaviors and preferences. As a B2B supplier, you can be very useful to your business customers by alerting them to end-consumer changes.
Additional Resources Download "Menger's Manifesto"—Professor Peter Klein’s list of 10 Austrian Principles from Principles Of Economics (PDF): Mises.org/E4E_40_PDF
Download our free e-book, Understanding The Mind Of The Customer (Mises.org/E4E_Understanding).
Download Menger’s Principles of Economics (Mises.org/E4E_Principles).
Marketing guru and fund investor Hunter Hastings joins the Human Action podcast for a look at Economics for Entrepreneurs, a new platform which uses Austrian theory to teach actionable entrepreneurship.
Can business acumen be taught, or is it innate? Hunter and Jeff examine consumer sovereignty, value creation, and the theory of the firm, all from a unique Austrian perspective. Austrians have a lot to say about how entrepreneurs ought to think, while business schools fail to adjust to the new decentralized, agile world. Austrian economics provides entrepreneurs with a different set of tools than any business book or MBA program, and our new podcast series will help anyone improve their business or career bottom line.
Additional Resources Mises for Business LinkedIn page
Economics for Entrepreneurs (E4E) podcast
Rick Rule is CEO at Sprott US Holdings. His lifetime focus on natural resources finance enabled him to carve a unique pathway to entrepreneurial success. Like many entrepreneurial journeys, Rick’s had some twists and turns. Here are some of the key stages.
Key Takeaways and Actionable Insights Find out early what you love. Rick enjoyed the outdoors, nature and therefore natural resources, the associated science of efficient and effective use of natural resources, and finance. All of us have a combination of likes and preferences that may stimulate us but may not initially appear to present us with an entrepreneurial recipe. But as Curt Carlson explained in Episode #34, combining knowledge from different people and fields can result in compounding insights.
Combine Knowledge in New Ways. Rick combined natural resource science with principles of corporate finance, specifically debt and equity finance for extractive industries. As a result of the special properties of natural resource markets, and firms’ needs for customized financing, an opportunity niche emerged. Rick’s application of his special combination of knowledge placed him in a competitively advantaged position.
Learn By (Hard) Experience. Rick learned not to confuse a bull market with brains, as he puts it. He did business through a complete commodity market cycle in the 1970s through the early 80s, experiencing volatility and ups and downs first hand. Theory is no substitute for experience. Nevertheless, his knowledge of Austrian Business Cycle Theory, Austrian Price Theory (“the cure for high prices is high prices, and the cure for low prices is low prices”) granted him a superior perspective in interpreting market signals.
Develop Deep Market and Customer Understanding. In his focus market, Rick developed a business segmentation that focused on participant firms of a defined size (<$250MM market cap). He studied those customers and understood their circumstances. The consequence of limited information flow (data about these firms did not flow easily between conventional market analysts), was that the firms had limited access to capital. Rick was able to overcome these information gaps, making him a preferred supplier of scarce finance.
Identify a Need You Can Fill For Your Carefully Selected Audience in Your Carefully Selected Market Segment. The business model came together in a way that Rick describes as “lender of last resort to high quality management teams in high quality companies that were not popular” and were therefore capital constrained. In addition, Rick’s understanding of business cycles and commodity prices further strengthened his confidence in lending when others would not, the market rewards for which turned out to be high.
Combine Empathy, Trust and Courage. Rick confirmed the E4E emphasis on empathy as an important skill for entrepreneurs — primarily, in his case, empathy for the customers whom he financed. He sought to combine empathy with trust: in a market where information is scarce, it is imperative to have trust in the sources. “Without trust,” says Rick, “I have no information, and therefore I cannot make decisions.” The third emotional attribute he identified is courage — the courage to have the conviction that your model indicating a future upcycle or price rise is well constructed, and not to second-guess it during the time that the trade is underwater.
Additional Resource "Rick Rule's Path to Entrepreneurial Leadership" (PDF): Mises.org/E4E_39_PDF
The management methods and practices that have been gathered under the term agile claim the status of a Copernican Revolution. Agile reverses the traditional view of business revolving around the firm, instead placing the customer at the center and viewing all other elements as revolving around the customer.
This is a welcome development — but just a step towards the Austrian vision of consumer sovereignty and the concept of value as created by the consumer, not the producer.
Key Takeaways And Actionable Insights We examined the three "Laws of Agile" proposed by Stephen Denning in his book The Age Of Agile, and Per Bylund notes the elements that are useful for entrepreneurs, and the extra insights provided by Austrian Economics that can help entrepreneurs to perform at a higher level in facilitating value experiences for their customers and consumers.
The Law Of The Customer Agile recognizes that the one valid definition of business purpose is to create a customer.The customer — with mercurial thoughts and feelings — is at the center, and demands to be delighted.What the firm thinks it produces is less important than what the customer thinks he / she is buying — what they consider “value”.Everyone in the firm must view the world from the customer’s perspective, and share the goal of delighting the customer.The firm must have accurate and thorough knowledge of the customer.Continuous innovation is a requirement to delight customers.The firm’s structure changes with the marketplace.Speed of response becomes crucial and time is a strategic weapon. Austrian Enhancements The Austrian concept of Customer Sovereignty is even more powerful for entrepreneurs — customers create firms, in the sense that customers decide what is produced by buying / not buying, and therefore which firms are successful.Value is subjective — and so customer preferences can change rapidly and frequently.Responsiveness is not enough — the goal is to imagine the customer’s future needs, and involve them in the production of future value. The Law Of Network Collaborative network of competence replaces hierarchy of authority.The network has no leader, but it does have a shared, compelling goal.The network is the sum of the small groups (rather than individuals) it contains.Each group has an action orientation.The network’s administrative framework stays in the background. No bureaucratic reporting. Austrian Enhancements Agile is based on too narrow a view of the economic network. It’s still producer-centric.The true network is the market — which includes customers (of which there are many more than firms, and who exert more economic influence than firms).Networking the production side of the firm is an incomplete act.A fully-functioning network includes customers and consumers with equally valid connections to the firm, not just collaborative production partners. The Law of Small Teams Big and difficult problems are disaggregated into small batches and performed by small cross functional teams — scaling down the problem.7 +/- 2 is a good rule of thumb for team size.Each team is autonomous, and works in small batches and short cycles.Each team aims to get to “done” — it’s binary: either done or not done, never almost done.No interruption.Radical transparency.Customer feedback each cycle.Retrospective reviews. Austrian Enhancements A pure focus on short term execution can divert attention away from longer term considerations – especially, imagining the future, which is the core component of entrepreneurship.Focus on creating value for the future, while ensuring no loss of current reputation and relationship.Administration — and therefore “bureaucracy” — can’t be eliminated entirely without a reduction in customer value.Required services can be a component of value creation — such as compliance, operations management, etc. Additional Resource "The Laws of Agile Meet Austrian Economics" (PDF): Mises.org/E4E_38_PDF
Jeff Deist: Professor Bylund, you grew up in Sweden. What stands out from your childhood?
PER BYLUND: I grew up in a suburb of Stockholm, separated from Stockholm by just a lot of nature. It’s close enough to be part of the Stockholm metropolitan area, but far enough away from it to be on its own.
When I grew up in the 70s and 80s, I was given a very romantic view of Sweden and how everything worked, but I only realized later it wasn’t very true. It was the happy 80s, so there was no end to public funds for anything. Everybody went to free dental care and everybody had their teeth fixed, so everybody could have good smiles. I did that as well. During the early grades — from first through sixth grade — we had a lady who was hired only for one task. She visited each class once a week with a big tray of very colorful little plastic cups with fluoride. You were supposed to just swoosh that fluoride in your mouth between your teeth and then spit it out, but the beauty was that we got to keep the cups, so that was something that all the children collected back then. We got hundreds of those different fluoride cups in different colors. That gives you sort of a taste of what growing up in Sweden in the 70s and 80s was like. No problems. More money and government takes care of everything, basically.
JD: We hear a lot about Scandinavian models of governance. What can we learn from Sweden today, a country of 10 million people?
PB: We can learn a lot. Sweden is a story that goes back more than the past 150 years — going from being the poorest country in Europe to being the world’s fourth richest in 1970. That’s totally a free market story. It’s about deregulation, it’s about limiting the powers of government. It’s about separation of powers between the king and the parliament. There was lots of investments in infrastructure, but only in the supportive sense. There was not a whole lot of welfare state. That meant the welfare state started to grow, but not as fast as the economy, which means that the economy can cover for all the inefficiencies of the welfare state before the 1970s. And then, the more important lesson — or the not-so-common lesson — would be that the welfare state was started in 1970 and it really went berserk and it completely imploded after 22 years. So, that’s how fast it goes if you try to nationalize everything and really go for socialism.
You can see policies Sweden pursued back then are policies that politicians today are promising. One of the things that was a turning point in the 80s, at least policy wise and in people’s ideological consciousness was the Employees Fund. It was this new progressive proposal that the government would tax corporations and put part of their profits into a fund that was going to be run by the national labor unions. This fund had only one purpose and it was to reinvest that stolen profit into buying stocks in those corporations. It was nationalization, not of single businesses, but of the whole free enterprise system. And that was the wakeup call for the nonsocialist part of the Swedish population. As a result, there was a huge protest. If you know anything about Swedes, Swedes do not protest. The way we tend to say it about ourselves is that a Swede is really angry if he closes his fist in his pocket. You don’t get more out of a Swede. So, when you have tens of thousands of people protesting the government, of all things, in Sweden, it is a really big thing.
Beginning in 1970, progressive policies were enacted throughout that decade, depreciating the currency numerous times in a few years, just to cover the holes and increase exports to cover the expenses of the government’s progressive policies. Then in ’92, when the Swedish currency completely imploded, they set interest rates to 500%, trying to defend the fixed currency exchange rate. They couldn’t defend it, so they let it go and it immediately dropped substantially in exchange value. Then, surprise, it became a repeat of the Golden Century — from 1870 to 1970 — when government wasn’t the main driver of the economy. After 1992, all the parties agreed to cut back on the very generous universal welfare system. That is where Sweden is right now. The government is still very big even after they cut back a lot. Now since there is a little more money, they are discussing how to expand the welfare state, as politicians always do.
JD: As a young man in Sweden did you make a conscious decision to leave for America, or to become an academic?
PB: Yes, that was a conscious decision. I always was playing with the thought of having the whole world as a platform. I was always fascinated by, and dreamt in some sense, of moving to the US. That was a dream come true. Pursuing an academic career, that was a conscious choice. I was an IT consultant in Stockholm. I had a Master’s degree in informatics and I was working as a senior software developer and business consultant. But I spent basically all my time, when I’m not in the office, writing libertarian columns online. I published around 200 columns in one year on all different websites. Mises.org was one. And my then-girlfriend, now wife, simply asked me, “you don’t like your job, all you do is just study philosophy and economics, why don’t you quit your job and go back to school and pursue an academic career?” And like any man confronted by his woman, and being young, I immediately decided to do it.
JD: But why America in particular?
PB: The reason I ended up in the US is simple. I applied for PhD programs in Sweden, for three years. But I couldn’t get into those PhD programs. Part of the reason is that they are fully funded and are in reality full-time employments with an okay salary. You can only pursue a PhD in areas where you already have previous degrees. Swedish academia works like it does all over Europe. Your bachelor’s degree is very focused, and then you study your major and minor and nothing else. After that, you can pursue a Master’s and then you can pursue a PhD in the same discipline. I had, at that point, a degree in informatics that I was sort of basing my career on. And on the side, I was studying political theory at the university. I finished a Masters degree in that too. I was trying to get into a PhD program in political theory as a libertarian, and as a white heterosexual male. That made me sort of the last applicant that they would choose. I think the best year during which I applied they had four open positions in the country. I was not going to get any of those. I had one interview in three years. Then I sent my résumé to friends at the Mises Institute. I think the very next day, I get an email from Peter Klein saying “how about Missouri?” And that’s how I ended up in the US.
JD: Fast forward to today, and you’re a professor of entrepreneurship at the business school at Oklahoma State University. You’re very active on Twitter. You write for popular outlets like Entrepreneur magazine. Do you intentionally seek out a popular audience, beyond the parameters of a normal tenured professor?
PB: To some degree. I’ve been influenced by people like Joe Salerno, who says that an economist should really see economics as a vocation and not a professional career. I think that is correct. I also recall Mises saying that a public intellectual should be just that, a public intellectual. I realized the limitations of the classroom. I remember from my college career, you studied really hard for the test and then you go and party like hell to forget everything, so you have some space in your brain for the next test. People don’t really remember what they study a whole lot. But they do remember good stories and I think they need to be reminded over and over again of what the truth really is.
My job and my role as a professor is, yes, teaching in the classroom, and yes, do research, which is the main task. The job is also to reach out with everything I know and everything I’ve come across and with everything I learn to help others understand the world better. Today, most college professors are progressives and they definitely do not hesitate to take their own “arbitrary theories” of the world and make that their starting point in what they teach. So, I don’t see why I shouldn’t be able to tell the world about Austrian economics and how free markets work. For us as Austrians, it’s not as arbitrary as it is from a progressive perspective. We start with the action axiom and then we derive truths from there. It’s not an ideological thing. I’m spreading knowledge. I’m spreading what I know and what I understand. What I’ve learned doing this, both online getting comments from readers, and especially on Twitter, is that I get a lot of pushback. But I get a whole lot of questions too, and questions that make me have to rethink some things and dig deeper into my own knowledge. I use the classroom in the same way. I teach stuff that I know, but I encourage pushback and it’s all discussion-based, meaning I want them to push back and ask hard questions because that’s how we can all learn. It’s sort of a discovery process, overall, for both me and for others.
JD: You’re adept with Twitter. Despite the character limit, you don’t use it for trite self-promotion or sound bites. You actually create substantive threads.
PB: You know that’s really odd because Twitter is supposed to be this really fast medium — just slogans and stuff like that. I found out very quickly that the really long threads consisting of 30-35 tweets, with one argument building up throughout in those tweets, those are by far the most popular ones. Those are the ones that people retweet. Those are the ones that people like. Those are the ones that people connect with you and ask questions about. They go through private messaging on Twitter itself and that’s how I get the little following I have on Twitter. It’s totally through those longer ones, and it happens over and over again. When I think I write something really clever and really cool in just one single tweet, even if I retweet it a bunch of times, it just never takes off. People don’t really like slogans as much.
JD: A recent example of your Twitter campaign is a lengthy conceptual thread concerning value. People still struggle with the labor theory and marginal utility. They think cost, time, and inputs determine value, and ultimately determine prices. Why does this still trip people up more than a century after Böhm-Bawerk explained it?
PB: It is the power of economics, and I think it was Mises who somewhere said that the power of economics is to show people that it’s really the opposite of what it looks like. I think that is at the very core: people think they see things, they think they understand things, and they just create those patterns. The patterns do exist and they do observe the patterns, but they do not recognize the actual processes that create those patterns. And the role of the economist is to point out that these are the true processes, whereas everybody thinks that those processes are very different.
The labor theory of value was debunked by Böhm-Bawerk almost 150 years ago, and yet, it’s very much alive because that is where people start. They think of value as objective and they think of value as being the creation of labor. But it is really the other way around. We invest labor because we think we’re going to end up with something valuable. I think that is the very core of the Austrian school. It’s also a core insight that completely changes how you view the world and I use that a lot when I teach entrepreneurship. That’s something that entrepreneurs figure out themselves because they make so many mistakes following the objective-labor-theory-of-value type of view of the world. They realize that it doesn’t matter what they think or what they think they have seen, but value is truly in the eyes of the consumer. They have to figure that out and that’s their task. Entrepreneurs in general, especially experienced entrepreneurs, are truly and fundamentally Austrians.
JD: Even entrepreneurs focus too much on cost?
PB: Yes, it is strange, but people tend to think of cost, which makes sense, when you’re producing something. What do you have first? Well, the thing you have first is the cost, and because you assume that cost, you have a product that you can then potentially sell and make a profit. If you think about it in technological terms, it makes sense to start with the cost because there is value. But, as Menger showed us, that’s not the case. We pursue this end because we think the end is valuable to us. We expect value from this end and therefore we are willing to assume those costs. And there we go again. It’s exactly the reverse of what we think of the world, but people are really, really sure that it’s cost that creates value. Unfortunately, they are taught that in school, too. I mean, it’s intuitive. For most of us just observing the world, there isn’t much pushback, not even in school. Not in the first 12 years, not in college, even if they major in economics. They’re not going to understand subjective value, they’re just going to look at it as money values and it’s not until they encounter a professor associated with the Mises Institute, or Austrian economics, that they’re going to get some pushback. By then they’re already old and you know about old dogs and new tricks. It’s hard.
JD: Why did you decide to specialize in entrepreneurship and theories of the firm?
PB: It happened through Peter Klein. When I started, he was an assistant professor, still not tenured, in the Department of Agricultural Economics at Missouri. But agricultural economics is not “real” economics, if you ask any economist. The department was a little bit weird and marginalized to begin with and they are, of course, very focused on farming and agriculture. But there was also a focus on regional economic development because they are an outgrowth of the land grant mission as with many public universities. In this department, they had an eclectic approach to economics because there was already a group of professors doing entrepreneurship and transaction-cost economics. It was a little more practical and applied than a regular economics department.
But in my work there, when reading Ronald Coase, I immediately realized that something is completely and fundamentally wrong with his thesis. I couldn’t figure out exactly what, so I dedicated my dissertation to, in a sense, disproving him and drafting my own theory of why there are firms and what sort of function they have in the market economy. That idea was interesting because it also has to do with the Mises Institute.
I was sitting in the second floor of the Mises campus as a Research Fellow during one of my first summers as a grad student and sifting through books by Mises. I was reading up on, and trying to figure out, what the heck is going on in the economy overall and how to understand where productivity comes from, and where wealth comes from. And it suddenly just struck me that maybe it has something to do with specialization. I remember going immediately to Joe Salerno’s office and asking him if he thought that was a good project to work on, and he looked at me and said, basically, “huh? I’ve never heard that explanation for the firm before.” That, of course, was enough for me to think that that’s something worth pursuing. If he has never heard of it, then obviously there’s got to be something there, or I’m completely wrong, and if so then I’m going to figure that out. Peter totally approved of the idea too, and I pursued that. My dissertation is, in a sense, a refutation of Coase’s concept of the firm. My position was, “how can you have firms if you don’t have the entrepreneur at the very core?” So, that became it.
And how did I get into the professional academic career as an entrepreneurship professor? Well, there’s a bunch of luck and coincidence, because both Peter and I were in the Department of Agricultural Economics. It’s not an obvious path to move into the business school and start teaching and doing research there. I mean, as competitive as it is to try to get a tenure-track position, if you have training in a completely different discipline, then you’re basically excluded. So, how do you do that?
Here is where luck and coincidence play a part. I was playing squash with friends in grad school. One of them was in the Management Department where entrepreneurship is usually studied. It happened he was also playing squash with his advisor, who turned out to be the new department chair in Management. So, I played his advisor as well and the advisor said, “oh you’re an entrepreneurship guy, right? … We need someone to teach entrepreneurship because we don’t know anything about it and no one’s really interested in entrepreneurship in our department. Do you want to teach for us?” So, my first job after graduating was one year of adjuncting, which I can’t recommend to anyone because it’s nuts, and not really paid. I made less money being an adjunct teaching seven courses that year than I did as a grad student.
That year a research position at Baylor University also opened up, and they were looking for someone in entrepreneurship and policy. The position was also associated with free enterprise. It turns out that if you want something in entrepreneurship and policy, you are in a very bad position because entrepreneurship scholars know nothing about policy and those who do know something about policy are either political scientists or they don’t know anything about entrepreneurship because economics threw out the entrepreneur from their models a long time ago.
I was the only candidate for two positions and I fit in perfectly as an Austrian economist studying and teaching entrepreneurship. I got that research position. It was a three-year position and that gave me enough time to just do research and try to get published in the journals, which is necessary to get a job in academia. And that, in turn, led to my position now at Oklahoma State. It was quite a bit of luck and lots of coincidences. The reason I have a pretty good career, and a good position now, is basically because I was playing squash with the right people and because I happened to be with Peter and other professors doing entrepreneurship stuff. And now, of course, Peter is at Baylor, so we both moved away from agricultural economics.
JD: Distill for us your theory of the role of the entrepreneur, and your theory of the firm. How does the Austrian school inform your thinking?
PB: My focus is on studying the problem of production. We know that through the more intensive division of labor, we get more productive, but we also know that the market economy is decentralized. If it’s decentralized and it is also very specialized, that means that you have to also be compatible with everything around you in the sense that if you’re specialized, you use standard inputs to produce standard outputs in any supply chain or production process. So, how do you get from there to introducing highly specialized production processes? You can’t do it individually. I can’t suddenly specialize in the standard way of thinking of specialization, which is simply cutting up an existing task into smaller and smaller, moreand more narrowly defined subtasks. If I have this standardized task that I am carrying out, if I say “well, I’m really good at this one-third in the middle,” I can’t just do the one-third in the middle because that makes me incompatible with both the other standard inputs traded in the economy and I will not produce complete outputs that someone else can use. If I do the middle third, I have to combine my efforts with the first third and the second third. I have to work collectively with them to organize and coordinate the introduction much more intensively than a specialized production processes.
I developed this imaginary construct of this specialization deadlock. The deadlock is this: if we push people to just continue specializing as much as possible, we’re going to end up at a point where no one can specialize any further because that will make them incompatible with the economy, and then whatever they’re producing is incomplete. They will not be able to be part of any existing production process. And from there, of course, the solution is, in a sense, obvious. You need someone to come up with the idea for how to replace a part of the production process or the whole production process, whatever it is and coordinate those new tasks that need to be carried out. You need to create this whole process, in a sense, with new types of specializations that have not existed before. Obviously, the whole thing stands or falls with everything working out because if anybody fails in this new chain that you’ve created, it is itself incomplete and incompatible with the rest of the economy. In order to break free from the specialization deadlock, you need to create these islands of more intensive specialized production. This must be coordinated by and led by the entrepreneur, who Mises has as the driving force of the economy.
Ludwig Lachmann talks about it as the truth function of the entrepreneur: it is to change the capital structure of the economy which is exactly what this is. This is how you make the production structure more roundabout: by splitting tasks up in more specialized subtasks, introducing capital potentially to make this happen. For me, at least, it fits perfectly in how the market economist solves that problem of specialization itself.
JD: Mises characterized entrepreneurs as “uncertainty bearers” and Israel Kirzner characterized their alertness to opportunities. Is this a distinction lay people like me should care about?
PB: I think it’s very important to understand the role and function of entrepreneurship as creation of new goods and services, and new conceptualizations of goods and services. I like to call it more the facilitation of value, since value is in consumption. The consumer can create the value by simply consuming a good or service, but where do these goods and services come from? They come from entrepreneurs trying to figure out how to better serve the consumers. That makes it very clear that the judgment necessitated by entrepreneurship — and the uncertainty-bearing function and also the imagination of it — are really core to understanding the economy overall.
JD: When Mises says uncertainty that means risk, the possible loss of capital and time. We might call it skin in the game. As you know business school critics like Nassim Taleb say entrepreneurship and business acumen can’t be taught. Professors aren’t business people with skin in the game. Give us your take: can entrepreneurship be taught?
PB: The short answer is yes and no. What I mean by that is simply I don’t think you can teach how to be a successful entrepreneur. That’s pretty obvious because if you could teach that, then obviously I, and other professors, would know how to be successful in the marketplace, and then why the heck would we be professors instead of not making money in the economy? We do not know how to actually be successful, but we know how to avoid a lot of errors that people make. What you teach first is all the tools that are either necessary or have a function: accounting, marketing, and all this stuff that business schools teach. In terms of entrepreneurship per se, learning how to think about business and where value comes from can be taught and it has to do with what we were talking about before. Understanding value and how to get to it, is very important. There really are two components to this. The first part is to understand the economy — that is, sound economics — so you don’t start investing just before the bubble bursts, so that you’re not tricked by asset bubble thinking. The other part is to understand people, primarily consumers, being able to put yourself in their shoes and understand what would create the most value for them. What are the most urgent and important problems that they have? How can you satisfy their wants or help them move away from the uneasiness that they’re feeling? Those two aspects can definitely be taught. Maybe not completely, but enough to understand how to not mess up as an entrepreneur.
JD: Austrians suggest that many entrepreneurs don’t recognize how important monetary policy really is. Professor Bryan Caplan criticizes Austrian business cycle theory on the ground that smart business people could figure out the booms and busts central banks create, rather than fall prey to malinvestment. Do you think this holds up?
PB: Entrepreneurs are not specialized in economic theory, and why would they be? Economic theory is not always super applicable to what they’re doing, and there is an opportunity cost to learning stuff and deep diving into most of the aggregate data. So theory is probably not worthwhile. There’s also this little thing called profit. During a boom — even an unsustainable boom — you can make tons of money if you are investing right. And most entrepreneurs think they are investing right and they’re following signals that are false because the interest rates are too low. Even if they know that the bubble will burst, why would they sit at home and not get that money that is available for them? They can grab the money by running a business. What they need to do is get out before anybody else. They usually think that they can do that, when they see the signs. I don’t think even if you have the time and interest in learning business cycle theory, you would be a poor entrepreneur if you just said, “well, this is an unsustainable bubble, so I’m just going to sit this one out.” Besides, it could be an unsustainable bubble that lasts for 10 years, like we’ve seen now, since the financial crisis. Are you just going to sit on your hands and not make any money for 10 years just because you know that this bubble will eventually burst? That doesn’t make any sense at all. Many entrepreneurs do get out in time, so it’s not really about learning because every actual situation is unique in many ways. Learning the theory which tells you what is going on in universal terms, theoretical terms, that definitely helps you. But it doesn’t help you to get out in time because the timing of it is not down to the theory that can help you predict.
JD: I have one last question for you. Critics on both the Left and Right increasingly seem to claim economics is not a real science or discipline. Economists just provide intellectual cover for business interests. There are no economic laws, just policies that legislatures can command. I’d like your response.
PB: I think it’s silly. That’s my short answer. What it really shows is, in a sense, economics has made its own bed because economics is not very helpful. Economists, using math and throwing out the entrepreneur, what they’re doing is providing the planning tools for the central planner and they think that they can do it. The recent Nobel Prize is just proof of this, that they’re conducting experiments thinking that they can find real truths about how to produce better policy so that they can make micro adjustments to society and the economy and create better outcomes. What they’re missing is that we’re dealing with people, so it’s not truly mechanistic. But, just because it’s not truly mechanistic doesn’t mean that there aren’t patterns to it and regularities. There are regularities to the economy. But better understanding can be directly derived from us as people, and also from what we do, and especially our actions. We’re always trying to attain some value that we think is valuable enough for us to pursue. That’s the axiom that Mises develops with praxeology, and that explains this really well. The problem in economics now is that they have completely thrown out subjective value. Now they start with using proxies by looking at money price instead of subjective value because it fits their models better.
But now they don’t even know that there is such a thing. I was fortunate, I suppose. I took my advanced microeconomics course at Missouri, and was taught in the economics department and not in the ag commerce department. That professor started by saying, “we know that value is subjective. Assuming that we could still plot it in the utility function and use utils, we should be able to maximize it as well.” Then he started filling the blackboard with one big equation and the rest of the semester was trying to maximize this equation with using partial derivatives of different variables. He was part of the old guard in the sense that he recognized that value is subjective, but he just chose to disregard it. Whereas now, I don’t think there are any economists being trained in economics programs, at least not in the classical sense, because they are now technocrats. They don’t think about economic issues. They think about how to program different statistics programs and how to check their results for biases and then they come up with some clever explanation for their findings. They use economic terminology, but there’s really no economic understanding behind that at all. They’re trying to predict and they’re trying to get into a career in government basically, trying to help policymakers produce better policy, which is very different from the type of economics that we do in Austrian economics.
We’re trying to understand the world and help people become better people. We’re not trying to push people around the way you do with policy and always create new problems because that’s what policy ends up doing. There are both large and small problems, but still problems. This is because there are unintended consequences. They assume that people are not people. In other words, we can tell a story about what is actually going on, that people can understand and learn from.Real life entrepreneurs, they understand Austrian economics, they just don’t have the tools, the terminology or the theory. They have the experience telling them exactly what we know — that is Austrian economic theory is correct in how it explains the market economy and how it works. That’s how we can explain all these problems that come out of policy and all these errors made by politicians. We can, in this sense, predict or at least foresee all the suffering that people will have to go through simply because they want these quick fixes through policy that have never worked and will never work. Economics is a social science, but it’s definitely also a tool for uncovering the true state of the world and the true dynamics of the world. At present, there are really two categories of people who understand the world and understand the economy and those are experienced entrepreneurs and Austrian economists.
JD: Is it an overstatement to say most mainstream economists have no concept or theory of the entrepreneur at all? They think individuals are interchangeable widgets?
PB: The way they treat entrepreneurship is to look at startups. For these economists, the aggregate number of businesses and jobs being created is all they’re interested in. They have no conception of the entrepreneur as a person, or the entrepreneur’s function in the economy beyond just jobs creation. It makes me think of the famous Schumpeter quote about how studying the economy without the entrepreneurs is really Hamlet without the Danish prince.
Is successful value creation through innovation the product of genius? Or, of luck? No, it’s the product of a system, applied with discipline. Utilizing the system can result in repeated success in customer value generation.
Curt Carlson is the world’s leading expert practitioner. He is the founder and CEO of Practice of Innovation, LLC, and was President of SRI International, identified as the most successful innovation company in the world based on its development and introduction of globally important innovations like Siri for the iPhone4 and HDTV. Under Curt’s leadership, SRI grew 3.5X and created tens of billions of dollars of new customer value.
Key Takeways And Indicated Action Curt believes any company can systematically generate new value for customers, and reap the rewards of the market for doing so, when they rigorously apply three fundamental rules:
They have a simple value creation methodology that everyone in the company (and its collaborative partners) can describe, understand and apply every day in every job function. (Curt’s test: ask everyone in the company what the firm’s value creation method is: if they can’t describe it, there isn’t one).They have metrics to define innovation work that is important rather than merely interesting. While subjective value is not quantifiable, there are proxies for measuring importance and market potential.They have a system for active learning. Innovation is a learning science, and active learning is a specific, high speed, high productivity version of learning, applying the best learning science principles. In this week’s podcast, we focus especially on the simple, effective value creation methodology that Curt identifies by the initials N-A-B-C.
N is the identification and quantification of the important customer need. In B2B businesses, it’s possible to monitor financial flows and identify needs based on quantifiable elements — cost savings, time savings, and measurable quality improvements. In consumer businesses, need identification is much harder, and quantification impossible except by proxy, since needs are subjective and individual. Importantly, they are also multi-dimensional, and need identification must encompass all the dimensions.
It’s important to deeply understand human wants, whether it’s for convenience, or higher order wants such as pride and identity. Surveys told Steve Jobs that consumers wanted a “new keyboard” for existing Nokia phones that were hard to use. Jobs’s intuition was that what they really longed for was convenience. The touchscreen on the iPhone provided convenience and opened a doorway to all kinds of additional services.
A is the Approach the entrepreneurial innovator takes to meet the customer need. The approach is the design of an experience that the customer will desire. The Approach mist embrace both the assembly of the right resources into a technical solution, and the business model so that the solution makes money. There’s an iterative back-and-forth between technical solution and business model that can continue for years. Nike’s technical solution for shoes is good but not unique; its business model for sponsoring athletes to inspire aspirational consumers who wanted to “be like Mike” (or, today, like LeBron) elevated their offering from product to experience.
B is Benefits Per Costs. Curt uses this construction to emphasize that there are large buckets of both benefits and of costs. Benefits include not just features and performance and appearance, but also the feelings produced by the experience. Costs are similarly multi-layered: not just dollars, but also the effort required to acquire the product, and perhaps to master its use, the opportunity cost of what is given up, durability, and more. The innovative entrepreneur must look at costs from all of these angles and calculate that the “benefits per costs” for customers are much better than alternatives.
Curt’s rule of thumb is 2X to 10X better. People measure perceived benefits in percentages. 10% better, 50% better, 100% better than the status quo or the alternatives. Transformational innovations are 2X to 10X better.
C is the competition and other alternatives — both today and in the future. What are all the other ways the customer can experience the benefit they seek? What are alternative ways for them to spend their money — perhaps on a different experience that’s not a direct substitute but on which they’ll spend instead of buying our solution. How does your innovation fit into their lives so compellingly as to become preferred over all these alternatives?
N-A-B-C is a simple framework, but it’s not easy to achieve results. It requires iteration at speed among many collaborators (including customers, and possibly investors), all with different and specific talents and tacit knowledge. No individual can command sufficient knowledge, so team learning — active, comparative learning, frequently updated — is critical to the outcome.
The result is transformational: for customers who experience new value, for the firms that facilitate it, and for the individuals who practice the discipline of innovation.
Additional Resources "Curt Carlson's N-A-B-C Innovation" (PDF): Mises.org/E4E_37_PDF
Curt Carlson’s book is Innovation: The Five Disciplines For Creating What Customers Want.
This week, while keeping our eye on our highest value — entrepreneurial success — we raise our focus to the system level and the meta-ideas that sustain entrepreneurial effort and Austrian innovative dynamism.
Key Takeaways and Indicated Action Professor Arthur Diamond has written a wonderful book about nurturing the system in which we entrepreneurs operate. The subtitle of his book is Sustaining Innovative Dynamism. Like all great writers in the Austrian tradition, he recognizes and celebrates the contribution of the entrepreneur to society: to make others’ lives better.
In many ways, this is both an economic and an ethical stance. To quote Jesus Huerta De Soto (in a similarly titled essay, "The Theory of Dynamic Efficiency"):
…the most just society will be the society that most forcefully promotes the entrepreneurial creativity of all the human beings who compose it.De Soto, Jesús Huerta. The Theory of Dynamic Efficiency (Routledge Foundations of the Market Economy) (p. 176). Taylor and Francis. Kindle Edition.
But Professor Diamond is a little bit concerned that the environment for entrepreneurial dynamism is under assault in the US. It’s up to all of us to work hard to sustain the system. Professor Diamond lays out the threats under three headings.
CULTURE The entrepreneurial culture would celebrate the contributions of its entrepreneurs to a better life for all: prosperity, comfort, efficiency, health, personal achievement, and the human augmentation that comes with technology. Our lives are not only more prosperous, but more productive and more enjoyable, longer and healthier, thanks to entrepreneurs.
Often when we do celebrate entrepreneurs, it’s one hand clapping. Bezos, Musk, Gates and Jobs and others are recognized, but also sometimes vilified, and often judged on whether they “give back” — as if there was some guilt about their incredible contributions to human well-being.
And, Professor Diamond points out, a truly entrepreneurial culture would celebrate the lives of meaning and purpose led by entrepreneurs on every scale, from small business to big business.
We can all participate by celebrating the heroic stories of the entrepreneurial life, telling them loud and often.
INSTITUTIONS Under this heading, Professor Diamond focuses on the law, private property and markets.
We can observe our legal institutions turning against entrepreneurs in the form of tort suits and punitive damages. Professor Diamond calls for reform to preclude unreasonable awards of damages, and points to examples where doing so has resulted in unleashing entrepreneurship (such as 7000 new doctor’s practices opened in Texas after a damages cap on malpractice cases was put in place).
Private property protection is fundamental to the economic freedom entrepreneurs exercise to bring the benefits of innovation to society. Government is always tempted to seize private property, and often succumbs to the temptation. We must publicize each instance and protest each time.
Markets are the institution that facilitate the entrepreneur’s presentation of new offerings, and the consumer’s freedom to choose from what’s on offer. We talked about matching venturesome consumers (early adopters) with venturesome entrepreneurs, and removing the barriers that often come between them (for example, in medical innovation markets).
GOVERNANCE At this point, Professor Diamond exhibits amplified animation, recognizing that government regulation is the greatest threat to entrepreneurship and innovative value creation on behalf of others. He’s angry. He discerns two types of anti-entrepreneur regulation. The first is regulation that is sourced in purportedly well-intentioned (but demonstrably wrong-headed) efforts to protect consumers or workers. Here, we must energetically point to the greater benefits that ensue from the exercise of economic freedom than from its constraint.
One particularly important example is medical innovation. Too often, the heroic efforts of medical entrepreneurs to alleviate pain and suffering are thwarted by FDA regulation.
The second kind of regulation is the overtly corrupt protection of industry incumbents and big business, lubricated by lobbying and political quid pro quos. Here, we must all be whistleblowers.
Key Takeaway: Maintain entrepreneurial energy at all times and spread it in all directions.Celebrate heroic stories at every scale. Educate the world on the ethical and moral superiority of the entrepreneurial society, as well as its prosperity and wellbeing. Denounce legal predators, regulation and protectionism. We must contribute to the development of the entrepreneurial culture, institutional framework and governance as much as we do to customer betterment.
Additional Resources "Sustaining Innovative Dynamism" (PDF): Mises.org/E4E_36_PDF
"Entrepreneurial Stories For Young Socialists": Arthur Diamond tells Walt Disney’s story.
"When New Yorkers Cheered The Wright Stuff:: Arthur Diamond tells The Wright Brothers Story.
Openness To Creative Destruction: Sustaining Innovative Dynamism: Arthur Diamond’s book.
Visit Professor Diamond’s personal website (ArtDiamond.com) and blog (ArtDiamondBlog.com), and read his article on Innovation Unbound, which begins: "Inventors and entrepreneurs are key drivers of innovations that result in improvement in human welfare."
Is there a recipe for entrepreneurial success? Chris Wilton has established a successful and growing catering business, and the recipe he developed has some ingredients that every entrepreneur can utilize.
Key Takeaways And Actionable Insights Economists (e.g. Murray Rothbard in Man Economy and State) often talk about the recipe that entrepreneurs develop for business growth and success. They don’t quite mean it literally — a fixed proportion of ingredients combined in the same way and the same sequence every time for the same result — but the analogy is nevertheless useful. Recipes are plans entrepreneurs utilize to advance from one step to the next in pursuing their goals.
A recipe is intellectual property — software if you will. Sometimes it’s opensource, sometimes it’s proprietary. When a chef utilizes a recipe, even one that is well known, both the chef and the customer anticipate something unique: Mary makes the best chocolate cake! Lots of people make chocolate cake, and they might use the same ingredients as Mary, but, in the subjective view of a customer, no one’s result is as good as Mary’s.
To get a result, Mary has to combine hardware with the software, and perhaps there is an edge there. We might call that the capital structure that is perfectly tuned to Mary’s purpose and matches her skills. Perhaps it’s even possible to assemble superior ingredients — a special and better kind of chocolate for example.
Mary might also need collaborators. She certainly needs customers to subjectively evaluate her cake.
We’ve probably tortured the analogy enough at this point. But hopefully, we got you thinking about the role of the entrepreneur in assembling resources in order to produce something that the customer values.
In this week’s podcast, Chris Wilton of Wilton’s Catering gave us his recipe for a successful and growing business. We’ve captured it in the accompanying PDF, linked below.
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Here are some of the headlines:
Start with self-assessment: The one universal attribute of entrepreneurship that everyone seems to agree on is: it’s hard. It requires creativity but also discipline, determination and grit. It’s important to have examined your own disposition before you embark on the entrepreneur’s journey. Passion and drive are mandatory. (There’s a self-assessment tool, and a journey map.)
Identify a market and a customer: Chris Wilton knew his industry, and worked hard to pick the right beachhead customer. The beachhead customer is the first adopter who will be your customer-partner in getting your business off to a good start. Chris chose a nearby university with a highly developed and diverse set of catering needs, where he could develop his unique style of food and service.
Plan, plan, plan: Prior to launch, Chris spent months developing a detailed plan. Working from the customer (what are their needs — identified by multiple, frequent, in-depth customer conversations) backward through on-site service and set-up, delivery, capital equipment, real estate, raw material procurement, recipes, hiring and training and operating manuals. Chris’s time allocation and effort in planning was intensive. And it paid off.
Develop a customer experience, not just a service: Chris is totally focused on delivering a delightful customer experience, which entails a lot of empathic listening to the customer to understand what they expect, and then disciplined and detailed execution at every event and every meal, including the customer experience orientation and training of staff. After the event, always ask and listen for customer reactions. Was the experience good? How could it be better?
Innovate, innovate, innovate: You evaluate so that you can innovate. Innovation is continuous improvement — always looking for something new and better that will create new value for customers. A new or improved recipe, better preparation methods, improved staff training — it’s all innovation when it’s done to elevate the customer experience. One of Chris’s technique’s is sampling events where he can try new things, give away his food for free, and get feedback that he can use to perfect the innovation.
What’s the end-result? For Chris, it’s happiness. He loves and enjoys what he is doing, and he brings happiness to customers, to the attendees at customer events, and to his employees. That’s the great fulfillment of entrepreneurship.
