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Don’t Worry So Much About The Politics Of Big Tech, Focus On The Economic Benefits.

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During last week’s antitrust hearing, Representative Jamie Raskin (D-Md.) provided a sound bite that served as a salvo: “In the 19th century we had the robber barons, in the 21st century we get the cyber barons.” But with sound bites, much like bumper stickers, there’s no room for nuance or scrutiny.

The news media has extensively covered the “questioning” of the CEOs of Facebook, Google, Apple, and Amazon (collectively “Big Tech”). Of course, most of this questioning was actually political posturing with little regard for the actual answers or antitrust law. But just like with the so-called robber barons, the story of Big Tech is much more interesting and complex.

The myth of the robber barons: Market entrepreneurs vs. political entrepreneurs

The Robber Barons: The Great American Capitalists, 1861–1901 (1934) by Matthew Josephson, was written in the midst of America’s Great Depression. Josephson, a Marxist with sympathies for the Soviet Union, made the case that the 19th century titans of industry were made rich on the backs of the poor during the industrial revolution. This idea that the rich are wealthy due to their robbing of the rest of us is an idea that has long outlived Josephson and Marx down to the present day, as exemplified by the writings of Matt Stoller and the politics of the House Judiciary Committee.

In his Myth of the Robber Barons, Burton Folsom, Jr. makes the case that much of the received wisdom on the great 19th century businessmen is wrong. He distinguishes between the market entrepreneurs, which generated wealth by selling newer, better, or less expensive products on the free market without any government subsidies, and the political entrepreneurs, who became rich primarily by influencing the government to subsidize their businesses, or enacting legislation or regulation that harms their competitors.

Folsom narrates the stories of market entrepreneurs, like Thomas Gibbons & Cornelius Vanderbilt (steamships), James Hill (railroads), the Scranton brothers (iron rails), Andrew Carnegie & Charles Schwab (steel), and John D. Rockefeller (oil), who created immense value for consumers by drastically reducing the prices of the goods and services their companies provided. Yes, these men got rich. But the value society received was arguably even greater. Wealth was created because market exchange is a positive-sum game.

On the other hand, the political entrepreneurs, like Robert Fulton & Edward Collins (steamships), and Leland Stanford & Henry Villard (railroads), drained societal resources by using taxpayer money to create inefficient monopolies. Because they were not subject to the same market discipline due to their favored position, cutting costs and prices were less important to them than the market entrepreneurs. Their wealth was at the expense of the rest of society, because political exchange is a zero-sum game.

Big Tech makes society better off

Today’s titans of industry, i.e. Big Tech, have created enormous value for society. This is almost impossible to deny, though some try. From zero-priced search on Google, to the convenience and price of products on Amazon, to the nominally free social network(s) of Facebook, to the plethora of options in Apple’s App Store, consumers have greatly benefited from Big Tech. Consumers flock to use Google, Facebook, Amazon, and Apple for a reason: they believe they are getting a great deal.

By and large, the techlash comes from “intellectuals” who think they know better than consumers acting in the marketplace about what is good for them. And as noted by Alec Stapp, Americans in opinion polls consistently put a great deal of trust in Big Tech, at least compared to government institutions:

One of the basic building blocks of economics is that both parties benefit from voluntary exchanges ex ante, or else they would not be willing to engage in it. The fact that consumers use Big Tech to the extent they do is overwhelming evidence of their value. Obfuscations like “market power” mislead more than they inform. In the absence of governmental barriers to entry, consumers voluntarily choosing Big Tech does not mean they have power, it means they provide great service.Big Tech companies are run by entrepreneurs who must ultimately answer to consumers. In a market economy, profits are a signal that entrepreneurs have successfully brought value to society. But they are also a signal to potential competitors. If Big Tech companies don’t continue to serve the interests of their consumers, they risk losing them to competitors.Big Tech’s CEOs seem to get this. For instance, Jeff Bezos’ written testimony emphasized the importance of continual innovation at Amazon as a reason for its success:

Since our founding, we have strived to maintain a “Day One” mentality at the company. By that I mean approaching everything we do with the energy and entrepreneurial spirit of Day One. Even though Amazon is a large company, I have always believed that if we commit ourselves to maintaining a Day One mentality as a critical part of our DNA, we can have both the scope and capabilities of a large company and the spirit and heart of a small one.

In my view, obsessive customer focus is by far the best way to achieve and maintain Day One vitality. Why? Because customers are always beautifully, wonderfully dissatisfied, even when they report being happy and business is great. Even when they don’t yet know it, customers want something better, and a constant desire to delight customers drives us to constantly invent on their behalf. As a result, by focusing obsessively on customers, we are internally driven to improve our services, add benefits and features, invent new products, lower prices, and speed up shipping times—before we have to. No customer ever asked Amazon to create the Prime membership program, but it sure turns out they wanted it. And I could give you many such examples. Not every business takes this customer-first approach, but we do, and it’s our greatest strength.

The economics of multi-sided platforms: How Big Tech does it

Economically speaking, Big Tech companies are (mostly) multi-sided platforms. Multi-sided platforms differ from regular firms in that they have to serve two or more of these distinct types of consumers to generate demand from any of them.

