119. Peter Klein on Cronyism, Capitalism, and the Entrepreneurial Pathway

/0 Comments/in /by

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.

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): Download PDF

The Austrian Business Model (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple Podcasts, Google Play, Stitcher, Spotify

Loss Of Jobs? No, It’s The Splendid Rise Of Entrepreneurship.

/0 Comments/in /by

There is a bit of a wall of worry that advancing technology will eliminate a lot of jobs in the future economy. As usual with conventional wisdom, it’s the wrong way to think. What if jobs are just a bad idea, or at least one whose time has passed? What if we are on the cusp of figuring out a better way for everyone who works to be appropriately rewarded?

Let’s start with corporations, since they represent the source of most jobs. They hire workers, they offer jobs. Jobs are designed for corporate purposes. That has been a good system for a couple of hundred years, because it was the only way workers could access the capital they require to be their most productive. Specialized skills plus specialized capital combinations equals high productivity. Workers are paid in relation to their marginal variable product, and so some of them could be well remunerated if they found the right job.

But the arrangement has a little bit of a whiff of dependency. Some call it wage slavery, although that seems like a step too far. But workers are clearly dependent for access to capital. The corporation has provided that access.

Have you noticed, however, that the respect that society grants to big corporations is eroding? We can see it in the repudiation of Big Energy, Big Tech, Big Pharma, and even Big Food. The withdrawal of respect is critical, as a Big Energy CEO Bernard Looney of BP observed:

Looney said there’s no question that oil — his company’s main commodity — is becoming increasingly “socially challenged.” Even people working within BP started to have doubts about their line of work, Looney said. The company was in danger of losing staff, he said, and job candidates were reluctant to join. “There’s a view that this is a bad industry, and I understand that,” he told the Times.

Looney makes a far-reaching point. People are not going to work in a job where they get no respect, whether from their employer or form their peers or from society (represented, these days, by Twitter and Facebook). Respect is a fundamental. It’s why we work.

Lack of respect is one reason people will migrate away from Big Corporations. But economics provides another. More are realizing that the cost-benefit analysis of the career ladder / work-life value proposition is worsening. According to Bernhard Schroeder at forbes.com, young people can do the math in a very sophisticated manner.

A significant portion of the Gen Z demographic is having second thoughts about whether college, and its debt/cost, is necessary to accomplish their goals.

Gen Z is becoming more open to doing college differently or not going at all, according to a new study by TD Ameritrade. The study surveyed over 3,000 U.S. teens and adults, including approximately 1,000 Gen Z (ages 15 to 21), 1,000 young Millennials (ages 22 to 28), and 1,000 parents (ages 30 to 60). About one in five Gen Z and young Millennials say they may choose not to go to college. Many others see a less conventional path through education as a good idea.

As Jared Lindzon writes at Fast Company,

the traditional pathway to career success—namely higher education and climbing the corporate ladder—has never felt more out of reach or less certain. 

What’s the alternative? Don’t take a job, make a job. Become an entrepreneur. While the PR machine for Big Corporations continues to tar entrepreneurial business with the brush of high risk and fear of failure, and as an entitlement desert without corporate benefits or the warm embrace of the corporate PR department, young people are migrating to entrepreneurship and smaller, more nimble entrepreneurial companies where they can enjoy more creative empowerment. They are calculating the cost-benefit equation in a different way.

The calculus is not just financial. There are many psychic benefits from entrepreneurship, and they’re superior to the corporate ladder option.

Earlier start

In the corporate world, it’s required that you start at the bottom of the pyramid. With sacrifice (usually of work-life balance), it’s possible to climb upwards, but the pyramid narrows quickly after you and your fellow climbers, get beyond the base, and it’s easy to get jettisoned. On the job site, you start as apprentice or assistant and do the menial tasks until you are trusted with the tools. In the restaurant, you start as waiter or dishwasher and hope there is a pathway upwards.

Entrepreneurs are starting out at a younger and younger age. Even teenage. There’s no need to climb someone else’s pyramid if you can start out as the boss.