Additional Resource "A Recipe for Entrepreneurial Success" (PDF): Mises.org/E4E_35_PDF
Pricing is fundamental to business success — to generating transactions, to cash flow and to profitable operations. There’s a lot of uncertainty for entrepreneurs in the pricing process, and economics is a good source of clarity. In fact, Peter Klein tells us that economics used to be called price theory, recognizing this fundamental role of pricing in economic exchanges.
Key Takeaways and Actionable Insights Austrian economics offers a special way of thinking about pricing that is helpful for entrepreneurs. Here is a 12-point list of pricing fundamentals.
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Consumers set prices. This insight establishes the right entrepreneurial mindset: the entrepreneur can’t control pricing and shouldn’t try to. It only leads to frustration. Act on the basis of the consumer as the determiner of market prices.
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Consumers don’t set or negotiate the price in every transaction. They are the determiners in the medium and long term. If sufficient numbers of them don’t feel they experience value at the price they’re asked to pay, they won’t buy and the entrepreneur will not be able to generate the revenue that’s called for in their business model. They’ll have to change their price, or their offering or their valued proposition.
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A price holds only for one transaction. Just because it was the right price to get one consumer to transact at one moment in time and one context, does not mean it will hold for the future. Just because it is the sticker price or asking price does not mean the consumer has no alternative but to pay it.
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That’s why Austrian Economics sees pricing as a dynamic and creative discovery process. The entrepreneur is charged with discovering the price the consumer is willing to pay now, in the future, in different circumstances and different contexts.
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Price discovery goes further — to the design of specific packages of product / service and experiences. What will the consumer pay for the product now, with no waiting? What will they pay for same-day delivery? What will they pay for the product / service in a special physical location — is a newly-released movie in a luxury theater valued more than a 3-month old movie on a streaming service? Is a coffee in a cafe where the consumer can sit for a while more valued than a take-away cup?
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The creativity and dynamism of pricing extends to promotions and discounts, including coupons, loyalty bonuses and time-based offers (10% off until midnight!)
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The key to getting this creative and dynamic discovery process right is a deep knowledge of the consumer and their individual preferences. Senior discounts might be effective when they’re offered at a time of day that works for the retired seniors and not for working people. Coupon offers are effective for people with the time and inclination to collect and clip them, but wasted on consumers who feel themselves too busy for such efforts. The smart entrepreneur exercises price segmentation.
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The same principles apply to B2B pricing, although it might not be apparent in the entrepreneur’s subjective experience. The entrepreneur might feel that a retailer or wholesaler or customer to whom he or she is selling makes a take-it-or-leave-it offer on the price they are willing to pay. But the creative dynamism of discovery applies — the entrepreneur experiments with different packages of service levels, contract duration and other variables to find the right value combination that works best for both parties.
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Once prices are discovered, the entrepreneur assembles resources to facilitate a profit at the prevailing price. This process is fundamental to Austrian price theory, yet the opposite of the typical business school scenario of cost-plus pricing. Business schools often get things backwards.
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Entrepreneurs discover many ways to manage costs in the supply chain to meet the price the market dictates. One we talked about was channel management. For example, in the burgeoning Direct To Consumer (DTC) business model, entrepreneurs have eliminated the costs of doing business with physical wholesalers and brick-and-mortar retailers. Often the consumer is willing to pay an unchanged price. Alternatively, the entrepreneur can offer greater value via a lower price, as is the case with Warby Parker in the eyeglasses business, as well as many other innovative DTC brands.
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The key to this process is simply to treat what accounting defines as “costs” as prices that are upstream from the entrepreneur. All prices can be discovered, negotiated or re—channeled. It may not seem that way to the entrepreneur who is buying from a seller with asymmetric negotiating power. But the dynamism, creativity and innovation of the price discovery process is always available and always on the entrepreneur’s side. The only prices we know are historical. All prices in the future are to be discovered and creatively negotiated.
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Sometimes the creative solution is for buyers to organize themselves in a way that brings new negotiating power. Peter Klein used open source software as an example — users who are uncomfortable with the sticker prices of Microsoft or Oracle create an alternative service with an alternative price.
In Summary A price is the outcome of a single transaction — it does not necessarily hold for future transactions.
Prices are determined by the consumer — in the medium to long term.
Ultimately, the consumer also determines prices further up the value chain because all intermediate prices must contribute towards a cost-of-goods that is less than the price the consumer is willing to pay.
Entrepreneurs take control when they consider pricing as a dynamic, creative discovery process. Creativity spans pricing segmentation (different prices for different customers on different occasions in different contexts), pricing objectives (one transaction, multiple transactions, long term loyalty, etc.) and product-service-price repackaging.
In all cases, deep knowledge and understanding of customers and vendors yields the understanding that informs effective creativity and discovery, and experimentation yields new knowledge.
Additional Resource "The Process of Pricing Discovery" (PDF): Mises.org/E4E_34_PDF
Per Bylund teaches us to explore the only two fields that matter for entrepreneurial success: understanding the laws of economics and understanding the mind of the customer. Isabel Aneyba is an expert in the techniques of empathic diagnosis that yield the understanding of the customer’s mind, and she shares these techniques — and her success in starting and growing a customer research company — on the Economics For Entrepreneurs podcast.
Key Takeaways and Actionable Insights Listening to customers is a planned activity. Yes, we suggest regular, frequent, conversational interaction with customers. But not without a calculated purpose. You need to know in advance what you will do with the information — what decisions will you make that you can’t make now. This enables you to define the expected value of the information, and how much of your scarce resources of time and money to allocate to gathering and processing it. If you don’t know the purpose and estimated value of the research, don’t conduct it.
Conduct conversations with customers at least every week. Isabel includes conversations in the customers’ homes or offices, conversations in your offices, face-to-face (including digital face-to-face using webcams). To make emotional connections, we look into each others’ eyes. Certainly, these conversations can be integrated with findings from other customer data sources, but they can’t be replaced.
Exercise your passion for listening; don’t focus on asking questions. The style of conversational research is the opposite of interrogation. Don’t work too hard on composing a list of questions, and sticking to your list. Once the conversation starts, let it flow. Focus on what the customer is thinking and feeling, not on facts. Use non-verbal cues to do so (Isabel tells us how during the podcast). Employ gentle probes (“Tell me more about that”) rather than direct questions. Let the customer do the talking and make it comfortable and easy for them. Good researchers, and all entrepreneurs, have a passion for listening.
Storytelling is the great revealer. Rather than ask a structured set of questions about, for example, the stages of a customer journey, it’s better to get the customer to tell a story, in their own words. Invite them to start at the beginning and continue to the end, without interruption. For example, the story of a visit to the doctor might begin with feeling symptoms and end with the doctor’s prescription. The customer will tell you everything that went on in between, from the drive to the office to the time in the waiting room to the doctor’s demeanor. Let them tell the story uninterrupted. You can loop back later into internal details.
Try other exercises besides asking questions. In some cases, Isabel favors the exercise of having a customer make a collage out of photos, magazine pages and other materials. The choices in the collage can revel preferences, and the customer is naturally open to explaining why they made the choices and what the collage and its elements means to them.
Listen with the heart to uncover hidden truths. Isabel explains how:
Open the conversation with an “emotional handshake”. Find a conversational path (which might not concern your business question) for the customer to express emotion. “What do you love to do?”Listen for the customer’s emotional drivers — expressions like “I feel” or “I enjoy” — when they talk about a behavior or choice or a functional benefit. These expressions reveal emotions, and you can gently probe whether these emotions represent the subjective reason why customers behave as they do.Interpretation is required — the customer won’t tell you that they take action X because of emotional driver Y. You have to make the connection. Then gently probe to see if you can find confirmation. Apply the learning to design a better customer experience. Remember that customer research has a purpose. Your purpose in business is to create and keep a customer. Customers purchase your good and services for the experience they anticipate. By listening for their emotional drivers, you’ll identify gaps in the current experience — examples of customer unease. Use the information you gather to eliminate the gaps, and relieve the unease.
Compute the return on information. How much does the information gathering cost? How much value will you able to facilitate for the customer by designing an experience they feel better about?
Additional Resources "5 Steps To Help You Listen With Your Heart" (PDF): Mises.org/E4E_33_PDF
Isabel Aneyba's company, COMARKA Consulting & Marketing Research
"Qual Method Aims to Unite Clients, Respondents in Co-creation"
"Let’s Work Together: The Consumer Co-Creation Camp"
James Beardsley owns and runs a law practice. He decided from the outset that he would run it like a business — not all lawyers do — and, once he had discovered Austrian Economics, he saw more clearly how to succeed in reaching his goal.
Hunter Hastings and James discuss the principles of Austrian Economics that James puts to work.
Key Takeaways And Actionable Insights Self-assessment: The entrepreneur is an individual with a role to play in society — someone who breaks new economic ground as a business owner, leader, team member, or contributor. That’s why we say that the entrepreneurial journey starts with self-assessment. James Beardsley’s was that he wanted to be a different kind of lawyer — one who ran a business rather than just a professional practice. That’s a commitment to approach, method and lifelong learning — a commitment he has maintained for many years.
Find applicable models: James sought models and principles for successful businesses of all kinds. Entrepreneurs break new ground, but before they do, there is no reason to ignore the empirical and historical data that can provide a foundation on which to build a new approach.
Read the books that can help you establish core principles: James was reading business and investment texts, and discovered Austrian Economics, which he felt covered the same topics with better logic and greater clarity. Austrian logic — breaking issues and challenges down to their simplest and most basic levels, establishing understanding at that level, and then building up from there — helped him immensely. He did not become an expert on economics, but identified and applied the core principles.
Identify the customer and their problem-to-solve with precision: James’s chosen target customer is very precise: people who experienced injury in a car accident. This precision yields certainty in the process of developing services for the customer.
Think from the perspective of the customer: Having identified the customer, think like they think. Accident victims are jarred; their lives have been changed dramatically; they are experiencing emotional turmoil; they don’t know how the legal process works; they may be angry or scared. Trying to think the way they think, and accepting their need, can lead to providing the compassionate help they are seeking.
Know their personal value scales: Every individual has their own value scale, and what is most important to one customer is not the same as what is most important to another. James’s firm seeks to understand each individual client’s personal value scale and to respond appropriately.
The customer creates value: At E4E, we try to stress that value is subjective and therefore created by the customer; the entrepreneur is a facilitator. James’s process is a striking example: accept the customer’s perspective, identify and adjust to their personal value scale, and let them determine the kind of service they prefer.
Empathy is the most important entrepreneurial skill: Throughout our conversation, James stressed the central role of empathy as the skill that he and his team employ to enable them to think from the customer’s perspective, identify their values, and to provide them with the reassurance they need in a difficult period in their life. The empathic process builds trust and long-term relationships.
Empathic diagnosis is the specific application of empathy: James stresses listening, trying to understand how the customer is feeling, understanding that perhaps they do not know how to react and therefore may not be able to communicate clearly, or may do so through a veil of denial or anger or frustration.
Hire people with the right disposition for the empathic process: Assembling the best set of entrepreneurial resources includes hiring the right people. Some people — but not all — can be trained to serve the customer with empathy. Provide them with a process and system to guide them, but recognize that not everyone will prove themselves at the task, and make a change as soon as the need for one is indicated. It’s critical for the health of your business.
Marketing is a fundamental tool for business success: Many entrepreneurs don’t leave enough resources for marketing, and this can be an error. James takes the Austrian causal-realist approach, which is the professors’ term for the base logic of Austrian Economics. “Realist” means seeing the world as it really is, rather than how you would like it to be. Law firms need clients and they are not just going to walk through the door. James’s target customers are unaware of the availability of the services that can help them. Therefore advertising is required. “Causal” means understanding what works to solve the problem at hand. In this case, James built up a database of “what works and what doesn’t” to bring clients to the firm, and advertising — specifically TV advertising — proved to be the right tool, as measured by revenue realized minus costs expended.
Understand and employ the concept of opportunity cost: Resource allocation and spending decisions are always trade-offs and the best tool to make them definitively is to apply the concept of opportunity cost. If I allocate resource X (e.g. an advertising budget), what is the next best resource I am choosing not to allocate (e.g. hiring an additional staff member)? Is that the best use of resources? Which one will serve the client best? Which one will deliver most revenue for the firm? The point is to do the analysis carefully and honestly, so that you can be confident in the decision.
Understand the value (and cost) of time: Austrian Economics focuses quite specifically on the time it takes to produce, and the cost to the entrepreneur of this production timeline. Costs are incurred while no revenue comes in. James methodically addressed this cash flow challenge, and has become adept at identifying cases that can be expected to settle faster, and he will select for that attribute even if the end-revenue is smaller. “The prospect of getting paid two years out is less risky than getting paid four years out.”
Take active steps to manage and reduce uncertainty: We always highlight the role of uncertainty about the future as an important component of entrepreneurial action. James has found ways to narrow uncertainty. One example is to take only cases where the responsibility is clear, and so the uncertainty is limited to the settlement. That is less uncertain than being unsure whether you will win or lose the case. Another uncertainty-narrowing action is to keep a sufficient cash reserve so that fluctuations in cash flow will not impair ongoing business processes. This makes possible the avoidance of debt obligations, which are always troublesome for a professional services business.
Additional Resource Download "Austrian Economics: A New Lens" (PDF): Mises.org/E4E_32_PDF.
Predictive analytics can’t predict! That was Dr. Per Bylund’s provocative introduction to our discussion of the uses and drawbacks of big data in the context of the entrepreneurial mission.
Key Takeaways and Actionable Insights The claims made on behalf of the analytical powers of big data may be exaggerated, and entrepreneurs should learn what they can and can not expect from the application of big data analytics to business. Otherwise there is the chance of both error and wasted spending on the tools of business intelligence. It’s important to distinguish between the different roles of multiple data types.
Pattern recognition is not prediction. Dr Bylund contrasted what Big Data can and can’t do for entrepreneurs. He used an example of analytics predicting the outcomes of future NFL games. Here there are large sets of historical data on players, teams, plays and previous outcomes. There are limited potential outcomes (e.g. one team will win the game — there is no third team that will unexpectedly turn up to change the range of possible outcomes). The predictive analytics got the outcome right about 75% of the time. In a world of more open-ended results (e.g. predicting the outcome of a multi-team tournament), big data could be expected to be right fewer times. There is danger in over-reliance on the law of large numbers and tendencies like reversion to the mean. Pattern recognition from historical data sets (which is what big data does well) is not prediction.
Download the "Big Data vs. Big Ideas" PDF.
In fact, in the world of economics and entrepreneurship, there is no prediction. Entrepreneurs deal with social phenomena that emerge from individuals’ actions and interactions, across billions and trillions of instances. Entrepreneurial outcomes depend on how people act, and how they act depends on their feelings, how they see the world (subjectivism) and what they feel like doing. We can’t know or predict that. There may be some general rules that apply in many cases (for example, raising prices rapidly and significantly in a competitive market will, all other things being equal, result in a reduced unit volume of sales). But those rules don’t predict the decisions of specific individuals in specific cases.
Mainstream economists and central planners long for a mechanistic world: turn a dial, get a result. But this approach is not valid. In the economy or any market, all variables are dependent on all other variables. Everything affects everything. The consequences of any action — like central bank interest rate tinkering — affect different people in different ways, and whoever is affected first or last will experience different consequences and react in different ways.
The core of the issue is that human behavior is unpredictable. Subjective choices can’t be predicted. Prediction implies precision, and that’s not available.
Yet the entrepreneur must deal with the future. The entrepreneur seeks to produce a good or a service that consumers will consider valuable at some point in the future. Even if they tell you today that they will value your offering in the future, they may change their minds.
Is there any contribution that big data can make, any help that it can offer? We discussed these areas:
It’s hard to know what people might want in the future. But it might be possible to identify what specific people will not want, based on their past behaviors. Data can show you which purchases cluster together, and which don’t. Beef purchasers may also buy red wine. Vegans won’t buy beef. Facebook and other ad targeting tools (which use big data effectively) can help you avoid marketing beef to vegans or pasta to keto diet followers.Data can sometimes detect dissatisfactions, which are the universal raw material for entrepreneurs. Analysis of sentiments expressed in reviews can guide you in the right direction. Writing a negative review on Yelp or Trip Advisor is both a behavior and an expression of sentiment and data analytics can detect patterns here. But Dr.Bylund advises us that it can only provide a guide – there is no substitute for talking directly to consumers, human to human.Data can help with segmentation. If you want to better understand a geographical market segment or a demographic segment or a behavioral segment, there are lots of data that can detect the differences between segments, and this can help you with targeting of communications (but not necessarily with the message).Quantitative data can be combined with qualitative data to sharpen insights. Dr. Smita Bakshi, in our episode #24 described how analysis of student performance data (50% of computer science students don’t complete their first year course) combined with personal discussions with students in class, delivered an empathic understanding of their struggles, from which her team developed a winning interactive learning tool for computer programming languages. Sometimes an entrepreneur can skip the big data analytics, but never the empathic diagnosis. Entrepreneurship consists of understanding the mind of the consumer and understanding the economics of the marketplace. Where the market is heading and what will be in consumers’ minds in the future are more the realm of judgment than analytics.
Entrepreneurs behave differently than dig data driven large corporates. They think harder about the customer, they study human motivation, they utilize the rich qualitative data that comes from talking to customers, and they concentrate their capital and resources on developing and extrapolating their customer understanding. They uncover subjective value — the value that only exists in the mind of the consumer. Imagination is the key to the future. Entrepreneurs try to succeed in bringing about that imagined future. Big data might help them avoid mistakes, but it’s impossible to rely on the past to produce the future.
Additional Resource Download "Big Data vs. Big Ideas" (PDF): Mises.org/E4E_31_PDF.
In Austrian Capital Theory, Brands are valuable financial assets. Brands are architected in response to the subjective value preferences of consumers, and the more accurate the responsiveness, the higher, faster, longer and more reliable are the future cash flows. Brands are promises of value and, when the promise is kept, the result is delighted, enthusiastic and loyal consumers.
In this episode of the E4E Podcast (Mises.org/E4E), global branding expert Trini Amador explains how every business and every entrepreneur can methodically build a strong brand to deliver consumer value and unleash cash flow.
The entrepreneur makes a promise that the consumer will experience value. The brand is the promise. Here are the principles for building a strong brand:
Key Takeaways and Actionable Insights There are two pillars to the construction: Relevance and Differentiation.
Pillar 1: Relevance
It’s central to economics, because economics deals with individuals and their preferences and their choices. Your brand is not for everyone, it’s for specific individuals. It’s important to know them and understand them deeply.
Relevance Box 1: Core Target
Many brand owners think that the more customers they target, the more they will sell. The opposite is true. Define your target audience as narrowly as possible.
Relevance Box 2: Core Needs and Insights
Strong brands are built on unique entrepreneurial insights into the motivations of their core target audience. Entrepreneurs use the deductive method: observing behavior and deducing motivations from those observations, using tools like the Means-End Chain.
Relevance Box 3: Customer’s Frame Of Reference
This component is based on the Austrian value principle that the customer finds value in meeting a need in a way that is better (for them) than direct substitutes, indirect substitutes, or than non-purchase or deferred purchase.
Pillar 2: Differentiation
In Pillar two, we build an implementation of the Austrian principle of uniqueness in your entrepreneurial offering. A brand is the ideal platform for communicating uniqueness.
Differentiation Box 1: Brand Promise
The brand promise is to deliver in a unique way the highest possible level of benefit, which is an emotional benefit, the consumer feeling that your offering assures they will achieve their highest fulfillment.
Differentiation Box 2: Brand Delivery
Brand delivery is how the brand keeps the promise it makes.
Differentiation Box 3: Brand Character
Customers are people and they relate to brands subjectively — almost as if the brand were a person.
Building the 6-Box Brand Foundation brings clarity about what your brand stands for, defines your competitive advantage, and ensures that your entire team knows what they must deliver, and what the customer expects.
Additional Resources Download the free "Brand Uniqueness Blueprint" (PDF) to help you implement your own brand-building process: Mises.org/E4E_30_PDF.
Have you heard of the knowing-doing gap? Accumulating unique knowledge — expertise, processes, experience, skills, recipes, qualifications etc — is important, as we always emphasize at Economics For Entrepreneurs (Mises.org/E4E). In business, that’s half the story. The second part is effective action, judged by results. Knowing what to do translated into actually doing it. Becoming not just a learning organization but a doing organization.
Key Takeaways and Indicated Actions Dr. Per Bylund frames it this way: having a great idea for a business is not the crucial element for success. It’s whether you can pull off the idea in implementation. That’s what investors and customers are looking for — not the idea, but executing the idea.
Dr. Bylund guides us with 5 Austrian action principles.
Principle 1: Consumer sovereignty. The consumer is boss and decides whether a business is executing well, i.e. to customers’ satisfaction. The only purpose of a business is to make and keep customers. Amazon calls this customer obsession — everything starts and ends with the customer, and the customer is central to every decision, in every resource allocation, and is invisibly present in every meeting and presentation. Does your company act this way? Are you certain you know and understand your customers’ needs and preferences, and their hopes and dreams? Are you deeply immersed in customer knowledge? Do you talk one-on-one with customers as often as possible? Do you go out to the building sites where they use your equipment, or to the offices where they use your software, or to the homes where they consume your food and beverage products? The consumer culture is exemplified by anthropology — getting out there with your users. Jeff Bezos observes that consumer-obsessed companies act differently. What actions are you taking to observe, understand and serve individual customers better?
Principle 2: Subjective Value. The consumer or customer you are getting close to by implementing Principle 1 is the decision-maker on whether or not your firm is providing value. Their decision is subjective — it’s entirely theirs, entirely emotional, entirely about their perception. Do you know what factors are the most persuasive and influential in creating a positive perception? We discussed a case study of premium vodka. The basic liquid is to a great extent an undifferentiated commodity. Differentiation comes from the varied subjective experience a consumer can feel in ordering and consuming and sharing a brand of vodka. How much of that perception is affected by the bottle shape design and the label design? How much by the social prestige of the location where the brand is served? How much by the consumer’s perception of the merit of the people who drink this brand? It’s hard to know but necessary to find out.
One route to implementation success in business is to manage expectations. Find out what customers expect, then make a promise to meet those expectations and keep your promise. So often in business, promises are made but not kept. That means you created an expectation, then did not meet it. You should make sure to do the opposite.
Principle 3: Dynamic Resource Allocation. The Austrian principle is that the firm’s capital and resources are, at all times, a reflection of the market and of customer preferences. What does that mean and how can a firm activate this principle? In practice it means two things. First, do not lock in to any asset or resource that is difficult to change or adjust on short notice. Stay flexible at all times. Second, make sure that you are collecting market signals — data — that tell you what you need to know about customer preferences today (not yesterday) and will provide you with insights into where they might shift tomorrow. Based on those insights, conduct experiments and tests that can be quickly scaled up when they show results, and quickly shut down when they don’t. If you find yourself responding to changes in customer preferences — or, even worse, changes in competitors’ behavior that seem to be more responsive to customers than your own — it’s too late. Get comfortable with continuous change.
Principle 4: Dynamic organization. How can you identify and eliminate all the barriers to your team’s empowerment to serve the customer in the way the customer prefers? Often, the barriers can be found in rules. In customer service, for example, there may be rules about the level of decision-making delegated to a customer representative, or even the amount of time a representative can spend on the phone with a customer. Examine all your rules, standardized protocols and bureaucratic structures. For each one, ask: does this contribute to the satisfaction of the customer? Does it produce customer value? Or is it to cut cost and minimize risk? Cutting costs will never add value. To be great at implementation, examine all practices to make sure they are value-creating and not value-consuming. Who decides? Your customer.
Perhaps you have employees who are not value-creating. You can’t afford them.
Principle 5: Measuring The Right Things. With metrics, most business advice is to be objective and numeric. You are advised to measure sales, profits, distribution, etc., and take surveys of customer satisfaction expressed as numbers on a scale or percentages compared to a norm. For great execution, it is far more important to measure subjective value, and to shed light on what the firm is doing right in the creation of consumer value and where it is falling short. This is a challenge, but not an impossible one. There are places to look, such as sources of spontaneous praise. Your firm’s Trip Advisor comments from recent visitors, for example, if natural, honest and spontaneous, can be great indicators for you. The same goes for other spontaneous commentary channels. Commit to conducting a minimum number of in-person one-on-one customer conversations every week. Summarize them. Conduct sentiment analysis. Try to develop data on the direction that sentiment is trending — modern tools can do this via language analysis and emotional content analysis. Commit your firm to becoming the best at monitoring, projecting and analyzing subjective customer perceptions.
Additional Resources 5 Ways To Analyze Executional Excellence (PDF): Mises.org/E4E_29_PDF
Do you have any experience of measuring subjective value creation? What has worked for you? Share your ideas in the Mises for Business group on LinkedIn.
Negotiation is a capability that entrepreneurs use almost all the time. It’s an area of entrepreneurial performance where an understanding and application of Austrian Economics can be very helpful.
It’s all Austrian! Negotiation skills represent one of the resources entrepreneurs must assemble and maintain. The value of any resource is subjectively determined, and so the price is never fixed, it’s subject to negotiation. Two people can have different subjective opinions about the value of a resource – and those opinions can change, e.g. during the course of a negotiation, when one agent changes the opinion of another.
Key Takeaways Negotiation starts on Day 1 and never stops. Founders deciding to set up a company negotiate over who plays what role, who gets what share of the equity, and so on. From Day 1, the entrepreneur bargains for advantage, putting the best case forward at all times, and always thinking ahead to the next negotiation.
In Bargaining For Advantage (Revised Edition, 2018), Richard Shell lays out six principles of negotiation that Professor Steven Phelan, himself a teacher of negotiation strategies to entrepreneurs in business school, reviewed and illustrated with examples.
Subjectivism: Know Your Own Bargaining Style. The entrepreneurial journey starts from self-assessment: Who Am I? Some people are uncomfortable with negotiation, and sellers might take advantage by making only fixed offers. There is a competitive negotiation style and a cooperative negotiation style, and some points on the spectrum between them. (Most professional negotiators think of themselves as cooperative.) Don’t feel bad if you hate the confrontation of traditional negotiation. You don’t have to drive the hardest bargain. You can control the timeline for greater reflection. You can prepare yourself well to reduce your anxiety. Know yourself, accept your self—knowledge, and learn how to apply it for advantage.
Know your ends and select the best means. Ends-means analysis is fundamental to entrepreneurship, as it is to negotiation. Identify your own expectations, set your goals high, and be ambitious. Remember that a goal is not a fixed point — like a price to settle on. It’s complex and layered and can have a lot of non-monetary components. These are the elements you can vary to adjust the bargaining advantage in your favor, by using them as concessions, or trading them for a better deal. For example, you may be able to reach the price you want by providing seller financing.
Use external — and authoritative — standards and norms to help you. Norms can narrow the uncertainty in negotiation for both sides. For example, real estate agents use “comps” (recent sales prices of comparable homes in the local area) to narrow the range of possible prices in a transaction. Of course, there are multiple norms and standards that could be used — like price per square foot, or lot size, or views — and you should know them all, select your preference, and then argue persuasively in favor. Pick a standard that shows your offer in the best light.
Time preference — thinking long term. A negotiation might seem like the very definition of short-term: you want a good outcome now! But is this the last time you’ll negotiate with this party? Does your agreement in this situation potentially affect future negotiations? If you bargain a new hire down to the lowest compensation level, do you risk them leaving in the future and jeopardizing a team project? Think of the second order consequences and the lifetime of your business. It’s a mark of the good economist — and the good negotiator — to always think in the long term.
Use empathy as the planning basis of all negotiations. We’ve emphasized many times that the core skill of the entrepreneur is empathy — understanding the feelings of the other party, whether that’s a customer or a party to a negotiation. Why is the other party negotiating with you at all? What do they want — or need? Get to know them as people. Take them to dinner. Meet their family. Can you ethically meet their personal needs as well as their corporate needs? You can never eliminate all uncertainty, but deeply understanding the other party can go a long way towards doing so.
Find your leverage: the situational advantage to reach agreement on your terms. Of course, leverage in a negotiation can be positive or negative at the outset, depending on the situation. You should always look for ways to reduce the value of the other party’s alternatives (that’s their leverage) and increase the value of their own. Put scarcity on your side by having more than one bidder for what you are offering. Use time — leverage can change over time, especially if you can wait and the other party can not. One useful tool is BATNA — best alternative to a negotiated agreement. If you have more alternatives than the party on the other side of the table, that gives you leverage.
Use the six principles to prepare a strategy. Shell recommends that you make your opening position as aggressive as you can, and support it with the best norms and standards you can compile. That will put the other party in the position of having to find contrary logic as a counter — it’s called anchoring: your opening bid becomes the anchor for locating the range of negotiation. Never meet in the middle. Let the other party concede first. Shell refers to if — then thinking. If you’re called upon to make a concession, then you know exactly what counter — concession you are going to call for from the other party. Never concede voluntarily, always ask for a responding concession.
Have a specific negotiation plan in mind. Use the accompanying planning tool, adapted from Richard Shell’s book. Physically fill it out, use empathy, acknowledge uncertainty, gather as much information as you can, find your own norms and predict which ones the other party will use, find a good agent if you need one. Planning in advance will give you confidence and help you succeed, even if you don’t relish negotiating.
Additional Resource 10-Step Planning Guide (PDF): https://Mises.org/E4E_28_PDF
There are many, many pathways of entrepreneurial opportunity in creative services, where it is eminently possible to succeed on talent, where big companies are eager to work with small creative companies and individuals, where agile low-overhead business models are thriving, and where technology is the entrepreneur’s friend.
It’s an exciting time for entrepreneurs to be in the creative industry, say Cheryl and Cliff Pia, founders of the Pia Agency, a leading video and audio production firm working with many of the leading brands and largest companies worldwide. It’s an industry of rapid change — for example from the orderly process of television advertising to the frantic chaos of social media and web advertising and YouTube and Twitter videos. Change is confusing and scary for established businesses, and therefore full of opportunity for innovative entrepreneurial creativity. Centripetal forces of decentralization are breaking up the “Big Agency” structures and their retainer fee-based business model. If you can become the best at a specialized service, many doors are open.
Key Takeaways and Indicated Actions The pathways of the creative industry often start very differently than for more traditional industries. Cheryl and Cliff provided E4E listeners with their creative origin stories.
Cliff played in bands and as a studio musician. He played some jazz and learned the “jazz method” (you don’t know what is coming next so relax and pick it up when it comes to you). He performed comedy in clubs and learned how to act on his intuition, read the mood of the room, and be hyper-responsive to audience input. By “always sitting next to the sound engineer” — and asking questions — he learned the technology and techniques of recording.
Cheryl worked in the music industry because that’s what her friends were involved in, and then in the film industry. She learned about music publishing through another friend, saw an opportunity and started her own publishing company. She also worked in the film industry and the non-profit sector, learning development and fundraising. Learning, learning, learning all the time.
Force majeure can be the catalyst to make the ultimate creative leap to start a new company. The key is to do it fearlessly, with grit and courage.
Cliff’s position at a corporate was eliminated in an economic downturn. He had started a new division for his company to produce television advertising. Faced with a need, he and Cheryl started their own TV production company: The Pia Agency. “The phone didn’t ring for seven months,” Cliff told us. They didn’t quit. Entrepreneurs embrace that uncertainty and answer it with problem-solving action.
Often, the first problem for entrepreneurs to solve is their own. The Pia Agency opened in Arizona and the critical mass of clients was located on the East Coast. The new agency found the solution in the adoption of cutting-edge technology for time-shifting and location-shifting (e.g. working with animators and voice talent all over the world) and remote online collaboration (e.g. online real-time video editing with remote studios, which sounds commonplace today but for which the Pia agency had to invent a new digital toolbox at the time).
Growth comes from demonstrating value, and a people-first approach. The new system worked, and the Pia Agency began to get work from big name clients like Hewlett Packard and Merrill Lynch, among many more. High quality work generates recommendations — from one brand manager to another in a multi-brand company, and from one company to another when clients change jobs and take their valued relationships with them. Cliff told us that a “people-first” approach — treat clients like people, empathize with them holistically, not just in their business lives — generate not only meaningful relationships but the pass-along recommendations that cause service businesses to grow. Austrian empathy and the role of trust are all pervasive in successful service providers. It’s the human moments that are the most valuable; paydays follow.
Innovation consists simply of new ways to serve clients by responding to their expressed needs.
Innovation 1: Speed and Responsiveness. TV Production processes were traditionally slow and linear and expensive. But clients preferred speed and responsiveness to rapid market change. The Pia Agency developed speed and responsiveness capabilities (e.g. multiple editors working on the same video at the same time) and a fast-turnaround culture (e.g. hired a key producer from the news industry who was used to high-speed turnaround). This became part of the agency’s unique value to clients.
Innovation 2: Sonic Branding. In the internet age, when we listen on laptop computers, phones and earbuds, audio has taken a second position to video. Consumers put up with generically poor quality. But as voice-shopping evolves, consumers are going to hear brands instead of seeing them. Audio will regain its importance. Cheryl and Cliff understand audio and have developed and invested in capabilities in “sonic branding”: distinctively identifying brands though their audio signature. There is huge growth potential in this new field.
Greater growth comes with adding new external resources. Cheryl took an MBA so she could better direct the growth phase of the Pia Agency. She found she was able to apply this resource directly and immediately. And then Cliff and Cheryl merged their agency into a larger global group called Creative Drive, to establish the organization model of the future, an independent collective of content creators, a larger expression of the speed and responsiveness operational model. The Pia Agency has access to a larger client base, a more widely distributed set of relationships, and to expertise in new channels, such as e-commerce. The journey continues.
Cheryl and Cliff recommend their journey map to creative entrepreneurs for consideration.
If you enjoy music or film or art, and you have a talent, there is every opportunity to do what you love and what you are good at, and the challenge is to learn how to get paid for it. The recommendation they make is to work in an appropriate part of the industry for an established company. For example, you might love music and performing, but you also might realize that music production is more lucrative than performing. The key is to create value, and therefore to understand what others find valuable, and what they will pay for the value brought into their lives. Get a job where you can learn in an area you’re passionate about, and learn what the world will pay for. Start there. Learn more, work with like-minded people. The pathways of entrepreneurship will open up to you.
Additional Resources Cheryl and Cliff’s Entrepreneurial Journey Map (PDF): https://mises.org/E4E_27_PDF
Creative freelancers can register at the CreativeDrive Work Market.
Dr. Bylund observes that students, when selecting entrepreneurial projects for his course, lean heavily towards consumer products and services. Does this represent smart entrepreneurial thinking, or not? Is it biased by (lack of) marketplace experience? Is it biased by media reporting and “buzz”? And what can practicing entrepreneurs learn from a reasoned analysis of the profit opportunities in Business-to-Business ventures compared to Business-to-Consumer ventures?
Key Takeaways and Actionable Insights The economy — measured by Gross Output — is 70% production. That means that 70% of entrepreneurial opportunities arise in the supply chain stages that are prior to the final consumer purchase.
Keynesian economists believe that the economy is defined by consumption. Hence all their policies are justified as supporting or boosting consumption. Austrian economists think differently, and recognize that production is the health of the economy. People produce so that they can then exchange with others — that’s simple way to invoke Say’s Law. Keynesians use the metric of GDP to indicate economic growth or decline, and that metric is 70-75% composed of consumption. Economist Mark Skousen led the charge for an alternative metric, Gross Output or GO to track the size of the economy. GO measures the value of all production at every stage of the supply chain, i.e. every transaction where one entrepreneur or firm sells to another. GO identifies pre-consumption transactions as 75% of the economy. As Dr. Bylund says, it’s where the money is for entrepreneurs.
For the entrepreneur, B2B — producing input for other firms — offers advantages of structure, standardization and scale.
Structure: When an entrepreneur sells inputs for another firm’s production, the customer provides structured guidance on measurements, quality, delivery methods and timing — a blueprint for what they want to receive and how they want to receive it. Demand is codified. If the supplying entrepreneur can meet these codes, and a bid and a supply contract are approved, then a great deal of certainty is created around the business relationship.
This does not mean that there is no room for innovation. That comes in the elements of the business relationship that are not contracted. The creative entrepreneur can innovate in speed, responsiveness, ideation, and spotting new opportunities for efficiency. Innovation occurs at the edges of the structure, while the structure itself provides stability.
Standardization: Once the structured relationship is defined and agreed and the production interchange is established, the supplier-entrepreneur benefits from maintenance of the standard. There is precise knowledge of the ingredients to use, the production process to follow, the production rate and delivery specifications. This adds to certainty, and allows for the negotiation of lower costs.
Scale: Obviously the scale opportunity for the supplier is dependent on the size of the buyer and the size of the contract — it’s in the buyer’s hands. Nevertheless, contract reliability represents scale over time, and future volume assumes some (although not complete) predictability. The supplier can concentrate on efficiency measures to lower costs when there is no need to concern themselves with throughput variability.
These advantages are reversed in B2C businesses, where the trend is towards the opposite of structure, standardization and scale: personalization. Dr. Bylund called the B2C market ephemeral and flimsy. He was referring to the changeability of the consumer. Austrians understand that value is the subjective perception of the consumer. And the consumer is emotional, idiosyncratic and inconsistent in their continual rearrangement of value scales — what they prefer today is often different than what they prefer tomorrow, even if it is not obvious to the entrepreneur what change in conditions has brought this about. Consumers’ moods change and their choices change. Our free pdf points out the techniques required to manage in this context — tight targeting, deep empathy, and micro-segmentation.)
An entrepreneur’s production cycle may be 5 months or 5 weeks, but the consumer can change their mind in 5 minutes. They are on a different cycle. Their demand can not be relied upon. Continuous change is required of the entrepreneur competing for the consumer’s dollar, and continuous change is a tough business model. (Listen to our previous podcast on Austrian Capital Theory for the best tips on how to manage for continuous change.)
There are business channels where both B2B and B2C models are required. Some entrepreneurs find themselves moving their consumer goods to their end-consumer through distribution channels owned and operated by big businesses, such as CPG manufacturers of foods and beverages that sell on the shelves of Whole Foods or Walmart. The Walmart and Whole Foods relationships are B2B, even though the entrepreneur is in the B2C space. It is necessary to focus on producing value for the consumer, and educating the retailer about their benefit in passing on that value, as well as their role in communicating it to the consumer. At the same time, it is necessary to comply with the structure, standardization and scale rules set by the big business. We might call this a B2B2C business. It requires skills for both B2B and B2C.
Competing in B2B remains challenging, of course, but entrepreneurs should consider the size of the opportunity and the reduced uncertainty that are potentially available. In B2B, the entrepreneur is required to compete with other suppliers, to get costs and prices right to meet the customer’s needs, and to work hard to meet supply chain standards and specifications, and to negotiate contracts. Those requirements may be preferable and less uncertain than the ephemerality and flimsiness of consumer markets.
Additional Resource B2B, B2C, and B2B2C (in PDF): https://Mises.org/E4E_26_PDF
Austrian economics has valuable and important things to say about organizing entrepreneurial firms.
Key Takeaways And Actionable Insights Organization can make a crucial difference to entrepreneurial success. Ideas alone are not enough — execution is needed and the details of execution are important. The entrepreneur must design an organization for detailed, effective and efficient execution. Some entrepreneurs shy away, thinking it drudgery. That’s a mistake.
Organization is never static, but always dynamic. It’s not a structure, it’s a process. It’s your business model. It’s the collaboration that achieves the desired return on the entrepreneur’s imagination. Austrian economics doesn’t prescribe a fixed way to “do” organization (unlike the rules- and framework-based approaches of consultants and organization gurus). It provides the right way to think about organization.
Organizational design starts with the entrepreneur’s ends in mind. The purpose of the organization is to create customer value. Everything about the entrepreneurial firm is customer value, and so organization must be all about customer value. Elevate those elements that deliver customer value, and eliminate those that don’t. Everything that is not customer value, or gets in the way of creating customer value, or diverts resources from customer value, is waste and inefficiency.
Start with the best combination you can — in the current moment — of people and resources and capabilities to create the most customer value possible.
Delegate as much entrepreneurial judgment as you can — to people with the same customer value-creation focus as you, but greater expertise and knowledge in specific areas of the business. Hire good people (or engage good contractors and vendors) who have the right skills and experience for a specific task or field, and then give them as much authority as possible. Don’t worry about over-delegating. Rather, worry about retaining too much control and becoming a limiting factor. Employees may find better ways to utilize an asset or expand a capability than you could have done in their place. They may show more ingenuity. Make sure your organization is consistent with the most productive use of available resources. It’s becoming more and more inefficient over time to exercise authority through control mechanisms. You can’t afford the transaction costs. By delegating, you lower your monitoring and management costs.
The owner-entrepreneur’s role is to design the rules of the game: making specifying decisions and determining how performance will be evaluated. You retain ownership control by making what Peter Klein calls specifying decisions up-front: how you are going to run the business, tight or loose; defining in advance what discretion employees have, so that they don’t have to ask about every decision.
The second tool of control is defining the measurements of success and holding your team members to your metrics.