Economist David Evans, who has done as much as any to help us understand multi-sided platforms, has identified three different types:

  1. Market-Makers enable members of distinct groups to transact with each other. Each member of a group values the service more highly if there are more members of the other group, thereby increasing the likelihood of a match and reducing the time it takes to find an acceptable match. (Amazon and Apple’s App Store)
  2. Audience-Makers match advertisers to audiences. Advertisers value a service more if there are more members of an audience who will react positively to their messages; audiences value a service more if there is more useful “content” provided by audience-makers. (Google, especially through YouTube, and Facebook, especially through Instagram)
  3. Demand-Coordinators make goods and services that generate indirect network effects across two or more groups. These platforms do not strictly sell “transactions” like a market maker or “messages” like an audience-maker; they are a residual category much like irregular verbs – numerous, heterogeneous, and important. Software platforms such as Windows and the Palm OS, payment systems such as credit cards, and mobile telephones are demand coordinators. (Android, iOS)

In order to bring value, Big Tech has to consider consumers on all sides of the platform they operate. Sometimes, this means consumers on one side of the platform subsidize the other.

For instance, Google doesn’t charge its users to use its search engine, YouTube, or Gmail. Instead, companies pay Google to advertise to their users. Similarly, Facebook doesn’t charge the users of its social network, advertisers on the other side of the platform subsidize them.

As their competitors and critics love to point out, there are some complications in that some platforms also compete in the markets they create. For instance, Apple does place its own apps in its App Store, and Amazon does engage in some first-party sales on its platform. But generally speaking, both Apple and Amazon act as matchmakers for exchanges between users and third parties.

The difficulty for multi-sided platforms is that they need to balance the interests of each part of the platform in a way that maximizes its value.

For Google and Facebook, they need to balance the interests of users and advertisers. In the case of each, this means a free service for users that is subsidized by the advertisers. But the advertisers gain a lot of value by tailoring ads based upon search history, browsing history, and likes and shares. For Apple and Amazon they need to create platforms which are valuable for buyers and sellers, and balance how much first-party competition they want to have before they lose the benefits of third-party sales.

There are no easy answers to creating a search engine, a video service, a social network, an App store, or an online marketplace. Everything from moderation practices, to pricing on each side of the platform, to the degree of competition from the platform operators themselves needs to be balanced right or these platforms would lose participants on one side of the platform or the other to competitors.

Conclusion

Representative Raskin’s “cyber barons” were raked through the mud by Congress. But much like the falsely identified robber barons of the 19th century who were truly market entrepreneurs, the Big Tech companies of today are wrongfully maligned.

No one is forcing consumers to use these platforms. The incredible benefits they have brought to society through market processes shows they are not robbing anyone. Instead, they are constantly innovating and attempting to strike a balance between consumers on each side of their platform.

The myth of the cyber barons need not live on any longer than last week’s farcical antitrust hearing.

Are You A Dissatisfied Consumer? You Are One Of The Geniuses Of Economic Betterment.

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Entrepreneurship is the intentional pursuit of value. This pursuit fuels the engine of economic growth. The entrepreneurs who achieve the realization of value become folk heroes, and the great firms that create value at scale – Apple, Microsoft, Amazon, Facebook, Google – are stock market heroes.

All of this is acceptable wisdom. However, it’s the wisdom of outcomes, of recording the score after the play has been completed. Who drew up the play? Don’t we concede some genius to the coach and the offensive co-ordinator as well as the quarterback and the wide receiver?

Who Is Pursuing Value?

In order to understand cause and effect, we have to start at the input, not the outcome. Who is actually pursuing value? How did the entrepreneur – or Apple – know that something new was needed? That some improvement was required to retain the role of stock market hero?

Henry Ford is often quoted as saying (although he probably didn’t), “If I had asked people what they wanted, they would have said faster horses.” The implication is that he placed no faith in the identification of consumer needs. His preferred method was invention (coming up with something new through his own genius) followed by innovation (translating the invention into something that could be produced, and then sold on the market).

In fact, Ford’s attitude, according to Harvard Business Review, “had a very costly and negative impact on the Ford Motor Company’s investors, employees, and customers”. Because it turned out that, once consumers had Model T’s, they quickly decided that what they wanted was better cars. General Motors developed a response in the form of their “A Car for Every Purse and Purpose,” strategy which aimed to produce cars for distinct market segments aided by installment selling, used car trade-ins, closed car models, and annual model changes. The Ford Motor Company was quickly relegated to a minor, small-share role in the American automobile market.

Think of this as the genius of the consumer. One minute, they don’t have cars. Next minute they are demanding not only better cars, but also better ways to buy them, better aesthetics, greater variety and frequent upgrades. Such boldness, such expansive thinking, such imagination! Edison brought them lightbulbs, and they imagined a world of devices attached to an electricity grid providing on-call productivity services of all kinds. Steve Jobs brought them the iPhone and they interconnected themselves to each other and to sources of knowledge and to global supply chains.

The double genius of the consumer.

What is this genius? It is twofold.

First, it is consumers who actually create value. How so? Because they are the ones pursuing it.  Entrepreneurs and the innovators put resources – such as cars and refined gasoline and silicon chips and touchscreens and internet connections – into consumers’ hands, and then the consumers roar into action, their creativity unleashed by new affordances. They try to create as much value as they can with the new resources. They drive to work and drive to school and drive across America and put grocery and tools in the backs of their cars (Hey, Henry! Make me a pick-up truck!), and maybe sleep in the car (Hey, Henry! Make me an RV!) and maybe make music in the car by singing and whistling to themselves or to their kids in the back seat (Hey, Henry! Where is the radio?), and maybe find themselves wishing they could call home to say when they’ll be home for dinner (Hey, Henry! How about a carphone?). Value occurs entirely in the consumer’s domain (or the customer’s if you are in B2B). Value is a feeling of satisfaction in the consumer’s mind.