Easy access to capital

For today’s entrepreneurs, capital is something you download from the internet. Amazon.com will provide all the infrastructure needed to operate a digital retail business. Alibaba will hook you up to a supply chain. Mohammed Keyhani will connect you to dozens of generative tools for business design and business building, many of them free. There’s a whole fintech world of distributed capital on offer for those who want financial backing. The cost of entry for entrepreneurship has never been lower.

Self-sufficiency

Young people want to respect themselves. They’d rather be creative and resourceful and trust in their own self-confidence than to work in a corporation where they are told what to do, perhaps by people for whom they have no respect or in pursuit of hopeless strategies. The old “loyalty for security” trade (do as you are told and keep your job) is no longer as attractive as it once was. The market rather than the corporate HR department is Gen Z’s preferred mechanism for evaluating human worth and allocating human resources.

Control

The market is uncertain. Entrepreneurship is risky. Competition is unforgiving, red in tooth and claw.

Gen Z is not buying this corporate and government propaganda either. The uncertainty in the market is human: how do people choose, what do they prefer, what do they believe constitutes good service, what makes them loyal? These questions are fascinating and engaging. Gen Z loves to swim in these waters. Empathy is a business tool they can cultivate. They know how to run the A/B tests on offers and content through which they can implement the explore-and-expand methodologies that harness the complexity of adaptive systems. Entrepreneurs embrace and welcome market uncertainty, and get an emotional reward from mastering it.

Meaning And Purpose

Active participation in the capitalist system as entrepreneurs competing to best serve customers in the economic marketplace is a source of meaning. Clay Routledge, a social psychologist at the Challey Institute contextualizes it this way:

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.

Clay’s research reveals the importance of existential agency – the extent to which people believe they have the ability to pursue and maintain meaning in their lives. And people’s beliefs about meaning and existential agency influence a range of economic beliefs and views towards capitalism and entrepreneurship. People who have more existential agency were more likely to have positive views towards capitalism, about entrepreneurship, and more likely to be motivated to start or run their own business.

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.

A better choice

For Gen Z and Young Millennials, the realization is dawning that entrepreneurship is a better choice – for them as individuals, for the customers they will serve, for society and for the economy – than entry into the corporate hierarchy or wage labor in a system controlled by employers.

118. Per Bylund on the Importance of Good Theory for Good Business

/0 Comments/in /by

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.

Download The Episode Resource Entreprenership In Theory and Practice – Download

Key Takeaways & 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 — 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.

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 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 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

“Entrepreneurship in Theory and Practice” (PDF): Download PDF

The Austrian Business Model (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple Podcasts, Google Play, Stitcher, Spotify

Entrepreneurs Do Not Fail, They Effectuate Funds Of Knowledge For Human Flourishing

/0 Comments/in /by

Failure is a misnomer if we are referring to the human action involved in an entrepreneurial pursuit. A commonly held, although misleading notion, is that entrepreneurs often fail within the first few years in the marketplace. Often, I wonder why and how it happens that entrepreneurs fail only after a few years in the market if they envisioned a profitable opportunity where none had existed beforehand and was visually unapparent to others. In a non-metaphorical sense, let us think about this: Entrepreneurs discover and invest in producing and distributing goods for those who demand them the most, thereby creating downward pressures on consumer prices via their purposive action. With that said, why is it that at one point, the entrepreneur discovers effectual ways to satisfy consumer demands, and only within a few years is the entrepreneurial reported to have failed? I do not buy this one bit, and I believe this belief is all wrong. Here is why: Firms measure “success” or “failure” via profit and loss. How do we measure the entrepreneur’s contributions? One way we might measure the entrepreneurial function is by their compounding effect on future developments for human flourishing.

Instead of, as some might think, that entrepreneurs quit too soon, the reality is that entrepreneurs are often negatively affected by distortions and interventions in the marketplace. Not to mention, entrepreneurs are subject to the ongoing competition between existing and emerging institutions. Institutional competition is a result of what has been and what will be. Nevertheless, Institutional conditions serve to attract the unknown persons with specific knowledge who are incentivized and motived to contribute to the knowledge fund of the marketplace.