Outsource as much as possible. The entrepreneur defines what resources and functions are crucial and proprietary to the business of customer value creation, and keeps control over them. Everything else can be outsourced — items like payroll services, accounting, transportation, legal, anything that constitutes overhead, and any tasks that are routinized. Just make sure there is no possible damage to the customer experience.
Employment contracts and compensation systems are tools of entrepreneurial control. The specifying decisions can often be captured in the employment contract, where decision rights can be traded for benefits, and incentives can be defined to motivate the right levels of performance and the right feelings of participation and motivation. Go-getters and exceptionally creative people can be turned into “proxy-entrepreneurs”, exercising entrepreneurial judgment that is derived from the owner’s original judgment. There are no hard and fast rules about this trade-off, and it’s often a matter of gut feel. The savvy entrepreneur constructs a mental model of how the organization operates when it’s “just right” and makes adjustments when it’s not.
How you finance your business has major implications for your governance of your own company. Venture capitalists want a major say, often a board seat and supervision of critical decisions. Lenders may have covenants that affect your governance decisions, and most definitely affect reporting. Friends and family will want to look over your shoulder, at minimum. When you are planning your financing, be sure to think about how it will affect your organization, and whether you want to accept the inevitable constraints.
In all cases, be ready to make adjustments to your organization design, your specifying decisions, your resources, and your metrics. The entire point of flexible, dynamic organization is to facilitate change and adjustment on the fly. Plan to monitor continuously, and make changes whenever indicated. Never get locked in to a poorly functioning organization: change it.
Additional Resource Organizational Designs (PDF): https://Mises.org/E4E_25_PDF
Dr. Smita Bakshi, an engineer passionate about her mission, makes an impact by combining what the world needs and what the world will pay for.
Key Takeaways And Actionable Insights What is the nature of the journey from growing up in India and Africa, to an education in America and the successful founding, growing and managing a high-impact ed tech business that helps instructors teach and students learn computer science?
The answer is: it’s not direct, and it’s not planned from start to finish.
It’s powered by individual drive, assembling knowledge, collaborating with a changing circle of smart and accomplished people, identifying the right pain point to address, and eventually finding — and then keeping — your focus.
The journey starts with individual drive: to better your own circumstances and those of your family. You are not necessarily called to change the world or start a brilliant new company. You find your drive at an early age to do better, move forward, expand your opportunity and improve life for you and your family. Perhaps there is some hardship in your early experience that provides greater determination and zeal. Channel it well.
Don’t necessarily expect a direct path. Keep moving forward, accumulate knowledge and experiences, and gradually start to narrow your preferences. Dr. Smita Bakshi identified engineering as her pathway. Her undergraduate degree was gained in India, and her Master’s and Doctor’s in the USA. Then she taught. Then she took an MBA. Then she worked for a small company in an engineering role, then a large one. There was diverse knowledge around engineering and its application in business and commerce. She established what she was good at.
Finding out what the world needs is a process of experimentation and discovery. It’s not always clear, and sometimes the people with the need can’t articulate it. Dr. Bakshi realized that her passion could not be fulfilled working on server configuration software, because, important though it undoubtedly is, it was too far removed from observable human impact. She made human impact her passion and began to experiment and investigate — in finance, healthcare and education. The idea was not necessarily to start and own a business, but to find the right place and the right way to make an impact.
There are two challenges in finding out what the world needs. The first is articulation: the customer can’t translate their felt unease into an articulated need. No-one "needed" Uber to fix the problems of the taxi industry. All the taxi user knew was that they were unhappy with the existing experience. In what way? In many, many ways. Uncertainty of getting a ride when wanted; uncertainty of the quality; uncertainty of the costs. It takes entrepreneurial skill to articulate a solution and a business model.
The second challenge is scale. Is the need big enough to support a business? Answering that question also requires entrepreneurial imagination.
A mission emerges when you can identify a pain point within your circle of human impact that’s big enough and important enough to generate significant revenues. Dr. Bakshi started a consulting business helping start-ups to fashion business plans for their ideas and technologies. She rapidly found that it’s easy to identify pain points — engineering-speak for market needs or problems-to-be-solved — but that many of them are not significant enough to generate a business. A pain point is only half of a value proposition. Customers can live with pain points that don’t cripple them. It’s important to find the ones that they can’t live with. She advised all of her consulting clients that their ideas would not translate into effective business plans.
Having identified a significant pain point, with a potential for real human impact via a new solution, the next step is product-market fit. Imperfect is OK at the outset, improving steadily over time. Product-market fit is Silicon Valley-speak for the solution to the two challenges of articulation and scale: a set of features and benefits that truly meets the market’s need, and delivers an experience that matches the expectations that a sufficient customers have in their mind when they buy the product, and for which they will pay.
Dr. Bakshi found an unarticulated need in Higher Education for teaching Computer Science (CS). The inputs were part data (more than 50% of students abandon their CS course in Year 1 because the struggle to learn is too difficult) and part sentiment (instructor unease not only at this student struggle, but also at the instructor struggle of teaching with tools that were a poor fit to the task — text books — and the imbalance of administration (especially grading) versus teaching.
The answer was an educational technology solution — a web application instead of a text book, facilitating learning in as interactive a manner as possible, with limited text, interactive, animation, built in labs (tests for students to see if they can write short pieces of code), and auto grading. The brand name was Zybooks.
Importantly, the pilot looked nothing like the Zybooks product today. Once the product was in the market and began to generate feedback, there was a process of continuous updating, improvement and adding features. The MVP (minimum viable product) model worked for Zybooks because the first experience, though imperfect, was a sufficient improvement over the status quo of CS textbooks.
The harder part of success is adoption, rather than product design and launch. Even though the market has confirmed the need, that doesn’t mean adoption is ensured. Dr. Bakshi had commitments from target customers that “if you build it, I will use it”. That turned out to be an unreliable promise. Dr. Bakshi had to take an engineer’s approach to understanding how the market really worked. In this case, the higher education market, there is no incentive for the adoption of the best technology and best practice. In business, there is an expectation of switching to a new service — e.g. a CRM suite — if it is the best performer and an improvement over existing choices. This is not true in higher ed. The instructor has the academic freedom to use whatever techniques he or she prefers.
The engineering solution was direct sales: one-on-one, telephone, email, online and in-person, whatever it took to influence one instructor at a time.
The final part of the journey is “crossing the chasm” from early adopters to early majority. The famous technology adoption life cycle chart suggests that the first 2.5% of a market are the innovators who grab at new technology. The next 13.5% are the early adopters who like to be not necessarily the first but at the front end of adoption. But then there is a chasm to cross before bringing in the early majority, who are more skeptical and less open to change. Dr. Bakshi feels she is still not across the chasm, but is making progress.
The keys, she suggested are:
Focus: don’t be tempted to stray from your core mission and core product. Stick with what you do well, and what your core knowledge and core capabilities fully support.Never compromise — and always keep improving — product-market fit. Is the user experience exactly what the customer wants — and ideally, even exceeds their expectations. Obsess about this fit, and make sure the people in your company think and act as one in their alignment around this singular purpose. When there is time to reflect on the journey, Ikigai is a good philosophy.
IKIGAI CIRCLESSMITA’S IKIGAIFind out what you love.Engineering.Invest in becoming really good at it.3 degrees, teaching, working at small and large engineering companies.Impact: find out what the world needs.A better way to teach and learn computer science.Business model: make sure you can be paid.Design, launch, get adoption for, and scale Zybooks.
The result is a life well-lived.
Additional Resource Ikigai (PDF): https://Mises.org/E4E_24_PDF
Business strategy in books and business schools has tended to towards metaphors of sports or war. There are playing fields or battlefields, and the strategy question is “Where to play, and how to win?” In other words, it’s competitive strategy, where one firm wins and others lose, within some pre-set boundaries of industry structure. This is hardly useful for the start-up or SME entrepreneur, or indeed for any executive in any company who is dedicated to delivering customer value.
Austrian entrepreneurship, built on foundations from Austrian Economics, focuses on the strategic question of how to facilitate customer value. That requires a 100% focus on the customer — not competitors or industry structures. Per Bylund explains how adherence to this one core principle drives a very different approach to business strategy.
Show Notes Strategy in business schools is about how to gain competitive advantage. Austrian entrepreneurs think differently — they are constantly probing their own customer understanding rather than thinking about competition. An entrepreneur’s time is his or her most valuable resource, and they don’t waste it thinking about other entrepreneurs. Competition is usually understood as a firm’s relative position in a well-defined industry. It’s an idea from the economics of the early 20th century, when economists were thinking about market structures like oligopolies producing near-identical goods and services, and how firms performed within these structures. 21st century entrepreneurs don’t think that way.
Entrepreneurs pursue uniqueness: to become the customer’s choice by delivering the greatest value. Entrepreneurs spend their strategy time focused externally on customers and target customers. They are the ones who create value, in the form of an experience of satisfaction or pleasure. The entrepreneur’s task is to facilitate that value experience by offering a product or service that will be perceived as valuable. If the customer is dissatisfied with the status quo, then the entrepreneur’s strategy is to bring to market a solution that eliminates that felt dissatisfaction.
Deep understanding and deep empathy are the entrepreneur’s strategy tools. How can entrepreneurs facilitate value, if customers are the only ones who can create it? The answer lies in deep understanding of customers at the emotional level — how they feel. There is no shortage of data to help shed light: just initiate a conversation with them and they’ll talk about their dissatisfactions and hopes and concerns. They won’t design new products and services for you — that’s the entrepreneur’s job. But the application of deep empathy — truly understanding how the customer feels by seeing things from their perspective rather than yours — will take you to the level of understanding that’s required. If you are really, really good at this — in fact, if you can make it a unique capability — then you’ll realize success. Empathy is the best strategy.
Austrian entrepreneurs are rivals with each other for the customer’s dollar. Entrepreneurs’ continuous striving for uniqueness enables more and more satisfying and valuable customer experiences. All entrepreneurs are rivals — to do a better job of facilitating value for customers. If the customer buys a new digital printer rather than a new dress, the printer maker and the dressmaker are rivals. The dressmaker is stimulated to raise their game in value facilitation so that, next time, the customer buys the dress instead of, say, a bathroom rug.
There are some tools for customer understanding. The best one is conversation. We discussed various research techniques and tools such as the Voice Of The Customer, a method of data and information collection across all kinds of knowledge categories, capable of analysis and potentially leading to insightful interpretation. Dr. Bylund thought these tools worthwhile, but with the risk of being too formalistic. The Austrian route to deep understanding is one-on-one conversation: talking with customers about their feelings and their lives and their preferences, and perhaps getting them to discuss a prototype or rough description of a product or service. Numerical surveys and quantitative analysis are less useful.
There are also tools for internal allocation of resources to support uniqueness of products and services. We discussed the VRIN principle: reviewing the resources and capabilities of the entrepreneurial firm to ensure they are:
VALUE-CREATING: how much does a resource or capability or software feature or service element directly contribute to facilitating a valuable experience for the customer.
RARE: to achieve your uniqueness in delivering value, look for resources and capabilities that are unique, or at least rare. These could be particularly skillful individuals on the team or processes and recipes developed over time that are uniquely refined and uniquely aligned with the value preferences of your target customers.
Inimitable: if your capability can be imitated with a similar (but perhaps not identical) feature that delivers the same level of customer value, then your uniqueness is temporary.
Non-substitutable: if you are able to preserve uniqueness, but customers find they can substitute an alternative about which they feel just as good, then you are marketplace position in not sustainable. Customers can sometimes find value not only in direct substitutes but also indirect substitutes — like choosing a glass of wine over a glass of beer. Your unique beer recipe isn’t non-substitutable.
The VRIN formula is a useful lens to look at your internal capabilities. But Dr. Bylund stressed again and again that the strategy answer can not be found inside the company. Entrepreneurs must only think about the customer, and how to facilitate the greatest possible value for them. It’s the only way to build and sustain a business. Always reinvent and innovate. Always look for some new value that you can deliver. Keep talking to the customer, keep tapping in to the infinite resource that their dissatisfactions represent — just ask them, they’ll tell you.
Additional Resource Voice of the Customer (PDF): https://Mises.org/E4E_23_PDF
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Entrepreneurs operate in the future. They imagine a future where lives are improved because dissatisfactions are removed and there’s greater well-being to enjoy. Everyone can embrace that future. So what could go wrong? Well, your customer may expect more than they feel they actually get, so they stop being a customer. Investors and bankers may expect you to get to your next milestone faster, putting you in a race to recover their confidence. Suppliers may expect a better relationship than they actually experience, and they become more difficult to deal with. And heck, you didn’t expect all this angst, so you are dealing with your own disappointments.
What’s the commonality here? Mis-managed expectations. Steve Phelan reckons you might spend half your time as an entrepreneur on the task of expectations management. If you can do it well, it’s a resource for you. Follow these management steps.
Definition: Expectations management is actively and purposefully changing someone’s opinion about the value of a resource or asset. For example, many start-up or growing businesses suffer from a perception liability of newness or smallness. Target customers or potential investors or even potential employees might have a negative expectation about the company’s future prospects, which might present a barrier to securing capital or resources. You need to overcome the risk premium of smallness / newness in their eyes. You do so through expectations management.
At the outset, when you are identifying your entrepreneurial opportunity and polishing your idea for a new business, a new project, or a new expansion phase, the expectations that most require management are your own. Get help. Entrepreneurs are confident, action-oriented people. Confidence is good — but research indicates that entrepreneurs are often over-confident about their plans. Steve Phelan calls this the Identification Phase, the point at which the entrepreneur forms the belief that arranging a new set of resources to serve customers in new and better way will achieve a profit.
While start-up entrepreneurs tend to over-confidence, those in business over 5 years tend to demonstrate tighter control over their expectations about what’s possible. So experience can be a good expectations management tool. But, if you don’t have the experience, try to gather more perspective from people who have. Assemble an extended team, even if it’s only by e-mail or Slack. Ask them to share their experience to substitute for your own experience gaps.
When you’re assembling resources, your goal is to give the right impression of a solid plan, trustworthy management, and a well-paced path to profits. Your target audience may be investors, whether friends and family or venture capital, or credit providers, like banks. In addition to the quality of your plan, your ability to manage expectations is also influenced by soft skills such as presentation style, and environmental variables such as how you dress. As always, the entrepreneur’s go-to tool is empathy. Take the time to learn about your audience’s history and preferences and form a clear idea about their goals and motivations. VC’s are portfolio managers — show them you fit. Bankers want zero defaults — assure them you can easily clear that bar.
If you are managing potential employees’ expectations, try to be sure you know how they form them. Are they thinking about future equity and getting rich? Or is security a higher preference for them? What about commuting versus working from home? What improvement over their current job are they are expecting? In order to manage expectations, you need to know and understand what the target audience expects.
In your growth phase, expectations management shifts to customers. They form their expectations entirely subjectively, and your task is to align with them emotionally. Austrian economists understand that it is customers who create value – it’s a consequence of their satisfaction, which only they can determine. In fact, they form satisfaction expectations in advance, based on your value proposition. If their experience is less than their expectation, they’ll be disappointed, even if your product or service performed well. Therefore, expectations management with customers is a matter of alignment.
If you operate a B2B business, the alignment vector is always trust. Customers are taking a risk when they embrace a new supplier or a new idea or a new product. Trust helps them embrace that risk. What is the signal of trust that will make the difference? Can it be influenced by guarantees or warranties? How can you demonstrate that the service level you promise will be the service level you deliver? And take the time required to identify the customer’s transaction cost (the cost of taking on a new supplier) and opportunity cost (what’s the alternative to your service). Be sure to address those two costs directly.
At some point, you will prefer to release assets. This is the time to manage expectations upwards. The exit stage may apply to selected assets — for example, you may want to reshuffle your capital structure by selling some and buying others — or you may be exiting a business by selling it. Steve Phelan had two pieces of advice for the exit stage. One was directed at the entrepreneur’s own expectations — to think about exit at the purchase stage (“making money on the buy”) so that there’s an advance plan for a realistic exit price. The second was to let multiple bidders be the influencers of each other’s expectations. Otherwise, you’ll need a strong case to manage expectations to be higher than the market average. For a hard asset, you may have to demonstrate how your ownership was a positive contributor to value — e.g. a superior maintenance regimen. For a financial asset, you may have to demonstrate the opposite — that new ownership can get a higher return. For example, entrepreneurs selling a business to a strategic buyer must create the expectations that the greater resources of the new owner can accelerate growth, reduce costs or increase profitability.
Do’s and don’ts. Manage expectations every day. Where are they set in the minds of others? Do they need adjusting?
Don’t create negative expectations (e.g. by failing to meet deadlines or over-promising). Don’t ignore inputs or advice. Don’t set expectations that can’t possibly be attained.
Your brand is not just your promise. It’s keeping your promise.
Additional Resource Entrepreneurship as Expectations Management (PDF): https://Mises.org/E4E_22_PDF
Hunter Hastings and Peter Klein emphasize profitable value creation as the role of the entrepreneur. Managing costs can contribute to profitability — but there are some costs that are not easy to calculate and not even that easy to identify in some cases. They are not captured by traditional cost accounting. Economists call them transaction costs. They are the costs of acquiring, assembling, monitoring and managing and, in some cases, discarding or re-purposing the resources and assets your firm utilizes to produce output. They are not production costs per se; they are not value creation costs. They’re administrative and managerial costs.
Peter Klein explains.
Show Notes Think of any transaction, like buying a cup of coffee at a Starbucks store. Now think of all the economic costs of that transaction above and beyond the actual dollars you hand over to the barista. There’s the cost of traveling to the store, in both time and money (gasoline if you drive) and wear and tear on your vehicle. There is time spent on studying the menu, explaining your choice and waiting for delivery — and time is the entrepreneur’s most precious scarce resource.
Now apply that same thinking to the acquisition of any resource you want to bring into the firm to support your business model. There are many transaction costs in addition to the purchase price. There is the time taken to research features and attributes, and comparative pricing. There may be negotiation or haggling with the vendor. There may be legal costs in a contracting process. There may be integration costs to fit the new resource into your production chain. If you’re buying from a wholesaler, there are issues of timely delivery and accurate order fulfillment you must monitor and manage. If the new resource is an employee you are hiring, there are advertising, interviewing and negotiation costs, as well as the benefits package that accompanies the salary agreement. All of these transaction costs, across the entirety of your business, add up to an amount that is pretty significant.
And, once you own the resource, transaction costs don’t disappear. They transform into monitoring and managements costs. Peter used the example of Walmart’s trucking fleet. Walmart owns many trucks and the drivers are employees. There are extensive monitoring costs associated with the ownership of these resources and the employment of the drivers and mechanics and service technicians. This group of costs can be characterized as the cost of confidence that you are getting the performance that you want out of the resource you own. In the case of Walmart’s truck fleet, these costs include monitoring the vehicles themselves (location, speed, downtime, tons hauled, gasoline used, etc), the drivers’ productivity, the maintenance burden, delivery accuracy and many more metrics. Walmart employs people and uses technology assets to implement all this monitoring, and those monitoring resources are not really creating value; they’re supervisory overhead.
Another kind of transaction cost arises when you decide you want to recombine, reshuffle or discard assets, or to use them in a new way. In the entrepreneur’s uncertain business environment, it’s never certain that the asset you have acquired or the people you have hired are always going to be perfectly tuned to your business model. Circumstances change, and you want to make adjustments. Is the asset adjustable? Does the employee have exactly the skills you want for a new process or method? Will you be able reprogram the asset or redirect the employee to a new job function? In many cases, you might have need of the legal system for a revised contract (legal costs are transaction costs), or there may be regulations preventing you from closing a plant or laying off workers. Any time you are constrained from making the adjustments you want at the speed you prefer, you are facing transaction costs. Could you have anticipated the situation when you first contracted for the resource or first hired the worker? Probably not — but trying to do so would be a transaction cost in itself!
Often, the issues raised by the problems of transaction costs are characterized as “make versus buy” decisions. Or rent versus own. Or in-house versus outsource. It seems that there is a tendency today towards organizational models that are asset-lite, with a lot of the control that the firm seeks to exert over resources being exercised through renting or outsourcing, or by utilizing independent contractors rather than directly hiring employees. (Actually, Peter disputes this, suggesting that many such business models get a lot of publicity but there is no general tendency across multiple business sectors.) Does a virtual organization chart or a network model compared to a hierarchical model always have lower transaction costs?
Not necessarily. Compare Amazon, which mostly utilizes FedEx and UPS and USPS to make deliveries. Amazon still has many of the monitoring cots that Walmart has — it’s just that they are monitoring an outside vendor. Yes, FedEx and UPS bring their own tracking systems and technologies, but Amazon can’t afford to let its vendors go un-monitored.
In fact, in-house transaction costs are declining at the same speed as outsourced transaction costs. With the advent of software HR and CRM systems and other kinds of monitoring and management technologies, internal transaction costs are not as burdensome as they were in the past. It would be unwise to make the automatic assumption that in-house transaction costs are always higher than outsourced costs.
Actionable Insight So, what’s the answer for entrepreneurs? There’s no simple formula, just the admonition to be transaction cost savvy. In every situation where there are alternative scenarios, the savvy entrepreneur thinks through the transaction costs of each one, and makes a best estimate of the economic costs. He or she thinks about the present costs, the future ongoing monitoring costs, and the potential costs when there is a future adjustment to be made.
Always relate this economic calculation of transaction cost alternatives to the creation of customer value. What is the best alternative transactional mode or organizational mode to deliver value to the customer, today, tomorrow and a year from now? What is the cost of the resource control you need in order to deliver value, especially if customer preferences change and you want to change with them?
Additional Resources Transaction Cost Checklist (PDF): https://Mises.org/E4E_21_PDF
Buy Peter Klein’s book Organizing Entrepreneurial Judgment.
An article Peter wrote to commemorate Oliver Williamson’s Nobel Prize — he is the originator of “transaction cost economics,” which is closely related to today’s discussion topics, though not directly dealing with entrepreneurship.
A longer, more academic survey on transaction costs (PDF) — may be a useful reference.
Also, listeners may enjoy the comments on this blog post.
Dr. Keith Smith is an anesthesiologist and founder of both the Surgery Center of Oklahoma and the Free Market Medical Association. Surgery Center of Oklahoma has innovated in healthcare with a completely free market offering of transparent pricing with no hidden fees, with a radically patient-centric organization and different and better patient and doctor relationship protocols. Free Market Medical Association is a movement to encourage medical practitioners throughout the country to pursue a similar pathway of radical innovation. Dr. Smith took inspiration from Austrian Economics principles. Here are the seven principles he talks about on the Economics For Entrepreneurs podcast:
- Subjective Value This was the first Austrian principle that Dr. Smith learned from reading Menger and Mises. He applied subjective value thinking to the healthcare industry by asking, “Who is the customer?” and “Are health care industry participants focused on creating customer value?”
He realized that, since the patient is not paying the anesthesiologist or the surgeon, then there was no value exchange between the customer and the service provider. Therefore, there is no market relationship. The customer was not in a position to evaluate the quality and efficiency of the medical service that Surgery Center Of Oklahoma and its surgeons provided.
When a third party payer is paying the fees, the patient is not acting as the customer. The fee from the third party can never represent the right price — the one that properly reflect customer preferences — and much of what is dysfunctional in the health care system stems from this arrangement. The industry can not accommodate the fact that patients who wish to consume medical services value different aspects of the service in different ways. Some will pay any price to experience the value of immediate service: surgery today. Some will defer service to a later date to pay a lower price. Some want a surgeon that spends a lot of time with them before and after surgery. Some prefer speed and efficiency. All individuals create value in their own minds, and should be able to decide what price they will pay for that value. Subjective value theory guides Dr. Smith to run his surgery center to serve patients’ preferences.
- Preference Rankings The idea of preference rankings may sound theoretical, but Dr. Smith has found a practical way to make them a tool for building an organization.
When the patient and the surgeon are both customers of the surgery center, it can be hard to align the interests of both without conflict. Dr. Smith calls this desired outcome “accommodating all interests with boundaries”. Both the surgeons and the patients can make unreasonable demands that can’t both be accommodated in the service of good care. How to accommodate both? Just ask them what their preferences are and how they rank them. Many times, just having the conversation is a revelation — it reveals considerations to the patient or surgeon they had not appreciated before. For example, if a patient demands a local anesthetic and the doctor reveals a preference against it, the reasons for the surgeon’s ranking may bring new information to the patient and may change their preference.
Preference ranking provides an organizational tool to help Dr. Smith build his team of surgeons. A surgeon that frequently shows up late, or habitually takes an excessively long time for a procedure, may be revealing a preference for revenue over patient quality. By observing behavior, it becomes easy to identify a doctor (or a hospital) that is revenue focused compared to one that is truly focused on value, taking the long-term view and making every value exchange mutually beneficial. If a surgeon is observed acting in a way that is not in the patient’s best interest, Dr. Smith does not want him or her on the team. Asking preference ranking questions — what is important to you and how do you rank it? — is a good way to get to know someone you are considering for your team. It’s a troublesome thought process for some, and an enlightening one for others.
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Self-Examination Preference ranking can be applied in self-examination. Dr. Smith says, “I scour myself for inconsistencies”. He found one when he realized he was filing Medicare insurance claims that were paid with government funds which, he declares, is like “receiving stolen goods”. That, he realized, was inconsistent with his free market principles. And so he abandoned the practice and now treats Medicare patients at no cost. The acceptance of the market is the determinant of his business success — “to hug us or crush us”. Dr. Smith’s preference is to be consistent in his commitment to free market practices.
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The Errors of Interventionism The refusal to accept government money was just one step in expunging the corrupting and distorting effects of government intervention in the health care market. Dr. Smith examines every element of government intervention in the market and attempts to eliminate it from his business, to make sure his business does not benefit from it. He scrutinizes one situation after another and attempts to eliminate them all.
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Dynamic Flexibility. Austrian Capital Theory — and the Resource-Based View of the firm that derives from it — prescribes extreme flexibility of capital assets and resources to enable shuffling and recombining in response to changing consumer preferences. Dr. Smith describes the process of continuously looking for more knowledge, more learning and more flexibility as “radical entrepreneurship”. He looks for texts like Peter Klein’s The Capitalist And The Entrepreneur to provide new ideas and new initiatives. Continuous learning is part of Dr. Smith’s recipe, and he is always searching out readings that will change his mind.
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Time Preference Time preference is a core concept in Austrian economic theory. Entrepreneurship takes time. It requires patience, and the elevation of long-term goals over short term goals. It also requires foregoing present opportunities in order to pursue future benefit. What are you willing to forego in order to be an entrepreneur?
Dr. Smith found the most striking discussion — “jaw dropping” in Dr. Smith’s words — of time preference in Hans-Hermann Hoppe’s Democracy: The God That Failed (i.e., the relevant passage starts at the very beginning of Chapter 1).
He found an immediate application in the business model for Surgery Center Of Oklahoma. As surgeons get older, their time preference changes. They want to monetize their ownership position in the partnership — to “cash out”. This often leaves junior surgeons “holding the bag”, because the partnership (or an intervening VC) may buy the departing surgeon’s position, but this is paid for out of the future earnings of the remaining partners. Through his understanding of time preference, Dr. Smith was able to anticipate this situation and organize his surgery center like a law firm — no partner pays anything to join and receives no exit payment when they leave. They also don’t own the real estate. So there is no opportunity to monetize on exit, which “saved SCO as a business” and brought stability by de-fanging an activity that doctors are known for.
- The Austrian Way of Thinking As important as any principle of economics is the Austrian Way of Thinking: rigorous reasoning based on logic and a priori axioms; being aware of assumptions and always examining them; respect for how others value things; understanding the difference between risk and uncertainty, and looking uncertainty in the eye; and generally exerting more logic and less emotion in conducting business.
Economics is the study of human behavior. Humans move from A to B because they prefer B to A. Understanding the logic of human action — and the motivation behind it — provides a lens through which to observe what is going on around you and to see it more clearly, obscuring distractions and perceiving conflicts of interest you might not see without the lens. The Austrian Way of Thinking brings confidence, decisiveness and calm. Physicians — and anyone — can benefit.
Additional Resource Dr. Keith Smith's Austrian Approach to Innovation (PDF): https://Mises.org/E4E_20_PDF
Austrian Capital Theory (ACT) sounds arcane, academic, and complicated. In fact, it’s the key to modern organizational design, cutting edge business structures, and the high-response business models leading entrepreneurs deploy to win in today’s business environment. Hunter Hastings and Per Bylund discuss how to apply Austrian Capital Theory in modern organizational design, contemporary business structure, and a high response business model.
Show Notes Austrian economics recognizes that capital and resources are so varied and different today that agile entrepreneurs can combine them and recombine them in ways that are highly differentiated — even unique. Every firm is a capital structure that is in continuous flux, as the entrepreneur changes and adjusts to create new value in response to marketplace and environmental changes. Therefore, the whole economy is a changing, rapidly evolving capital structure, generating economic growth. It is the appreciation of the need to continually shuffle the firm’s capital combinations, and the mastery and agility in doing so, that marks the Austrian Entrepreneur. He or she is an orchestrator of capital, buying and selling capital goods and combining them with new and retrained workers to change production processes, scale up to new levels of efficiency, and to solve customers’ problems in new ways.
The purpose of the orchestration function is to achieve the highest return on capital by creating the most customer value. The value of capital is the future revenue streams it generates from customers, and revenues are a reflection of value created. Entrepreneurs examine every piece of capital, and every capital combination, to measure how much value creation it contributes. Could it do more? Can the entrepreneur render the capital more productive in maximizing value at the end of the production chain?
How can entrepreneurs assess whether their combination of capital assets is right? The managerial accounting of Austrian entrepreneurs is not identical to formal financial accounting. A conventional balance sheet is not going to tell the truth about the money-value of assets, since it is not based on assessing future revenue streams. And this year’s P&L is of little use since it is static and backward looking. How can entrepreneurs differentiate between assets that it merely feels good to own and assets that genuinely create consumer value and future revenue streams? It’s not easy, but there are two useful steps, both of which focus you single-mindedly on the consumer.
Root out those assets that clearly do not contribute directly to consumer value, or clearly contribute very little. An office building might be one such example. It’s nice to have a central office, but couldn’t your employees contribute as much from a remote location, so that you can eliminate the cost of centralization?Examine capital combinations that could contribute more if they are rearranged. A server + software + trained personnel is a productive combination. What if the entrepreneur could ditch the server and rent computing power from AWS? What if the savings could be reinvested in more training for the person or better software? Would this rearrangement contribute more to consumer value? Renting rather than owning assets is one way to add dynamic flexibility to the firm. The entrepreneur should focus the firm on what it alone can uniquely do for its consumers and customers. Outsource everything else. The firm is a necessary vehicle for the entrepreneur to take ideas to market to earn a profit. It is at its most efficient when it is 100% focused on what it does uniquely: its unique brand, its unique processes, its unique recipe, its unique design, its unique functional and emotional benefits for the consumer. Everything else should be stripped away. The necessary infrastructure can be rented or outsourced. If you own 10 computers and have 10 people sitting at them every day, it’s hard to identify what productivity you are getting out of each of them every day. If you don’t own them, and you are thinking rigorously about the future streams of consumer value your firm is producing, you won’t feel locked in to your current capital structure.
A “capital-lite” structure in no way reduces the market value of the firm — in fact, it can increase it. In the past, companies were valued based on the assets they owned, as captured on the balance sheet. But this valuation method was based on an assumption that the assets were owned because they produced consumer value and contributed to profits. What if the assets are not contributing to future profit? They become a liability. Firms like GE are finding this out today — they own a lot of non-contributing assets and face major transaction costs in shedding them.
There is no need to own consumer value-producing assets. You need to control then and have the rights to utilize them to produce value, but not to own them. In venture capital markets, it is common to see firms change hands at a price that represents a high multiple of revenues or of earnings, even if the traditional capital base is insignificant. Assets that don’t appear on the balance sheet, like brand and a loyal customer base, are more important than those that do.
Actionable Insight The Austrian Entrepreneur reviews combinations of capital and labor and non-capital resources at every moment, seeking ways to improve that combination for the consumer’s benefit. The single-minded focus is on consumers and their changing preferences and the consequent implications for responsive change in the capital structure of production.
Additional Resource Austrian Capital Theory at Work (PDF): https://Mises.org/E4E_19_PDF
Austrian Capital Theory holds that capital assets are heterogeneous and complementary. In business language, that means an entrepreneur can assemble set of assets that are special to his or her firm and combined in such a way that the combination is unique, or at least hard to copy. If the assets generate consumer value, and hence a revenue stream from consumer purchases, then the entrepreneurial firm can be said to have marketplace advantage—it is unique or advantaged in its creation of consumer value.
The Resource-Based View (RBV) of the firm came from this thinking. The marketplace advantage available to any firm results from its assembled resources (synonymous with assets for the purposes of our discussion). We talk to Professor Steven Phelan, Distinguished Professor at Fayetteville State University, an expert in this field.
Note: The conventional language of RBV is competitive advantage. At Economics For Entrepreneurs, we prefer the idea of the search for uniqueness, where the point of reference is the consumer rather than the competitor. Therefore, we’ll use terms like marketplace advantage and commercial advantage.
Show Notes Resource-based strategic thinking guides entrepreneurs in the identification, assembly and use of resources in unique (or at least differentiated) ways to create sustained marketplace advantage. The use of resources is how entrepreneurs create revenue flows from consumers. The money-value of the resources—and hence the market value of the firm—derives from these revenue flows. The goal is to align the resources as perfectly as possible with consumer wants and preferences. Entrepreneurs who combine consumer-valued resources in unique ways can establish an advantage in the marketplace. If their combination of resources is unique, or at the very least hard to copy, then the advantage is sustainable and the revenue flows can be anticipated to continue absent changes in consumer preferences.
What kind of resources are we talking about? All kinds, both tangible and intangible, and both physical capital and human capital. It’s the combination that counts. A handy acronym for the kinds of resources available for entrepreneurs to combine is PROFIT: Physical, Reputational, Organizational, Financial, Intellectual and Human, and Technological resources. It’s a good exercise to review your resources under each of these headings and question whether they are unique and hard to copy.
Reputational, Organizational and Intellectual (Human) resources are the most usual sources of uniqueness (in the VRIO framework, “unique” translates into valuable, rare, hard to copy / inimitable and non-substitutable).
Reputational resources can include brand, customer satisfaction levels and trust.
Organizational resources can include processes, methods, and culture, and also includes the bundles of resources we call capabilities.
Intellectual resources include people (always unique), teams, decision rights, as well as patents and recipes.
Sustainable advantage is reinforced when other firms can’t see inside the “black box” of the combination of resources and can’t reproduce the “secret sauce”. It might be the case that your Physical, Financial and Technological resources are not differentiated, or even rare. The “secret sauce” is in how you combine them, and especially how you combine them with Reputational, Organizational and Intellectual resources. If outsiders can’t see inside, and can’t decipher the combination or copy the recipe, you can separate yourself in the consumer’s perception as a unique choice.
How you deploy the resources can also be a source of advantage. Operational excellence can be differentiating and value-creating. If you can guarantee customers and suppliers that you’ll operate with excellence in all directions—on time, on budget, high responsiveness—you’ll create an advantage over other firms that don’t keep their promises. Think of this as a bundle of resources that you deploy really well. The business literature sometimes calls it “core competence”. High quality, consistent operations do not come easily. This capability is also a resource.
Dynamic flexibility can be thought of as a bundle of capabilities around detection of and action in response to the need for change. Austrian economics stresses marketplace dynamics and the role of entrepreneurs in detecting and responding to changes in consumers’ wants and preferences. Such agility does not come easily to the firm. It requires “sensing” the uneasiness of consumers and using empathic diagnosis to identify the source of the uneasiness, and creativity and imagination in rearranging resources to produce new offerings. Organizationally, the entrepreneur must make the change occur—ready the organization for the adjustment and orchestrate individuals and functions to shift. It’s a rare capability.
Implementing the resource-based strategy is a continuous activity. Winning entrepreneurs shuffle and reshuffle resources continuously. Professor Phelan urges entrepreneurs to ask this question every day: what can we do better? Ask it in every resource area of the PROFIT framework. Gather information that tells you where you need to improve or change (You can use a template like SWOT—Strengths, Weaknesses, Opportunities, Threats; but make sure your use of it is deeply analytical and not just a laundry list of what you do). And then execute the hard part of dynamic flexibility: taking rapid action. This is the advantage of small companies and entrepreneurs.
Additional Resource Resource-Based Theory of Entrepreneurship (PDF): https://Mises.org/E4E_18_PDF
Useful books mentioned by Professor Phelan Entrepreneurship Strategies and Resources by Marc J. DollingerThe E-Myth Revisited by Michael E. GerberCrossing The Chasm by Geoffrey A. Moore
Yousif Almoayyed runs a concrete business based in Bahrain, part of a family conglomerate of businesses. It’s a complex business, requiring the procurement of raw materials both locally and imported, the manufacture of products to exacting standards, the provision of on-time and efficient service and deliveries, relationship management, and cash flow management. The business involves high-cost capital goods and careful economic calculation of the revenue flows from those capital goods in an environment of fluctuating costs and market prices.
His university education was in engineering: math and computer science. He declined the opportunity for a business degree in order to learn on-the-job. Part of his self-directed business education was the reading and thoughtful analysis of Austrian Economics texts, and the practiced application of the principles gleaned from non-stop reading.
Show Notes By reading Austrian Economics texts and thinking about how to apply the learning, It’s possible to develop an “economic way” of seeing and thinking. Yousif’s reading plan was eclectic and broad-ranging. He first discovered Irwin Schiff’s How An Economy Grows And Why It Doesn’t. Then he found Bastiat, and heard Ron Paul mention Austrian Economics, so he signed up for Mises University, which he listened to in his car via iTunesU. Since then he’s read all the great texts, many downloaded free from Mises.org. His reading gave him principles, economic logic, and clarity and precision in vocabulary.
Looking through an economic lens results in a better understanding of people, their goals and motivations and the purpose of their actions. Now it is possible to look at people and understand why they do what they do. Economics teaches empathy — putting yourself in other people’s shoes to understand their motivations and therefore their actions. This analysis applies to customers, colleagues and employees. Yousif declared himself “surprised and shocked” at why he had not been taught this before.
For entrepreneurs, the core of economics is subjective value. Many people use the term “value” mistakenly and imprecisely. They equate money prices with value. But Austrians do not make this mistake, and by analyzing the subjective value preferences of customers and employees, it is possible to be more effective at motivating. To a customer, on-time delivery and operational efficiency have a value that can be reflected in higher price or longer cash flows through relationship strengthening. To an employee, convenient parking and recognition for extra effort can have more value than a pay raise. Your tennis coach tells you, “Keep your eye on the ball”. In business, it’s “Keep your eye on each individual’s subjective value preferences”.
Austrian economics provides a uniquely helpful perspective on pricing. Pricing is a particularly challenging subject for entrepreneurs. The Austrian perspective recognizes that, at any given moment, price is a kind of average of what many involved actors think it should be, i.e. it’s subjective. Some think it should be higher, some lower; some think it’s going to drop, some think it’s going to go up. At a point on time, all the actors settle on a number. Austrian economics teaches you to observe what all the actors are doing or hoping to do in the market at the time, and to analyze what’s motivating them. Many things influence price actors — including the supply and demand for the product or service, but also the supply and demand of money — but always in the specific market of your local set of exchanges and local actors.
Prices tell the truth. A lot of people won’t accept market prices. They deny the truth. If prices contradict what’s in the news, the news is fake. If a building owner fails to lower the rental prices of apartments because he things that would be going too low, and the building becomes one-third unoccupied, it is the prices that are telling the building owner the truth.
In Austrian economics, prices determine costs. The entrepreneur has some discretion to manage costs, but must meet the market price. Entrepreneurs must meet the market price in order to sell, and find ways of keeping costs below that level to make a profit. The entrepreneur can have some influence over costs e.g. via negotiating contracts based on volume, or speculating, or finding new suppliers.
Importantly, if market prices change, the entrepreneur’s cost must change. Subsequently, it’s important to understand that accounts look instantly different. What you did in the past is no longer an accurate indication of what you can do today. You can’t repeat old arrangements when future prices change. Prices change the way your accounts look in the past, present and future.
As a consequence, traditional accounting is mostly useless for entrepreneurs. Accountants do not really measure anything, at least not accurately. Many of their numbers are aggregated figures, or averages over arbitrary periods of time like quarters or months. Accounting takes something inherently dynamic and simplifies it and puts it into numbers for purposes of stewardship over capital. Accounts were originally simplified snapshots for owners who look periodically at what their managers are doing. Entrepreneurs who are actually running a business need to understand what is going on dynamically under the numbers. We need economics to understand “underneath the numbers”. Austrians are very careful with assumptions, and are sensitive to the many assumptions in accounting.
For example, asset prices may fluctuate. They are accounted for via straight line depreciation, which is calculated for deduction from income tax, and therefore is not necessarily accurate regarding the real world.
Austrians examine the ends of the people who devised the accounting systems.