Which brings us to the second aspect of the consumer’s genius. It’s their dissatisfaction. Henry Ford wanted to accuse them of lacking imagination. He got it all wrong. Anyone can imagine the future (flying cars for example). Not many can get it right. Consumers don’t waste their time on such high error rate activities. They concentrate on a subject where they are always right: their own feelings of dissatisfaction. “Henry, we get wet driving your car in the rain!” “Henry, it’s really hard to change the tires.” “Henry, I can’t afford to pay you that amount of money all at once. Give me some time, won’t you?” “You said it only comes in black, but blue is my favorite color.”  “Henry, your Model T looks the same this year as it did last year.” “Henry, can you speed this thing up?” “Henry, I need to work remotely. Can you make my F150 like a mobile office?”

The consumer has big dreams.

How genius is this? Dissatisfaction indicates that the consumer is able to dream bigger than the producer. Every new invention that becomes an innovation and is introduced to the market is immediately scrutinized under the lens of dissatisfaction, critiqued and criticized. No matter how many millions or billions of development dollars went into it, no matter how many Ph.D. engineers and Harvard MBA’s brought it to market, it can not survive the consumer’s examination unimproved. Because the consumer has big dreams.

The genius of the consumer outstrips that of the entrepreneur. Economists see the entrepreneurial process as one of trial and error, with the emphasis on error – a lot of mistakes before arriving (with the help of consumer feedback, of course) at a salable proposition, which is defined as one that generates less dissatisfaction than some alternative on which the consumer could spend their money.

Entrepreneurs are still heroes of course. If they weren’t willing to invest time, money and ego into the process of trying to please consumers, despite all the rejections, then there would be no progress. We might still be driving Model T’s, because no entrepreneur was willing to suffer the wrath of dissatisfied customers. We love our entrepreneurs. And we especially love those with more empathy – more ability to listen to consumers’ complaints to stimulate their imaginations for future betterment.

But let’s not err in identifying the locus of genius in this market process. Let’s help consumers achieve their dreams (before those of the entrepreneur).

A Values-Driven Entrepreneur Shares Ten Principles For Success In The Highly Competitive World Of Sports Content.

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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.

Recently, I was able to learn 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, the famed sports journalist and occasionally outspoken opinion commentator, shared many principles of his success;  here is a summary.

 Choose a field that fits your personality and interests.

Entrepreneurs talk about assembling a unique and competitively advantaged set of resources. Jason’s unique resources are 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.

Choose your path based on vocation, and not purely for financial reasons.

Don’t choose entrepreneurship to “get rich” or “make a killing”. Choose it because it’s your vocation. Jason wanted to stay in the world of sports, one he’d joined by playing football in college. If he could spend the rest of his life writing about and talking about sports, he felt he’d be happy – he’d have life licked, as he put it. Would he make money? An adequate salary probably, but money was not his goal.

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. Experienced entrepreneurs are the most successful in business even if they have made mistakes along the way – 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 on his entrepreneurial distribution platform, Outkick. He cites Booker T. Washington as one of his guides. The entrepreneurial life is a values-driven life.

Study your field – know its history and role models.

It dawned on Jason why they teach you history in school – in order to learn about trends and the consequences of actions and the role of change and the nature of competition in ideas, institutions, nations and firms. Having chosen sports journalism as his field, he studied it deeply, to get a sense of how it changed over time, with technology, and in the culture. He tried to imagine – even though no-one can forecast – how it might evolve over time, and to equip himself for a new and different future.

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. 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.

Be yourself! Emphasize your own uniqueness, personality and talents.

 Many of the assets Jason brings to the business of sports are personal and individual – a sense of humor, a jaunty outspokenness, a willingness to delve below the surface in defiance of conventional wisdom. In a corporate world, these traits can be viewed through a clouded lens; in the entrepreneurial world, they can be great strengths and differentiators if applied for customer benefit, information, and entertainment. Be yourself, and on your vocational path, your individual attributes will support you in your journey.

Always keep building a bigger and bigger platform for yourself and your content.

Jason started his career at the bottom of the ladder, covering minor college sports for a local newspaper as a part-time reporter. That’s a platform – a small one. He kept ascending on to bigger platforms – a major city newspaper, then a national reporting and opinion platform (ESPN), and now an independent internet platform (Outkick). There is always the opportunity to expand and grow.

Embrace change; try to stay ahead of it by always reinventing yourself.

By studying change in his industry and attempting to understand it and chart it, or at least acknowledge it, Jason was able to avoid being caught out by unexpected disruption, and to embrace the wave. If it is impossible to predict and master change, it is feasible to be the kind of economic actor who can self-reinvent, whether that is by learning, moving from platform to platform, adding new skills and capabilities, or finding new audiences. Never get locked in to one persona or set of capabilities.

Your intuition and innate ability to read people are your best tools for managing the future.

 I asked Jason how he predicts the future. Of course, he acknowledged, you can’t do that. But you do have tools, and intuition and what he called an “innate ability to read people and situations” are the most important. This is consistent with scientific research into the cognitive attributes of successful entrepreneurs. They have highly developed intuitive skills as well as more formal cognitive abilities, and it is a highly developed intuition that gives them the confidence to make quick decisions without waiting for all the data.

Always, always put your customer first. Be honest with them, be objective, and serve them distinctively.

It is the first principle of economics for business that the consumer is sovereign and that a successful business puts the customer in first role in everything that they do. Jason Whitlock confirmed the same principle. 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 in a more conventional fashion.

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.

 

You can listen to Jason on the Economics For Entrepreneurs podcast #75.

 

 

Entrepreneurship Is The One Institution We Can Rely Upon To Maintain A Prosperous And Civil Society.

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In this time of social unrest, Americans’ confidence in our institutions is in decline. A sample from Gallup’s frequent annual poll  includes these selected comparisons between 2019 (latest available data) and 2000.

% Confidence in Institutions (Great Deal + Quite a lot)
2019 2000
Congress 11 24
Big business 23 29
Newspapers 23 37
Banks 30 46
Small Business 68 57

Relatively few Americans declare confidence in political institutions, as represented by Congress. Roughly twice as many – but still less than a quarter of Americans – express more confidence in big business and banks. Newspapers, similarly, command only low levels of confidence. All the poll data from 2019 are lower than those from 2000, indicating across-the-board declines of confidence in institutions in general.

The Institution Of Entrepreneurship

Except for small business. Two thirds of Americans declare confidence in this institution, and that number is higher than in 2000. We can easily look beyond the structural definition of small business – which is, after all, defined by government statisticians gathering employment data – into the institution of entrepreneurship.

Entrepreneurs are those individuals who shoulder the task of making things better for the rest of society. They are society’s optimists. They recognize current conditions for what they are – and then imagine a future in which conditions are better. Then they sacrifice themselves to bring that future about, expending capital and labor now for the prospects of revenue in the future. That future is uncertain –  entrepreneurs do not know if their initiative will be as well-received by customers as they hope it will. They press on anyway, their goals being discovery and achievement and making a difference, more than profit.

In this sense, entrepreneurs perform the kind of social function that is badly needed in a time of lost confidence in institutions. Having little time for the rear view mirror and gazing intently through the windshield at the road ahead, they substitute sanguine imagination for everyone else’s dissatisfaction and disappointment with the status quo. They don’t dwell on past injustices, as so many young people seem inclined to do today; they’d rather concentrate on what is possible in the future. When they see barriers they dismantle them.

Solving The Problems Of Others

Entrepreneurs are problem solvers – and the problems they solve are those that their fellow citizens (all potential customers) deem most pressing. If you’re looking for a solution to a problem, seek out an entrepreneur rather than an elected official or bureaucrat.

Entrepreneurs’ problem-solving technique combines empathy with rigorous cause-and-effect thinking. Empathy is the entrepreneur’s tool to understand why people – why society – feels a certain way. What does dissatisfaction stem from? Why do people feel uneasy the way they do? Entrepreneurs take society’s pulse  and measure society’s level of pain. From this input, which is largely emotional, they try, as rigorously and logically as they can, to reverse-engineer a cause-and-effect chain. If dissatisfaction and pain are the outcomes, what are the causes? Entrepreneurs are not policy-makers like politicians, whose aim is to appease. They are obliging and accommodating collaborators whose aim is to please.

Entrepreneurial Creativity

Entrepreneurship is a profoundly human, social and creative activity that changes our world for the better. In contrast to the destruction that our current social justice warriors seek to impose, entrepreneurs create new economic value via a transformative act of human imagination. Their ingenuity is limitless.

What are the entrepreneurial actions that result from this creative societal problem-solving disposition? Entrepreneurs start firms, grow businesses, research and introduce innovations, lower customers’ costs and increase customers’ convenience. Their guiding principle is that whatever customers want, customers can have. The responsibility to improve life is given to the customer, in that they are tasked with communicating, as clearly as possible, what needs to be done and what needs to be provided and what needs to be changed to make them feel better. Entrepreneurs put their own private property at risk to create customer benefits that add up to social benefits for all. The customer is sovereign in this exchange – what they want is what is produced. If they stop wanting it, entrepreneurial production ceases.

Contrast this with political action. Politicians put none of their own private property at risk. In fact, they steal property from some citizens, through taxation and debt (which is a tax on future citizens), in order to redistribute it in some new form to a different set of citizens. They appease one group of citizens with the property of another group. Where the entrepreneur’s collaborative deal with customers is win-win (entrepreneurs make profits when customers approve their initiatives), the politicians’ deal always involves loss. The politician achieves office when an opponent loses an election, and makes policy that imposes loss on some part of the population. Politicians deal in losses, entrepreneurs deal in benefits.

Individual Action, Social Benefits

Society would be happier and healthier if we turned to entrepreneurs for all our solutions, and to politicians solely to protect the system of private property and freedom of contract that makes entrepreneurship possible. It would be healthier still if we were to encourage the spirit of entrepreneurship in a larger group: the spirit of service to fellow-citizens through innovative technological problem-solving. The measure of success for this system is what historian and economist Deirdre McCloskey calls “trade-tested betterment”. What she means by that is the customer-determined improvement in the quality of life (i.e., betterment) validated by customers buying or not buying what entrepreneurs offer as potential solutions to their problems and their pain (i.e. trade-tested).

If those who protest and complain today were themselves to adopt the entrepreneurial spirit in their own lives, they would find that they could not only build better platforms for progress, but also introduce more purpose, meaning and autonomy into their own lives. The entrepreneurial life is purpose-driven (solving others’ problems), a source of meaning (solving problems is more meaningful than carrying protest signs or throwing rocks) and the ultimate autonomous lifestyle (discarding dependency on employment wages or welfare payments).

Entrepreneurship is an American institution. Every immigrant who ever came here brought an entrepreneurial spirit: life will be better for me and others if I escape from the limitations of my current situation and join this open, betterment-demanding, property-protecting, innovation-welcoming country and see what I can do. The institutions that grew up with our innovating immigrants and their offspring are now largely decayed and decrepit. But entrepreneurship is one institution that there is no need to abandon. In fact, it’s necessary that we revive it.