Knowledge of Austrian Economics is the foundation for confidence and decisiveness. An entrepreneur can never have complete data or complete information. Austrian economics enables the entrepreneur to make confident decisions under these conditions of uncertainty. That’s because the Austrian lens focuses not on data but on more qualitative understanding. Austrian entrepreneurs utilize the principle of distributed knowledge from F.A. Hayek. Talk to salespeople. Talk to cab drivers. Observe behaviors. Derive indications. If those indications are pointing in a certain direction, reach a conclusion. Confidence, of course, comes from being right. So keep practicing the formation of entrepreneurial judgments. Call things before all the information is in. Review the outcome based on results. If there is contradictory information, don’t be hasty. Economics helps you build a picture of what all these indicators mean.
Supplementals Yousif mentions accounting as a field where Austrian Economics gives entrepreneurs a different perspective. See Thomas C. Taylor’s Accounting In The Austrian Tradition, as well as his interview on mises.org.
For a general view of Austrian Economics for Business, you might like this lecture video by Peter Klein.
David Nordfors is CEO and co-founder of IIIJ and the co-chair of the i4j — Innovation For Jobs — Summit together with Vint Cerf. He was previously co-founder and Executive Director of the Center for Innovation and Communication at Stanford University. He has served on World Economic forum Global Agenda Councils and was one of the WEF Innovation 100 in 2009.
Show Notes Will technological innovation kill or create jobs? It’s the wrong question. The right question is whether technology being used enough to innovate new ways of earning a living, to open new sources of income. The value proposition should be focused on the individual earner.
David predicts there is a huge opportunity for entrepreneurs to make people more valuable to each other. He calls this idea The People Centered Economy. It’s a research project, a book, a Summit and discussion group, and an innovation idea. Or, rather, an idea for a solution. The problem to be addressed is the fear that technological automation will destroy jobs. David wants to make sure technological innovation makes people more valuable to each other. We’ve illustrated David’s People Centered Economy in an infographic for you to download and share.
In his view, this is a disruption of the conventional economic approach — which he calls the Task-Centered Economy. In the Task-Centered Economy, producers pay workers to do tasks with little concern for making those people more valuable. If they can eliminate them through automation, they will. But on the other side of the economy, the consumption side, they want those people to buy the goods and services that are produced. Corporations are working hard to help people consume, but less hard to help them earn.
In the People-Centered Economy, entrepreneurs will work hard to make individuals more valuable to each other. Entrepreneurs are creative people who identify an unmet need felt by customers, and devise novel and profitable ways to meet that need. David says that the need among earners that is largely unmet is to “work with people you like, be valued by people you don’t know, in order to provide for people you love”. That’s a pretty good description of the collaborative entrepreneurial economy. Making people more valuable will be a new market for opportunity-seeking entrepreneurs. It may be one where entrepreneurs will be highly successful, because the difficulty for large corporations — who control much of the relevant technology — in switching to a PCE (people-centered economy) mode from a TCE (task-centered economy mode) is daunting for them.
David has developed a concept for the execution of PCE: Jobly.com. In his book, David describes a conceptual platform called Jobly.com. On one side of the platform are earners. Jobly applies A.I. to assess everything about the individual that’s available to know – probably more than they know about themselves – to profile them and assess their talents. Those talents may be latent or hidden. As an example, he uses people with synesthesia. They combine senses in an unusual way, for example, seeing colors when hearing music or a person’s voice. There may be no obvious way this talent can be applied in the job market to earn money.
But what if Jobly could also use A.I. to ascertain what unmet job needs can be met by this unusual talent. For example, HR can be viewed as an industry with 95% failure rate — only 5% of people say they have a job that both fits them and is engaging. What if a synesthetic could identify people who are in the “wrong” jobs — hear a marketer who’s “green”, and would be better placed in a technology job — and thereby improve the performance of an HR department with their hidden skills?
Jobly would match hidden talents to unrealized job needs so that both the earner and the employer become more valuable. Jobly could find a person with talents they don’t know about, and introduce them to an organization to solve a problem the organization didn’t know it had, creating the perfect job for both the individual and the organization.
David’s imagination of the future is that a good economy will be defined as people finding valuable things for each other to do. If people don’t find valuable things for each other to do, ultimately no-one does valuable things. Then we don’t have a very good economy. The customer is the earner. It’s the difference between EBay and Uber. EBay makes its sellers — earners — the most important people; they’re more important than buyers. Uber takes the opposite approach, making riders more important than drivers — and now drivers are dissatisfied because of eroding earning power. Uber may have to think about how to make its Drivers more valuable.
We’ve prepared a graphic to illustrate the evolution of the People-Centered Economy (Mises.org/E4E_16_PDF). We’d welcome any ideas you have regarding entrepreneurial initiatives to make people more valuable.
Jeremy Vesta is a partner in Vesta Holdings, and a manager of Harmony Beef, a greenfield start-up in the fresh beef industry. Fresh beef might be thought of as a commoditized industry. But new entrepreneurial thinking can bring profitable differentiation to all markets. Here are some highlights from our conversation.
Show Notes What’s the entrepreneurial response if you are operating in a commodity-like market? A fresh beef processor stands in the middle of the production chain, downstream from the unprocessed inputs and upstream relative to the distributors, retailers and consumers. Some abundant products and services that are inputs to finished consumer goods are deemed to be commodities and subject to price competition — lowest price gets the contract. Market conditions like these can be very challenging for entrepreneurs, apparently leaving little room for the kind of value creation or brand building that will generate higher prices and customer loyalty. What’s the right entrepreneurial response?
Operational excellence is a primary pillar of value provision in commodity markets. Jeremy’s first foundational principle for value creation in his industry — fresh beef — is operational excellence. It is often overlooked as a source of value by theorists, but not by customers. When they can count on exactness in meeting specifications, when their preferred timing is respected, when the quantities they ordered are the quantities that are delivered, customers translate the reliability of promises kept into trustworthiness, and the integrity of contractual precision into relationship strength. Operational excellence is often underestimated as a source of customer value.
The same is true further up the production chain. When an operator exhibits excellence to upstream suppliers and vendors, they are reassured that they are selling into a waste-free and efficient partnership, without operating friction or relationship tension.
An operator in a lightly differentiated market can provide the valuable service of transmitting market signals up and down the chain. Austrian economists say that the capital structure of an industry reflects the preferences of the end-consumer. Once customer and supplier relationships are established, the middle-of-the-production chain firm can provide a valuable market function as a curator, evaluator and transmitter of market signals. In Jeremy’s business, consumer signals pass through retailers as a request for “more products like that” or, conversely, as a non-purchase that shows up as “shrink” (perishable product that is unsold before its expiration date). Jeremy’s firm can pass these signals to the upstream suppliers to adjust their production practices. Similarly, social conversations in the marketplace about grass-fed beef, or organic beef, or hormone free / antibiotic free beef can be passed up the chain to producers willing to respond, and the resulting new products can be marketed as innovations by the retailer.
Careful and responsive market signal management enables increasingly sophisticated consumer, customer and product segmentation. True commodity markets, if there are such things, defy segmentation. The operator who senses the potential for market changes by curating market signals can create effective segmentation to increase differentiation and therefore profits. When the upstream producer provides more grass-fed beef in response to the market signals transmitted through Jeremy’s company, the supply side is newly segmented to Jeremy’s benefit. Then his company can supply the beef to selected retailers, restaurants and foodservice distributors who have expressed an interest in serving it to consumers, thus creating strong downstream segmentation and relationships. The capability to organize market signals, deduce evolutions in consumer preference, and to be a catalyst for innovation in the production chain is an important value-creation skill, even in (perhaps especially in) a lightly differentiated market.
The use of technology is another source of differentiation. Jeremy identified vacuum-packaging as a consumer-value creating technological advance in his industry. The product arrives at the consumer in a fresher condition and better protected, and provides the consumer more convenience as well as greater confidence in storing and handling. Jeremy’s company is an early adopter of such operational technologies, procuring the most advanced machinery and the latest componentry (such as high-tech bag material) to ensure the best functional performance (better / more complete vacuum) and therefore the greatest level of consumer emotional benefit (trust). Beef is still beef, but packaging and presentation are open pathways to greater customer satisfaction.
Most importantly, a firm can bring its own distinguishing values to bear in any market. Culture, values and integrity can’t be commoditized. Jeremy’s family chose the name Harmony for their beef company with great care and purposeful intent. Harmony up and down the production chain is built on trust and service. The company realizes more value when it exhibits core, true, genuine empathy. All market participants operate more efficiently when there is unquestioned trust. Each helps the other realize its goals. That doesn’t mean that there are never any problems or disputes, but integrity always defuses tensions, and trust always finds collaborative understanding. Setting high standards and adhering to a distinguished set of high values is beneficial for the whole production chain. Fairness pervades transactions. The market synchronizes when the counterparties in trades include care and trust in their dealings.
Find out more about Harmony Beef at HarmonyBeef.ca. Download the "Value Innovation Pathways" PDF (https://Mises.org/E4E_15_PDF).
The entrepreneurial life is good for the individual, the family, society and civilization. Whether your entrepreneurial undertaking is something small or something huge, or somewhere in between, doing something entrepreneurial, utilizing your own resources, benefits others and is therefore heroic.
Show Notes Successful entrepreneurs should not be called upon to “give back” to society. The entrepreneurs’ role itself is socially beneficial. They make money by producing goods and services that consumers value more than the money they pay to acquire them. Society — in the form of the market — has its own feedback loop to tell the entrepreneur whether or not value is being created for others: profit is the signal that society is experiencing value, and loss is the signal that the entrepreneur got it wrong and is not creating value. There is no need for a bureaucrat to tell us.
But you don’t need a social purpose or a change-the-world idea, or even a monetary goal to be an entrepreneur. Just get started. C Jay Engel started straight out of school. Entrepreneurship was stability; bread and butter. He had skills in project management and found that people needed those skills, and he developed a consulting business. He was able to try to expand in other areas, which took him into technology; successes and failures were part of the recipe, as was fun. He enjoyed himself and was able to develop as a person.
The pursuit of higher values can come later, when your entrepreneurial business matures and stabilizes. Initially, C Jay focused on what was immediately in front of him. Plans shift quickly and new directions open up, and agility is required. You can’t plan your entire entrepreneurial life at the outset. Now — still in his thirties — he is able to reflect on what he calls “grander things”, like the legacy he will leave to his kids. Not the financial one, but the kind of world he can contribute to, that they will live in. He likes to think that there are hundreds and thousands of entrepreneurs all over the world doing the same thing to help bring about that good world. It’s an exciting and inspiring spontaneous order: entrepreneurs making a better world by helping individuals.
Is entrepreneurship especially arduous? It can be. Think of Elon Musk. The task of getting people to Mars to establish a colony is pretty arduous. It’s less so if you’re setting up a consulting shop. But there is uncertainty to grapple with, and doing so requires a certain mindset. It’s a learning process, and trying different ways to handle uncertainty in the multiple different ways you’ll encounter it makes you a better, more developed person. Constant self-awareness helps you realize what you need to do to handle conditions of uncertainty.
Does that mean that a special set of personal attributes is required to be an entrepreneur? Is there a personality test? We’ve had a number of guests talk about elements of entrepreneurship, like a bias for action, risk mitigation, and brutal determination. But these are patterns of behavior more than they are personality traits. C Jay’s advice is: just do it. Examine yourself along the way and you’ll find out your strengths. And when you find that there are places where you can strengthen yourself (or your team), that’s what other people are for. You can’t be highly successful without engaging other people, so focus on that rather than on any so-called “weaknesses” you may be told you have.
Technology helps you assemble not only your team, but also a full set of entrepreneurial resources. The entrepreneurial economy is highly collaborative. Whether it is Upwork or LinkedIn or Alibaba or Amazon, technology can help you assemble a team, a full set of resources and a supply chain. You can find marketers and accountants and engineers and interconnect them all over the globe or locally, in a team. Team building and team motivation are core skills (and can be a limiting factor). Self-reliance does not mean the same thing as it did in the past. The rugged individual is not the driver of the market economy. In fact, the entrepreneurial economy is highly collaborative — self-supporting rather than self-reliant. Any capital you acquire depends on the entrepreneurs in the earlier stage who produced it for you, in anticipation of your needs. Price signals from other entrepreneurs guide you. No entrepreneur is alone. The invisible hand is actually visible — it’s the price mechanism connecting you to all the people and all the resources in the world.
How do we communicate this narrative to the world? The socialists are better at marketing than the entrepreneurs. Such harsh words are used about profit, and yet it is the social signal of approval. People who are benefiting from capitalism, like Hollywood celebrities and Silicon Valley billionaires, do not understand capitalism and decry it. What should entrepreneurs do? Just keep working at entrepreneurship. Keep making life better for customers and everyone else. It’s also healthy to reflect on how you are benefiting people around you. If you have a chance to say something or write something and share an idea then take it. Doing so is itself an act of entrepreneurship. Our message will emerge from the communication efforts of individuals.
C Jay Engel himself has started Austro Libertarian magazine. It’s a new publication located somewhere between the academic rigor of QJAE and the shorter articles of Mises Daily. Original content in longer form articles, in your choice of digital or a beautifully designed and printed physical magazine. For C Jay, starting a magazine is another example of economic action rather than political action.
Per Bylund talks to Hunter Hastings about the value-centric model for successful entrepreneurship, and we provide an infographic to help you apply the model to your own business.
Show Notes Subjective value is an important subject in economics — and even more so in entrepreneurship, where it is fundamental to what entrepreneurs do. It’s the critical factor in entrepreneurial success. Business schools talk about “creating value” and “value added” as if value creation were an objective process. But it’s not. And businesses can fail if they misunderstand value, because they can easily produce something for which there is no market.
Value is a felt experience, 100% inside the consumer’s head. Value is a satisfaction that consumers feel. It’s the result of an escape from or a relief from a felt uneasiness, or felt dissatisfaction. That’s often called a “consumer need” in business language, but unease or dissatisfaction are better words to describe what the consumer feels before the entrepreneur’s new solution is offered. Unease and dissatisfaction are hard to articulate, they are emotional conditions, they are affected by context and circumstance, and they can be inconsistent and idiosyncratic. The consumer feels, perhaps vaguely, that life could be better, or their current circumstances could be improved. Value is the feeling the consumer experiences in the period after having consumed the entrepreneur’s offering that relieves this vague feeling. They feel better – perhaps in a way that the entrepreneur never expected.
The consumer’s perception of value can change, in unanticipated ways, and very quickly. Take food as an example. Consumer needs are changing rapidly. There’s a new unease about ingredients and methods of production. It’s not exactly clear what the consumer “wants”, but their preferences are changing to include notions of holistic health and wellness, so that taste and calories and other attributes of food are less important to them. We can’t rely on consumers wanting today what they wanted yesterday. Just look at the problems big companies like Kraft-Heinz are experiencing as they try to keep up with this rapid and broad-based change in consumer preferences. And it is even harder to predict where the consumer is going next on this journey of change.
So, if value is perceived by the consumer, what do entrepreneurs really do? Do they create value, or add value, or something else? Per Bylund thinks of entrepreneurship as facilitating value. Entrepreneurs can’t create it and can’t add it. They design a value proposition based on their empathic understanding of what the consumer wants and of their sense of unease about their current circumstances, and they present this value proposition to the consumer. Then they must listen for and measure the consumer’s response to find out if the consumer is experiencing value.
Production must be designed with the consumer in mind. The consumer is the boss, and the production chain must reflect the consumer’s preferences and change with their evolving tastes. The economists refer to consumer sovereignty — the consumer determines what is value, and therefore which entrepreneurial initiatives are successful and which are not. The successful entrepreneur designs a production chain that can deliver value. In a very real sense, the physical and financial and human capital in the production process must be a reflection of the consumer’s preferences and desires. The consumer’s preferences determine the capital structure.
And since the consumer’s preferences are continuously changing, the successful entrepreneur practices a kind of capital dynamism that follows these changes and, to the extent possible, imagines where the consumer is headed, because production takes time and entrepreneurs are always concentrating on facilitating future value.
Advertising, marketing and communications are a fundamental part of the value proposition and not a supplemental part. The entrepreneur must tell a persuasive story about the value the consumer will experience. Advertising and marketing are ways of communicating to the consumer that there are new alternatives available to them — new ways to improve their circumstances and feel like life is better. Often, the entrepreneur is a pioneer, creatively interpreting the consumer’s need and developing a solution that the consumer might not have thought of on their own, but which they’ll embrace when they find out about it. Sort of like the Model T the consumers got in place of the “faster horses” they asked for in the (probably apocryphal) store about Henry Ford. Advertising and marketing tell the entrepreneur’s story, and they’re an important and integral part of the value proposition.
This consumer-first (or customer-first) process works in B2B businesses as well. When selling to or supplying a B2B customer, it’s important to know the customer’s individual preferences and needs, which are subjective — the need to feel satisfaction — in just the same way that the consumer’s needs are subjective. In fact, since the ultimate consumer determines what is valuable throughout the production chain, an entrepreneur who is knowledgeable about the B2B customer’s end consumer can establish an advantage. Being able to demonstrate (1) a deep knowledge of the end-consumer’s needs (especially when they are changing), and (2) how to bring the B2B customer’s position into greater alignment with those needs, makes the vendor-entrepreneur an especially important partner. The B2B customer will experience their own sense of satisfaction and value in the exchange.
The entrepreneur who adheres to a value-centric process has the greatest chance of success. The entrepreneur’s process of thinking must start at the consumer and work “backwards” to production. The entrepreneur must live inside the consumer’s mind, and employ empathy to understand the consumer’s subjective needs and wants. From an empathic diagnosis, the entrepreneur designs a product or service and a value proposition and takes it to the consumer when it is ready. By this time, the consumer may have changed, and so speed and agility are mandatory. It’s easier said than done. But it is critically important, especially for a new business or initiative. For established businesses, when the consumer changes, it’s extremely hard to change with them.
Use our free download of the value-centric process for entrepreneurs (https://Mises.org/E4E_13_PDF) to help you think about the stages of value facilitation.
In our ongoing project to build a solid bridge between the theory and practice of entrepreneurship, we explore the connection between organizational psychology and the entrepreneurial personality.
Lisa Stevenson studied I/O Psych as an undergrad, in connection with business courses, and became fascinated with it. I/O Psych is shorthand for Industrial and Organizational Psychology — the application of psychology in the workplace. Lisa went on to post-graduate studies and a Masters Degree in I/O Psych. She applied it in consulting companies, first as a recruiter and then as an organizational development consultant.
Show Notes The application of I/O Psych is aimed at improving people outcomes and people performance within firms. The discipline embraces talent and fit — does an organization have the right talent to get jobs and projects done now and in the future, and do the people with the right talents “fit” the firm’s values. Often, firms use I/O Psych to develop pro forma profiles and compare individual assessments to those profiles, looking to emphasize the most desired characteristics and avoid those that are unwanted.
One of the methods of I/O Psych is the application of self-assessment tools. There exists a wide range of psychology-based or psychology-inspired self-assessment questionnaires and surveys that are focused on assisting firms and their HR departments to evaluate and optimize their employee base. One particular application is the combination of different personality types in teams in an attempt to balance strengths and maximize collaborative output and productivity. One of the prominent self-assessment tools Lisa mentioned is MBTI (Myers Briggs Typology Indicator) — a popular free version of which is available at 16Personalities.com. Another is "Business Chemistry", the internal tool used at the global consulting firm Deloitte, where Lisa works in Talent and Development. You can take this self-assessment yourself at BusinessChemistry.Deloitte.com, and find the explanations and implications of their personality classifications. A third widely used self-assessment tool is StrengthsFinder from Gallup.
Can self-assessment help entrepreneurs to succeed? Lisa says yes — but not in the same way that corporations use self-assessment. The entrepreneurial role — whether (co-)founder / CEO or team member — is different. It requires adaptability, being able to do lots of things well, not just one thing; to earn new jobs and skills, including “dirty work”; to be deeply involved in all aspects of operations to understand and master how the entire business functions, not just one aspect of it. When she is hiring for entrepreneurial roles she looks for (1) a bias for action and (2) a willingness to take risk (such as learning a new skill or taking on a new task) combined with a skill at mitigating risk (learning fast, narrowing options quickly, reversing bad choices when new information requires it, without self-criticism). Entrepreneurial self-assessment is not concerned with strengths and weaknesses, but with knowing oneself candidly and acting on that information. There is an entrepreneurial personality based in bias for action and risk mitigation, but it’s not the same for every entrepreneur. It’s best to find your own balance. (At Economics For Entrepreneurs, we are developing a self-assessment that assesses behavioral traits rather than personality traits — you can take the first iteration here).
As an entrepreneur, Lisa applied the lessons of self-assessment both to herself and to her brand. Lisa started a growing jewelry brand called Rise Hawaii. Initially, it was based on her hobby of free diving and scuba diving. She would collect shells and sea glass and sell them to jewelers. She discovered that there were no jewelers making exactly the kind of jewelry she preferred personally — a combination of delicate elements with high-end precious metals. She started designing, then manufacturing — learning skills like dipping shells in molten gold — then selling on line and distributing to retail stores. Rise Hawaii is now a fast growing international brand selling online and through more than twenty retailers.
Personality analysis helped her in two ways. She understood her own personality from the self-assessments she had taken, and could observe her own behavior in stretching herself too thin in her business by trying to please every potential customer and meet every demand. By understanding the underlying personality traits, she was able to change behavior for the good of both her business and her best customers. She also applied a similar assessment technique to the personality of her brand. Lisa realized that, initially, she was trying too hard to emulate established "Hawaiian jewelry" branding adopted by others, but this did not reflect her authentic self. She consciously realigned her brand’s personality with her own. The result is a unique and sustainable brand positioning and a happy owner.
And self-assessment helps Lisa imagine her entrepreneurial future: growth through alignment with companies and causes exhibiting values she shares, including worthwhile purposes such as ocean conservation.
There’s a way for all entrepreneurs to benefit from self-assessment and self-awareness. Take one or more of the self-assessments accessible via the links provided here. Absorb the background information that’s provided. Use it to be self-aware: what do the results tell you about yourself? Did you learn anything new? Can you observe your own behavior and see personality traits at work? Are there any ways in which you are being inauthentic — behaving in ways that others want you to, rather than being true to yourself? What do the results tell you about your personal balance? Where does your profile need shoring up with new practices, new learning, or someone’s help? The key is to be aware, to understand yourself.
Links 16Personalities.comBusinessChemistry.Deloitte.comEntrepreneurial StrengthsFinderE4E Behavioral Self-AssessmentFind Rise Hawaii on Etsy at RiseHawaii and on Instagram at Rise.Hawaii.
How should entrepreneurs think about the economic concept of competition? Is there anything to learn? Is thinking about the concept useful for entrepreneurs running businesses? Hunter Hastings asks Per Bylund to steer us through this thicket.
Show Notes In mainstream economic theory, competition occurs between producers or suppliers of commodities. The good is pre-defined and undifferentiated, and competition is a matter of price and the production function. If this theory were looking for an example, it might find it in the gasoline market, where there are lots of gas stations with identical product, everyone has the same information, and price is the main means of competition. Economic theory calls this “perfect competition”, which is an ideal compared to “imperfect competition” (monopoly, duopoly, oligopoly, etc). It’s all pretty unrealistic and there’s nothing for an entrepreneur to learn.
Austrian economics sees competition as entrepreneurs competing for the customer’s dollar. The starting point is consumer sovereignty — the idea that the consumer (or the customer in B2B exchanges) is the one to exercise choice, and therefore determine what is purchased and, consequently, which brands, products and services are successful. An entrepreneur is competing with all the other ways a consumer could spend their dollar: by not buying at all, by buying a direct substitute, or by spending it in another category, or by deferring their purchase to a later time.
To succeed in this competitive environment, the entrepreneur should seek to create unique value. The Austrian logic of competition is value-centric. Value is subjective — it’s a perception of the consumer or customer. The entrepreneur competes for the consumer’s dollar by creating a value that the consumer can not realize from any other source — including non-consumption. The entrepreneur searches for uniqueness, to find a niche where he or she can serve the consumer in a way that no-one else has done before. This is what Peter Thiel calls a “monopoly” in his book Zero To One: a unique offering in a precise niche.
The way to compete is to develop a better empathic understanding of consumers’ needs. Every entrepreneur has the opportunity to be the best at developing an understanding of a target customer’s needs. In many cases, the competitive edge will be in choosing the right audience to serve — narrow enough that the empathic diagnosis is specific and precise and therefore more likely to yield an opportunity to serve the segment in a unique way. Generalizations and common denominators may not be precise enough and may cause the entrepreneur to miss precisely what it is about an audience’s needs that provides an opening for differentiation. Differentiation means a higher level of perceived value for that audience.
Positioning and telling a uniquely persuasive story are a big part of competitive value delivery. In so-called “perfect competition”, all players, producer and consumers, have the same information. Of course, the opposite is true in real life. One of the important differences in information lies in how value is positioned to the consumer, how the value story is told. Entrepreneurs compete to tell the best stories and communicate in the most persuasive ways.
In this way of thinking about competition, so-called “business strategy” is not particularly useful. Five year plans and specific organizational goals (like doubling sales) are not useful and there’s a high likelihood of failure. They represent the wrong focus. The right focus is “how can we increase value for the consumer” or “how can we be unique?” How can we satisfy consumers in ways that no-one else does? Dynamism means that all players are changing all the time, including consumers, and so entrepreneurs must be learning and adjusting all the time, and always trying to create new value.
Can strategy tools be useful? Strategy tools can be useful to help structure thinking and help you to be sure not to have overlooked some element you should have considered. The VRIO method helps you to think about assembling a unique set of resources to support a unique value delivery to customers. Modern entrepreneurship education offers a number of frameworks to help entrepreneurs in starting a business, like the Disciplined Entrepreneurship Canvas and the Lean Startup Canvas. They are both pretty good at starting with consumers and the value the entrepreneur can create for those consumers. We’ve re-created a few versions of the Lean Startup Canvas for you to download:
a version with explanatory notes, to help you better understand what each section represents and how it should be used;an annotated canvas that can be printed on regular letter-sized (8.5x11) printer paper;and a blank one that can also be printed, for you to complete yourself. Bottom line: Austrian Economics’ value-dominant approach provides better guidance for entrepreneurs than the formulas for strategic thinking that come from business school.
Start with the customer. Understand their needs, create value for them, and keep refreshing that value. In fact, this is a collaborative view of the market. Entrepreneurs share the desire to find a unique niche and establish a unique service, and they’re happy to compare notes and methods in order to help each other, which is one of our aims at Economics For Entrepreneurs.
Additional Resources The VRIO Method (PDF): https://Mises.org/E4E_10_PDF
Lean Startup Canvas, with notes (PDF): https://Mises.org/E4E_11_PDF
Lean Startup Canvas, horizontal (PDF): https://Mises.org/E4E_11_PDF_2
Lean Startup Canvas, blank (PDF): https://Mises.org/E4E_11_PDF_3
Alertness, Discovery and Resource-Based Strategy. Ed Pletner talks with Hunter Hastings about applying these economic concepts to start, grow, and manage a thriving and highly differentiated business.
Show Notes Entrepreneurial theory in Austrian Economics employs several terms to describe the entrepreneurial process and the exercise of entrepreneurial skills.
Alertness refers to the ability of some entrepreneurs to identify, and quickly gain profit from, marketplace opportunities to buy from one resource and sell to another in a way that benefits both and allows for a profit. Discovery refers to the process of applying empathic diagnosis to accurately identify unmet needs of potential customers and to rearrange resources to meet that need, enabling customer value and generating entrepreneurial profit. Capabilities-based strategy is the idea of identifying certain key resources — tangible or intangible — that enable a firm to establish a strong and potentially lasting competitive advantage in the marketplace. This approach to strategy is often packaged up in textbooks as the Resource Based View (RBV) of the firm. Ed Pletner started his entrepreneurial journey with a straightforward application of alertness.
Ed began as an eBay “trading assistant”, buying from one source (individuals or businesses that had something to sell) and selling to other individuals who wanted to buy, and taking a commission on the trade. With effort, energy and hard work, Ed quickly established that he could sell to large audience and develop a revenue-generating business without the need for a large overhead or expensive technology.
As his trading business expanded, Ed discovered ways in which to serve many large customers with a new service of electronics recycling.
Ed began buying his own electronic equipment for resale from garage sales and local swap meets. He describes this as a “great experience” of discovering both sides of the service equation – who wants to sell and why; who wants to buy and why; and what are the specific conditions necessary to complete the trade.
It all started with buying and selling technology hardware. At the beginning, Ed was moving it from garage to garage — a seller’s garage to his own, in order to store it before reselling it. Then the business became engaged with bigger quantities — warehouse to warehouse.
He couldn’t sell everything — some items had to be recycled or destroyed. It was at this point that the discovery process yielded the business opportunity of data destruction and electronics recycling.
From dynamic marketplace change, there emerged the customer need for secure and compliant data destruction as an integral element of electronics recycling. The problem to be solved was called E-waste.
We always encourage entrepreneurs to find a problem that customers want solved. Ed discovered e-waste. When hardware is recycled, there is always an associated amount of data: customer records, company data, financial records, health records, memos, emails etc., on hard drives, thumb drives, and all kinds of digital media. It has to be destroyed. And the customer needs to feel confident and assured that there is no failure or leakage in the destruction process, and that they can prove to regulators or auditors that they did the right thing and hired the right experts to avert any potential issues or claims.
Ed was able quickly to recognize the opportunity to become a trusted service provider in data destruction.
Ed invested in capabilities to enhance and strengthen his credentials in this emerging market that had a strong need for standards.
Ed understands subjective value. Value is, as he puts it, “in the eyes of the beholder”. And in this case, the beholders were the clients who had stringent guidelines to follow — HIPAA guidelines, or financial industry guidelines or contractual customer requirements — regarding how data is destroyed. It was most important to these clients to be able to retain a service that is compliant — that can provide proper certification of destruction and a third party audit. They are looking to avoid both legal and financial penalties and any reputational risk.
Ed invested in establishing his company, avritek, as a properly certified vendor. R2 Responsible Recycling is the industry environmental standard for electronics recycling. ISO 14001 and OHSAS 18001 are environmental and worker safety and health certifications. NAID (National Association of Information Destruction) is a location-based certification with onsite auditing for both paper and digital data destruction standards. Avritek has them all.
Ed has embraced the capabilities-based strategy approach wholeheartedly, always asking how he can expand his capabilities to serve clients better. How do we install a larger shredder to better serve large scale clients? Which ERP system shall we install to tie in all our processes and partner services? This is a lot different than spreadsheet based planning and budgeting. It’s all about delivering more value to clients via better capabilities.
Customer segmentation follows from commitment to capabilities. Avritek does not have to target customers. It aligns with them and synchronizes with them by understanding what they care about and providing the capabilities to enable them to exercise that care. In San Diego, where avritek is based, there are many biotech firms. They care deeply about data security, not only for compliance reasons but also because “they are in a caring industry”, as Ed puts it.
Interconnectivity opens up an international business footprint for the capable, service-oriented firm. Avritek is San Diego based. Many of its clients have offices and locations in multiple states and multiple countries. By partnering with similarly-credentialed electronics recycling companies, Avritek can provide a complete service to clients, along with a single point of invoicing, administration and relationship management. In this way, capabilities-based strategy is an excellent route to organic growth with high levels of capital efficiency.
Additional Resource Alertness, Discovery and Capabilites-Based Strategy (PDF): https://Mises.org/E4E_10_PDF
Decision-making can feel particularly challenging for entrepreneurs. Entrepreneurs face the unpredictability of the future with a limited set of resources, limited information, very little history of what works and what doesn’t, and few, if any, people to help. There’s no corporate research department and not much big data. Decision-making can be daunting. How can economics help?
Show Notes Economics helps us understand the process of decision-making, and how to enhance it with human creativity and wisdom rather than spreadsheets and analytics. The first step is to recognize and embrace what economists call uncertainty. Entrepreneurs face it all the time. We can’t know the future, or even the number of possibilities. The world is organic and human, and future outcomes depend on the interactions of millions of humans. No one can predict them. Don’t try. But don’t be intimidated by uncertainty.
Understand the difference between risk and uncertainty. Risk is a mathematically definable probability. When we roll a 6-sided die, we don’t know which number will come up but we can calculate the probabilities for each one of 6 possible outcomes. That’s a highly defined situation with a mathematical probability, as is insurance risk. Uncertainty is different — we can’t list the possible future outcomes or attach a probability to each one.
In uncertainty, think of decision-making as a continuous process, not a fork in the road. There is no need to fear decision making. It’s not a back-and-white choice, X or Y, right or wrong. Think of decisions as continuous; we decide, we try something out, we experiment, we get results, we adjust, we try again. Every piece of new information we obtain from experiments helps us make a more informed decision next time. Entrepreneurs are good at dealing with this continuous flow of decisions, and making adjustments as they go — like a basketball coach on the sideline. The system of decision making is far more important than any one single decision.
Peter Klein calls this process Entrepreneurial Judgment. Entrepreneurial judgment is reasoned, purposeful action regarding feasible outcomes. It’s not formal or mechanistic or mathematical, but nor is it blind guessing. The key is that it is the entrepreneur who makes the final decision. He or she is not executing decisions that others make. Entrepreneurs make their own reasoned judgment in a middle ground between guessing and mathematical certainty.
There is a systematic process to mitigate uncertainty. Dr. Klein defines the process as (1) defining what type of uncertainty you are facing (2) taking appropriate steps to narrow the scope of the particular type of uncertainty you are facing; (3) exercising judgment — i.e. making a decision and taking action — in a timely manner when uncertainty is reduced but not eliminated; (4) gathering feedback for your action and continuously repeating this process.
Environmental uncertainty is external to the entrepreneur and means that many possible outcomes could result from a decision. You plan to launch a new product. You don’t know how the competition will react, or how the consumer might change or what will happen to regulation. In this situation, entrepreneurs try to narrow the range of possible outcomes, using experience, history, testing and other means. For example, you could run a test of different price levels to ascertain which one generates the most purchases, and use the test results to narrow the possible outcomes.
Creative uncertainty is internal to the entrepreneur with a defined goal but many possible options of means to reach it. You want to sell a million units at $5, but don’t know which combination of messaging, media, and promotion is best to help achieve the goal. You narrow the range of possible options by hiring an expert marketing agency, instructing them to develop 6 alternatives, and choosing between the options based on consumer reactions.
Absolute uncertainty occurs when there is a wide range of possible outcomes, and a large set of possible options for action, in a dynamic environment of change. You want to start a company but you are not sure which consumer needs you are best placed to meet, or which of many options you would select to meet them. You have to find a way to narrow both the possible outcomes (which needs will I serve) and the possible options for action (what kind of a company will I launch). Dr. Klein used the example of Netflix. Reed Hastings wanted to start a tech company but wasn’t sure what kind — absolute uncertainty. He settled on direct delivery of VHS tapes, with moderate success, but at least he established a consumer need to fill. But then the technology environment changed, first to DVD’s (easier to ship) and then to streaming (better consumer solution but technologically very challenging). Netflix thought and re-thought the environmental uncertainty (changing technologies and consumer tastes) and the creative uncertainty (how would pricing, subscriptions, packaging etc affect outcomes?) in a continuous process of experimentation and recursion.
Entrepreneurial decision-making is evaluating and mitigating uncertainty. Narrow the range of your options and possible outcomes. Decide and act, and don’t be afraid to do so. Think of decision-making as a continuous process, one at which you can get better over time and with experience.
Additional Resources Entrepreneurial Decision-Making Under Uncertainty (PDF): https://Mises.org/E4E_09_PDF
The Types of Uncertainty Entrepreneurs Face (PDF): https://Mises.org/E4E_09_PDF_2
Hunter Hastings talks to Will Dinkel, CEO of Nova.ai, an intelligent platform for outbound sales and marketing — and a great example of AI as a tool for everyday tasks of everyday businesses of all kinds.
Show Notes AI has come a long way in a short time. Ten years ago, we always had to have a “human in the loop” for any task that could be made more productive with software. It could never be so productive as to not use human labor. And often that labor was very inefficiently deployed. Will cited the example of tracking labels and numbers on shipping containers — software could record the data, but humans still had to interpret it.
AI is available and relevant for entrepreneurs and small businesses today. Emerging technologies — including AI, Platforms, Apps and Global Exchanges — augment the capacity of individual entrepreneurs: AI is a business tool and a creative tool for entrepreneurs right now.
Outbound sales and marketing is a practical application of AI in a critical everyday activity. The specific area of application we talk about is personalization — which increases engagement and results. Personalization can generate as much as a 10X increase in sales effectiveness. Without AI it’s very labor intensive — 94.2% of the typical enterprise sales team’s budget is labor. With AI, personalization is very much less labor intensive, very effective, and potentially self-improving over time.
Personalization of sales messaging via AI is an example of bringing machine intelligence to empathy. In episode 5, Peter Klein explained the pivotal role of empathy in entrepreneurial success. With AI — in combination with the empathic entrepreneur — we can make empathy work for us more intelligently, more intensively and with greater analytical rigor.
Machine learning accumulates data over time and, via regression, uses it to make better decisions. When Netflix recommends “British mid-century dramas with a strong female lead” for your viewing enjoyment, it has accumulated your input data (searching, for example), and your output data (what you actually watch) and identified the most dominant co-varying themes in order to identify a recommendation you are highly likely to accept. Initially, the model needs a human in the loop to help it become accurate, but over time it can operate autonomously.
Nova.ai is an example of an application of AI that has become much more broadly capable over time at helping humans perform better. Initially, it was able to identify snippets of sentences and information that were effective in increasing outbound e-mail sales productivity by +40%. Now it can focus on the much broader role of the seller — in a process called Intelligent Customer Management — by sifting through all the data a salesperson has to deal with, identifying the major time sinks associated with it, and lifting the burden by providing analyses and recommendations for the most productive actions.
The future increase in AI productivity will come from it knowing more about the individual user. Currently, AI can sort through data intelligently, but it knows far less about the human user of the data. When that gap is closed, AI productivity will ascend to a new level. Imagine a nutrition bot that knows all your personal health and eating and exercise data. When scanning data in front of your eyes — like a menu or a deli counter — it will be able to make truly personalized, and perhaps life-extending, recommendations.
A.I. productivity will be available to all businesses, big and small. AI will be very egalitarian. Everyone can access it, and the upfront cost is low. In the first industrial revolution, capital intensiveness limited the access to opportunity. Not many had enough capital to build a railroad or a steel mill. In the era of AI, we can all access training in coding and AI and machine learning on Udemy or Coursera or one of many other learning platforms.
A good place to start is to open a Github account. Gitub is free at the basic level, and anyone can search for AI applications in any subject of interest. Everyone should have a fundamental programming education and Github is a great place to explore. Nova.ai is the place to find out about Intelligent Customer Management.
Additional Resource A.I. As Value Facilitation Through Personalization (PDF): https://Mises.org/E4E_08_PDF
Hunter Hastings talks with Per Bylund about Opportunity Costs. Why is this important? Because, for entrepreneurs, all costs are opportunity costs; and opportunity costs are the only costs. Opportunity cost is the core of economics, and to develop an understanding of how to apply economic principles to real life, it’s the place we must start.
Show Notes Opportunity cost is the fundamental trade-off. The value of any action or choice is defined by the value of what I am foregoing — of what I can’t do as a result of choosing. If I decide to make my product out of stainless steel, I can’t also make it out of aluminum. The value I create by choosing stainless steel must be greater than the value I gave up by not choosing aluminum.
We calculate opportunity cost as the NPV of different alternatives. The NPV of the second best choice is the opportunity cost of the first.
The entrepreneur must understand the mind of the consumer in order to see opportunity costs in the way the consumer sees them. Opportunity cost is a subjective evaluation on the consumer’s part. How do they look at alternatives when they are considering the entrepreneur’s offer? Would they assign greater value to the aluminum product compared to the stainless steel product? An entrepreneur needs to be able to answer that question in order to calculate how to design a good deal in the consumer’s eyes.
The way to do this is to solve an equation: consumer value = the value of what I am offering minus the customer’s perceived opportunity cost of acquiring it. We must understand what is the first alternative for the consumer (including doing nothing — not buying). That’s one part of the consumer’s opportunity cost. Second, what are the additional opportunity costs of buying — such as the difficulty of getting to the store to buy the product, or the difficulty of ascending the learning curve to use an app. These are the second component of opportunity cost for the consumer — the alternative is not to have to face these costs and may be preferable.
Use our Opportunity Cost Calculator.
It’s possible to segment consumers by understanding their attitudes to opportunity costs. Book buyers on amazon prefer the low cost and fast delivery. Their opportunity cost is going to the book store, where there is a limited selection and prices are higher. Book buyers who go to the brick and mortar store prefer mingling with other book buyers and perhaps getting a cup of coffee — experiences that are unavailable on amazon. For these consumers, the opportunity cost of foregoing such experiences on amazon is high — so high that it makes amazon’s low price unattractive. These attitudes are held by different kinds of book buyers.