 

 

How Entrepreneurs Build Beautiful Businesses.

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In his book, Narrative Economics, Robert Schiller, Nobel Prize-winning economist, tells us that the greatest influences on the nation’s economy come from the stories we tell ourselves about it.

A depression lasts longer when people tell themselves and each other that it’s going to be a long time before things turn around. Recoveries accelerate when people turn optimistic and tell each other that the good times are just over the horizon and will be back soon. Currencies lose their purchasing power when people tell each other prices are going up and its best to exchange cash for products now and not wait for the higher prices. Trade unions are vilified when people start talking about excessively high wages pushing up inflation. Schiller has a lot of stories, or narratives, as he calls them.

These are macroeconomic tales, about trends in GDP, and the price level. But the same is true at the microeconomics level. The reason why there is so much negativism about business, capitalism and free markets is that people are telling each other negative stories about business aggressiveness, unsustainability, lack of sympathy and general coldness. We’re angry at business, it seems.

One source of this anger are the business school instructors, and their textbooks and business biographies and histories that portray businesspeople as a warrior class and business competition as warfare. Invading industries, taking beachheads, fighting for market share. The Art Of War by Sun Tzu is often cited as the most popular business book, and a source of business strategies.

Another military metaphor is defensive – protecting your castle. “You need a “moat” — essentially, a barrier that can protect your business from potential encroaching forces”, says one writer in Medium.

The military narrative is a horrible metaphor for business. The blood and gore and destruction and operational chaos that war metaphors bring to mind have no place in our image of what businesses do and the service they provide. Customers buy products and services only if they believe that, by so doing, they’ll make their lives better in some way. Otherwise they wouldn’t buy. Businesses exist to generate this sense of betterment, of satisfaction, of well-being among their customers. If they are not good at it, they’ll lose the patronage of that customer to a business that pleases them better. Consequently, businesses are always trying harder to understand what will make their customers happy, and to perfect their own knowledge of how to deliver that happiness.

We need a new narrative of business formation and business action that is an alternative to the military metaphor, especially so that we can teach our kids in school that business is a channel for their aspirations, not a regimen to which they are to be subjected. We need a business-is-beautiful metaphor. That its purpose is to serve and to please and to make life better. That it’s the source of what’s good: income to nurture families, products and services to nurture life.

One business guru who is leading us in this direction is Per Bylund, a professor at Oklahoma State University’s Spears School Of Business. He writes about business owners and executives and managers building an island – an island that is inviting enough to attract visitors who will enjoy their time there, and perhaps become residents. An island that’s separate but well connected by bridges and ferries and transportation to bring people comfortably to and fro. Like any island, it’s unique. No two are the same.

Professor Bylund calls them “islands of specialization”, designed by entrepreneurs and their management teams to serve customers in a specialized way that will merit their patronage, keep them visiting, and make them loyal. His strategic advice to businesses has no military overtones.

“Aim to please” is his first principle of beautiful business. To attract people – customers – to the island is simply a matter of understanding what will please them. This requires empathy – understanding people, their hopes and dreams and desires and preferences, and catering to them. It’s a matter of discovery and translation. Business strategy, in this vision, is not aggression but deference: seeking to please others.

“Don’t copy – move beyond” is the next principle. The military metaphor sees competition as conducting wars over business territory, or fighting for customer attention. That’s a misconception of the economic concept of competition. In the economic way of thinking, there is no new value for customers when a firm merely copies what is already offered by others. 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.

Once they establish the new location, entrepreneurs build from strength. They distinguish what is unique about 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.

And 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. Perhaps there’s an attractive resort hotel welcoming and catering to customer-guests. Let your imagination run free in conjuring up beauty – that’s what entrepreneurs do as the start, grow and sustain their businesses.

Per Bylund, PhD, is assistant professor of entrepreneurship and Records-Johnston professor of free enterprise in the School of Entrepreneurship at Oklahoma State University. His areas of research are entrepreneurship, management and economic organization. He is author and editor of four books.

Life is Good with Individual Economics

Individual Economics Shows Each One Of Us The Pathway To The Good Life.

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Everyone can benefit from a knowledge of economics. Economics is powerful science. To support that assertion, we could simply cite the $US86 Trillion global economy. It has grown and grown – 3000% in 200 years to cite one estimate by Professor Deirdre McCloskey – because we all learned, and started to talk to each other about, economics. The term the Professor prefers is not economics but “ values” – the ethics of commerce.

Now, that doesn’t sound much like the statistics and curves and lines and graphs of GDP projections, money supply, trade balances, employment participation rates and government policy prescriptions. Those, we are told today, are the proper subjects of economic study and the products of economic knowledge.

But we are being led astray by the consultants and bureaucrats and Federal Reserve employees who conduct that level of aggregate economics for their own purposes. Everyday Americans, both as consumers and producers, are helped in making good decisions by an entirely different brand of economics.

Individual Economics

Let’s call this brand of economics Individual Economics. The unit of analysis is the individual, not the grand aggregates of Gross Domestic Product and the like. Every individual plays two economic roles, as consumer and producer. In these roles, every individual is involved in transactions or exchanges. What individual economics has discovered is that, for an exchange to take place, each party to it must feel that they are benefitting. An exchange is mutually beneficial. Economics is never about exploitation, and always about shared betterment. “Give me that which I want, and you shall have this which you want, is the meaning” of every exchange, as Adam Smith, often quoted as the father of economics, put it. Economics is collaboration, and it’s what gives us the good life, rather than the dog’s life. (“Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog” as Adam Smith declared.) Or, as we might say, economics is more about the wealth of the individual than the wealth of nations.

Means and Ends

How does individual economics help us make the good decisions that result in wealth? Through a minute study of individual ends and individual means. Ends are goals, objectives, aspirations. It’s important to choose them wisely and not get misled by unachievable ambitions. No-one can choose for you. Economics can help you understand what’s possible, but it doesn’t constrain you. Where it really helps is on the subject of means – which means are the best ones to choose to reach the goals you have set for yourself. Economics helps with both cause and effect – identifying what is the most likely outcome of choosing one means versus another – and the analysis of opportunity cost: if I choose this means, what alternative choice am I giving up, and have I weighed all the consequences properly? In individual economics, the future is always uncertain, and we don’t try to predict; but we can achieve good decision-making using available information and sound decision processes.

As the consumer, you are the boss.

The captain of the economic ship is not the President, or the Chairman of the Federal Reserve, or a billionaire CEO like Jeff Bezos. The captain of the ship is the individual consumer. The consumer determines what is produced and what sells well. How? By buying or not buying. If the consumer buys a certain good, more of that good will be produced. If the consumer stops buying, the production line shuts down, the brand dies, the company closes. If the consumer never bought in the first place, even the most splashy new product launch with all its glitzy advertising and celebrity endorsements will fail. As individuals, we can exercise immense market power.

Not only do we have the power of life and death over brands and products, as individual consumers we are co-creators of the products that serve us. By exchanging information with producers, we influence their decisions about what to produce. The information we provide might be direct commentary, like leaving a Yelp or amazon review, or an indirect indication about what we’re interested in, such as the clickstream we leave on the internet.

The most powerful individual tool we have as consumers is dissatisfaction. If we express it, the entire entrepreneurial production system is geared to find out what we’re dissatisfied about and how to make us happier through innovation, better service, lower prices or some act of betterment. By being dissatisfied at all times, we can drive economic growth through innovative new solutions. Our power as consumers is undiminished.

As Producer, You Are A Do-Gooder.

We are all both consumers and producers. Through the complex global network of interconnected specialization, we all collaboratively contribute what we’re individually best at to the world production system. Together, we produce food and fertilizer, houses and furniture, laptops and computer chips, credit cards and financial services, healthcare, entertainment, schools and ships and cars and concrete. Individually, we produce the work and the thinking and collaboration and connecting that go into these outputs.

The purpose of all this production is betterment for others. If what you are producing improves their lives, they’ll buy, subscribe, join and click. If not, they won’t, and you and your collaborators will stop producing it and move on to something else that’s better received. The goal is not production for its own sake, but production to improve lives. All the feedback loops reinforce this virtuous circle. By producing, you are doing good. You’re a do-gooder. Try hard to produce more.

How you feel is what you get.

How do individuals decide what to consume and what to produce? The answer lies in the economic concept of subjective value.  We each produce and consume in order to experience value. Note the word experience. Value is a feeling. It’s in your own head. It’s unique to you. It’s idiosyncratic. What feels valuable to you today may not feel valuable tomorrow.

Despite what the business schools and business books tell us, corporations can’t create value or add value. That sounds like engineering, an objective science. Corporations – or at least the people working for them and the parts of the capital structure that come into contact with customers – can make it possible for individual consumers to enjoy a value experience. Will they succeed? It depends how the customer feels on any given day. Will corporations be successful in energizing their employees and harnessing their energy and commitment? It depends on how the employee feels.

Money has little to do with value. You can’t feel money. Money is not an experience.

Fitting In And Contributing.

We are individuals, pursuing our own ends, choosing our own means, producing and consuming according to our own values. But we are not atomistic loners. We are part of a system, comprising the interactions of many individuals each pursuing their own competent goal-oriented activities. We have learned over time that collaboration in these interactions is more productive for everyone than antagonism. In fact, the economic idea of competition is a collaborative concept: multiple producers rivalrously pursuing the best ideas to improve the lives of our fellow men and women.

Our economic actions are directed at identifying for ourselves the best way to fit in to the system – finding the most valuable specialization for which others will reward us. When we find this role, we are contributing to the system in the most productive way we can. It’s a generous act of imagination to identify the future value creation of which we are capable, and to prepare for it now. For some, the contribution is rewarded with great wealth, for others it’s social recognition, and for most of us it’s the quiet satisfaction that we did our best.

Out of all of these individual contributions, there emerges a growing economy – 3000% in 200 years – a flourishing society, and an elevated civilization. Our understanding of emergence is most important. These complex systems to which we all contribute – economy, society, civilization – can not be designed or planned or ruled or directed. They emerge as the consequence of the behaviors of each one of us.

The Idea Of Emergence.

Most academic and professional economists prefer to think of the economy as a machine, and themselves as engineers. They can compose equations that tell them how the machine can perform. If they modify the equations, they can make it perform better on paper, and if they modify the engine itself through government policy, they can make it perform better in practice.

All this is rubbish. The economy is simply all individuals, acting as producers and consumers, and interacting and exchanging with each other. Each individual in each interaction is making their own decisions based on their own values and preferences. Every one of us is different, and every transaction is different, and we’ll each feel differently tomorrow than we feel today. This can’t be modeled and government policy intervention can’t possibly result in predictable change, only in error and confusion.

How does the economic growth we prize so much – the 3000% in 200 years – happen? Through the process we call emergence. It just happens – as a result of the hard work and good intentions and personal choices of individuals. Scientists understand this phenomenon. Complex systems, they say, have emergent properties. It’s impossible to direct the outcome of complex systems, or to tinker with them to try to influence outcomes. All that can be done is to make sure they are working with beneficent general rules. The emergent growth of free-market economic systems results from the general rule of individuals being free to make their own choices, to try new ideas to innovate and improve, and to ‘truck, barter and exchange” as Adam Smith put it.