The entrepreneur’s first opportunity cost is the value of choosing another career, such as a corporate job. Many entrepreneurs could make more money — and do so with more continuity and security — as a corporate employee. That’s the opportunity cost. But it may not compensate for the excitement and fulfillment of doing what you love as an entrepreneur. Be sure to calculate the opportunity costs carefully!
Once you’re an entrepreneur, every decision is a trade-off, and calculating opportunity cost is an everyday task it’s important to master. Every resource allocation decision is an opportunity cost decision. How much should I spend on product development, if that means less money for marketing and sales? Whom should I hire versus what tasks should I outsource? Once the decision is made the opportunity cost is locked in. This is especially critical for small and start-up businesses with limited resources and tough cash flow constraints. Always think in terms of opportunity costs when making decisions: what’s the alternative?
The allocation of time is often the most important opportunity cost of all. A classic example is engineering time spent perfecting the product versus getting a just-about-good-enough product to the consumer for evaluation and feedback. The engineering trade-off is that the product is not the best it can be. More time would help. The business trade-off is that customer feedback is the most important resource of all, especially negative feedback which tells you how to improve. Delaying it could be fatal. The entrepreneur must weigh these two alternative uses of time. That’s how the concept of the MVP (minimum viable product) and agile programming emerged. They’re both ways to make the best trade-offs of time allocated to the most important tasks.
The entrepreneur must always be thinking of trade-offs. What am I losing or foregoing by making this choice? That’s the opportunity cost. Calculate it, estimate it and put a value on it. Focus on what you are not doing in order to choose the right thing to do.
Additional Resource Opportunity Cost Calculator (PDF): https://Mises.org/E4E_07_PDF
At Economics For Entrepreneurs, we believe that everyone can be an entrepreneur, should they choose to do so. It may take you some time to find exactly your best niche, and a few experiments may be in order. The right mindset, we propose, is to pursue your entrepreneurial goal with belief and commitment, while being sufficiently adaptive to make some adjustments along the path when new information and new learning becomes available.
This week we speak with Ricky Porco, a young CEO who already has several entrepreneurial experiences to his name. He’s co-founder of an innovative community-building platform, and of a software development company. He’s also been a marketing, sales, and do-it-all guy at a digital marketing agency; and now he runs a service company to help small businesses make the transition from paper to digital — that is, he’s an entrepreneur who supports entrepreneurs.
Show Notes Starting entrepreneurship early in life is an advantage. Ricky tells listeners how he started his entrepreneurial career in college, packing a lot of learning into a short period of time. It’s a permanent advantage he’s carried forward with him into every subsequent stage of his journey.
It might take you a few tries to understand what kind of entrepreneurship is best for you. You might expect to switch businesses two, three, four or more times, changing markets, organizations, and business models. Make sure you make your choices purposefully, and commit to active learning from each one.
You might even try life as an employee to learn by comparison. Ricky switched into the role of employee at one stage. He was able to observe how the boss he reported to struggled with management and growth, and learn from it, while gaining confidence in his own skills through his success as a rainmaker for this employer.
You quickly find out the importance of financial management. Ricky quickly found out that he and his co-founders were good a business model design, product development, marketing and sales, but a start-up is financially immature by definition and can easily run out of cash. Without sound and disciplined financial management, all the other skills and capabilities can count for nought.
And you also quickly find out that effective marketing is essential to every business. Some of Ricky’s clients see marketing as optional — “if there are funds left over”. The opposite is true: marketing is a fundamental requirement.
Organizational structure and design is a critical factor in success, and especially in opening information flows. The biggest threat to the entrepreneurial success of a firm is a clogged information flow, when employees or partners don’t have clear direction or timely data. This can easily happen in founder-centric companies and especially in family-owned businesses that tend to be hierarchical.
Digitization is the best opener of information flows: software is organization. One simple solution to the clogged information flow is digitization. Software solves the problem; there’s no hierarchy in Slack.
Additional Resource 8 Attributes of Austrian Entrepreneurs (PDF): https://Mises.org/E4E_06_PDF
The Henry Hazlitt Memorial Lecture, sponsored by Hunter Lewis. Recorded at the Mises Institute on March 22, 2019. Includes an introduction by Joseph T. Salerno.
The Austrian Economics Research Conference is the international, interdisciplinary meeting of the Austrian School, bringing together leading scholars doing research in this vibrant and influential intellectual tradition. The conference is hosted by the Mises Institute at its campus in Auburn, Alabama, and is directed by Joseph Salerno, professor of economics at Pace University and academic vice president of the Mises Institute.
Lecture Text: In 1946, a book named Economics in One Lesson was written by a man who did not think it would have a great impact beyond the economic fallacies of his day.
That amazing man was Henry Hazlitt.
Now over one million copies have been sold and it remains in print.
It is a personal honor to lecture about Hazlitt: He is one of my favorite writers on economics, political economy, and ethics. Economics in One Lesson, which was based in part on Bastiat’s essay, “What Is Seen and What Is Not Seen,” debunks the most prominent economic fallacies of the past and the present, summing up economics as long-term versus ephemeral thinking.
He wrote more than twenty books and was the principal editorial writer on finance and economics for The New York Times for twelve years and a columnist for Newsweek for twenty years. More importantly, his writing was thoughtful, incisive, and influential, and he played a significant role in supporting, introducing, and explaining the ideas of Mises and also Hayek. He is a stellar example of the impact one person can have on our society. My mentor, Dr. Bill Peterson (a student and colleague of Mises) and his wife Mary were good friends of Hazlitt, so although I never met Henry, I did receive first-hand knowledge of his life and work from the Petersons.
I am thankful to Laura Bennett Peterson, Bill and Mary Peterson’s daughter, for assisting me with this lecture. Laura grew up knowing Hazlitt and she has been exceptionally helpful with her knowledge and insights about him. Dr. Peterson was very complimentary of Hazlitt’s writing and personal courage, especially when he opposed the Bretton Woods agreement. Hazlitt knew Bretton Woods would cause inflation. The New York Times had no interest in criticizing this agreement, and that sent Hazlitt looking for a new job.
Hulsmann indicates in Mises: The Last Knight of Liberalism that Hazlitt may have been one of Mises’ first close American friends. In 1940, Hazlitt received a call from “Mises speaking,” and he described the encounter as if “John Stuart Mill were speaking.” This was the beginning of a long-term friendship between Hazlitt and Mises. By explaining economic theory, Hazlitt enabled many entrepreneurs to think clearly and correctly. Most of the time the world promotes compliance with existing ideas and punishes critical thinking and new ideas. This was Germany’s mentality in the early 20th century, Mises was treated miserably because of what he thought; this is common today. Profound thinkers are rarely appreciated and often scorned. Today we are witnessing this in our universities, which were created for thinkers but now suppress original thoughts.
This talk focuses on three of Hazlitt’s central concerns:
His book, The Foundations of Morality, established a high standard of morality. Current events demonstrate a widespread lack of morality in our society.His book, Thinking as a Science, elevates thinking to a new level. Today everyone is “thinking outside of the box.” The problem is, most people are not thinking most of the time.His book, Economics in One Lesson, introduces us to classical-liberal thinking, which is foreign to most Americans He wisely pointed out, along with Mises, that economics “is a description, explanation, or analysis of the determinants, consequences, and implications of human action and human choice.” Hazlitt’s economic thinking is thus grounded on human behavior. The recent gyrations of the stock market, based on fears of tariffs or higher interest rates, illustrate how markets react in real time to the effects of current policies. Hazlitt was a giant in financial journalism, as noted in Jim Grant’s Hazlitt lecture. But Hazlitt was also a public intellectual with unique insights on morality, thinking, and political economy. We will begin with Hazlitt’s understanding of morality as embodying long-term thinking, his foundational theme.
This is his most powerful message.
Morality For Hazlitt, “morality is essentially, not the subordination of the ‘individual’ to ‘society’ but the subordination of immediate objectives to long-term ones.” Hazlitt realized that the long-term interests of the individual would serve the long-term interests of society. The long-term interests of the individual depend on social cooperation, as Hazlitt points out:
“Social cooperation is the foremost means by which the majority of us attain most of our ends.” (The Foundations of Morality, 13) CAS stresses cooperation as the primary way we can progress as a company. It can be challenging and requires humility. We witness the parade of lobbyists seeking government favors: lobbyists from GM, the U.S. steel industry and Tesla, to name just a few. I might add our universities to this list, since the federal government helps to fund their excessive spending. These companies and institutions are rent seekers and tariff promoters.
German and Asian automakers, which also manufacture in America, received no bailouts and don't want tariffs. In fact, BMW exports 75 percent of the SUVs it makes in South Carolina. Hazlitt reminds us to let the market decide, as “dying industries absorb labor and capital that should be released for growing industries.” Hazlitt believed that bailouts and tariffs are short-term solutions to long-term industry problems. Hazlitt’s concept of morality can be summed up in two of his own sentences: “The conduct we call moral is the conduct we consider likely to lead to the most satisfactory situation in the long run.” And “immoral action is nearly always short-sighted action.”
These important principles are lost on our society today.
The challenge for entrepreneurs:
We must focus on the long term in spite of tremendous pressure to think only over the short term. Markets are very competitive, and sometimes promote short-term thinking and solutions. But we know, short-term decisions can be very costly in the long run. It is imperative to teacher our students about Hazlitt. Many domestic steel manufacturers raised prices over this past year even higher than the steel tariffs. It did not work, Users take notice and take action. In the long term our domestic steel industry will be harmed by tariffs.
This is human action in the marketplace.
We are witnessing a parade of successful entrepreneurs, as well as leaders in all walks of life, fall from grace because they lacked morality. These individuals may have brilliant ideas, but they lost sight of the long term and failed to learn Hazlitt’s most important lesson on morality:
High integrity is required for the sustainability of an enterprise over the long term. Our society promotes and praises loud and unethical leaders such as Elizabeth Holmes, Elon Musk, but companies and investors suffer. Companies suffer because of these unethical individuals in charge: think of VW, Lehman Brothers, Tesla, and now Boeing. Conversely, Warren Buffet is not an Austrian Economist but he is an excellent investor, capital allocator has an exceptional reputation for honesty and became rich in the long run. Companies and Investors flock to him. The market requires moral leaders because the market cannot function without integrity.
In addition to morality, Hazlitt makes the need for freedom very clear:
This freedom applies to entrepreneurs: In order to have the freedom to succeed, we must have the freedom to fail. For Hazlitt, capitalism allows for freedom, It does not hinder freedom:
Modern capitalism is not an inevitable or inescapable system but one that has been chosen by Americans. It is a system of freedom.
In America, some 300 million people produce 24 percent of the world’s goods. America leads the world in innovation, which is the essence of American exceptionalism.
Too Many countries undermine freedom and the results are clear. The EU has slow growth and high unemployment. In Venezuela, freedom is denied to the point of starvation.
There is concern that the free market creates inequities and failures. But Hazlitt points out that “a free-market system tends to give to every social group, and to every individual within each group, the value of what it or he has contributed to production.”
Hazlitt sums it up perfectly. Socialists refuse to understand free markets. They fail to see that production is based on incentives, not coercion. Some politicians live off the fat of the land but hate producers, freedom and success. It would be entertaining to read what Hazlitt might write about the lunacy of the Green New Deal and massive government debt.
Successful businesses must have a strong record of morality and must think long term to survive in a competitive marketplace.
The CEO of Boeing would probably affirm this statement, at least right now. Unfortunately, Boeing’s marketing group convinced the FAA the 737 Max was the same as the old reliable 737. This wasn’t true. Even many pilots were not aware of the complexity of the new MCAS software. The FAA did not understand the new Boeing technology, so why are they regulating. The 737 Max’s software relied on a single sensor, which failed. Some important safety features were sold as “options,” not standard equipment. Those options weren’t chosen by Lion Air or Ethiopian Air, but you can count on them being standard in the future. Internal concerns from Boeing engineers and pilots’ reports to the NASA system were ignored.
Why? Boeing was focusing on competing with Airbus, which had the lead; morality and long-term thinking be damned. No one will ever think of Boeing in the same way and there could be criminal as well as civil liability.
Lesson learned: One must bear in mind, as Hazlitt taught, the long-term consequences of conduct. Industries must be 100 % responsible 100 % of the time.
Thinking H. L. Mencken described Hazlitt as "one of the few economists in human history who could really write." Hazlitt wrote well because he thought well. Hazlitt, affirms in his book, Thinking as A Science, that most people are not thinkers. I love Hazlitt’s observation that if there is a problem and a solution is needed, “They want to look it up.”In today’s world, they’d want to “Google it.”
Too many of our educational institutions are propaganda centers and not cultivators of thinking people. Many institutions suppress thinkers and demand compliance with politically correct, non-thinking popular culture, which undermines an entrepreneurial America.
I often tell our students and our interns: How you think will determine your future. Good thinking and cooperation are critical to making progress in life. Hazlitt was a great thinker by analyzing the long-term consequences of economic policies, such as tariffs and monetary and fiscal policy. He knew that our thinking will have major consequences, for good or evil. His book, The Failure of the New Economics, masterfully refutes Lord Keynes’s General Theory by showing Keynes’s theories as nothing more than bad thinking.
Two great thinkers in the 20th century were the Wright brothers. The Wright brothers were successful in flight because they visualized the need for “suitable controls” to balance the plane once it is in the air. Our government sponsored Samuel Langley who failed to realize the need for suitable controls in flight.
The Wright Brothers took no government money, they are a perfect future model for Entrepreneurs. Thinking ability is the greatest single advantage of the entrepreneur. “The greatest resource,” as Julian Simon put it, “is the human mind.”
Thinkers in business applied the principles of “exit” and disruption. Think of technologist Balaji Srinivasin in genomics and mobile money, and of UBER, Airbnb, and self-driving cars. Harvard business professor Clayton Christensen is among those who have studied old industries that were disrupted by new companies with a better approach.
Nucor Steel, an upstart in 1960 with its minimills, is now the largest steel company in the U.S. Our only task as entrepreneurs is to serve the user.
CaptiveAire thinks in the long-term, continuously. Even with the steel tariffs in effect since 2018, CaptiveAire has refused to raise prices beyond our normal level. We gain market share because we think long-term, and we generate profits by always putting our users’ interests first.
We witness short-term ideas and fallacious claims every day.
Socialism is being sold hard as a solution to a problem that does not exist in America.There is a Green New Deal to save our planet, which is doing pretty well.Debt and deficits do not matter, as long as interest rates are low. Congress does not even attempt to balance the budget.Free trade is portrayed as the enemy of prosperity but in fact it has made us rich. Hayek in The Road to Serfdom described those who would “buy” such fallacious claims as the gullible.
Problems and solutions must be well-thought out and understood before changes are made. Good decisions require real thinking, which is hard and time-consuming.. Yet without good thinking, the consequences may be catastrophic.
Long-Term Economics Hazlitt sets a clear path for entrepreneurs who think long term.
The entrepreneur must make the hard decisions at the right time, based on the known facts that are often sparse in the creative world. In 1978, when we began making kitchen ventilation hoods, the machines to create more hoods faster did not exist… In 1983, the computerized hydraulic-press brakes we needed were invented by Darley in Holland. This technology revolutionized the sheet metal industry. Hydraulic-press brakes increased productivity four times and the now fully-automated machines produce eight times what they did in 1982. In 1988, international alloy prices were spiking, causing stainless steel prices to increase dramatically. My solution was to find an stainless steel product less vulnerable to volatile alloy price spikes.
CaptiveAire adopted two important changes that transformed the industry:
We light-weighted Commercial hoods, saving 20% of the metal.We changed the standard from 304 to 430 stainless steel, saving another 20%. In 2008, most of the food service industry adopted our 1988 standards using 430 metal when possible. CaptiveAire was a little-known manufacturer with sales of nine million dollars in 1988. These and other decisions propelled us to a half-billion dollars in sales last year. Changes are risky, but the long-term outcome was that CaptiveAire became the leading producer of commercial kitchen hoods in North America.
In 1925, Treasury Secretary Andrew Mellon and President Calvin Coolidge applied a supposedly “scientific” method in determining the marginal federal income tax rate. They chose 25 percent. The decreased income tax rate helped America to enjoy the Roaring Twenties’ economy. After the stock market crashed in 1929, Hoover prolonged the Great Depression by raising the marginal rate to 63 %. Tariffs averaged 40 % with the Smoot-Hawley Act.
Hazlitt clearly describes the tax dilemma:
When the total tax burden grows beyond a bearable size, the problem of devising taxes that will not discourage and disrupt production becomes insoluble.
Hazlitt cautioned that tariffs do not raise the standard of living; they have the opposite effect, which we witness today.
Tariffs are self-inflicted wounds and the current trade wars are slowing economic growth here and abroad. Growth is slowing internationally because of tariffs.
On free trade, Hazlitt quotes Adam Smith:
In every country it always is and must be the interest of the great body of people to buy whatever they want of those who sell the cheapest.
Free trade should be intuitive, especially with the example of the 50 American states, which comprise the largest unilateral free-trade zone in history.
But despite the value of free trade, large numbers of Americans believe tariffs raise our standard of living and create jobs. The steel tariffs under President George W. Bush were meant to help American steel companies, but ended up hurting even more companies and causing the loss of 200 thousand jobs in industries using steel.
This exemplifies how a short-sighted policy hurts entire industries in the long term. Hazlitt’s long-term approach is imperative for America.
Three things we desperately need to think about in regard to the long term are:
Eliminating fiscal deficitsEducating our childrenFocus on integrity to the market place, not special interests. These policies would greatly benefit our economy: The more the deficit Reducing Government spending allows more investment capital, allocated by entrepreneurs not government. The better our students are educated, the more productive our workforce will be.
U.S. K-12 public schools are one of the largest monopolies in history. Costs are high, quality is low, discipline and character formation are gone. In America’s public schools, you don’t get what you pay for. In 2007, I opened a private K-12 chain of private schools named The Thales Academy. Hazlitt’s morality, thinking, and long-term outcomes formed our philosophy.
The Thales standard is the highest possible academic quality and character formation for each student at the lowest possible cost. The cost for K-5 is $ 5,000.00 per year and has not changed since the founding. Today we have 8 campuses and 3,100 students. My goal is to grow Thales to 25,000 students as an example of what can be done. The Thales model is changing the way parents think of K-12 education.
One important lesson I have learned, which is contrary to conventional wisdom, is that it takes a very long time to establish a great company. And the process never ends! Individuals, companies, and our government must think about the long-term effects of their actions.
Conclusion: Why Hazlitt Matters for the Entrepreneur Hazlitt states that an entrepreneur is "a capitalist willing to take unusual risks." His theories of morality and long-term economics are found in every story of a successful entrepreneur. When an entrepreneur is able to achieve excellence, society is benefited as a whole. However, the entrepreneur can only achieve excellence when freedom prevails. Calls for the government to provide its citizens with every necessity, whim, and craving lead to chaos. Venezuela is a leading example of this. This is why the moral entrepreneur is critical to the market: He is not concerned with garnering the most rights for himself, but rather gaining the most customers by serving.
Hazlitt explains, “the rules of morality are those rules of conduct that tend most to increase human cooperation, happiness and well-being” The entrepreneur’s morality directly correlates with society’s well-being; the job is never done for entrepreneurs and economists. Hazlitt never went to college: his thoughts were not dependent on what he already knew, but rather on trying to explore things he did not know. Edwin Land affirmed this way of learning and thinking when he said: “Creativity begins at the edge of the known.”
This is how successful entrepreneurs operate: They make guesses and take risks off of the edge of what they already know. They apply their thinking skills to make the best possible decisions using the information they have today to positively influence the long-term future. My Message to entrepreneurs: Maintain humility in realizing that you don’t and can’t know everything.
In the words of Dr. Bill Peterson, “None of us get it all right.” No matter how much you know, it will always be a fraction of what is already known.
In the 40 plus years that CaptiveAire has existed, we have made many mistakes but our policy is that if we are wrong, we pay the price, not our users. In 2016, we designed a new leading-edge Roof Top Heating and Cooling unit for commercial buildings. This new technology uses a modulating compressor so it’s very efficient and can provide 100 % outside fresh air to buildings. We learned from past errors and elected to have a three-year BETA testing of this product. We know we are 100 % responsible for the performance of this product for the next 20 plus years. Hazlitt’s long term philosophy does work in the market and it fact this is how the market works. Entrepreneurs aggressively seek new knowledge and rethink everything: they carry the torch of Hazlitt. We live at a time where Entrepreneurs & Producers are the villains and the heroes are the Government and Politicians. I quote Bill Peterson: “Entrepreneurs are every bit the heroes of our society.”
I might add, the takers are the real villains. As we witness rallies and hear cheers for the short-term economic policies, we must think of the long-term to achieve the American dream. Hazlitt, Mises and Hayek lived in more challenging times, but our society is on the road to Serfdom unless the Austrian School prevails; as economic illiteracy rules the day. Hazlitt’s morality through long-term thinking is hard to sell to the public because Human Nature lives in the present and wants it now. Our country’s foundation is being shaken by the lack of and therefore it is imperative that we integrate long-term thinking into our homes, our schools, our places of work. I challenge you to take up the mantle of Hazlitt and be a courageous writer, debater and teacher of morality and long-term thinking.
We could use an army of Hazlitts today: men and women of courage and wisdom, who are unafraid to speak and write the truth.
I conclude with Hazlitt’s words.
The times call for courage. The times call for hard work. But if the demands are high, it is because the stakes are even higher. They are nothing less than the future of liberty, which means the future of civilization.
Today we talk with Peter Klein about empathy—a critical tool in the entrepreneur’s toolbox. It’s through empathy that entrepreneurs can get into the customer’s mind, understand and identify their needs and wants from their perspective and in their perception. This is the skill that enables the design of new products, new services, new systems and new solutions. If the entrepreneur has exercised empathy well, the chances of success in the design process are high for the customer to say, “Yes! That’s what I need!” Is empathy a difficult skill to master? Not really. We all have it to some degree. It needs to be applied with a combination of subtlety and discipline.
Show Notes Empathy is a skill we learn from childhood. We’re taught as kids, when we say or do something that might be unkind or upsetting to another person, to “think about how they must feel”. The vernacular is to “walk in their shoes”. It’s the same essential skill we apply as entrepreneurs.
Entrepreneurs need to master the skill for an audience that might not be in their social circle and with whom they may not be familiar. You may be selling to car buyers, or cooking enthusiasts, or sports fans, or the procurement officer at a client. This kind of empathy is a little bit less natural and a little bit more learned.
It is entirely possible to learn entrepreneurial empathy and to get better at it. You can develop a process of reading and gathering data about the category or market you’re operating in, talking to actual and potential customers, conducting quantitative or qualitative surveys (like focus groups), analyzing the sentiments in social media conversations, or just talking to folks with a viewpoint. You can hire a consultant or an employee with highly developed customer empathy skills. But always, it’s your interpretation of the data that’s the key. What is motivating the customer, what is driving them, what is the feeling that’s at work?
There are plenty of tools. There are market research tools, analytical tools, and all kinds of methods you can use. Learn them on YouTube or an online course. Or use our Entrepreneurial Diagnosis Tool: the Contextual In-Depth Interview.
Think of yourself as a Doctor, performing a diagnosis. Often the patient can describe symptoms, but does not know the underlying cause, and certainly doesn’t know the cure. The doctor asks questions, performs some pattern recognition based on existing knowledge, and perhaps performs some tests to narrow down the possibilities. In the end, the doctor arrives at the diagnosis and the prescription based on skill.
The Doctor analogy extends even further to the cure you are trying to deliver to the customer. Your target customer is not so much looking for something new as they are seeking to solve some dissatisfaction. There is some feeling on their part — a little vague, perhaps, not too well articulated, but nevertheless genuinely felt — that something in their life could be better. Ludwig von Mises called it “felt uneasiness”, which is a wonderfully descriptive expression. As an entrepreneur, you are taking away an uneasiness. The result is a better feeling on the customer’s part — an end to that uneasiness.
This is what entrepreneurs do in a free market economy of mutual voluntary exchange. We persuade customers that they will feel better, be better off, experience more enjoyment, if they buy the product or service we are offering to them. They can be confident of that future feeling because of the empathy the entrepreneur has exercised in developing an understanding of them, their dissatisfactions and their unique individual preferences. The entrepreneurial system is best for everyone, because it’s based on empathy.
Additional Resource Entrepreneurial Diagnosis Tool (PDF): https://Mises.org/E4E_05_PDF
It’s a fallacy for an entrepreneur to believe in chasing the biggest possible audience or the largest possible market. Why? Because your business will get pulled in the direction of “all things to all people”, and you may end up pleasing none.
The opposite rule applies: identify and gather specialized knowledge, and apply it in a specialized market to a select group of customers. Aim to be the best in your specialization. To do so requires discipline, application, and—as we discovered when we talked to Bob Luddy—time.
Bob is the founder and CEO of CaptiveAire, a business specializing in commercial kitchen ventilation systems. It’s a fast growing business, now generating hundreds of millions of dollars in revenue and hailed by its customers as best-in-class. It didn’t get there overnight, and it didn’t get there without some difficult moments along the way. Bob shares his experience with us on Economics For Entrepreneurs.
Show Notes Bob Luddy’s case history represents an approach to starting an entrepreneurial business that is sometimes called Effectuation, illustrated in this handout. See also Bob’s book, Entrepreneurial Life: The Path from Startup to Market Leader.
Your first business may not be your ultimate business. Bob started in the fire suppression business. He aimed to be the best in that niche, but realized that there was a better opportunity in kitchen ventilation, so he made the switch. The new business was a slower build, but in a more fruitful market.
He felt a positive tipping point in year 9. He obtained a commercial bank loan — prior to that he had been short on capital. Now he felt he could accelerate growth. That didn’t mean he had “made it”, but that he was on slightly firmer footing. Nine years is a long time to find firmer footing — be patient! It takes a long time to build a great business.
Patient specialization is a critical component of success. So-called “serial entrepreneurs” never spend enough time to be the best at the business they’re engaged in. By being patient, Bob was able to identify weaknesses in the market on which he could capitalize: long lead-times (shorten them!), high prices (lower them!), imperfect performance (improve!), and poor service levels (invest in service!). These were innovations a new entrant could bring.
Be the best in your specialization — not all things to all people. Bob’s specialization methodology has been to create the highest industry standards for the products and services he sells, and then don’t deviate. Don’t make “wild” sales promises that are not standard. Keep to a tight range of products so as to drive down costs, and shorten execution times. Competitors who try to be “All things to all people” go out of business. Specialization is a basic economic concept that is key to success.
Systems thinking brings growth to specialization. Thinking like a customer means systems thinking: what is the complete solution the customer is seeking? Specialization does not mean being a tiny piece of the solution. By integrating the entire system, you become more valuable to the customer. The future of entrepreneurship is in integrating systems, and defining integration is the job of the entrepreneur. A business can keep growing by advancing towards greater integration.
Innovation is ephemeral — you never stop. Innovation is important, but don’t think of it as an event. It’s an activity that is continuous. Every single innovation will be competed away. You’ve just got to keep on doing it, and always be alert to new ideas, new combinations of existing ideas, and changes in customers wants and needs.
All decisions are subject to re-evaluation. None of us gets it right every time. Most decisions are made with incomplete information. But that’s necessary — an entrepreneur needs to make high velocity decisions. If they are wrong, own up to it, fix the consequences and re-evaluate based on new information.
The purpose of a business is profit. With no profit, there is no business, no jobs for employees, and no innovation. Make profit in a fair and moral way. And make profit in the long term, not necessarily maximizing profit in the short term. Everyone — the whole society — benefits.
Entrepreneurs don’t plan: they execute a vision. Entrepreneurs have a vision they are working towards. They have aspirational goals for sales or revenues. But they know they can’t plan the future. It’s hard to plan a month or even a day, let alone five years. What they can do is execute with excellence. The key question is, did you get it done today? As the world of business closes in on real time, execution is primary.
The winning entrepreneurial trait is brute determination. Sometimes, all you have is your own determination to succeed. You define what are the things that MUST be done, and you execute with no exceptions. Vision is good, but execution is hard. Doing the hard things, correctly and consistently, is what makes an entrepreneur.
Additional Resource Bob Luddy's Effectuation Process (PDF): https://Mises.org/E4E_04_PDF
At Economics For Entrepreneurs, we are going to combine theory and thought leadership about how entrepreneurship works, with practical advice and shared experience from those who have achieved entrepreneurial success. This week we feature Per Bylund. He is an economist who observes what entrepreneurs actually do, rather than analyzing the statistics of GDP growth and macro-economic trends. He’s a research fellow in entrepreneurship at Mises Institute, a teacher of entrepreneurship at Oklahoma State University, a writer of books about firm-level economics and of a regular series of articles in Entrepreneur magazine, and he himself has been a serial entrepreneur. He has a lot to share.
Show Notes Economics can’t help entrepreneurs much by talking in abstractions about economic growth and economic systems. That’s not what you as an individual entrepreneur are engaged in. You are trying to make a living, and you are trying to create value for others via new or different services. Economics can help with applications of sound principles that help entrepreneurs build better-performing businesses.
What you are doing as an entrepreneur is not for you. It’s for the customer. They decide what is value. It’s not enough to generate an idea. The entrepreneur must ask, with objective honesty, is this valuable? For whom? How is it valuable? Value is subjective in the customer’s mind, so you have to empathize, penetrate that mind and understand it in the customer’s terms.
So don’t start at the wrong end of the process. Don’t be thinking: I want to produce something. How much can I produce it for and sell it at a profit? Rather, you should be thinking: who is out there looking for a value; what is valuable to them?
Price is determined by the customer. You can only sell a product or service for a price that is lower than its value, and value is determined entirely by the customer.
Similarly, you don’t “make a sale” to the customer. You make it a no-brainer for the customer to buy because you offer a better product or service than they’ve got today, and one that is better value for them.
Customer centricity, or customer obsession is a good path. Listen to customers, and learn what they are looking for, and what represents value to them.
Always be thinking about how to meet the future. Customer wants and needs and circumstances and preferences are always changing. Anticipating the change is the stock-in-trade of the entrepreneur. That’s not necessarily the same as innovating. You can create new value by anticipating future needs. Listen to people and look for trends.
Everyone can be an entrepreneur and it’s a very fulfilling experience. Entrepreneurship is aspirational. It’s something you do for customers, and making people better off is very rewarding. They’ll buy your products and services only if they feel that it’s a benefit for them. If you are successful, you’ve helped them. And to be successful, you must be doing something you are good at, which is another source of reward.
Additional Resources Customer Journey Mapping (PDF): https://Mises.org/E4E_03_PDF
How to Use the Customer Journey Map (PDF): https://Mises.org/E4E_03_PDF_2
[This is a chapter from The Problem of Production: A New Theory of the Firm.]
This book is about what is generally referred to as the ‘firm’, a phenomenon in the market that appears obvious but that remains difficult to explain. While there is a field of study referred to as the theory of the firm, there are in fact a number of noteworthy theories. All of these theories claim to explain the firm’s rationale, value, and purpose. But the theories tend to describe the firm in different ways. The discussion is further complicated as there are several different definitions of this seemingly elusive concept. As a result, our understanding for the economic reality of the firm is inhibited.
The purpose of this book is not to reconcile these theories or definitions, however, but to try a new approach and provide an explanation for the firm by looking at the market setting where we find firms. We start by constructing an economic model of the market as an elaborate yet dynamic system of production without firms. This, in turn, allows us to study the limitations of the economic system of production, and what means are available to overcome them; or, more precisely, how the market deals with this ‘problem of production’. The goal is to elaborate on an explanation for the firm by seeking its economic function within the extensive production apparatus of the specialised market.
This chapter positions this book in the extant literature on the economics of organisations and institutions. It does so by summarising and delineating two strands of the academic literature that are separate but should complement each other: strategic management (or, as it is sometimes referred to, organisational economics), especially the theory of the firm, and the Austrian school of economics. While they have things in common and have recently been approaching each other, we will here draw from both strands to produce a theory of the firm. Our theory is based on the Austrian conception of production in the dynamic market process and it takes market-based production and the evolving dynamic of the market process as its point of departure. The perspective is Austrian, but the object for our analysis is borrowed from strategic management. The discussion thereby indirectly attempts to reconcile these literatures by providing a theoretical explanation for particular phenomena in the overlapping space between them. This first chapter is intended to provide background by making the reader familiar with economic theorising on the firm and what the two aforementioned literatures have in common.
Theorising on the Firm Whereas firms are ubiquitous in the economy and therefore often assumed to be a natural component of the market, the concept of a ‘firm’ poses an interesting question relating to economising, organisation, and production. The question can be stated as simply ‘Why are there firms?’, but its simplicity is deceiving. The question requires both elaboration and contextualisation to make the problem clear. The ‘why’ in the question suggests that there must be a rationale for forming firms such that there is a distinct value of coordinating production specifically within firms, which directs our attention to the question of what possible alternatives to firm organising there could be. The commonly assumed alternative is a model of the market as predominantly decentralised exchange-based coordination of production. The theory of the firm literature aims to formulate an economic argument for firm organising in contrast to decentralised market exchange, and under what specific conditions this is of value and therefore can be the predicted outcome. Due to the importance placed on this distinction between firm and market, a significant and important subset of this literature stresses issues relating to the firm’s ‘boundaries’. A firm’s boundary denotes the point where the firm ends and the market begins (and vice versa), which indirectly suggests what makes the firm different from the market. The ‘why’ of the firm therefore relates to (if not requires) a definition of what constitutes a ‘firm’, since ‘why’ must point toward a certain ‘what’. Knowing the ‘why’ and ‘what’ should also provide insights necessary to investigate the ‘how’ of the firm, which is another important question at the core of the theory of the firm literature.
The questions of the firm’s why, what, and how are generally referred to as the Coasean questions of the firm since they were posed or implied in Ronald H. Coase’s ground-breaking, Nobel Prize-winning 1937 article ‘The Nature of the Firm’.R. H. Coase, 'The Nature of the Firm', Economica, 4:16 (1937), pp. 386-405. Coase was not the first to pose questions about the firm’s rationale, boundaries, and internal organisation, but his comparative framing was novel and the article’s approach has become starting point for the modern study of economic organisation and the firm. Coase’s basic question, which asserted a clear theoretical distinction between the firm as a planned hierarchy and the decentralised exchange in the market, was stated rather bluntly: ‘in view of the fact that it is usually argued that co-ordination will be done by the price mechanism, why is such organisation [the firm] necessary?’.Coase, 'The Nature of the Firm', p. 388. Indeed, as Coase points out, if the market economy is efficient there should be no need for and certainly no value in such alternative means to organise production. Coase answers the question by introducing a cost specific to market exchange — a marketing or transaction cost — that produces a cost-based rationale for organising hierarchies in the place of markets. The firm is according to the Coasean view a means to economise on the market’s transaction costs.
From our contemporary perspective, Coase’s article appears as the culmination of a vast literature on economic organisation and management of the firm in the 1920s and 1930s. This literature continued the earlier work by primarily Alfred Marshall, who discussed the abstract conception of a ‘representative firm’This highly abstract concept was criticised by Lionel Robbins, one of Coase’s professors at the London School of Economics, to whom the concept of ‘a long-period average business unit, representative of the organisation of a given line of production’ is both ‘superfluous’ and ‘misleading’. This concept, which ‘lurks in the obscurer corners of Book V [of Marshall’s Principles] like some pale visitant from the world of the unborn waiting in vain for the comforts of complete tangibility’, had nevertheless garnered ‘discernible’ influence in ‘certain recent discussions of applied economics’. L. C. Robbins, 'The Representative Firm', The Economic Journal, 38:151 (1928), pp. 387-404, pp. 391, 399, 387. and offered an extensive study of industrial organisation.See book IV, A. Marshall, Principles of Economics. 8th edition (1890) (New York: Macmillan, 1920). This line of research, to which Coase’s article was likely intended as a challenge but ended up making little if any impact,I have made the argument that Coase’s contribution should be considered a challenge to, and also attempt to undermine, this literature elsewhere. See P. L. Bylund, 'Ronald Coase's "Nature of the Firm" and the Argument for Economic Planning', Journal of the History of Economic Thought, 36:3 (2014), pp. 305-329. subsided within mainstream economics in the late 1930s. The economic study of the firm was not revived until Coase’s pioneering work was rediscovered in the late 1960s and early 1970s, primarily through the work of Oliver E. Williamson who adopted Coase’s comparative institutional analysis (‘firm vs. market’) as well as the concept of ‘transaction costs’. The rediscovery of the Coasean ‘make-or-buy’ perspective on coordination became the starting point for an extensive literature in economics aiming to explain firm organising, which developed over the course of some twenty years.Notable contributions to this literature include A. A. Alchian and H. Demsetz, 'Production, Information Costs and Economic Organization', American Economic Review, 62:5 (1972), pp. 777-795, S. J. Grossman and O. D. Hart, 'The Costs and Benefits of Ownership: A Theory of Vertical and Lateral Integration', The Journal of Political Economy, 94:4 (1986), pp. 691-719, O. D. Hart, 'An Economist's Perspective on the Theory of the Firm', Columbia Law Review, (1989), pp. 1757-1774, M. C. Jensen and W. H. Meckling, 'Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure', Journal of Financial Economics, 3:4 (1976), pp. 305-360, B. Klein, R. A. Crawford and A. A. Alchian, 'Vertical Integration, Apropriable Rents, and the Competitive Contracting Process', Journal of Law and Economics, 21:2 (1978), pp. 297-326, O. E. Williamson, Markets and Hierarchies, Analysis and Antitrust Implications: A Study in the Economics of Internal Organization (New York: Free Press, 1975), O. E. Williamson, The Economic Institutions of Capitalism (New York: Free Press, 1985). This literature is still core to the study of the firm.
Austrian Economics and the Firm The emergence and development of the literature on economic organisation in the 1920s and 1930s coincides with the Socialist Calculation Debate, one of the great debates in economics. The latter was prompted by the work of Austrian economist Ludwig von Mises, who argued that an economic system based on socialism was both theoretically and practically impossible.L. v. Mises, 'Economic Calculation In The Socialist Commonwealth', in Hayek (ed) Economic Calculation In The Socialist Commonwealth (London: George Routledge & Sons, 1935), pp. 87-130, L. v. Mises, Socialism: An Economic and Sociological Analysis (1936) (New Haven, CT: Yale University Press, 1951). For a connection between Mises’s and Coase’s arguments, see Bylund, 'Ronald Coase's "Nature of the Firm" and the Argument for Economic Planning'. Mises was a proponent of the Austrian or ‘causal-realist’ school of economics founded at the University of Vienna, which focuses on studying the real market through the lens of a deductive theoretical framework. The tradition’s focus on the market as it is, rather than — as in modern mainstream economics — highly formalised mathematical models with only occasional relevance to the real workings of the market, suggests it perhaps should have researched the firm. After all, markets both then and now are predominantly populated with firms; most economic activity takes place within or between such organisations. Yet, in contrast to neoclassical economics, which gave the topic a lot of attention in the 1960s, 1970s and 1980s, the Austrian school did not develop a theory of formal economic organisation, and even less a theory of the firm.
This appears as a conundrum but is also an opportunity. That it is an opportunity is evident from two recent trends in the literature related to the Austrian body of research, on the one hand, and the study of the firm, its governance and organisation on the other. One trend is the growing interest for issues relating to economic organisation from within the Austrian school and by Austrian scholars. Since the 1990s, articles and books have been published as part of the Austrian research program that propose approaches to and directions for developing an Austrian theory of the firm.Noteworthy examples include N. J. Foss and P. G. Klein, Organizing Entrepreneurial Judgment: A New Approach to the Firm (Cambridge, UK: Cambridge University Press, 2012), P. Lewin, Capital in Disequilibrium: The Role of Capital in a Changing World (London and New York: Routledge, 1999), F. E. Sautet, An entrepreneurial theory of the firm (Routledge, 2000). The other trend is evident by the (re)discovery of and then growing use and influence of Austrian economic concepts and theory in strategic management and entrepreneurship research.P. L. Bylund, 'Toward a Framework for Behavioral Strategy: What We Can Learn from Austrian Economics', in Das (ed) Toward a Framework for Behavioral Strategy: What We Can Learn from Austrian Economics Information Age Publishing, 2014), pp. 205-232, P. G. Klein and P. L. Bylund, 'The Place of Austrian Economics in Contemporary Entrepreneurship Research', Review of Austrian Economics, 27:3 (2014), pp. 259-279. These two trends, while addressing similar issues, have different starting points and approaches, and build off different theoretical frameworks. But, as we will see, they nevertheless have similar theory implications, however with different emphases, and therefore suggest a possible future convergence.
For scholars in management and entrepreneurship, Austrian economics has offered an opportunity to open new venues for research. While the formal models in mainstream economics, especially industrial organisation (IO), originally laid ground for the study of strategic management, they are deficient for producing predictions and advice in a dynamic world. The formalised economic approach offers little support for more practically oriented or realistic research aiming for understanding and aiding in the creation or management of real firms. In contrast, the Austrian view of the market as a dynamic, entrepreneurship-driven competitive discovery process, and its focus on realism in aiming to explain real empirical phenomena, has considerable potential to enhance research and practice in both management and entrepreneurship. As we shall see, modern research in these fields has already adopted several core Austrian concepts and insights.