The Transition To Individual Economics.

The world, and each of us in it, would be much improved if Individual Economics were to become the dominant form to be taught in school and university, and to inform the efforts of every producer and every consumer. The opposite form – mainstream economics or government economics – is dominant today. We will attempt to influence this imbalance with more articles explaining the elements of Individual Economics.

We are not breaking new academic ground. There is a highly-researched, fully developed, historically significant form of economics known as Austrian economics, because of the geographical origins of its founders in Vienna. The Austrian school of economics is largely ignored today. People’s mental imagery immediately leaps to the country of Austria when Austrian economics is mentioned. So it’s appropriate for the Center For Individualism to re-christen this school with the term Individual Economics. We are all individuals, and so we are all Austrians.

 

 

Choose Economics: It’s The Culture Of Smart Decisions

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Economics is for everyone. Ludwig von Mises wrote, “It concerns everyone, and belongs to all; it is the main and proper study of every citizen.”

Is that overblown? Not really. For individuals, economics is about making good decisions, and good-decision making leads to the good life. Bad decisions lead to bad journeys along bad roads, and it’s often hard to find the way back.

Think Economically, Like An Entrepreneur.

The decision-making practices of entrepreneurs, those innovators who drive economic growth and elevate the life-enjoyment of their fellow citizens, are worthy of emulation. We can all benefit from thinking like entrepreneurs. Let’s call it thinking economically.

First, entrepreneurs choose the economic way over the political way. The economic way creates value by identifying ways to serve others, especially in a new and better manner than their competitors. This creates new value for society, and entrepreneurs get rewarded in proportion to how much value they create. The political way is to let others do the work of value creation, and to appropriate the fruits of that value creation for other purposes.

In the economic way, the individual selects ends (which, in ordinary conversation, we might label as goals or objectives) that they can strive to achieve. These are not ends for society, or for the tribe or the group, but for the individual. Happiness results from the feeling that we get when we select appropriate ends and for which we are able to find the right means to achieve them. Carefully selected ends are important, as opposed to a vague search for “something better”. There are many different ends we could aim for, and so both selection and ranking of the most important are central to good decision-making. Milton Rokeach was an American sociologist who formalized the ranking of ends based on the value that people attach to them. He identified the highest-ranked ends in terms like “An exciting life” or “A sense of accomplishment” or “Freedom”, “Equality” and “Family Security”. These are ends that can occupy us for a lifetime, and should be well chosen.

The Right Ends Require The Right Means.

The second vital component of happiness is selecting the right means to achieve our ends. Means will vary with time, as opposed to ends, which can be maintained throughout life. For example, an individual might select the pursuit of a college degree as a means towards the end of a career and a sense of accomplishment. Some are now questioning whether this is still the best means to that end, indicating that we must all be conscious of changes in the applicability of different means to reach our ends, and that we should be adaptive in making adjustments. “Am I selecting the best means to attain my highest ranked ends?” is a question to ask constantly.

Time Preference: Choose Saving Over Consuming.

Within the ranking of ends and the matching of means to ends lies the variable of time preference. To entrepreneurs, the future is worth more than the present. They are willing to make sacrifices in the present (i.e. consume less) with the goal of reaping greater benefits (i.e. achieving more important ends) in the future. In economics, this behavior is called saving and investing. When we don’t think entrepreneurially we often succumb to short-term preferences that don’t contribute towards our highest ranked long term goals. For example, if we eat or drink too much that’s enjoyable in the moment but bad for us in the longer run, we are undermining our own goal of extended and sustained good health. It’s easy to do, unless we are thinking economically at all times.

Negative Feedback Is A Gift.

To help us to think economically, there is negative feedback. This invaluable input to better thinking comes to us free of charge, courtesy of the marketplace. If we try to make a contribution to the benefit of others, whether that is a business offering or proposing a transaction, or whether it is offering an opinion on something, we’ll quickly get feedback from the marketplace. If the feedback is positive, we are reinforced in our thinking, and we can continue in the same direction. If the feedback is negative, we are faced with a different choice – either to change our communication, to make our contribution more persuasive and acceptable, or to make a different, better and more acceptable offer. Economic thinking embraces negative feedback because it’s the most valuable resource for helping us to improve and do better. To continue our food-and-drink analogy, getting fat is negative feedback (assuming that this was not our chosen end), as is the commentary from others who notice it and are uncomplimentary.

Embrace Uncertainty.

Whatever action we take and whatever ends and means we select, the entrepreneur and the economic thinker recognize that the future is uncertain and there are no guarantees that our desired outcome will come to pass. Economists call this uncertainty. In uncertain conditions, there is always the possibility that our expectations will be disappointed. Entrepreneurs deal with uncertainty by attempting to reduce the number of variables in the uncertainty equation. Given all the choices of action, what evidence is there that one is more likely to generate the expected outcome than another? Entrepreneurs achieve this narrowing of choices of action through testing and experimentation, at the lowest level of commitment and consequently the lowest possible level of risk. In the world of start-up businesses, this is often captured in the idea of minimum viable product or MVP. Given what the entrepreneur needs to find out to reduce future uncertainty, what is the offering with the lowest but most salient number of features, developed with the least commitment of valuable time, in order to generate real feedback, positive or negative, from real customers?