The study of strategic management was originally an offshoot of the so-called Bain/Mason paradigm of industrial organization (IO). While IO focused on the overall efficiency of the economic system as compared to the perfectly competitive model, strategic management developed strategies for the individual firm to exploit the efficiency logic and so establish monopoly power through which it can earn above-normal returns.M. E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York, NY: Free Press, 1980), M. E. Porter, 'The Contributions of Industrial Organization to Strategic Management', The Academy of Management Review, 6:4 (1981), pp. 609-620, M. E. Porter, Competitive Advantage: Creating and Sustaining Superior Performance (New York, NY: Free Press, 1985). But the empirical market in which business leaders draft strategies and make decisions is scarcely similar to the perfectly competitive model. Also, in stark contrast to the model, real production is neither perfectly optimised nor instantaneous (which is often the case in formal economic models), and business decisions are always made under uncertain conditions. The market, in other words, is dynamic and uncertain, it is in a constant flux and is fundamentally less than perfectly foreseeable. Businesses consequently operate in a changing world — that is, disequilibrium — that is rather far from a stable equilibrium state, and this makes the formalised models describing maximising behaviour of rational actors with perfect information quite inapplicable in real business management.
It should therefore have been an obvious and expected development within strategic management to move toward adopting and analysing a more dynamic conception of the market and the firm. The change to focusing on the analysis of a more dynamic and ‘messier’ view of the market constituted a shift from the formal models of mainstream economics toward an Austrian conception of the market as a competitive and equilibrating process. As Robert Jacobson observed in the early 1990s, there are ‘relatively few strategy researchers [who] explicitly attribute or link their analysis to Austrian economics’, but ‘the influence of Austrian thinking is more widespread than this lack of attribution might suggest’. He continued by noting that much of the then-recent strategy research ‘fit[s] squarely into the Austrian school of thought’ and that this work even ‘can be seen as forming an “Austrian School of Strategy”’.R. Jacobson, 'The "Austrian" School of Strategy', The Academy of Management Review, 17:4 (1992), pp. 782-807, pp. 784, 802.
A similar shift has occurred in the study of entrepreneurship, though this field (at least the research done outside of economics departments) never adopted as fully the streamlined economic models on which strategic management was originally based. Entrepreneurship is here commonly perceived as some form of open-ended change, whether it is the fundamental ‘driving force of the whole market system’, as Mises puts it,L. v. Mises, Human Action: A Treatise on Economics. The Scholar's Edition (1949) (Auburn, AL: Ludwig von Mises Institute, 1998), p. 249. or simply the act of creating firms.Daniel F. Spulber, The Theory of the Firm: Microeconomics with Endogenous Entrepreneurs, Firms, Markets, and Organizations (Cambridge: Cambridge University Press, 2008). As it constitutes a process of change, the concept and its impact on the market are profoundly difficult to express in formal notation. As a result, entrepreneurship could never rely on the models of modern economic theory as was the case in strategic management. This may be a reason why, as William J. Baumol noted, ‘[t]he theoretical firm is entrepreneurless — the Prince of Denmark has been expunged from the discussion of Hamlet’.W. J. Baumol, 'Entrepreneurship in Economic Theory', The American Economic Review, 58:2 (1968), pp. 64-71, p. 66.
Expunged is probably a proper description. Since at least the early 18th century studies in economic theory have placed the entrepreneur at the centre. Richard Cantillon, for instance, defines entrepreneurship as working for non-fixed income (and therefore the bearing of uncertainty)R. Cantillon, Essai sur la nature du commerce en général (1755) (London: Macmillan & Co, 1931). and saw in the entrepreneur the force that brings equilibrium to the market.M. N. Rothbard, An Austrian Perspective on the History of Economic Thought, Volume I: Economic Thought Before Adam Smith (Auburn AL: Ludwig von Mises Institute, 1995), p. 352. Adam Smith, commonly regarded the ‘father’ of economics, saw in the ‘undertaker’ an agent that transforms demand into supply.A. Smith, An Inquiry into the Nature and Causes of the Wealth of Nations (1776). Jean-Baptiste Say saw the entrepreneur as a speculator who runs the firm for profit.J.-B. Say, A Treatise on Political Economy or the Production, Distribution and Consumption of Wealth (1821) (Auburn, Al.: Ludwig von Mises Institute, 2008), see also M. N. Rothbard, An Austrian Perspective on the History of Economic Thought, Volume II: Classical Economics (Auburn AL: Ludwig von Mises Institute, 1995), pp. 25-27. The common denominator of these classical approaches to entrepreneurship is that the concept is considered primarily in terms of the role or function it plays in the economy. Modern entrepreneurship, in contrast, has to a great extent approached entrepreneurship as an empirical phenomenon, in which entrepreneurship is measured as ‘self-employment’ or as the degree of non-concentration in an industry.See P. G. Klein, 'Opportunity discovery, entrepreneurial action, and economic organization', Strategic Entrepreneurship Journal, 2:3 (2008), pp. 175-190.
It was not until the work of Scott A. Shane and Sankaran Venkataraman,See especially S. A. Shane and S. Venkataraman, 'The promise of entrepreneurship as a field of research', Academy of Management Review, 25:1 (2000), pp. 217-226 and S. A. Shane, A General Theory of Entrepreneurship: The Individual-Opportunity Nexus (Cheltenham, UK: Edward Elgar, 2003). who suggested the study and implications of the entrepreneurial opportunity as common denominator for studies in entrepreneurship, that theorising without direct basis in empirical observation regained its foothold in the field of entrepreneurship. Shane and Venkataraman relied heavily on the work of Israel M. Kirzner in reformulating the study of entrepreneurship, and contrasted Kirzner’s ‘alert’ entrepreneur with a conception of Joseph A. Schumpeter’s ‘disruptive’ innovator-entrepreneur.I. M. Kirzner, Competition and Entrepreneurship (Chicago, IL: University of Chicago Press, 1973), J. A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits, Capital, Credit, Interest, and the Business Cycle (1911) (Cambridge, MA.: Harvard University Press, 1934). This has ultimately led to Austrian economics having a strong influence in entrepreneurship.
The use of Austrian concepts in strategic management is as prevalent as in entrepreneurship, but far from as explicitly attributed. Whereas entrepreneurship theory was built on an openly Austrian foundation, strategic management research only infrequently recognizes that many of the field’s core concepts have already been used, elaborated on and scrutinized by the Austrians. While there are indeed a number of studies in strategic management that explicitly use an Austrian approach or even adopt Austrian theory, the measurable relative influence of Austrian economics has not increased. Instead, concepts such as resource heterogeneity, uncertainty and dispersed knowledge — and their implications — are reinvented and drafted anew, and used as means to deal with problems arising due to the reliance on formal economic models. This may at times give a thoroughly strategic management flavour to these concepts that can seem to create a distinct paradigm, but it also subjects the field to costs as already developed theoretical concepts, which can be common knowledge in the Austrian tradition, are reinvented and suffer problems achieving consistency. The latter, in fact, is in line with a warning drafted by Jacobson, who cautioned that while Austrian economics is a mature theoretical framework and therefore both useful and valuable, it is also highly integrated due to its strictly deductive method; this means that ‘inconsistencies can arise when attempting to integrate other frameworks with Austrian paradigms’.Jacobson, 'The "Austrian" School of Strategy', p. 803. This may turn out to be a severe problem in strategic management as the field borrows, whether or not intentionally or even knowingly, several core concepts from Austrian economics, and it can equally become a problem in entrepreneurship theory as it originated as an application but not elaboration of Austrian theory. But, as we shall see in the next section, the same type of problem is latent also in Austrian theories of the firm.
Coase and the Austrians Austrian approaches to studying the firm face similar problems as those we just discussed with respect to theories in strategic management including Austrian concepts and constructs. The approach, however, is the obverse: they take Austrian theory as starting point and then add concepts, theoretical devices and reasoning from mainstream (non-Austrian) theories of the firm to it.P. L. Bylund, 'Division of Labor and the Firm: An Austrian Attempt at Explaining the Firm in the Market', Quarterly Journal of Austrian Economics, 14:2 (2011), pp. 188-215. In contrast to typical Austrian theorising then, which maintains consistency through strict deductive reasoning, Austrian approaches to the firm place mainstream conceptualisations within an Austrian ‘market process’ framework. In order to make the pieces fit, the framework is often made out to hinge on a single or couple of Austrian core concepts (such as knowledge, capital theory, entrepreneurship or uncertainty). Consequently, we see Austrian theories that discuss how concepts in mainstream economic theories of the firm, like transaction costs, incomplete contracting, monitoring costs and so on, relate to, can be combined through, are supported or otherwise further explained by utilising an approach that at least in part is or derives from Austrian thinking. By placing ‘bridging’ Austrian concepts at the core of the theory, which supposedly adds an explanatory dimension to existent mainstream theories, an argument is indirectly generated for the value of incorporating core components of Austrian economics in mainstream theory development. But doing so could also introduce inconsistencies. The product is in any case a theoretical amalgamation that appears to be mainstream in many ways and therefore builds on strengths perceived in the already established theories, but is presented with a distinctly Austrian flavour.
Whereas these approaches purport to indicate steps toward an integrated framework that can explain economic organisation on Austrian terms, they predominantly attempt to achieve this goal by relying on the unorthodox method of ‘combining’ Austrian with decidedly non-Austrian theoretical constructs. As these constructs have different histories, are from different bodies of theory and commonly are formulated using very distinct (and, at least to some extent, incommensurable) assumptions and reasoning, they risk appearing more as a jumble of concepts inspired or held together by an Austrian-style market process argument than an integrated theory. As I concluded elsewhere, ‘the existing [Austrian] attempts fail to convincingly explain why there are firms because they are too narrowly focused on specific characteristics rather than on the firm in the market’.Bylund, 'Division of Labor and the Firm: An Austrian Attempt at Explaining the Firm in the Market', p. 191 It should, in fact, be difficult to imagine an Austrian approach to explaining economic organisation that does not see the firm as having or supplying a distinct and important function to the integrated market system in which it is thoroughly embedded. The firm should be both affected by and effectuate change in the market process. In this sense, the firm cannot be seen as ‘only’ a governance choice for certain types of transactions or applicable under a certain set of conditions or in specific situations (as several theories suggest), but should — considering the firm’s relative omnipresence in the market — play a more substantial role in how the market process works. The firm, seen from an Austrian point of view, should provide a function that fits in the broader scheme of things.
At this point it may be appropriate to address the question of how we define a ‘firm’. But this is exactly the problem with existing theories of economic organisation, whether they are Austrian or mainstream — there is no established definition of the phenomenon, so common in the market, that we refer to as a ‘firm’. Instead, the theoretical literature suggests (at least) four distinct definitions or rationales for the firm: as a technological necessity, as having a nature that is distinct from the market, as a means for avoiding costs of using the price mechanism, or as an accumulated collection of resources.Sautet, An entrepreneurial theory of the firm, pp. 5-6. As can easily be seen, there is no reason to assume that all four rationales are necessarily and always present where there is a firm, which makes the situation theoretically unsatisfying. If we for a moment assume that firms are more than simple ‘legal fictions’,Jensen, et al., 'Theory of the Firm: Managerial Behavior, Agency Costs, and Capital Structure'. by which we mean that economic organisation provides an actual and real economic function regardless of legal status, it should be clear that the empirical observation that firms are ubiquitous in advanced markets cannot properly guide the development of Austrian theory. This is not to say that empirical observations are unimportant, but quite the opposite. The fact that business firms are practically ‘everywhere’ should to theorists of the firm indicate that there may be more to this phenomenon than suggested by either of the simple rationales relied on in the extant literature, and that it therefore could play a more important role in the market process than, for example, offering a means for avoiding some costs of market transacting. Cost minimisation through choosing the ‘cheaper’ means of coordination can of course be a benefit of the firm, as is Coase’s argument, but the full out adoption of the mainstream market/hierarchy duality as one’s theoretical point of departure does not necessarily follow from this statement.
Despite this, many Austrian theories adopt Coase’s transaction cost theory of the firm, or in any case its argument or assumptions, as starting point. While it is true that Coase introduced the comparative institutional analysis of economic organisation in a nice way, there is reason to think that Coase’s framework is incompatible with Austrian theory. His theory of the firm was intended as a defence of economic planning, and it was in support of planning in the market (Coase’s conception of the firm) that he introduced the concept of transaction costs — a kind of cost affecting market exchange yet that somehow exists outside of economic actors’ opportunity cost assessments and therefore have no effect on efficient resource allocation.Bylund, 'Ronald Coase's "Nature of the Firm" and the Argument for Economic Planning', see also, H. Demsetz, 'R. H. Coase and the Neoclassical Model of the Economic System', Journal of Law and Economics, 54:4 (2011), pp. S7-S13. Coase’s point was that the market is ‘costly’ because resources are heterogeneous and market coordination is not rationally planned, and it follows from this that rational planning (by definition unaffected by this cost) would tend to be less costly. Coase explains that this is the reason such a ‘large sphere’ of the Western market economies are not coordinated through market exchange but are instead planned within firms, and contrasts this ‘decentralised planning’ through firms in the market with the centralised economic planning in Soviet Russia (as Coase notes, Lenin had said the country would ‘be run as one big factory’).
Setting the political connotations aside, Coase’s economic argument stands in stark contrast to how Austrian economists understand the market and how they conceive of capital heterogeneity and the implications thereof. To Austrians, as to Coase, it is ultimately the fact that resources in production are heterogeneous, produced and non-permanent that makes economic planning costly (if not impossible). But Austrians would argue, along the lines of Mises’s argument against socialist economic planning, that this is what makes the market an unbeatable (though still, it must be emphasised, imperfect) coordination mechanism for advanced specialised production — not the other way around. It is Coase’s decidedly un-Austrian framework that allows him to conclude that ‘planning’ is superior to and therefore a multitude firms are formed to supersede the market’s price mechanism.
Whereas Coase’s analytical approach of comparative institutionalism is rightly accepted and appreciated by Austrians, it is difficult to see why the rest of his argument should be. Rather than using a theoretically streamlined but otherwise realistic ‘imaginary construction’ (the common method in Austrian theorising) to isolate causal links and interdependencies in the real economy, Coase’s assumptions intentionally do away with any structural differences so that only the means of coordination remains to distinguish the firm from the market. The conclusion that the choice (which to Coase appears to be made by the economy rather than by an actual actor) of coordinating force between price mechanism and manager is a matter of selecting the least costly alternative is neither interesting nor important — it follows directly from the stated assumptions. This is an important difference between Coase’s analysis and the deductive theoretical framework of Austrian economics. Coase relies on a set of strong assumptions without obvious grounding in theory, whereas the Austrian approach incorporates assumptions within a causal-realist framework that provides a bulwark against arbitrariness.
An Austrian Theory of Economic Organisation Coase’s theory ultimately challenged the theory of economic organisation at the time and thereby the body of literature in economic organisation that developed in the 1920s and 1930s. While inspired by E. Austin G. Robinson, an influential Cambridge economist who had written on the logic of industrial organisation,See e.g., E. A. G. Robinson, The Structure of Competitive Industry (London: Nisbet, 1931), for a discussion on Robinson's influence on Coase, see L. R. Jacobsen, 'On Robinson, Coase and "The Nature of the Firm"', Journal of the History of Economic Thought, 30:1 (2008), pp. 65-80. See also E. A. G. Robinson, 'The Problem of Management and the Size of Firms', The Economic Journal, 44:174 (1934), pp. 242-257. Coase’s approach deviated from Robinson’s in one important respect: he assumed that the firm’s internal organisation is practically a carbon copy of the market’s allocation of resources,Indeed, Coase argued that the ‘object of the organization was to reproduce market conditions’, that is to say ‘to reproduce [its] distribution of factors … within the business unit’. R. H. Coase, 'The Nature of the Firm: Origin', Journal of Law, Economics & Organization, 4:1 (1988), pp. 3-17, p. 4. which facilitated his marginal transaction analysis and allowed him to conclude that there is a strict cost rationale for the firm. The common starting point in the literature at the time, in contrast, was that the firm is defined contra the market by its more intensive division of labour. This difference means that the boundary of the firm, according to Coase’s theory, is the result of a simple cost comparison between different means for allocating resources, whereas ‘pre-Coaseans’ like Robinson derived organisational boundaries from real differences in productivity through resource heterogeneity and specialisation intensiveness.
The latter view was further developed in the works of Edith Penrose,For Robinson's influence, see L. R. Jacobsen, 'On Robinson, Penrose, and the resource-based view', European Journal of the History of Economic Thought, 20:1 (2011), pp. 125-147, see also E. T. Penrose, The Theory of the Growth of the Firm (New York: John Wiley and Sons, 1959). who with mentoring assistance by Austrian economist Fritz Machlup,C. M. Connell, 'Fritz Machlup's Methodology and The Theory of the Growth of the Firm', Quarterly Journal of Austrian Economics, 10:4 (2007), pp. 300-312. authored an influential book on the evolution and growth of firms. The modern resource-based view of the firm, which applies a strict strategic management perspective on the value creation and value capture problems that arise due to resource heterogeneity, is based on Penrose’s non-Coasean approach as derived from the work of Robinson and Machlup. As will emerge through the discussion in subsequent chapters, this legacy of Robinson — and the classical economics approach to the study of the firm that it was based on — should be a much more appropriate starting point for developing a dynamic theory of the firm. Not only is this particular approach evolutionary and dynamic in the same sense that Austrian economics provides a framework for studying and understanding the market as a process, but it already includes several concepts that are compatible with the Austrian approach.
Nevertheless, an Austrian theory of the firm should probably not assume it as a starting point. Considering the deductive and integrative nature of Austrian theory, it would be a mistake to do more than take inspiration from other schools of thought — especially if they are based on different (or even incommensurable) assumptions. Despite how it is commonly approached, the economic theory of the firm is not a specialisation, but an elaboration and extension of the existent body of economic theory aimed at providing an answer specifically to the question of economic organisation. This answer cannot, obviously, contradict the theoretical framework, but can suggest a potential theoretical challenge to existing emphases or applications. In order to be true, a deductive theoretical framework and all its parts need to constitute a consistent whole; what remains, therefore, for Austrian theory to properly provide an answer to the so-called Coasean questions of the firm’s rationale, boundaries, and internal organisation is to extend the theory by applying it on and emphasising the particular issues that pertain to organisation. Indeed, as Mises notes, ‘[t]here is no specialization [in economics], as all problems are linked with one another. In dealing with any part of the body of knowledge one deals actually with the whole’.Mises, Human Action: A Treatise on Economics. The Scholar's Edition: 869 The point of departure for producing an Austrian theory of economic organisation, therefore, must be the existent body of Austrian theory and consequently the Austrian understanding for what constitutes and drives the market process. It follows that an Austrian theory of the firm should be based on or, at a minimum, be related to core Austrian concepts such as knowledge, capital theory, entrepreneurship and uncertainty. It should also fit with the theoretical framework — and in fact constitute a missing piece of the puzzle.
As finding and theorising on this piece is the task for this book, our focus must first and foremost be on what specific problem the firm can solve in the market process, by which we mean that organising certain economic activity within the firm must have a value for those involved in the firm as well as the market process as a whole. The former is a question of how the firm attracts labour and capital factors, and the latter addresses the overall value of the structure to the market as such. It is not sufficient to address either of these aspects without also addressing the other ones, as it is not sufficient to address either of the Coasean questions separately, since what then emerges as a potential solution may not fit with the overall theoretical framework. The take-home here is that the theory of economic organisation must be built on yet be ultimately delimited (if not restricted) by the theory of the market.
It should be noted that existing approaches to explaining the firm from an Austrian perspective usefully adopt a similar problem-focused methodology. From our perspective, however, they do so in a very limited sense by phrasing the question to be answered in terms of a gap in the theoretical framework rather than a real economic problem. The integrated economic function of organisation for market actors in the market process becomes an implication rather than a core contribution of the theory. Granted, this allows for the approaches to focus primarily or even exclusively on a specific concept or sub-theoretical orientation (such as capital theory or entrepreneurial discovery or judgement) while purporting to — at least indirectly — inquire into the nature of relationships that exist in the market (or, if we wish, between firms and markets). But the approach in effect emphasises trees at the cost of failing to appreciate the extent of — or even see — the forest. But the nature of economics is such that we are unlikely to fully understand the tree, as a phenomenon that arises within an economic or market context, without first considering the tree as embedded within and part of the forest. In other words, we have to deal with the market embeddedness of the firm in order to understand it, and we therefore need to target its function within the broader market context. This is the point of departure for this book.
The discussion above indicates not only that there is a seemingly unoccupied space for a theory to explain the firm from the point of view of the market process, but also that there are several theories, approaches, and frameworks that we can draw from. While a new theory of the firm can provide important insights, and it is indeed the purpose of this book to draft one, it is unnecessary to adopt a completely different approach and ‘reinvent the wheel’ completely. Yet to take the firm’s embeddedness seriously, it is necessary to derive the firm’s function from limitations that the market suffers without it. In this sense, we start from the beginning by discussing the market process and how it functions without firms. We look specifically at production as the core activity within the market process, and then elaborate on whether market production is subject to a fundamental problem or shortcoming, which can potentially be solved by entrepreneurs only through economic organising. The next chapter discusses the market as a dynamic process.
In Economics For Entrepreneurs, we will attempt to bring you some usable tools that represent a way to apply economic principles to your business to help you to greater success. Economists talk about individuals embracing values as a guidepost to the right behavior and the right choices. An example of such a value might be Family Security. An individual who holds this value in high esteem will make certain choices about their career, for example, perhaps emphasizing stability over frequent change. Another individual who prefers an exciting life might make the choice of more change, excited by the possibilities it brings. How can entrepreneurs diagnose and understand these idiosyncratic choices and take cognizance and advantage of them in business? This week we talk with Trini Amador, who is an entrepreneur who advises some of the biggest corporations in the world on these mysteries, and has built a highly successful values-based brand of his own.
Show Notes People adopt values as a guide to their behavior and a signpost for prioritizing their preferences and choices. For example, a sense of achievement might be a value for one individual to pursue, and in as many circumstances as they feel are applicable, they’ll ask themselves, “Will this choice or action bring me a sense of accomplishment?
There are many possible values; individuals tend to be most motivated by their “highest values”. Entrepreneurs who can identify these highest values in their customers, and can develop an understanding of how to appeal to them, can be especially successful in designing value propositions and service offerings.
The way for entrepreneurs to understand how to appeal to consumers’ highest values is to think about climbing up the values ladder to reach the top. Their first encounter with your business will be at the bottom rung — the service or product you are offering. Their first question will be, what’s the benefit for me? If they see a functional benefit, they’ll ask themselves if it makes them feel good — proud, comfortable, energized, whatever feeling is relevant. If they experience an emotional benefit, they’ll ask if your offering fits with their highest value — that’s what makes them a devoted and loyal customer.
The tool to help your business climb the values ladder is the Mean-End Chain. We posted a simple example with Episode #1.
When you’ve constructed a Means-Ends chain for your target customer, you can begin to populate a brand framework. People are loyal to brands, and they often pay a premium price. A brand can be a person (you) or a business (yours) or a product or a service. Trini explains how to populate the brand framework to make your brand relevant to the target audience and differentiated by making a unique promise that you keep every time.
These are the brand building tools utilized by the world’s most successful brands. Trini delivers the insider’s knowledge.
Additional Resources Rokeach Values (PDF): https://Mises.org/E4E_02_PDF
The Use of Terminal and Instrumental Values In Understanding Consumer Motivations (PDF): https://Mises.org/E4E_02_PDF_2
There are some economic principles that can help entrepreneurs in their business-building endeavors. One is the understanding of ends and means. What ends (goals, objectives) are your customers pursuing, and how do they choose the means to achieve those ends? The customer is in charge of choosing ends, and the entrepreneur takes charge of offering the most attractive and valuable means. How do entrepreneurs solve that equation? We asked Peter Klein. Peter is Professor of Entrepreneurship at Baylor University’s Hankamer School of Business. He is also Senior Research Fellow at Baylor's Baugh Center for Entrepreneurship and Free Enterprise and Adjunct Professor of Strategy and Management at the Norwegian School of Economics. He knows ends and means.
Show Notes Economics helps entrepreneurs in a very practical sense by shining a very bright light on human motivation. In economic terms, people act. They do things. And when they do things, they always have purpose in mind. They are goal oriented. The entrepreneur’s job is to figure out how to help customers achieve a goal that they already have in mind.
Thinking about this principle in simple terms helps entrepreneurs develop a deep understanding of customer value chains. Why for example, do people choose to drink coffee? It doesn’t just happen. People raise a coffee cup to their lips because they want to enjoy the taste. Or maybe to give themselves a caffeine boost. Or perhaps they are drinking coffee in a social context and they want to enjoy the shared experience. Economists are always thinking about the customer’s goal in taking a certain action — and entrepreneurs can benefit from thinking the same way.
How and why do people decide on their ends? Economists — and entrepreneurs — don’t judge. We just want to find out what ends the customer is pursuing. And how behavior might change if circumstances change — for example, if prices rise, the customer might buy less or stop buying altogether.
How can entrepreneurs find out about what motivates customers to pursue certain ends and use certain means? By immersing themselves in a market — like the consumer market for coffee as a beverage — and thinking about it from all angles: psychology, economics, history, culture, fashion, supply chain, marketing. Like Howard Schultz observing coffee shop behavior in Milan as a precursor to launching Starbucks in the US. He deduced from his observations what Americans might derive from a similar experience if he provided it.
How do entrepreneurs develop the appropriate skills and knowledge? Not from reading books, that’s for sure. It’s instinct plus tools. The tool discussed in this episode is the Means-Ends Chain (see also the How-To-Use-It tool). It’s the tool that helps entrepreneurs understand that they are not selling — and the customer is not buying — coffee, but an experience.
The skillful entrepreneur links the proximate product — the coffee — to the desired experience — the “third place” experience as Starbucks calls it — in a convincing and persuasive manner. This requires exploration and experiment to get it right. It’s never obvious.
That’s why economists refer to uncertainty — it’s the situation all entrepreneurs face. You never know the future outcome until you try. The entrepreneur must be flexible in exploring the customer’s ends and means. Uncertainty rules.
Entrepreneurs exercise judgment, and try to develop insights, but can never achieve certainty. Data might help but it’s not infallible. Eventually, the entrepreneur must decide to “go for it” without certainty of being right. It’s the “plunge” decision. Learning, big data, and surveys are inputs, but they can’t make the decision; only a human can.
Experience can help. In the US, the average age of the first-time entrepreneur is mid to late 40s. Experience in an industry and lived experience are helpful. And intergenerational sharing of experience — like finding a mentor — can also contribute the experience you don’t have.
Entrepreneurship is not rocket science. Know your market, know your customers, and trust your judgment and your instincts.
Additional Resources The Means-Ends Chain Tool (PDF): https://Mises.org/E4E_01_PDF
The How-To-Use-It Tool (PDF): https://Mises.org/E4E_01_PDF_2
The Mises Institute is launching a new podcast with the title Economics For Entrepreneurs. Why should you listen?
The entrepreneur is the central hero in the dynamic order of Austrian Economics. Mises referred to entrepreneurs as "the driving force of the whole market system".Human Action, Scholar’s Edition, LvMI, Ch XIV. Jesus Huerta de Soto points to the unique role the theory of entrepreneurship plays in Austrian Economics.
Neoclassical economists... overlook the co-ordinating force that Austrians attribute to entrepreneurship. The entrepreneurial process….is a dynamic, never-ending process which constantly spreads and furthers the advancement of civilization.Jesus Huerta de Soto, The Austrian School.
Mises and de Soto were writing about economic roles. In Economics For Entrepreneurs, we are focused on the flesh-and-blood individuals who tackle the entrepreneurial task every day. The entrepreneurs who detect consumer and customer dissatisfactions and imagine — then produce — solutions for those dissatisfactions. The entrepreneurs who serve others by creating new value and, as a result, create the most just, moral and beneficent society for all, while creating a life of purpose and meaning for themselves.
We want to contribute knowledge and insight to that process. We want entrepreneurs to be successful. We’d like everyone to be an entrepreneur.
How is our podcast going to help? It’s a three step process. The first resource for successful entrepreneurs is understanding the laws of economics. If you have clear insight and a rigorous practical application of these laws, you have a competitive advantage over others. We’ll talk to the leading economic thinkers about the exactly how economic principles are best applied in business.
The second resource is the set of tools to apply these principles, and we’ll describe and, where possible, provide those tools for entrepreneurs to use. They can range from frameworks and processes to tools for planning and brand building. Some will make you better at specific tasks, others will augment your individual capacity, so you can be more effective.
The third resource is your imagination. We can’t provide that, but we can stimulate it. As you listen to both up-and-coming and established entrepreneurial practitioners, we think your imagination will be unleashed in multiple new directions.
The laws of economics, the tools for practical application, plus your imagination. We think that’s a winning formula.
Moreover, there is a world-changing innovation at work to which we can all contribute. If we are able to interconnect a worldwide group of entrepreneurs, the people who are the creators of new value in society, we will be able to unleash a wave of collaborative genius to change the world for the better. One entrepreneur can be smart, and one innovation can create value and one firm can grow revenues and profit. If they all share their learning and share the new information they create, and everyone acts on that learning at speed and scale, then we get to a new horizon of value creation. It’s what Austrians call spontaneous order, the driving dynamic of entrepreneurial human action, the never-ending process that constantly spreads and furthers the advancement of civilization.
We hope you will join us at Economics For Entrepreneurs. We’ll be on on iTunes, Google Play, Stitcher, Soundcloud, and via RSS; plus, Mises.org and HunterHastings.com.
T.R.M. Howard: Doctor, Entrepreneur, Civil Rights PioneerDavid T. Beito and Linda Royster BeitoOakland: Independent Institute, 2018, xxii + 339 pp.
Jason Jewell (jjewell@faulkner.edu) is a professor of humanities at Faulkner University.
Quarterly Journal of Austrian Economics 21, no. 3 (Fall 2018) full issue, click here.
A frequently debated topic among African-Americans in the 20th century was the relative merits of the improvement strategies proposed by Booker T. Washington (c. 1856–1915) and W.E.B. DuBois (1868–1963). Washington, a former slave and later head of the Tuskegee Institute, urged a non-confrontational program of self-discipline and economic improvement within the black community during the era of Jim Crow. DuBois, a professor at Atlanta University and one of the founders of the NAACP, favored economic improvement, to be sure, but also alleged the need for political activism against policies of racial segregation and de facto inequality. Many, if not most, prominent African-Americans came down clearly in favor of the strategy of one intellectual or the other. By contrast, T.R.M. Howard (1908–1976), the subject of David and Linda Beito’s biography, embodied both approaches at different times during his remarkable career.
David Beito, a professor of history at the University of Alabama, has published several books on classical liberal and libertarian themes since the 1980s, including From Mutual Aid to Welfare State: Fraternal Societies and Social Services, 1890–1967 (2000), which describes the robust network of mutual aid in the United States a century ago and its gradual crowding out by the state. His wife, Linda Royster Beito, is a professor of social sciences at Stillman College. Together the Beitos have co-authored many articles and essays with a classical liberal flavor since the late 1990s. They originally published their biography of Howard in 2009 with the University of Illinois Press under the title Black Maverick. This new edition, published by the Independent Institute, includes an afterword by the authors as well as a foreword by Jerry Mitchell, the journalist whose investigative reporting in the 1980s and 1990s led to murder convictions in several “cold cases” from the Civil Rights Era in Mississippi. The subtitle of the 2018 edition stresses elements of Howard’s life, especially his entrepreneurship, that will appeal to classical liberals and libertarians.
By any measure, T.R.M. Howard’s life and career were dramatic, with many twists and turns along the way. Born into poverty in the “Black Patch” area of southwestern Kentucky and northwestern Tennessee, Howard in his youth converted to Seventh-Day Adventism and embraced its rigorous ethic of self-discipline and clean living. He found white patrons in the church who sponsored his education and eventual training to become a physician. Although Howard eventually drifted away from the SDA church, its influence on his life and early career was crucial. His move to southern California in the early 1930s to attend its College of Medical Evangelists was what brought him into contact with socialite Helen Boyd, whom he eventually married. Boyd’s family in turn made introductions that led to Howard’s writing regularly for the California Eagle, Los Angeles’s largest black newspaper, helping to establish his reputation as a civil rights leader.
Upon completing his medical training, Howard spent several years at Riverside Sanitarium, an SDA hospital in Nashville, Tennessee, and also maintained a private practice while continuing to speak to churches and civic groups about civil rights. In 1941, he accepted an invitation to become chief surgeon at a new hospital in Mound Bayou, Mississippi, an all-black town in the state’s Delta region. It was in Mound Bayou that Howard became a wealthy man through both his medical practice and entrepreneurial activities in banking, insurance, and agriculture. In fact, the Beitos claim that Howard became one of the most prosperous black farmers in Mississippi, with over 1,000 acres to his name and dozens of tenant farmers who resided on his land. In Mound Bayou, Howard also built a recreational center, which included a restaurant managed by his wife.
During his early career, Howard took a stance on civil rights that could plausibly be called conservative. The Beitos provide a number of quotes demonstrating his admiration for Booker T. Washington’s philosophy and willingness to work within a regime of racial segregation provided that the doctrine “separate but equal” actually resulted in equal public accommodation for blacks. Howard received considerable, favorable attention in the white press for his emphasis on black self-improvement and economic development. His early political activity in Mississippi, as seen in his organization of the Regional Council of Negro Leadership in 1951, did not directly challenge the status quo.
However, Howard eventually became more confrontational in his advocacy for civil rights. He publicly decried persistent inequalities in Mississippi such as the mismatch in publicly funded education for white and black children and the legal system’s effective failure to prosecute crimes against black victims (whether the perpetrators were white or black). Whites in the Delta began to take more notice of Howard when he helped lead an effective economic campaign against gas stations that did not provide restrooms for black customers. Activities such as these helped expose the contradictions and weaknesses in a system that paid lip service to, but failed to deliver on, the “separate but equal” doctrine; the Beitos call it a “weaving together [of] pragmatism and radicalism.” (p. 99)
Racial tensions in Mississippi continued to mount in the wake of the 1954 Brown v. Board of Education ruling, and the Beitos ably document Howard’s continued campaigns of economic and political pressure in opposition to the white “Citizens’ Councils” that had formed in an effort to preserve the racial status quo. Howard gained national recognition even as a spate of murders of civil rights leaders in Mississippi made his life more dangerous. Then the murder of Emmett Till and the subsequent trial put Howard into the spotlight. His home became a sort of “command center” for the prosecution’s allies, featuring armed guards and a security checkpoint. Till’s mother stayed there. Journalists and civil rights activists from around the country visited. Howard actively sought out witnesses for the prosecution, offering them protection and (if necessary) relocation to Chicago following the trial. The eventual acquittal of the two defendants by a prejudiced jury was no surprise to anyone, and a white backlash against Howard (including attention from the FBI, which Howard had publicly criticized) finally pressured him to leave Mississippi the following year. However, by that point he was very popular in the national black press and well positioned for his transition out of the region.
Howard joined the Second Great Migration of black Americans out of the South, relocating to Chicago, which was experiencing an explosion of its black population at that time. There he established a new medical practice and continued his efforts on behalf of civil rights, mounting an ultimately unsuccessful candidacy for Congress as a Republican in 1958. He also became one of Chicago’s most prominent providers of illegal abortions. According to the Beitos, by the early 1960s Howard was performing around six abortions per day on both black and white women in addition to the more licit activities of his medical practice. Howard’s success in bribing local law enforcement kept him out of trouble for the most part, and physicians in states where abortion was legal consulted with him on the practice. He lived to see abortion in Chicago legalized as a result of the Supreme Court’s Roe v. Wade decision in 1973. Howard died in 1976 with his final major project, the Friendship Medical Center, in serious financial trouble. Its pending failure meant that Howard left almost nothing to his surviving family members, despite his having made so much money over the course of his life.
A strength of the Beitos’ narrative is the soundness of the economic analysis at several points. (This feature should never be taken for granted when reading most historians’ writing.) For example, when discussing the socio-political context into which Howard was born, the Beitos provide a clear description of the attempt by large farmers in the Black Patch to cartelize tobacco production via the “Planter’s Protective Association” and the violence that eventually resulted from the plan. Later discussion of Howard’s entrepreneurial activities is refreshingly free of the anticapitalist tone so commonly found in histories of business and businessmen.
T.R.M. Howard is well sourced, featuring frequent citations of interviews conducted by the authors along with archival evidence from newspapers, court documents, and private papers. In an age of hyper-partisanship, academic biographers are not always immune to the temptation to portray their favored subjects in a hagiographic manner. Commendably, the Beitos resist this urge with respect to Howard, giving the reader a “warts and all” portrait. While clearly admiring of Howard’s efforts on behalf of civil rights and entrepreneurial achievements, they do not shy away from a frank treatment of his severe character defects, most notably his frequent extramarital affairs and treatment of the women who bore his numerous out-of-wedlock children. (Helen Howard was unable to bear children.) Progressives drawn to Howard’s civil rights activism and heroics during the Till trial must contend with Howard’s Republican politics and penchant for big-game hunting. Conservatives who admire Howard’s entrepreneurship and disdain for government handouts must confront his gambling habit and willingness to perform illegal abortions for profit. In fact, the Beitos plausibly point to this impossibility of appropriating Howard wholly for partisan purposes as a likely reason for why he has received relatively little scholarly attention in recent decades.
T.R.M. Howard offers a corrective to overly simplistic narratives about the civil rights era and African-American history more generally. The Beitos convincingly show that figures like Howard could and did accumulate and deploy economic resources in significant ways to defend their communities’ interests against state-sponsored injustices and to bring about social change. The philosophies of both Booker T. Washington and W.E.B. DuBois found effective expression in the life and career of this remarkable entrepreneur.
Quarterly Journal of Austrian Economics 20, no. 3 (Fall 2017)Community Revival in the Wake of Disaster: Lessons in Local Entrepreneurship by Virgil Henry Storr, Stefanie Haeffele-Balch, and Laura E. Grube, Palgrave Macmillan, 2015
When a community is hit by a disaster, how can it recover? What choices of that community enhance (or hamper) revival? These are some of the interesting questions considered about the economics of mega-disaster.
This volume (and the deep scholarly work that led up to it) was inspired tragically by major disasters around the globe over the last twenty-five years. Such disasters, of course, are not unique to our time. Quite the contrary: In the middle of the nineteenth century, John Stuart Mill, writing in the Principles of Political Economy, Book 1, Ch. 7, remarked on how often devastated communities could recover rapidly in the face of extreme tragedy. Mill’s explanation focused on the accumulation of surplus capital (i.e., saving). A community that has accumulated significantly more capital than other communities will be able to withstand truly devastating events more successfully than can the average community. Mill’s simple insight helps power modern research that seeks to discover why some stricken communities outperform other ones in striving to recover from disaster.
Up to this point, we have used Mill’s capital concept narrowly. Let us now widen our concept of capital to include the social relationships inherent in communities. When we look carefully at these relationships, we detect complex communal connections of both business and social character.
One popular definition of “Social Capital:” is by Pierre Bourdieu: “Social Capital is a resource that facilitates collective action for mutual benefit….” Another is: “Social Capital comes in the form of social networks, norms, and narratives…” Woolcock (2001). Our authors emphasize “…bonding social capital… that exists among like-minded homogeneous groups….” The components of such ties might reasonably be referred to as social capital. Some of these recognized components are:
“Alertness” and the role of the entrepreneur: This is the ability to taste—so to speak—new wine in old wineskins. Our authors put forth good explanations of the two concepts (Chapter 2; pp. 12–16), with similarities and differences described between Kirzner’s entrepreneur and the closely related Schumpeterian concept.
However, if “alertness” alone falters, then it is nice to have something else to fall back on—such as market forces. The authors, like most economists, believe in the power of market forces, which are still seen as crucial in finding a robust equilibrium. The authors are also happy to work with an “in-kind” model of remuneration.
The scholarly reader will appreciate the round-up of the several meanings that capture and compare the different shades of entrepreneurship concepts; e.g., social entrepreneurship, ideological entrepreneurship, public sector entrepreneurship, and Schumpeterian entrepreneurship. The authors allow us to treat these various flavors of entrepreneurship as close cousins.
Chapter 2 is what we could and should rightly call a theory section because it drives the main argument of the book. Its title, “The Entrepreneur as a Driver of Social Change,” encapsulates its meaning perfectly. The roots of most of this particular research derive from earlier work by Joseph Schumpeter and Israel Kirzner. and the authors furnish an excellent review of that literature.
Chapter 3 opens with an insightful game theory model illustrating how one might productively choose a decision path if faced by a “should I stay or should I go” situation due to a catastrophe. To make an informed decision, a “player” would need to be able to judge the likelihood of other players staying in the area. If only a few are staying, then our “player” should probably leave the area as well. But what if others who are announcing false plans too? How does our “player” get the necessary information as to others’ true intent?
One’s ability to “tap” the network would make it easier to analyze the situation and possibly make a joint decision with others about whether to leave or stay. A “loner” would have fewer signposts. Lacking fresh information, he or she “would not know how others in the area are thinking. They would not know about all of the ‘unsettled facts’ that would, in normal times, be routinely available to guide those who are uncertain into a rational decision-choice.”
Social capital carries with it enough knowledge about local events to help in making such a fateful decision. The entire community’s comprehensive knowledge base (i.e., network) is put to work on a pressing problem.
So. To stay or to go. Specifically, should we abandon our homes and move away, or should we try to rebuild?” It turns out that sharing of information among affected parties is crucial, due to what is known or not known by the other “players.” If we know what the “leaders” in the community are most likely to do, it makes it less risky to the “follower” players to act accordingly.
What then about governments as cure for the crisis? In the eyes of many, only government can be effective enough to generate the large-scale coordination between both the private and the public sectors that are often needed in the wake of a large disaster. However, the authors suggest that a key cause of slower-than-expected recovery is more expansionist government policies—such as, for example, ridiculously harsh wage-and-price-control policies, as initiated aggressively by the governors of both New York state and New Jersey. The authors have documented numerous incidents where regulations make it harder, not easier, to get back to something approaching “normalcy.”
With that foray behind us, the authors take us crisply through the burgeoning social-capital literature. They then attach that literature to the topic of “mega-disasters:” how victims can be helped, and how the “heroes” of such a story can be freed to help. Researchers have consistently found a positive relationship between various types of social capital and various measures of societal well-being. They also report a positive correlation between economic growth and social capital.
Unlike machinery, social capital usually normally resides—at least in part—in the human consciousness. Thus, things can be changed up very quickly. Incentives are even more important than in other dynamic situations.
In the case of disasters, the authors play down somewhat the incentives that focus strongly on financial gain, and instead emphasize a more-broad-based concept of “reward.” Their “feed-back” mechanism includes things like social prestige and other such things, from which “high status” in the society may be achieved (p. 28). The authors sort of skip by this fairly radical adaptation, and with this adaptation, has the model morphed into a full-scale sociological one?
The authors make a strong case for their position that well-utilized social capital can make an important difference in the wake of a general disaster (p. 38). In one of the stronger portions of the book, the authors present other findings that corroborate their own findings. This is a very well-developed body of research indeed—and the authors should be congratulated for their body of work (pp. 38–42).
The authors emphasize the common-pool problem, preaching that “A community’s capacity to rebound is related to its capacity for self-governance” (p. 43).
Another theme emphasized by the authors is the superiority of polycentric orders versus a monocentric order. In a crisis, substantial uncertainty emerges as to what path should be taken. Different opinions will naturally emerge. Through differences of opinion, it is more likely that a better path will be discovered through simple trial and error. By contrast, if governance is by rules of a rigid authority, then it will be all the more difficult to find, through experiment, a useful path. Otherwise, we risk wasting precious time and resources, including social capital.
But how—assuming that disaster has struck and the citizenry must face stark and unpleasant choices—can it get out of the disaster? The authors argue that it is precisely at this point where the entrepreneurial spirit is needed most. What is needed are private citizens who are willing to lead, to encourage, to raise spirits. It is here, the authors say, where entrepreneurs need to say: “Help the community members overcome the collective action problem that plagues community rebound!” The authors see entrepreneurs as fulfilling at least three crucial functions (p. 46): providing needed goods and services; restoring of social networks that have deteriorated during the crisis; and their appearance sends a “Let’s go!” signal to other parties who might be hesitating. To some extent, this is the familiar “pulling yourself up by your own bootstraps” story.
We turn next to the energetic and remarkable efforts of those broadly conceived “agents of entrepreneurship” whom the authors identify as the “heroes” of the book.
How is it possible to supply a disaster area privately in the wake of massive destruction? First of all, in a free market, one might expect market forces to do much of the initial job, augmented by entrepreneurs and any remaining social networks. After that initial spurt, buying and selling would surely continue, though at considerably higher prices due to widespread shortages. From this point on, one would expect some social capital networks would that would be coming-online. They would make the initial “profit” also. Skilled labor would enter the area quickly, sensing a profit opportunity. A true devastation would of course be unable to easily return to normal, and the stronger medicine of, let us say, social networks and entrepreneurship. Similar things were observed by the authors in their extensive research on the two storms.
In the 9th Ward in New Orleans, skilled labor and entrepreneurs came together, more or less spontaneously, to help—no questions asked. Similar successes also sprung up in the disaster areas of New York and New Jersey. Entrepreneurs (in the broad sense) sprang into action, and in many cases their actions encouraged the despairing and created action where otherwise there would have been little action.
Chapter 6, “Regrowing Uprooted Social Networks” looks at the recovery of the devastated areas and observes steps that seemed to be helpful in bringing these areas back. The reader meets many of the “heroes” of this tale, and there are many. One challenge to those seeking to bring these areas back, was, surprisingly(?) “help” from government, which often earned poor marks. The tales told a fair share of circumstances where “for their own good” entrepreneurs were not allowed to take steps that they themselves felt were needed. Often, they lost those battles with government. This chapter opens the discussion as to how social capital can be created. The authors primarily use real-life examples, making the narrative more interesting. The remarkable flexibility and reorganizational features of social capital is how easily it can be transferred from one situation to a different one.
Many different skills are useful in the process of creating social capital. The “re-building process” surely must be one of the keys of social capital in the wake of a devastating catastrophe. The heterogeneous nature of social capital is one of the keys of its success. Similarly, such capital has many uses and has great flexibility. If a “hole” in the social-capital fabric opens, social capital can make repairs by calling upon skills of other members of the “social-capital chain.”
Ending this book are a few policy recommendations culled from the authors’ study. They suggest the following guiding lights.
Policymakers should … instead of embracing top-down concepts, instead ensure that our entrepreneurial actors have the space to act.
Eliminate, suspend, or simplify the rules that hamper the entrepreneurial spirit, especially in a true crisis.
In conclusion, the authors suggest a simple, but powerful idea: entrepreneurs are agents for social change, especially so in natural disasters.
(Excerpt from chapter 17 of Mises: The Last Knight of Liberalism, pp. 770–73.)
It was through the writings of Carl Menger and Eugen von Böhm-Bawerk that Mises had come to understand the market economy as a rational social order in which all factors of production are geared toward the satisfaction of consumer wants. Not only the allocation of the production factors, but also the incomes of the owners of these factors ultimately depended exclusively on their relative contribution to the satisfaction of human wants. All values, all prices, as Frank Fetter had put it, depend on a daily referendum in the market democracy.“The market is a democracy where every penny gives a right of vote.” Frank A. Fetter, The Principles of Economics (New York: The Century Co., 1905), p. 395. A few pages later he states: “So each is measuring the services of all others, and all are valuing each. It is the democracy of valuation” (p. 410).
But in none of his predecessors did Mises find a satisfactory account of the process through which the structure of production was brought in line with consumer preferences. His fellow Böhm-Bawerk seminar member, Joseph Schumpeter, had brilliantly shown how entrepreneurs drive the market. According to Schumpeter’s Theory of Economic Development,Joseph A. Schumpeter, Theorie der wirtschaftlichen Entwicklung (Munich: Duncker & Humblot, 1911). entrepreneurs are innovators who constantly interrupt the smooth operation of an inert economy.
Schumpeter had a point. Innovation does play a central role in the market economy. But how does this fit with the Mengerian picture of the market economy as a rational social order? Was there a contradiction between the Schumpeterian notion that entrepreneurs reap profits for innovation and the Mengerian insight that all incomes depend on consumer wishes? In Nationalökonomie, Mises reconciles Schumpeter with Menger. From Schumpeter, he adopted the idea that entrepreneurs are the motor of the market process. But they cannot earn a profit for innovation per se — only for innovations that improve the satisfaction of consumer wants.
Entrepreneurs constantly adjust the structure of production to what they expect will be the future preferences of consumers. The different entrepreneurs act in effect as advocates for different consumer needs. Based on their estimates of what they expect to obtain for an imagined product in the future, they go to the factor markets where they compete with other entrepreneurs, bidding up prices for the available factors of production—workers and material supplies. This pricing process determines the incomes of all factors of production, and it ensures that only the most important investment projects (“important” in terms of future consumer spending) will be realized.
The driving force of entrepreneurship is the profit motive. Profit is the specific remuneration a person receives for bearing uncertainty. In the market economy, entrepreneurs act with due caution and responsibility because they are personally liable for any wrong decisions. Loss is the punishment for unsuccessful entrepreneurship. Profit and loss are together the measure of entrepreneurship.
Are all businessmen entrepreneurs? Are all entrepreneurs businessmen? If not, how could entrepreneurs be distinguished from “regular” businessmen and other market participants? Mises answered these difficult questions by defining entrepreneurship as a social function, namely, as the function of assuming responsibility for the uncertainty of the future. The entrepreneur in Mises’s theory is not a person but a role played by people — and it is not at all limited to businessmen. Ultimately anyone can be an entrepreneur to the extent that he assumes the repercussions of uncertainty. Profits and losses do not only determine the income of businessmen, but also of wage-earners and capitalists. They always come mixed with specific factor incomes such as wages and interest.
One of the great problems Mises had to solve in this theory was to give a precise definition of profit and loss. In particular, he had to distinguish profit and loss from interest. His solution was that profit and loss were the results of human error. In other words, profits and losses can only exist in situations of disequilibrium. In contrast, money interest ultimately springs from time preference and has nothing to do with whether the market participants make good or bad decisions. Money interest exists both in general equilibrium and in disequilibrium, whereas profit and loss exist only in the latter case.
But then this line of argument makes it necessary to clarify the precise meaning of general equilibrium, as well as its role in economic analysis. Mises argued that general equilibrium — which he called the stationary economy (stationäre Wirtschaft)In Human Action, he called it the “evenly rotating economy,” pp. 246–47. — is a purely methodological device. It is an imaginary construct (Gedankenbild) that has no counterpart in the real world. Its only purpose is for the definition of profit and loss.
Our guest this week is Professor Per Bylund, a man who studies entrepreneurship for a living. Why is the role of the entrepreneur—the individual who risks capital, time, and energy to build a business—almost completely disregarded by most economists? Does the Austrian focus on individual human action explain why business schools are far more willing to embrace Austrian principles? Can real-world entrepreneurs improve their business skills in traditional university settings, or are much-hyped campus incubators a waste of time? Why do progressives dismiss entrepreneurs with their "You didn't build that" mentality? And how do socialist policies in places like Dr. Bylund's native Sweden kill the spirit that makes us rich?
One of the highlights of our Austrian Economics Research Conference is the interaction between scholars and entrepreneurs, and the new ideas that such conversations spark. Here business consultant Hunter Hastings outlines how technological innovation is already making centralized "designed" systems obsolete, and how artificial intelligence opens up a whole new era of spontaneous order.
Overstock.com founder Patrick Byrne, the keynote speaker at our upcoming event in San Diego, is a brilliant innovator and freedom advocate. He holds a PhD in philosophy from Stanford, but understands e-commerce and blockchain technology like an engineer. He also understands Austrian economics, and courageously uses his public profile to make the Hayekian case for a decentralized political, economic, and social order. This presentation is excerpted from his talk given on our Auburn campus discussing the relationship between Austrian theory and the blockchain, and what it means for the eventual demise of government gatekeepers and middlemen.
As we look at things that impress us technologically we also have a certain trepidation, because we’re told that robots are going to take our jobs. “Yes, the internet is wonderful,” we may say, “but robots, I don’t want those.”
I don’t mean to make light of this because robots are going to take a lot of jobs. They’re going to take a lot of blue collar jobs, and they’re going to take a lot of white collar jobs you don’t think they can take. Already there are robots that can dispense pills at pharmacies. That’s being done in California. They have not made one mistake. You can’t say that about human pharmacists, who are now free to be up front talking to you while the robot fills the prescription.
Much of this is discussed by author Kevin Kelly in his new book The Inevitable, with the subtitle Understanding the 12 Technological Forces that Will Shape Our Future. It’s incredible what robots can do and what they will be able to do.
Automation Really Is Taking Our JobsTo me, just the fact that one of Google’s newest computers can caption a photo perfectly — it can figure out what’s happening in the photo and give a perfect caption — is amazing. Just when you think “a machine can’t do my job,” maybe it can.
What kind of world is this we’re moving into? I understand the fear about that. But, at the same time, let’s think, first of all, about what happened in the past.
In the past, most people worked on farms, and automation took away 99 percent of those jobs. Literally 99 percent. They’re gone. People wound up with brand new jobs they could never have anticipated. And in pursuing those jobs we might even argue that we became more human. Because we diversified. Because we found a niche for ourselves that was unique to us. Automation is going to make it possible for human beings to do work that is more fulfilling.
How is that? Well, first let’s think about the kinds of jobs that automation and robots do that we couldn’t do even if we tried. Making computer chips, there’s no one in this room who could do that. We don’t have the precision and the control to do that. We can’t inspect every square millimeter of a CAT scan to look for cancer cells. These are all points Kevin Kelly is trying to make to us. We can’t inflate molten glass into the shape of a bottle.
So, there are many tasks that are done by robots, through automation that are tasks we physically could not do at all, and would not get done otherwise.
Automation Creates Luxuries We Didn’t Know Were PossibleBut also automation creates jobs we didn’t even know we wanted done. Kelly gives this example:
Before we invented automobiles, air-conditioning, flat-screen video displays, and animated cartoons, no one living in ancient Rome wished they could watch pictures move while riding to Athens in climate-controlled comfort. ... When robots and automation do our most basic work, making it relatively easy for us to be fed, clothed, and sheltered, then we are free to ask, “What are humans for?”
Kelly continues:
Industrialization did more than just extend the average human lifespan. It led a greater percentage of the population to decide that humans were meant to be ballerinas, full-time musicians, mathematicians, athletes, fashion designers, yoga masters, fan-fiction authors, and folks with one-of-a kind titles on their business cards.
The same is true of automation today. We will look back and be ashamed that human beings ever had to do some of the jobs they do today.
Turning Instead to Art, Science, and MoreNow here’s something controversial. Kelly observes that there’s a sense in which we want jobs in which productivity is not the most important thing. When we think about productivity and efficiency, robots have that all over us. When it comes to “who can do this thing faster,” they can do it faster. So let them do jobs like that. It’s just a matter of — so to speak — robotically doing the same thing over and over again as fast as possible. We can’t compete there. Why bother?
Where can we compete? Well, we can compete in all the areas that are gloriously inefficient. Science is gloriously inefficient because of all the failures that are involved along the way. The same is true with innovation. The same is true of any kind of art. It is grotesquely inefficient from the point of view of the running of a pin factory. Being creative is inefficient because you go down a lot of dead ends. Healthcare and nursing: these things revolve around relationships and human experiences. They are not about efficiency.
So, let efficiency go to the robots. We’ll take the things that aren’t so focused on efficiency and productivity, where we excel, and we’ll focus on relationships, creativity, human contact, things that make us human. We focus on those things.
Automation Really Does Make Us RicherNow, with extraordinary efficiency comes fantastic abundance. And with fantastic abundance comes greater purchasing power, because of the pushing down of prices through competition. So even if we earn less in nominal terms, our paychecks will stretch much further. That’s how people became wealthy during and after the Industrial Revolution. It was that we could suddenly produce so many more goods that competitive pressures put downward pressure on prices. That will continue to be the case. So, even if I have a job that pays me relatively little — in terms of how many of the incredibly abundant goods I’ll be able to acquire — it will be a salary the likes of which I can hardly imagine.
Now, I can anticipate an objection. This is an objection I’ll hear from leftists and also from some traditionalist conservatives. They’ll sniff that consumption and greater material abundance don’t improve us spiritually; they are actually impoverishing for us.
Well, for one thing, there’s actually much more materialism under socialism. When you’re barely scraping enough together to survive, you are obsessed with material things. But, second, let’s consider what we have been allowed to do by these forces. First, by industrialization alone. I’ve shared this before, but on my show I had Deirdre McCloskey once and she pointed out that in Burgundy, as recently as the 1840s, the men who worked the vineyards — after the crop was in, in the fall — they would go to bed and they would sleep huddled together, and they basically hibernated like that for months because they couldn’t afford the heat otherwise, or the food they would need to eat if they were expending energy by walking around. Now that is unhuman. And they don’t have to live that way anymore because they have these “terrible material things that are impoverishing them spiritually.”
The world average in terms of daily income has gone from $3 a day a couple hundred years ago to $33 a day. And, in the advanced countries, to $100 a day.Yes, true, people can fritter that away on frivolous things, but there will always be frivolous people.
Meanwhile, we have the leisure to do things like participate in an American Kennel Club show, or go to an antiques show, or a square-dancing convention, or be a bird watcher, or host a book club in your home. These are things that would have been unthinkable to anyone just a few hundred years ago.
The material liberation has liberated our spirits and has allowed us to live more fulfilling lives than before. So, I don’t want to hear the “money can’t give you happiness” thing. If this doesn’t make you happy — that people are free to do these things and pursue things they love — then there ain’t no satisfying you.
THE AUSTRIAN: How did you first become acquainted with Austrian economics and the Mises Institute?
ROBERT LUDDY: I was first introduced to Austrian economics by Dr. Bill Peterson, a student of Ludwig von Mises. We met when he was the Lundy Chair of the Philosophy of Business at Campbell University. Dr. Bill and I became lifelong friends and I was honored to learn under his mentorship until his death in 2012. Over the years, we attended Mises University with my two children as well as many Mises conferences.
MI: How did your “Austrian” education with writers like Peterson and Mises differ from your formal education in college?
RL: I studied Keynesian economics in college and it was worthless. As a business owner, Austrian economics makes perfect sense to me because it’s free market.
MI: Has there been anything specific to Austrian economics that you think has been more useful than other schools of thought in economics?
RL: Austrian economists are truthful and provide real solutions that can be easily understood by most people. Austrians have a perfect understanding of how a free market works and why the competition of the free market produces excellent companies. They understand that competition breeds excellence and the absence of competition produces the inefficiencies of government and large bureaucracies (e.g., public education).MI: You have said that understanding certain economic concepts like opportunity cost has been important in your decision-making as an entrepreneur. How has this helped you?
RL: Yes, we use a wide range of concepts including comparative advantage, opportunity cost, no free lunch, profits are a reward for efficiency, transaction costs, Say’s Law, and creative destruction, to name a few. I always encourage new entrepreneurs to learn fundamental Austrian principles if they wish to succeed.
You mentioned opportunity cost — this helps us determine how we deploy our time and our resources. CaptiveAire’s return on investment capital is the highest in the HVAC industry due to our product design, manufacturing process, material utilization, and efficiency. For example, in 1983, we bought a Darley hydraulic press break for our factory. The machine was revolutionary and reduced die changes, maximizing efficiency. I was very happy with it but it still required 2 die changes, which wasted time. After purchasing, I went to the manufacturer and requested a machine that didn’t need any tooling changes. A year later I got it, years ahead of the industry and resulting in major efficiency savings.
MI: Having worked in your field for more than one business cycle, how has the boom-bust cycle impacted your business and your employees, and how has your knowledge of Austrian economics helped you gain insight into the process?
RL: The boom-bust cycle is challenging for manufacturers. In our early years, the 1981 recession was very difficult. Same with 2008. In 40 years of business, 2008 was the only year we ever downsized — we cut operating G&A by 20%. To combat changing conditions, we have built our system to be very resilient, which is enormously helpful. For example, a percentage of every employee’s salary includes a monthly bonus that is based on profits and individual performance. Bonuses aren’t guaranteed, so if we don’t make a profit, we don’t pay bonuses. Another example is that our manufacturing plants can reduce production time from 5 days to 4 days if needed. This moves labor to a more valuable time. (E.g., all plants take a week off at Christmas during low production time. This is mandatory PDO, meaning that we have more man hours available for production during high demand time in other parts of the year.)
We have been able to grow sales in virtually every lean year except for 2008. We make sure that we are financially prepared to weather the worst recessions by having no debt, maintaining cash reserves, and not overextending the business even in good times. We also make sure that we test theories and look at things objectively and logically before putting them into practice. You have to be well-grounded in truth and have a good logical and analytical process to make good decisions.
Robert Luddy is the founder and owner of CaptiveAire, a manufacturer of kitchen ventilation systems.
Nathan Bond, 30, is an entrepreneur and the cofounder of Rifle Paper Co., based in Winter Park, Florida. Founded in 2009, the company has since expanded worldwide. We recently spoke with Bond about his support for the Mises Institute and how Austrian economics has impacted the way he does business.
THE AUSTRIAN: How did you first discover the Mises Institute?
NATHAN BOND: I believe it was sometime around 2008 following the housing bubble. I was in my early 20s at the time and trying to make sense of the situation, and the Mises Institute as well as fellow travelers in Austrian economic circles seemed to be the only ones who had any truly developed (or at least convincing) work on why booms and busts even happen. From there, I was immediately taken in by how engaging the material was and refreshed to discover an economic methodology that puts the emphasis on human behavior and the choices of individuals rather than a bunch of aggregates.
TA: Why did you decide that the Mises Institute was something you wanted to support?
NB: Primarily because I was dismayed that the Austrian school generally isn’t even presented as an alternative to the Keynesian or Chicago schools in your typical econ course (let alone the media). I am amazed at how many econ majors I run into that haven’t even heard of Austrian business cycle theory for instance. Whether you agree with the Austrian school or not, part of the role of education, in my opinion, is to at least present the different viewpoints and the Mises Institute plays an important role not only keeping the Austrian tradition alive but continuing to advance the discipline as an alternative to the mainstream view.
TA: As you know, the field of business is something very different from the field of economics. Can business owners learn something from economics that they can’t learn from studying business?
NB: I believe so, yes. I would say, one of the things that having a basic knowledge of economics has helped me with as an entrepreneur is to assist in understanding what my role truly is in the overall context of the global economy. This helps clarify decisions and gives me confidence to act with conviction in the best interest of my customers, employees, and company. I talk to a lot of entrepreneurs that feel conflicted about basic business decisions that I honestly think are just due to misconceptions about trade, development, and what role business plays in society. For instance, I think the concept of “social entrepreneurship,” which is very popular with my peers, is a great example. The implication, to some extent, is that “regular” business is not “social” or does not add value to society. This framework can lead to questionable decision making on the part of the small business startup who feels an unreasonable expectation from the outset. I do want to clarify that I have no problem with the concept of “social entrepreneurship.” My only concern would be as far as it implies that “traditional businesses” aren’t providing a valuable social function.
TA: Is there something about Austrian economics that is of particular value?
NB: Having an interest in the Austrian school certainly encourages one to be more cautious when making long-term capital decisions. This could work against the entrepreneur or investor as well, however, so I’m hesitant to say this is necessarily a good thing.
I will say, one truly beneficial aspect of Austrian insight that comes to mind is that it greatly encourages respect for the employee/employer relationship. The Austrian school is unique in how it humanizes economic relationships and helps one understand that an employee is an entrepreneur who is selling their goods (in this case their labor) to an employer. Main-stream economics almost belittles the employee’s role in the relationship, but the Austrian school views it more intentionally as a strategic partnership. Having this in mind has helped me understand the motivations of the people around me and given me a deeper respect for all the parties at play.
TA: How has the business cycle affected your experience as an entrepreneur?
NB: We actually started Rifle in 2009 so it was just after the housing bubble blew up. It was an interesting time for our industry but we were largely unaware at the time of what had just happened. Trade show attendance was markedly down from the previous years and a lot of companies had decided to either call it quits or write off a massive amount of receivables due to the number of their customers (largely retailers) declaring bankruptcy or just disappearing. We were fortunate to be starting in that climate, as it would have been difficult to have the rug pulled out from under us right after gaining some momentum. It also put us in the mindset to remain careful in our growth strategy to be able to withstand a sudden downturn when it inevitably occurs again. This hasn’t been put to the test as of yet, however, so I can’t say how successful that strategy has been.
TA: Has Austrian economics helped you better under-stand how the government’s response (i.e., stimulus, taxation, regulation) to economic busts has impacted you and your business?
NB: Absolutely, and perhaps in a counterintuitive fashion. I think a lot of people would assume someone like myself would use this as an opportunity to complain about taxes, but the reality is, while taxes definitely hinder the ability for a company like ours to invest back into our business and our people, much of the system actually benefits us and hurts those lower on the economic ladder. There is no doubt in my mind that QE, for instance, has propped up the economy and artificially benefited us, at least temporarily. Keynesians might see this as a good thing, but Ludwig von Mises’s great master-builder analogy reminds us that the act of propping up just brings more pain later.
At this year's AERC, Dr. Michel Accad, who practices cardiology and internal medicine in San Francisco, presented a fascinating paper fusing Misesian insights with medicine. Dr. Accad highlights how viewing "the body as a machine" has played a major role in the rise of medical paternalism and one-size-fits all treatment. Dr. Accad instead proposes a praxeological framework for medicine, with health being defined "as the state that is present when one's physical and mental conditions allow the pursuit of one's chosen ends." Dr. Accad's talk is a brilliant application of Austrian theory to real world practice.
Hunter Hastings, one of the leading business and marketing consultants, presented a visionary paper at this year’s AERC on “Individualism in the Age of the Smart Machine”. Weaving Austrian insights together with firsthand knowledge of technological innovation, Hunter outlines how the technology of the “cognitive assistant” can help empower entrepreneurship and usher in a new age of individualism.
The Ludwig von Mises Memorial Lecture sponsored by James Walker. Recorded at the 2016 Austrian Economics Research Conference. Includes an introduction by Joe Salerno.
Ever since the first computer game was introduced in 1962, video games have had an ever-expanding role and impact on society. In 2004, video games started earning more than Hollywood’s domestic box offices. With this expansion of the industry new kinds of games have started to emerge.
Recently, massively multiplayer online games or MMOs have seen increased popularity. In many of these MMOs, players are allowed to define their own goals and play in any way they desire. In addition, games such as EVE Online allow players to produce goods which can then be traded in the game world for the game world’s currency and goods. This means that the game takes place in and around a real and functioning virtual economy.
With the increasing popularity of virtual economies, however, scholars and academics have argued that the economies of virtual worlds are not as separate from the real world as they may appear at first glance. The argument goes that virtual currencies can be seen as just a continuation of money in the real world. This interpretation of virtual currencies can be seen when real world currencies are exchanged for virtual world currencies through sites such as Ebay. Increasingly, there has been a call for governments to regulate and implement policies into these virtual economies.
According to Clare Chambers in her article “How Virtual Are Virtual Economies?”:
the legal situation is vastly ambiguous and at best unclear. There is a lack of clear governance, jurisdiction and rule of law. Within this lack of governance and control there is a lack of real world regulation such as price control, taxable assets and income control which would have a benefit for the real world and causes disadvantages to the virtual world.
The argument used for implementing regulatory measures states that if virtual world currencies are a continuation of real world currencies, they must be subjected to real world laws and regulations. It has been stated by the same scholars who call for government regulation that the way in which regulation should be imposed is unclear; however, the notion that government oversight should be implemented in some way should be questioned before it becomes more widely accepted as the norm. Proponents of implementing real world regulations will point to scandals and crises in the virtual world to justify the need for regulation in virtual worlds, but this ignores some basic arguments against regulating.
Aside from the unsupportable claim that price controls, income controls, and taxes would help an economy, why should we trust real world governments and regulations to protect us from virtual world scandals and crises? Real world scandals and crises not only occur just as they do in the virtual world, often times they are caused, aided, and prolonged by the governments whose task it was to stop them. Another point that should be brought up is the existence of choice in a virtual world as opposed to the real world. For instance,
participation in these in-game economies is ultimately a choice, more akin to playing the stock market than to buying groceries. While players exchange their time or money for in-game goods and services, they can just as easily invest their time and money in activities of other sorts, effectively going “off the grid” in a way rarely possible in real life. Unlike participation in the economy of the real world, the choice to participate in a virtual world is entirely voluntary.
Unlike real world economies in which people are unable to totally opt-out, virtual economies are entirely optional. People are free to participate in virtual economies to any extent they desire. This allows game developers to create rules that support the design of the game. In certain games such as EVE Online, part of the appeal is the intentional lack of laws in the world which allows individuals to become pirates, bounty hunters, miners, and more. In Second Life, developers have granted intellectual property rights to players who make items for the game.
Choice in a virtual world presents some very interesting opportunities. Because developers create their own governments and regulations, analysis of which virtual governments’ people choose to live under would be an interesting venture. They can also be used to demonstrate economic laws. For example, the game Diablo 3 can help us understand the causes of hyperinflation. Unfortunately, many of these possibilities for analyzing human action may be limited or eliminated depending on how and whether government regulation is implemented.
Aside from virtual economies being completely optional, another difficulty that arises when attempting to regulate virtual economies is exactly who should be allowed to regulate these economies? Up until now the regulating agencies within virtual economies have been the developers of the games. Unlike the real world which has physical borders that government jurisdiction may be limited to, virtual worlds contain players from many parts of the real world. It’s an international and global marketplace. In addition, why should we assume that a third-party regulator would have better outcomes than the developers of the game itself?
As virtual economies grow larger and their popularity increases, the issue of regulating virtual worlds continues to be a topic of discussion among scholars, while providing a unique opportunity to analyze human action in a unique and interesting way.
Now entrepreneurship classes are all the rage. While in real life government strangles businesses large and small everyday, the academic community has finally woken up to what creates wealth—entrepreneurial activity. This is a positive sign. And again it is an advancement for Austrian economics, as it has been the Austrian school that has focused on the role of the entrepreneur in the market process, while other schools of thought haven’t recognized the role of entrepreneurs at all.
Foss and Klein recognize entrepreneurship as judgmental decision making under uncertainty. They show how judgement is the driving force of the market economy and that to understand the performance of a firm, its managers, and organization, the acumen of entrepreneurs and managers must be analyzed and dissected.
[Greg Morin is the CEO and owner of Seachem Laboratories Inc. Greg is a chemist, entrepreneur, writer/blogger on a host of libertarian topics, and a Mises Institute Society Member.]
THE AUSTRIAN: How did you first discover the Mises Institute?
GREG MORIN: Quite by chance, actually. Back when the bubble was collapsing in the fall of 2008 I was on an adult recreational league soccer team and one of the other team members was Erich Mattei — a former Mises U grad and student of Walter Block’s. There was an email exchange between some of us on the team about all the silly things they were doing to stem the market collapse and after the jokes died down Erich suggested I check out the Mises Institute if I wanted to learn more about what was actually going on. So I did. And I ended up buying The Mystery of Banking by Murray Rothbard, and that was that. I was drawn in by the clarity of his prose and the undeniable logic of the ideas and soon ordered book after book.
TA: Why did you decide that the Mises Institute was something you wanted to support?
GM: I decided to support the Mises Institute after attending some of their events (Mises Circle events and the Austrian Economics Research Conference) and it became clear that everyone involved or associated with the Institute were true scholars and professionals. I knew my money would not be wasted. I also quickly came to appreciate the importance of what the Institute was doing — not merely acting as a think tank or clearing house of information but rather as a catalyst to ensure these ideas are passed on specifically to the next generation. Although “the children are our future” is certainly a clichéd insight it is nevertheless true. The more of the youth who understand the foundations of liberty today the greater the likelihood we will have a freer future. That mission, perhaps more than any other, is why I support the Mises Institute.
TA: As a business owner, what do you think, for you, are the most valuable insights the Austrian school has to offer?
GM: To be honest, I’m not sure. I say that not to discount the Austrian school but rather because of the fact that I’ve never taken any formal economics classes. I was not exposed to the subject at all until I encountered the Institute, so in learning economics the “proper” way from the beginning, I’m not sure what would be different had I learned it the other way. One tangible effect it has had in my business is how it has shaped our market investment decisions relative to my awareness of the market distortions caused by state intervention. I definitely don’t invest in any sort of government bond!
I’ve also mostly divested out of the market because it is apparent it is more akin to a government-run casino than a real market. Manipulation of the market fosters volatility and that makes it very difficult to make rational investments. I suppose I can say though that the purchase of gold and silver as an inflation hedge are definitely an outgrowth of my knowledge of AE. I’ve also come to realize that as entrepreneurs, none of us has any idea what we are doing! We make the best guess with the information we have and hope for the best and if we are wise (and lucky) we’ll adjust quickly if we can.
Ultimately it is the market that decides if we know what we are doing or not. I guess to sum it all up, Austrian insights distill the complexity of what we business owners do down to a very simple mantra: satisfy the desires of others. That’s it, that’s all any of us are trying to do. As an aside I’d say unexpectedly it’s given me better insights into how an employee relates to an employer. An employee is like any other vendor. They are a business unto themselves. If they wish to “win” in the employment market they must do what any vendor would, offer a product so good your customers wouldn’t dream of going anywhere else.
TA: Having worked in your field for more than one business cycle, how has the boom-bust cycle impacted your business and your employees, and how has your knowledge of Austrian economics helped you gain insight into the process?
GM: I’ve always run my business very conservatively even before I was aware of Austrian economics, so perhaps I was predisposed to its teachings as they made a lot of sense to someone that rejects the notion of massive amounts of leverage in order to foster growth. Prior to exposure to the Austrian school things like the Accumulated Earnings Tax were a baffling mystery to me. Now the motivation for this tax is all too transparent: the more times cash churns back and forth through the economy the more opportunities the state has to take its cut. Likewise, compelling companies to run on a shoe-string of cash means they have to borrow simply to maintain operations — and more borrowing means more inflation (due to fractional reserve lending) which means more tax revenue. I recognize how this mode of operation leaves a business financially fragile and at the mercy of the banks. I refuse to play that game. We maintain “large” (what I consider reasonable) cash balances and the stability we have gained from owning our cash (vs borrowing it) has allowed us to weather these storms. During the downturn in 2000 I learned the hard way the truth of the aphorism that a banker will give you an umbrella when it is sunny and take it away when it rains. Never again.
TA: Has Austrian economics helped you better understand how the government’s response (i.e., stimulus, taxation, regulation) to economic busts has impacted you and your business?
GM: I already had an intuitive sense on these things that they were bad for business (well everyone knows taxes are bad!). But yes, Austrian economics did help bring some focus in my mind as to just how disruptive state interference can be to running a business. The pain of these things has always been there, AE simply helped bring it into sharper focus. Unfortunately there’s not much one can do with that knowledge in either case. The state will do what the state will do and as business owners we are powerless to stop it. We have large capital investments and are relatively immobile. We are also “plugged into” the banking system. We cannot simply choose to go our own way or thumb our nose at the state. We are under constant threat of financial retaliation if we do not comply. Even if relocation were a viable option (it’s not for us because of the enormous capital investment needed to make that transition) there really isn’t any place on this planet significantly better. So as I mentioned with the second question, all we can do is hope that the next generation is influenced by the Mises Institute and that the investment we make now in supporting the Institute will pay out dividends of liberty in the future.
We are now living in a post-ZIRP world. On Wednesday, Janet Yellen announced that the Federal Reserve will increase the target Federal Funds rate from 0.00-0.25 percent up to 0.25-0.5 percent. While Wall Street approved of the move, Ryan McMaken notes, “The fact that this is being labeled such a large change underscores just how fragile the current economic ‘recovery’ is.” Indeed, the new Fed target would itself have been unprecedentedly low if it had occurred prior to 2008. Bottom line, the Fed still hasn’t learned its lesson on interest rates.
What does this mean going forward? Well, while Austrians have long been calling for higher interest rates, the Austrian business cycle theory makes clear that any transition to what was once considered the monetary status quo is likely to cause economic pain. As Robert Murphy illustrates in his response to advocates of Market Monetarism:
[A]fter a credit-fueled boom, the precise timing of the crash will probably occur when the central bank “tightens. … Ultimately, the only way to prevent painful busts is to
Mises Weekends this week features a lecture from Dr. Murphy on what makes the Austrian approach to economics stand apart: its focus on human action.
It's this foundation in methodological individualism that has made Austrian economics an indispensable part of a consistent defense of liberty. If you’re interested in building upon your understanding of praxeology and the economic insights of Menger and Mises, this is an episode you won’t want to miss.
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Why Doctors Are Entrepreneurs by Dr. Michel AccadThe Dreary Utopia of the Socialists by David GordonLudwig von Mises Is Winning by Tho BishopDid "Tight" Fed Policy Cause the Financial Crisis? by Robert MurphyTechnology and Government Shouldn't Mix by Benjamin M. WiegoldNo, There’s No Economic Case for the Minimum Wage by Per BylundAre Entrepreneurs Naturally Talented, or Just Hard Workers? by Matt McCaffreyThe Diabolical Side of ZIRP by Mark ThorntonMises Institute Ranked 9th Most Influential US Think TankMises Brasil Parabéns Pelo Trabalho Bem Feito! by Joseph SalernoTrue Money Supply Growth Rises Slightly to Eight Percent in November by Ryan McMakenLudwig von Mises is the Most Searched Economist in Brazil by Tho BishopThe Fed Still Hasn't Learned Its Lesson on Interest Rates by Troy VincentStudents Forget About Keynes In The Summer by Jonathan NewmanWith Few Gun Laws, New Hampshire Is Safer Than Canada by Ryan McMakenThe Stock Market Reacts to the Fed’s Interest Rate Hike by Randall G. HolcombeFed (Slightly) Raises Target Fed Funds Rate After Seven Years by Ryan McMakenSEC Approves Patrick Byrne’s Plan to Issue Stock Via Blockchain by Tho BishopThe Absurdity of Negative Interest Rates by Paul-Martin FossCato on the Basic Income by David GordonMartin Shkreli To Learn a Hard Lesson? by Ryan McMakenThe Bill of Rights: The Only Good Part of the Constitution by Ryan McMakenThe Fed Can Do Real Damage Without Even Trying by Jonathan NewmanSo Much for "Rules-Based" Policy at the IMF by Paul-Martin Foss
In this article, I wish to introduce the reader to the theory of entrepreneurship advanced by Frank Knight (1885–1972), and show that the common, everyday work of the physician could be considered a form of entrepreneurial activity in the Knightian sense.
Knight was an influential American economist. He is best known for his book Risk, Uncertainty, and Profit in which he proposed to distinguish risk and uncertainty as follows: Risk pertains to situations where outcomes occur with a frequency that is quantifiable according to probability distributions.
Risk may be mathematical and a priori knowable, meaning that the probability function that governs the outcome is known with certainty, as in the case of a coin toss (assuming the coin to be well balanced).
Risk may also be statistical, where the outcome can be estimated according to an empirically discoverable probability function. This is the case in situations where we know the set of possible outcomes and can make observations under controlled conditions to determine the probability of occurrence of each outcome.
Uncertainty, on the other hand, pertains to situations where the probability of an outcome cannot be quantified in any meaningful way. The situation is such that we don’t even know the set of all possible outcomes, let alone what numerical probabilities to assign to those outcomes. Knight believed that most situations involving human beings fall under the category of uncertainty.
Knight’s great insight was to recognize that the economic role of the entrepreneur is to shoulder uncertainty. He does so not by calculating risk, but by exercising judgment. And, as Professor Peter Klein has noted, the entrepreneurial judgment is not “contractable,” because the entrepreneur cannot articulate his belief about uncertainty in a way that can be communicated and become subject to market exchange. Instead, the economic entrepreneur must directly invest in material resources and modify them for productive use.
It is in this direct involvement with resources that the entrepreneur shoulders the uncertainty and communicates his or her judgment. Of course, some risk calculation may take place and be taken into account if the entrepreneur has some knowledge of the probability of certain outcomes, but the entrepreneurial action is ultimately in the entrepreneur’s direct investment in the resources at hand. A correct exercise of judgment returns an entrepreneurial profit, while an error in judgment incurs a loss.
Medical Uncertainty and the PhysicianAre medical situations good examples of Knightian uncertainty? On the one hand, we may all agree that each human being is unique, unpredictable, and unrepeatable. On the other hand, much of medical practice is now guided by predictive analytics, by the examination of risk factors, and by the calculation of probability for certain outcomes, determined through ever more sophisticated epidemiological studies and clinical trials. And the use of predictive analytics is now sanctioned by “pay-for-performance” schemes to entice doctors to treat according to statistically-based algorithms.
Has modern outcomes research conquered Knightian uncertainty and provided clinicians with reliable statistical models with which medical treatment can be determined?
I don’t believe it has. How could it?
George is in my office and I ponder whether he should take a statin drug to manage his cholesterol and future risk of a heart attack. The studies that I should rely upon to make my decision have not enrolled George, of course. At best, they have enrolled someone “like” George: same age, gender, baseline blood cholesterol level, blood pressure, and perhaps a few other traits.
In other words, the claim of “likeness” that should convince me to apply statistical probabilities to George requires me to turn George into a stick figure of risk factors, a “profile,” an abstraction that overlooks everything else about him that makes him George and not someone else.