This kind of reduction of uncertainty with minimum investment is applicable to every economic decision. Should you commit your valuable time to going to see a newly released movie? Invest in finding out the evaluation of people whose judgment you trust and who share your tastes. Are you trying to decide which suit or dress to invest in for office wear? Check out the reaction of peers to the fashion and style choices of others who appear to be successful in gaining the kind of social and business acceptance you seek, and then follow their example. In both cases, the marketplace is giving you valuable feedback at little cost.

Economics For Life.

Ranked ends, carefully selected means, continuous assessment of the fitness of means to ends, time preference adjusted towards savings and investment, embracing negative feedback, managing uncertainty by careful testing of steps. These are elements of economic thinking that are useful to us at every moment and in every aspect of our lives.

6 Pillars Of Individual Economics For The 21st Century

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Arnold Kling is a rare bird, an economist who recognizes that mainstream economics is empty and worthless today. More specifically, he accuses economists of inhabiting the world of the 19th Century, where the mental model is one where “hordes of interchangeable workers in stark factories toil in the service of the owners of capital”. It’s pretty stupid, he implies, for economists to look at today’s economy through 200-year old glasses. As an example of the blindness that comes of looking through ancient glasses, Kling asks how economics can place a value on intangibles (like a Google search or free content accessible to all on the internet) when its 200-year old theories of value creation are based on factory production and physical capital.

After this explosive introduction, his essay, accessible through Medium, wanders off into what he calls “research directions” for a new economics. But that’s academic. We don’t need research directions. We need new principles of economics, to develop a science that is truly useful to help people succeed in a rapidly changing world.

Here are 6 pillars to build on.

Individualism.

Economists are always trying to aggregate economic activity into quantified data such as Gross Domestic Product and the Consumer Price Index and Total Employment and the Money Supply. But economics should deal with the actions of individuals, how they make decisions, and how they exchange goods and services with others. All economic actions are performed by individuals. All decisions are made by individuals. Individuals’ choices of ends and means are drivers of those decisions.

The unit of analysis for economics is the individual. If economics is to be a useful science, it will help individuals to make better decisions for themselves, in the context of productive collaboration with others. There’s a fancy academic term for this approach: methodological individualism. However, let’s not go there. Let’s just help shed light on good economic decision making.

Subjective value.

Arnold Kling wonders how economics can ever put a value on intangibles like Google search and Amazon marketplace. By analyzing how individuals make decisions, he would know. Value originates inside the mind of consumers, and they take action as a result. If they feel that, by deciding to use a tool like Google search, they will improve their situation (e.g. answer a question, expand their knowledge, find an appliance they were looking for, or whatever it might be), then value has been created. Every entry into the Google search bar is a statement that “my life would be better if…….” If I had this information, if I knew that answer, if I could find this object, if I could bring more knowledge into my decision-making.

Value is inside the customer’s mind. Google is valuable because people use it to improve their lives. The measurement of value is the level of satisfaction the user feels.

Connections and Interactions.

There are billions of individuals in this world. Economists try to place them in collectives in order to pursue their goal of aggregation. They talk about the working class and the middle class, or about the workforce and the capitalists. But the opposite perspective is the right one.

Individuals seek to be economically unique, to find a way to specialize and differentiate themselves from others to make themselves valuable in the marketplace. And then they connect and interact with others so that their uniqueness becomes a contribution to the system.=

The new world is a set of nested and networked systems, within which individuals play their role. Every time they connect and interact with others, new information is produced, a service is given, an exchange is made. It is the interactions that are productive.

That’s how the modern world is advancing. Because each individual is empowered and augmented and connected like never before by technology, the number of interactions and the frequency of interactions and the quality of interactions and the precision of interactions are virtually unlimited. There’s an economy of individual value creation in these ecosystems of interactions. That’s where economics should focus.

Services As Software.

Kling’s accusation that economists still seem to think as if the economy were made up of factories and line workers is doubly telling. First, the US economy is now 80% services – defined as the use of knowledge to serve others. But, even if economic theory were able to keep up with this development, services have moved on, and are becoming software.

Financial services are a good example. Financial services as software will change every perception we have of financial institutions. There will be no banks, just apps on a mobile device, with the same digital experience as any other. Instead of bottlenecked institutions, we’ll see peer-to-peer, self-initiated, self-controlled, low cost transactions that feel instantaneous, smooth and frictionless. There’ll be high privacy, high security, and no discrimination.

Kling suggests economists don’t understand financial intermediation today. When finance is disintermediated, they’ll understand even less.

Real World versus Theory.

Economists are always talking about economic theory: monetary theory, labor theory, capital theory, price theory and so on. Economics should be about the real world. There’s no shortage of real world data, and in fact much of it is real time. And we have advanced analytics to detect patterns and trends and identify insights from the data.

The data is factual – it’s about actual individual behavior. From these facts we can deduce the feelings and motivations behind the behavior, and hence individual value preferences. There’s no need for elaborate theories (which are often riddled with counterfactual assumptions) and even less place for the spreadsheet models that economists build on top of their theories and assumptions. We now have machine learning based on patterns of facts.

Economics As Morality.

The current world of interconnected individuals exchanging services points towards a highly moral society. Each individual wants to help others realize their subjective value preferences. They try their best, and accept market feedback with grace to achieve continuous improvement. The most just society is the one that releases the creative energies of their entrepreneurial citizens in service to others. Economics should concern itself with true morality.

Well done, Arnold Kling.

Dr. Kling has done economics a great service. He has demonstrated its emptiness. He has declared it worthless. Thank you, Arnold. New thinking can now take over.

 

 

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