Perhaps George will respond well to the drug, or perhaps he will not. As far as his personal outcome is concerned, the statistics are meaningless.
And this is not news to statisticians. Richard von Mises (Ludwig von Mises’s younger brother), a renowned mid-twentieth century Harvard statistician, put it in no uncertain terms:
We can say nothing about the probability of death of an individual even if we know his condition of life and health in detail. The phrase “probability of death,” when it refers to a single person, has no meaning at all for us.
Is there no meaning and value, then, in the clinical trials and large epidemiological studies? Of course, there is. Those studies do provide useful information about the frequency at which certain outcomes occur — good or bad. Those outcomes are the ones that the study designers have chosen to record and tally.
But when applied to the patient, such epidemiological information is limited and cannot determine the course of action to take. There is much inherent residual uncertainty.
Are doctors then paralyzed or impotent in the face of the unknowable future? Of course not, and that’s where Knight’s insights may be so valuable. For by analogy with the economic entrepreneur, we may conceive of the physician as a health entrepreneur, shouldering on behalf of the patient the inherent uncertainty associated with an illness.
Like the economic entrepreneur, doctors take into account not only quantifiable knowledge, but also locally obtained, tacit knowledge. This is a concept that we associate with F.A. Hayek, but a similar idea has been validated recently by psychologist Gary Klein in his studies on how experts — including doctors — make decisions. The totality of available knowledge is used, explicit and implicit. And we could push the analogy of the physician as health entrepreneur further if we recognize that, in a praxeological sense, the patient gives up ownership, or cedes control, of his or her body to the doctor.
Like the economic entrepreneur, the physician is now directly invested in the outcome for that body. It is through that investment that the physician communicates his or her clinical judgment, a judgment that, as Knight would think, cannot be properly articulated.
Entrepreneurship and the Healthcare SystemIs this understanding of the entrepreneurial nature of medical care an academic exercise? Not if we consider the extent to which the healthcare systems runs counter to it.
For doctors are precisely asked to communicate, for the benefit of third parties, and through endless documentation and arcane coding, an exercise in judgment which is inherently unsuited for linguistic or numerical articulation.
And this demand to articulate the inarticulable is not only a distraction and a drain on the doctor’s time, but also a misleading influence on her thinking, forcing her to translate the uncertainty of medicine into a false representation that soon becomes reality: physicians, patients, and payers all get lured into mistaking the illness experience for its coded description.
We should also be mindful that third-party payers do not bear ultimate responsibility for divorcing medical care from its reality. In fact, third-party payment systems arose precisely because the medical community, in a certain sense, has made the claim that the medical enterprise could be articulated. Third-party payment systems would not have emerged if the medical community did not agree that medical care is “contractable” (a concept that finds its ultimate legal foundation in licensing laws).
A Need for More ResearchThe idea that medical care has an entrepreneurial nature may seem novel, but that is mostly because our understanding of the entrepreneur is still embryonic. Economic science has neglected Knight’s theory of the entrepreneur for decades, focusing instead on the development of predictive models and econometric tools. Likewise, medical science has strongly favored predictive analysis, and it is no surprise, though still uncanny, that economic systems and healthcare systems share similar dysfunctions.
It is only in recent years that work by Peter Klein and others have rekindled interest in a proper understanding of the entrepreneur and of the entrepreneurial role of the business firm. I hope similar work can also shed light on a proper understanding of the doctor, the doctor-patient relationship, and the entrepreneurial work involved in the restoration of health.
That would really be a disruptive innovation.
We live in a time like never before in human history. Our scientific knowledge and technological capabilities are rapidly advancing, affecting nearly every aspect of human life. Examples are rife, from smart phones and robotics, to thought-controlled prosthetics, wireless power, even force fields. Countless others that sounded like science fiction a few years ago don’t even deserve mention today as they have become so commonplace.
In the nineteenth century, the Industrial Revolution marked the beginning of the process we see at work, when (mostly) free market capitalism unshackled society’s productive imagination. The key was that it allowed individuals to reap the fruits of their labor, providing incentives for workers and entrepreneurs by allowing them to accumulate capital. Capital accumulation is the prerequisite for a prosperous society, without it there can be no sustainable investment or economic growth.
Privately-Owned Technology Is Not a ProblemYet many are beginning to worry that our technology could soon turn on us and actually bring about our demise. The renowned physicist Stephen Hawking speculated earlier this year that robots will eventually take over the world, but has since revised his stance, now suggesting that capitalist-technology is a greater threat and will bring about unsustainable inequality and poverty as automated production techniques displace human labor. Such fears display an ignorance of history and economic science.
First, economists have for centuries pinpointed labor and land (i.e., natural resources) as permanent factors of production, with capital goods (in this case machines) being ultimately produced out of them. As Murray Rothbard explains in chapter 9 of Man, Economy, and State, there has always been a scarcity of labor, meaning that machines don’t make labor obsolete, but are rather labor-saving devices that make goods drastically cheaper for consumers, enable more leisure time for everyone, and simply redirect labor to other ends. Human labor is always required in some capacity for all production processes — such as the maintenance of machines — thus it’s inconceivable that every single industry could possibly be automated, not to mention the new industries that emerge as labor is freed up from its previous areas of employment. (For a complete demolition of this argument, see here.)
Second, the chilling irony of modern technology isn’t the menace of an AI takeover, where our creations turn against us in an apocalyptic scenario (although it’s impossible to completely rule this out). More to the point is that for all the ways technology is drastically improving the quality of life for people everywhere, the ability to inflict death, harm, and destruction is also unprecedented; and these technologies are being harnessed virtually entirely by states.
State Ownership of Technology Is a ProblemCoercive governments, for as long as they’ve existed, have been abusive of individual rights and the integrity of human beings everywhere, from the torture devices of Medieval Europe, to the cannons of the Civil War. However, the State in its proclivity to inflict violence upon humanity has always been restrained by the technology available to it, whether it was the axe, the sword, or the club in ancient times.
Yet as productive society has advanced in its ability to satisfy human needs and wants, the regimes of the day have used new technologies to expand their weaponry arsenals. The twentieth century will be remembered twofold: for its incredible increase in wealth and prosperity on the one hand, but also for its terrible wars. Indeed, more people were killed by state-governments in the twentieth century than in the previous nineteen combined.
Today in the twenty-first century, the world is embroiled in warfare and disaster wrought by the State, while the glories of the market economy surround us everywhere we turn. Market-societies build us up, while states tear us down.
Despite the sadistic few among us, there’s no question that the overwhelming majority of people prefer peace and prosperity and use technology as a means toward these ideals. On the other hand, it bears repeating that the primary culprit in turning technology toward nefarious purposes is the State.
So perhaps the most profound question of our time is, going forward, how we will use our increasingly powerful technology: as a progressive force to the benefit of humanity by relieving our ailments, extending our life spans, and increasing our worldly comforts beyond our wildest dreams — or as a retrogressive force that acts to our detriment by inflicting pain and suffering and death upon people everywhere?
From everyone at the Mises Institute, we’d like to wish you a Happy Thanksgiving weekend!
Even our readers outside of the US can agree, the Thanksgiving lessons of free enterprise and the beauty of abundance are of universal importance (as is knowing how to best communicate with family during the holidays!) This weekend is also a good time for us to reflect on all the many things we have to be thankful for: from the incredible supporters we’ve met during this year’s sold-out Mises Circles, to our phenomenal group of Mises Fellows, Rothbard Graduate Seminar attendants, and 2015 Mises University class, to the continued spread of Misesian ideas around the world — the Austrian school is thriving today and it is because of people like you.
Thank you for your time, your support, and your passion for the cause of Austrian economics, freedom, and peace.
Mises Weekends this week focuses on libertarian strategy and how we can continue to make gains in the name of liberty. During our Phoenix Mises Circle, Jeff Deist gave his thoughts on the question, “What Must Be Done?”
And in case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular articles at Mises Wire:
Should People be Allowed to Work for $1 an Hour? by Jonathan Newman
The Good Ol' Days: When Tax Rates Were 90 Percent by Andrew Syrios
With Mass Shootings, the State Makes Us Less Safe by Justin Murray
Thanksgiving Is a Celebration of Free Enterprise by Judy Thommesen
Economics Is About Scarcity, Property, and Relationships by Michael J. McKay
Peronists Lose in Argentina after 12 Years of Populist Rule by Ryan McMaken
Swiss Banks Expand Use of Negative Interest Rates by Ryan McMaken
Letter to the Philadelphia Inquirer by Patrick Barron
OMG: Do a Million Americans Really Have no Toilet? by Ryan McMaken
Austrian Student Scholars Conference by Jeffrey Herbener
Rothbard on North by David Gordon
Eliminating Cash Makes it Easier to Silence Critics by Ryan McMaken
Ralph Nader Is Right: The Fed's Stimulus Hurts Ordinary People by Ryan McMaken
What is the least you would be willing to be paid to verify business addresses or phone numbers for a database? If you had a large online inventory and wanted simple word tags to describe each one of your products for search engine optimization, how much would you be willing to pay somebody to trudge through your product images and generate tags?
Tasks like these still require human labor, but a voluntary wage for such tasks is usually very low, especially relative to legislated minimum wages.
Despite exponential growth in computing power and capabilities over the past few decades, computers still struggle with simple tasks like identifying objects in a picture, making qualitative judgments, and confirming the accuracy of language translations. Amazon embraced this fact and connected those that need these Human Intelligence Tasks (HITs) performed with the humans willing to do them.
The service is called Amazon Mechanical Turk, after the fake chess-playing machine constructed in 1770. It was just a real, human chess master playing from inside a box. Back then, no such artificial computing capabilities existed, mechanical or otherwise. Like the “machine,” Amazon Mechanical Turk involves humans doing the work, even if the task seems suited for computers.
A company with a large catalog might want to find and eliminate duplicate listings, but the items’ pictures and descriptions might be a little different, making computers unqualified for the job. “Turkers” may also fill out surveys for marketing information, social science research, or really anything the task creator wants to ask a large number of people. Audio and video transcriptions are common, too.
Submissions are judged by having multiple people perform the same task. If their submissions are the same or very similar, the task requester can assume that they are really working on the task and not just filling in random text to complete tasks.
Below is an example of a HIT that asks people to pull information from pictures of receipts. If three people perform this HIT and two of the responses for the business address city are “Lincoln Park,” but one of the responses is “a;sldkfj,” the first two would be paid and not the third. Having more than one submission per HIT is more costly, but the task requesters get more accurate responses this way.
Today, there are more than 500,000 workers and around 200,000 HITs listed. Most tasks will earn the worker just a few cents, but some workers have been able to make a living from the service. As a member satisfactorily completes the simpler but lower-paying HITs, they are granted access to the higher-paying ones. A dedicated few make thousands of dollars a month by working full time. Others make a few extra hundred dollars a month by doing HITs after their regular job.
A recent study found that almost half of the MTurk workers performed tasks while at their primary job: “For example, a cab driver at the airport may answer survey questions while waiting for a fare. A teacher or office worker could MTurk during lunch break.”
Many enjoy doing the tasks as a form of relaxation and social engagement. Although the tasks seem incredibly boring to me, some find it an escape from boredom. Through turker-only forums, they have built a large, thriving community. They direct their fellow turkers to fun and high-paying HITs and help them steer clear of tasks posted by those who might fraudulently withhold payment for a completed task. Hayek would be impressed.
Minimum-Wage Activists Strike AgainThe most common hourly rate for working on HITs is about $1. As such, minimum wage proponents have railed against Amazon Mechanical Turk, calling it modern day slavery. They see people having fun and voluntarily exchanging pennies for simple tasks and want it abolished. Bored people should just stay bored.
What would they say is an appropriate price for asking somebody to select what color a shirt is in a picture? How much should they charge for filling out their age, sex, and favorite ice cream flavor in a survey?
The correct answer, of course, is whatever the two parties agree on. Workers can scroll through hundreds of thousands of HITs and decide for themselves which ones are worth the payment, which is listed with each HIT. If something looks too long and complicated for the advertised payment, they can simply pass on it. The workers have complete control over which tasks they perform, what hours they work, and, of course, whether they are signed up to be an Amazon Mechanical Turk worker at all!
In the early days of Amazon Mechanical Turk, Salon ran an article on it that read like an exposé of a cult or a crime ring. They found a man who does HITs for fun and made him out to be an unknowing slave to evil corporate interests:
Curtis Taylor, 50, a corporate trainer in Clarksville, Ind., who has earned more than $345 on Mturk.com, doesn’t even think of turking as work. To him, it’s a way to kill time. “I’m not in it to make money, I’m in it to goof off,” he says. Taylor travels a lot for business and finds himself sitting around in hotel rooms at night. He doesn’t like to watch TV much, and says that turking beats playing free online poker. To him, it’s “mad money,” which he blows buying gifts on Amazon, like Bill Bennett’s “America, the Last Best Hope,” for his son, a junior in high school. “If I ever stop being entertained, I’ll stop doing it,” he says. “I’ll just quit.”
Yet what’s a happy diversion for Taylor is serious business for the companies on Amazon Mechanical Turk.
It turns out that there is a market for bored people. Prices emerge to pull them out of their boredom by working on simple tasks.
There are other ways people with extra time on their hands can provide labor services for low or even no pay. Certainly minimum wage proponents wouldn’t condemn volunteering for charities like homeless shelters, soup kitchens, Habitat for Humanity, disease awareness/cure campaigns, etc. Yet, what non-arbitrary feature distinguishes this sort of work from other lines of work that might offer a wage lower than any proposed minimum wage?
Not All Value Is Expressed in DollarsIn all voluntary arrangements, both the worker and the employer agree to a mutually beneficial wage, which sometimes means $0/hour. Even if nothing tangible is trading hands, it doesn’t mean that volunteers get nothing out of their work. Their “payment” is knowing they did something nice for free. It’s not really a wage or a payment in the economic sense, though, because the employer doesn’t lose this good feeling, like they would forgo money wages for paid work. In fact, volunteering labor like this is more appropriately considered a gift, not an exchange of labor for a wage.
When individuals make a choice, they aren’t just exchanging goods for goods or services for money, but they are making choices over alternative states of the world.
A potential volunteer isn’t weighing $0 against time working for some charity, they are weighing all the consequences of helping a charity versus not helping, including the subjective feelings they have for the cause and the knowledge that they had a hand in its well-meaning goals.
Likewise, a turker only agrees to a $0.01 HIT if the task looks easy or fun enough. They weigh the prospect of doing the task and receiving one penny versus missing out on the fun and not receiving the penny. Again, “fun” is also subjective. Most of the tasks look downright boring to me.
Whether a job requires intense effort and a specialized skill or just having a human brain, market prices are the only way to match people that want to do the job with the people that want the job done. Even $0/hour is sometimes voluntarily chosen by a worker who simply wants to help a certain cause. Mandated minimum wages eliminate these kinds of peaceful and productive arrangements, leaving both parties unsatisfied and society worse off.
Featuring Bill Haynes (CMI Gold and Silver, Inc., CMI-Gold-Silver.com), Kathryn Muratore (Fresno, California), Jordan Ausman (Beyond Software, BeyondSW.com), Marc Victor (AttorneyforFreedom.com), Hunter Hastings (BHC Consulting, San Diego), Taylor Conant (Valueprax.WordPress.com), Don Printz, M.D. (Stone Mountain, Georgia), and Peter Kallman (Liberty.Menu). Includes introductions by Jeff Deist.
Recorded at the Mises Circle in Phoenix, Arizona, on 7 November 2015. Special thanks to CMI Gold and Silver, Inc., for making this event possible.
On Wednesday, the Federal Reserve once again reaffirmed its zero-interest rate policy. Amusingly, this commitment to the monetary status quo is being seen by some as “hawkish” which, as Ryan McMaken points out, “shows just how much the goal posts have been moved in recent years.” Unfortunately all the spin and promises of future rate hikes doesn’t change the fact that we are nearing the seven year anniversary of ZIRP with an economy Janet Yellen doesn’t think is strong enough to survive the reversal of the Fed’s monetary morphine. Hopefully our central bankers will one day realize their war on deflation is leaving us poorer, but in the meantime — at least we can laugh about it.
In this edition of the Mises Weekends, we have the third in our series on the current state of healthcare. Our first episode featured Charles Hugh Smith who discussed the consequences of a healthcare market taken over by government regulators and insurance lobbyists. Our second featured Dr. Michel Accad giving his perspective as a practicing doctor in a post-Obamacare world. This week, Robert Murphy discusses his new book, The Primal Prescription, which he co-wrote with Dr. Doug McGuff. Murphy not only applies his understanding of Austrian economics to highlight the problems plaguing us today, but offers advice on how to navigate through the current state of American healthcare.
In case you missed any of them, here are this week’s featured Mises Daily articles and some of our most popular posts at Mises Wire:
The Fed Can’t Raise Rates, But Must Pretend It Will by Thorsten PolleitRobert Shiller Imagines What Consumers Should Want, While Ignoring What They Do Want by G.P. ManishThe War on Cars Is a War on Workers and the Poor by Gary GallesToday's War Against Deflation Will Make Us Poorer by Frank ShostakThe World Bank Threatens Free Markets in Peru by Simon WilsonIf Sweden and Germany Became US States, They Would be Among the Poorest States by Ryan McMakenThere’s More to Money than Hyperinflation by Matt McCaffreyPew: Homicide Rates Cut in Half Over Past 20 Years (While New Gun Ownership Soared) by Ryan McMakenSpectre by Matt McCaffreySunday of the Blind, or the Failed Revolution by Carmen Elena DorobățUS Soldiers Are Paid Significantly More than Civilians with Similar Skills and Education by Ryan McMakenWith Interest Rates, "There Are Two, Opposite Causal Chains at Work" Murray RothbardFOMC: We'll Raise Rates Some Day; We're "Hawkish" Now by Ryan McMakenUnderwear Prices to Remain Near Zero by Peter KleinTextbook Definitions of Economics: An Informal Survey by Jonathan NewmanPoliticians Pander to an Anti-Fed Public by Tho BishopIn Sweden Cash Is Becoming Radioactive by Joseph SalernoFirst they came for the cash, then they came for the microwaves by David Howden
Peruvians were pleasantly surprised, if a little bewildered, by the news that on the 8th of October they were to receive an extended weekend holiday. The reason for the impromptu vacation was the arrival of the “international community” in Lima for the IMF and World Bank’s annual board of governors meeting. Peru’s president, Ollanta Humala (enjoying a brief respite from an ongoing scandal involving his wife’s embezzlement of state funds), encouraged Peruvians to take pride in the fact that the leaders of international finance would deign to choose Peru as the venue for their conference and suggested that it “demonstrates to the whole world, the excellent stewardship of the Peruvian economy and the secure climate in which investment can be made” under his auspices.
These comments are interesting because Peru is indeed an undeniable economic success story. If you want a casebook example of markets lifting people out of poverty, look no further than Peru. However, what Humala skipped over is the fact this transformation took place long before his presidency and also that its causes are rooted not so much in wise statecraft, but rather Peru’s long and venerable tradition of state incompetency which has left it up to individuals to provide for themselves.
Fifteen years ago, the economist Hernando de Soto in his provocative book The Mystery of Capital wrote at length about the byzantine workings of Peruvian bureaucracy where registering titles to property or incorporating a business involved jumping through expensive administrative hoops and waiting not months but years for the right approvals. De Soto lamented the fact that this lack of legal recognition prevented the poor collateralizing and leveraging what were in reality quite considerable assets. However, his analysis overlooked the important question of whether, in the presence of an efficient Western-style regulatory state, ordinary Peruvians would have been able to accumulate the wealth to leverage in the first place.
It still remains — as every Peruvian and occasionally horrified western visitor knows — that Peru is a place where if you want to do something no-one, especially not the government, is going to stop you.
If you want a house, you can go to the outskirts of a city as millions of other Peruvians have done, take a piece of land and build one. If you want a business just start trading, on the street. If you want a garment factory just start one, in your house. Ditto if you want to set up a restaurant or even a school. It may be the case, as de Soto pointed out, that on paper it takes twenty-six months to officially recognize a bus route, but that did not stop enterprising individuals setting their vans or converted school buses on the road, marking out the beginnings of what are now the surprisingly efficient (if crowded) bus routes that carry passengers to almost every imaginable nook of Peru’s sprawling capital, for a fraction of a dollar. The successful bus and van enterprise is a remarkable display of spontaneous order in action.
In Peru there is no need to pay a consultation fee to a gatekeeper to authorize a medical procedure: blood analyses, endoscopies, and radiograms can be purchased on the spot from an array of sole proprietor clinics. All kinds of generic drugs can be bought under the counter. If in need of some entertainment, on nearly every street you can purchase a hi-resolution pirated DVD of the latest Hollywood blockbuster.
It’s not like Peruvians have never heard of regulatory permits, taxes, professional licensing, zoning laws, patent protections and so forth; they exist in a statute book somewhere, but they are largely abstract concepts, which, for most of the time can be safely ignored. Everything is for sale and barriers to entry are virtually non-existent.
The result of this serendipitous meeting of the cavalier Latin spirit with an apathetic state apparatus is a resilient civil society where low-cost privately provided health and education are available to all and people enjoy nutritional- and life-expectancy levels that sit high on the World Bank’s own development indices.
However, this achievement is only inadequately recorded in GDP statistics and is certainly not being celebrated by Peru’s president or the dignitaries at the World Bank. Indeed, rather than recognize informal and small enterprises as the true instantiation of free market principles, and the quintessence of liberty, the Bank quite openly decries its existence.
For the World Bank, absence of regulation automatically equates to underdevelopment. For the Bank, “development” is the attainment of specified metrics in consumption and social spending, years of state education, and implementation of legal provisions like minimum wage entitlements. The problem is that realization of these development indicators rather conveniently entails a populace in wage-labor, working for regulated businesses (corporations), where they can be taxed at the source. These taxes then are used to fund an array of social programs manned by "poverty professionals" who dedicate their efforts to finding out why everyone is strangely depressed once no-one is allowed to make a living that’s not mediated by state institutions or their corporate vassals.
This unimaginative development model also does nothing to detract attention from the questionable manner in which the Bank — and more specifically its private lending arm — the International Financial Corporation (IFC), work to bring people out of poverty. Peruvians are now quite aware of just how sincere the IFC’s motto of “creating opportunity where it’s needed most” really is.
For instance, one flagship project to provide access to high-quality health care saw the IFC provide a $120 million loan for the construction of the palatial Clínica Delgado now sitting in the middle of Lima’s exclusive Miraflores district. Lima’s residents can now enjoy consultations there for around $150.
Another needy Peruvian the IFC was happy to help was Peru’s richest man, Carlos Rodriguez Pastor, whose Intercorp group received $164 million dollars to expand its financial services divisions. Not to be outdone was Grupo Romero (owned by Peru’s wealthiest banking family) which received $180 million to renovate two vegetable oil processing plants, and Grupo Gloria which received a $25 million loan to build a factory that would solidify their total monopoly on dairy processing in Peru.
The IFC has also extended its influence into Peru’s tourist industry which attracts millions each year and provides a sizeable income to small companies, local tour operators, and indigenous communities that run it. Despite this success story, the IFC evidently thinks that there are still some Peruvians who could use a helping hand, like the plucky “Peru Holding de Turismo” group and its partner the “Orient Express” hotel chain who own and manage some of Peru’s most lucrative real estate. They received a $40 million loan to refurbish a number of luxury hotels in the Cusco region, catering to precisely the kind of jet-setting international elite sitting on the board of the IFC. One can only assume that the planners at the World Bank would like Cusco to become the Latin American Davos, all part of a poverty reduction strategy to assure Peruvians bright futures in hospitality, catering, and adult entertainment.
The examples go on and on as indeed does the story which can be retold from any other country in the “developing” world. The only thing that changes are the names of the domestic elites and some of the western corporations in receipt of this lucrative form of international state patronage.
The thousands of Peruvians who turned out to protest the conference are probably right to be suspicious of the motives of the bureaucrats and directors of the international institutions whose plans (like the Trans Pacific Partnership Agreement signed at the conference) and economic models would, if realized, remove real competition, deaden entrepreneurship, and curtail their freedoms.
As the conference came to a close, the sun came out and some of the informal street vendors, who had been rounded up and pushed outside the conference area before it commenced, began making their way back. If they looked hard enough they might have recognized Christine Lagarde, Jim Yong Kim, et al., speeding away in their blacked-out government cars. One had to wonder, whether this taxpayer-funded financial elite would recognize a free-market, even if were staring them in the face.
International trade grabbed headlines this week with Monday’s announcement that twelve governments have reached agreement on the Trans-Pacific Partnership. While it should be of no surprise to see the news celebrated in the editorial pages of the Wall Street Journal or the Council of Foreign Relations blog, it is unfortunate even libertarian organizations are praising the agreement.
Of course, this is not the first time alleged defenders of lassiez-faire have endorsed intergovernmental agreements that enhance the power of the state. Ferghane Azihari and Louis Rouanet put TPP in historical context in Wednesday’s Mises Daily:
Murray Rothbard opposed NAFTA and showed that what the Orwellians were calling a “free trade” agreement was in reality a means to cartelize and increase government control over the economy. Several clues lead us to the conclusion that protectionist policies often hide behind free trade agreements, for as Rothbard said, “genuine free trade doesn’t require a treaty.”
Dr. Ed Stringham takes on the notion that government is necessary at all for markets and trade to thrive in his new book Private Governance. He joined Jeff Deist to discuss his work on the latest episode of Mises Weekends. Listen as Jeff and Ed destroy the argument that markets rely on government to protect property rights, mediate contracts, and numerous other excuses interventionists make in defense of the state.
In case you missed any of them, here are articles from this past week’s Mises Daily and Mises Wire:
The TPP and the Trade Rhetoric by Carmen Elena DorobățTPP: The Latest Assault on Free Trade by Ryan McMakenRothbard: Gun Regulation Explained by Murray RothbardIn Policy Debates, Can Economics Trump Ethics? by Matt McCaffreyThe Future Is Decentralized by Patrick ByrneNo More "Free Trade" Treaties: It's Time for Genuine Free Trade by Ferghane Azihari and Louis RouanetThe Menace of Egalitarianism by Lew RockwellFashionable Prohibition for Modern Lawmakers by Ryan McMakenIn Brazil, Free-Market Ideas Rise as the Economy Falls by Antony P. MuellerMissed last Saturday’s Mises Circle? Watch Jeff Deist, Tom DiLorenzo, Tom Woods and Lew Rockwell tackle the threat of political correctness.
The costs of centralizing information are higher than people understand. Until they have worked in actual organizations that have missions like fighting a war or making a profit, people tend to underestimate just how expensive it can be to centralize information.
If our mental picture of the world is like the pointy-haired manager in the Dilbert cartoons, we’ll tend to favor institutions where knowledge comes from the knowledge frontier, and is then moved to the central office where the managers sit and cogitate. The managers then push stupid orders back to the frontier.
And that pretty much describes the way collectivists want to organize the world. They don’t want there to be peer-to-peer consent because they think they can save a bunch of time and cost if everything can be centralized.
Hayek understood this well, especially in his 1945 article “The Use of Knowledge in Society.” This article influenced Thomas Sowell’s work in his books A Conflict of Visions and Knowledge and Decisions. And all of these works influenced me.
Thanks to the works of Hayek and Sowell, I’ve come to appreciate that whether we’re talking about business or social matters, life is all about avoiding the costs of centralizing information to some higher power that then spits orders out.
How To Build Enduring Organizations that Use Decentralized InformationI know the last thing I want to be is the Dilbert manager who sits in the corner and thinks he has all the answers. I know the smart people are on the front lines; the smart people with the ideas; the smart people who understand the marketplace and customer. So my job is building institutions that let that distributed intelligence express itself. So, in my businesses, I have built various mechanisms that let innovation come from the front lines, from customer agents, from people in marketing.
I want an institution that can let the knowledge of 2,000 colleagues form the new ideas, and their colleagues can work together to decide how to use the knowledge.
I want a system to crowdsource innovation. The wisdom of crowds is smarter, and more consistently intelligent, than any single person.
As owner I must sometimes say “I think you got that wrong, I have to veto you.” And by its nature, sometimes, employees, for legal reasons, can’t know everything about the company. But for the most part, I can let the company run, and by giving the employees what they need, they just get smarter and smarter, and do more and more.
There’s a field that evolved in the last seven years called Enterprise 2.0. The idea is to use online technology to keep organizations flat and to avoid hierarchy — and people collaborate through technology. A very simple example of this model is Wikipedia, and closely related to this is a field called “idea management.” Think of it as a super-sophisticated suggestion box in which people are making suggestions and other people are seeing their suggestions. People then vote others’ suggestions up and down. For example, suppose 200 ideas get proposed over a two-month period. Using idea management, we then have the crowd decide the best ten. And then we have the crowd rank them and decide which are best and which we should put capital into.
Here’s another example: at the end of last year, I knew I wanted to give my employees a $4 million raise. They had many suggestions including changes to the 401k, an addition of day care services, or just a simple pay raise. I gave their ideas to the accounting department to figure out what each one would cost. We put a price tag on each one, and I gave the list back to the 2,000 employees. They ranked each, and we ended up with a ranking, and we went down from the top, until we got to $4 million.
So more and more decisions are being made in our company, not by me, but by our people in general. The philosophy underlying this all comes from Hayek and Mises — the true knowledge among our colleagues is all out there.
I’ve got the staff that can figure out what each option will cost. But the truth is I don’t know which one is going to work, but I have found that when I turn that over to the group, the result is more intelligent than the executive group can do or what I can do by myself.
Why We Have Centralized Government InstitutionsNaturally, this has applications far beyond some private companies. When we look at government in Washington, or what’s happening on Wall Street, we see so much centralization. But really, our goals should be to eliminate and overcome these central institutions.
And in recent years we have gained powerful new tools to do this, and most significant among those is the block chain, which is the software behind Bitcoin. But it’s so much bigger than just Bitcoin.
I’m not sure that even in our pro-freedom movement, that people are understanding the significance of the block chain. I discussed the topic at length in Wired, but even more important was a recent article in Politico in which my work with the block chain was featured, as was the central problem of consensual exchange in the marketplace.
This is where the block chain is most useful and revolutionary. It helps us to overcome the problem of mutual trust in exchange, which will in turn make many of our modern central institutions unnecessary.
So what is this problem of trust in mutual exchange? Well, if I have a camel and you’re going to give me a gold coin in exchange for it, I have to trust that you did not debase this coin.
Certain groups will then attempt to develop a business model that can address this problem. For example, an organization (i.e., a monarch) that has a monopoly on violence in some area can monetize this monopoly by saying “I will mint gold coins and put my face on them, and if anyone tries to debase those coins, I’ll kill him.”
That’s just a business model, and we happen to call that business model “government.”
So the question is: can we just have consensual exchange, or do we have to pick some central institution that we can trust, so we don’t have to trust each other?
There are, of course, many other examples of the usefulness of central institutions in exchange. If we want to buy and sell land, and we don’t trust each other, we can use a central institution called a land title office, which will ensure that the sellers actually own the land they’re selling. Governments all across the world are involved in this every day. And as Hernando de Soto discussed in his book The Mystery of Capital, it is difficult to have capital formation when you don’t know for sure who owns what.
So, throughout human history, we have relied on these central institutions to help us overcome this problem of trust in exchange.
But, as we know, there are problems that arise from these systems, as well.
Decentralizing Wall StreetNot all of these central institutions are what we call government. Yes, many of these institutions are run by guys in two-piece suits in Washington. And some are run by guys in black robes. Some are done by people with badges and guns. But many of them are done by guys in three-piece suits on Wall Street.
Wall Street, however, is not immune to fraud and abuse, and this problem is often made worse by centralization. But most people don’t know how these central institutions work.
When you watch a movie, for example, you know there are things going on behind the scenes, and you probably assume the same is true for Wall Street. But on Wall Street, that behind-the-scenes stuff works a lot differently than you think it does.
Unbeknownst to many, Wall Street now relies on central institutions that were created in the 1970s all allegedly with the purpose of accomplishing what’s called “settlement” which is the process through which securities actually change hands in exchange for payment.
These central institutions were created to replace the old “stock-jobbers” who carried around sacks of stock certificates in the old days, but who couldn’t keep up with the tripling of trading volume that occurred during the 1960s.
So we now have these central institutions that handle the problem of settlement by controlling the flow of information and the stocks themselves. But new problems have arisen as a result. As of 2008, for example, it was quite possible that Merrill Lynch was sending you a statement at the end of the month saying you own 100 shares of IBM, and other people saying the same thing. But back at Merrill Lynch, they only had 100 shares. They were telling five different people they had 100 shares.
On most days that won’t make a difference. But deep down that’s a game that looks a lot like fractional reserve banking.
And as a result, the system was being looted, and just like if someone practiced fractional reserve banking and wasn’t telling anyone, someone could loot that vault and take advantage of investors for a long time before anyone noticed.
And just in general, this is what happens when you have centralized institutions.
Getting Rid of CentralizationThe key to overcoming the problems in these central institutions is the block chain. Because, with the block chain, for the first time, we no longer need these central institutions for settlement, or for guaranteeing the value of coins, or for land titling. All of these functions can be replaced by a transparent public ledger that is safe from tampering, and which can make value and ownership clear and open for everyone. This is information that is decentralized, and is not controlled by any central organization. We don’t need central institutions to control or protect this information anymore. Using the block chain, we can disrupt all these systems — and much more, too — and the institutions behind them. In turn, this spreads decision-making and the use of knowledge to a much larger number of people and institutions. The advantages of decentralization that are already being employed in private companies can then be felt society-wide.
In other words, with the block chain, we liberals — those of us who have been fighting authoritarianism, whether it’s socialism or fascism or “social justice-ism,” for 500 years — just got “the bomb” in this fight. It’s something new.
And this is why the block chain and I got so much attention in response to that recent Politico article. I was told that the article was being talked about all over Washington. And they were talking about it because these institutions that are threatened by the block chain have finally figured out that they’re in trouble.
The CEO of JPMorgan, Jamie Dimon, for example, wrote a letter to shareholders in April that basically freaked out over the block chain. He told shareholders that “Silicon Valley is coming to eat Wall Street’s lunch.” Since he did that, everybody on Wall Street in the last three months — it seems every day, there is a new announcement coming from another corporation — whether UBS, Credit Suisse, Morgan Stanley, saying “we have to study this and get involved.”
But it’s too late for them. A year and a half ago, we started on this, and we’ve been very aggressive about developing new systems that can challenge these old central institutions.
I’m not doing this because I want to create a new monopoly. On the contrary, I want to create a bomb to blow up these central institutions.
Whether it’s a single company, or a stock exchange, or an entire society, we know — thanks to Hayek — that information is best used when it’s not centralized and when it’s not being monopolized by some central institution. We know that flat and non-hierarchical systems use information best. I’ve tried to do that with my own company because it works better that way. And society at large will work better as well, if we can get rid of these old institutions and hierarchies. New innovations like the block chain can make this possible.
We knew when the internet was being created, that it was going to cause profound changes. But this new invention and the crypto revolution is going to be more significant than the internet itself.
Rod Martin, a co-founder of PayPal and world renown philosopher-capitalist, joins Jeff for a wide-ranging interview covering such topics as the refugee situation in Europe, unrest in the Middle East, and why some cultures are more prosperous than others. Martin contrasts the difficulties world governments have in confronting global macro-crises with the hope and resilience of technological innovation and entrepreneurship.
Dan Price, the CEO of Gravity Payments, took a $930,000 pay cut to raise the minimum salary of his employees to $70,000. The plan was announced in April 2015, and set to be completed over the course of three years. Both his employees (especially the ones with a larger pay increase) and proponents of income equality celebrated the move. It garnered considerable publicity and rippled through social media, with mostly positive but some negative reactions.
In the New York Times piece that reported on people’s initial reactions in April, they quoted Rush Limbaugh calling it “pure, unadulterated socialism,” and an economist from the American Enterprise Institute saying “A lot of people have the sense that this may work for this one firm, but it is nothing we should take general lessons from.” Another economist from the Stanford University Hoover Institution took a different stance and predicted, “This is going to be great for his business.”
As usual, most of the praise and uproar from the respective proponents and critics are either wrong or right for the wrong reasons (if there’s not already a name for this phenomenon, there should be). But we can say this even without the benefit of hindsight, which has shown that the CEO’s actions have had some negative consequences he did not anticipate.
The Strategy BackfiresThe New York Times published another piece about three and half months later, reporting turmoil and struggles for the Seattle-based firm, directly and indirectly related to the new pay structure.
Some clients of Gravity Payments left because they viewed the action as a political move or because they expected fee increases as a result. But the number of new clients has more than offset those that sought payment processing services elsewhere, meaning Gravity Payments had to hire more employees, which now come in at a minimum of $70,000 a head.
The firm’s real problems are internal, though. According to the New York Times article, “Two of Mr. Price’s most valued employees quit, spurred in part by their view that it was unfair to double the pay of some new hires while the longest-serving staff members got small or no raises.”
Also, Dan Price’s brother, Lucas Price, has sued over violations of his rights and benefits as minority shareholder of Gravity Payments. Lucas also accused Dan of having excessive CEO pay (beyond the stipulations of their contract), which was $1 million before Dan’s voluntary pay decrease. So one major reason for the charitable restructuring of pay may have been to get public opinion on Dan’s side — quite the ignoble scheme for a seemingly noble move.
How Does Economic Theory Tie In?It’s tempting to pull in arguments against minimum wage legislation for this case, but the ostensibly applicable claims from economic theory actually don’t apply here. Dan Price voluntarily increased his employees’ pay. All of his employees are still earning no more than their expected discounted marginal revenue product. It’s just that some of their “product” may be non-monetary or “psychic” for the CEO, in the form of a good feeling Mr. Price gets from charitable donations, or the reputation Mr. Price wants as a CEO. The benefit he would get by having public opinion on his side and against his brother in their dispute would also qualify as psychic profit.
Entrepreneurs hire laborers on the margin, meaning they make decisions about hiring an additional laborer based on what that additional laborer would be paid and how much that additional laborer would help produce output and therefore generate revenue from the sale of output. Because of this, a laborer’s discounted marginal revenue product is the maximum any entrepreneur is willing to pay for a given laborer (“discounted” because there is a time difference between the laborer’s pay and the sale of output).
The situation with Gravity Payments requires that we distinguish between factor payments and charitable gifts. Suppose Dan Price hires a laborer at $70,000/year, but the laborer only brings in $50,000/year of increased revenue for the firm. This means that, for Mr. Price, it’s worth $20,000 for that worker to have $20,000 more per year, whether it’s in the name of income equality, or a happy-workers-are-productive-workers philosophy, or just plain charity.
The situation is the same with any sort of charitable gift. If A donates $100 to B, it means A prefers that B have the $100 (and not A) to A having the $100 (and not B). Charity isn’t “socialism” (per Rush Limbaugh), it’s people doing what they want to do with their own money, i.e., capitalism.
This, then, is the extent of the economics of the situation. It starts and ends with the coordinated preferences and expectations of the entrepreneur and the workers. On the other hand, there’s much to be said about Mr. Price’s business strategy and the social, psychological, and organizational implications.
Fairness and Equal PayWorkers prefer to be treated fairly, which doesn’t necessarily mean they all want the same pay. Maisey McMaster, former financial planner for Gravity Payments argued against the move and ended up leaving her job because of it. In her words, “He gave raises to people who have the least skills and are the least equipped to do the job, and the ones who were taking on the most didn’t get much of a bump.”
Mr. Price also lost Grant Moran, a talented web developer, who felt like the new pay structure wasn’t fair: “Now the people who were just clocking in and out were making the same as me.” He also said, “It shackles high performers to less motivated team members.”
Many of the employees didn’t like their pay information being open to the public eye, especially with all of the politically motivated attention. Other employees stated they didn’t feel like they deserved their new higher pay. One even admitted, “I didn’t earn it.”
So it seems that even the workers of a progressive and trendy (it is Seattle-based, and many of its clients are a part of the ultra-hip Pike Place Market) firm don’t equate “fairness” with “equal pay” — in fact, it has spawned envy, guilt, and ill feelings for their boss and coworkers. But this isn’t some inexorable law of human behavior. We could easily imagine a situation where workers do demand equal pay and collectively bargain for such a result. The economics of this type of situation would be different than the one at Gravity Payments, though (see Man, Economy, and State, chap. 10).
Economic theory pertaining to minimum wage legislation, unions, or socialism can’t be applied here directly. We can, however, branch outside the scope of economics and take the social, psychological, and organizational implications of an entrepreneur’s voluntarily chosen minimum salary (like with Gravity Payments) and reasonably apply them to government-mandated minimum wage and equal pay schemes. Imagine millions of people thinking the same things as Maisey McMaster and Grant Moran, who felt unfairly treated with the new pay structure. Or even more people saying, “I don’t earn my wage.”
If these sorts of negative consequences arise from a voluntary equal pay scheme, I don’t think we could expect anything better from an involuntary one on a national level.