Some have said that entrepreneurs do not pick the right people for their team, their purposes are directed toward the wrong endeavor, and somehow, they lack commitment, persistence, and all the rest. I do not buy it. We must look at the effects of various institutional changes, distortions, and interventions, that play such a significant role in the assumed failure of nascent or incumbent entrepreneurs. 

It boggles the mind how failure is attributed in many cases only to entrepreneurs’ characteristics instead of the distortions and interventions placed in their way that obstruct the signals that are widely used to make decisions. Institutions like money and price act as entrepreneurial signals that reflect the known knowledge needed to produce and distribute consumer goods and services, particularly those economic goods valued most by market participants who consume and are satisfied by them.

Even the thought of an entrepreneur’s failure is somehow self-inflicted is udder nonsense. Who would discover a profitable opportunity only to fail at it knowingly? Moreover, the same people who attribute failure to the entrepreneur have the antidote for fixing their failures. Ha! We got entrepreneurial failure all wrong. It is no doubt true that sometimes entrepreneurial projects do not cut the mustard. However, according to Murray Rothbard, no one else knows their market and the workings of their market better than the entrepreneur. Therefore, there must be some external factors creating situations conducive to failure. As you see, commentary about entrepreneurial failures seems to face inward – failure is the entrepreneurs’ fault – of course. I beg to differ. Firms may fail, but entrepreneurs do not. Entrepreneurs shape our future only by adding to the entrepreneurial stock of knowledge. The steamboat, airplane, vehicles, ice manufacturing, light bulbs, umbrellas, pens, food and food processing, digital apps, just technology, in general, are all outcomes of an accumulation of knowledge from previous entrepreneurs that took place over decades and in some cases even centuries. 

Here is a thought experiment: If entrepreneurs functioned under a designated entrepreneurial sector, I presume they would “fail” less often. We know that institutions shape individual’s decision-making and, in the entrepreneurial sector, risk tolerance. An entrepreneurial sector as a “fund of knowledge” creates conditions for entry and learning from previous entrepreneurs’ accumulated experiences. 

Institutions of Entrepreneurship invites the effectual conditions for human flourishing – the spontaneously grown institutions where wealth can be created ex nihilo. You see, the marketplace is not anthropomorphic; it is a means by which individuals can pursue their end. 

You see, “failure,” as implied by those who do not realize it is one of those misleading words concerning the function of entrepreneurship in a market economy. We cannot look at failure as such. Intervention and distortions and institutional shifts have a more significant effect on entrepreneur success than the personal characteristics attributed to their “failure.” 

How Creative SMEs And Their Digital Assistants Will Elevate The Second Economy To First Position.

/0 Comments/in /by

When we think of “the economy”, we tend to think about actions and interactions directed and organized by people, in a physical world of machines, factories, buildings, roads, airplanes, offices and houses and cars. This physical world is where production takes place, whether those products are goods or services. Phones are manufactured, planes take off, banks make loans, and meetings are held, whether on zoom or in a conference room.

Over the most recent decades, a digital infrastructure has been growing alongside this physical economy. Or perhaps the better analogy is that the digital economy is growing under the physical economy like a root system under a forest, unseen but penetrating ever further. W. Brian Arthur, in an essay in McKinsey Quarterly, characterized this growing digital infrastructure as a “deep and slow and silent” transformation.

Shifting his analogy from root system to information exchange, he described a “conversation conducted entirely among machines”. His illustration depicts a traveler checking in at an airport. By placing a credit card or a frequent flyer card into a machine, the traveler initiates a process that automatically generates a boarding pass, a receipt and a luggage tag. While this is going on, computers check the status of the traveler, the status of the flight, the traveler’s identity with TSA, the traveler’s seat choice and access to lounges. There may be an automatic check with passport control, and with ongoing flights. Several more “conversations” are automatically informed, such as one about weight distribution of the airplane and another about air traffic control. These conversations take place automatically among servers, switches, routers and other internet and telecommunications devices. They occur in a few seconds for this one traveler, while they are ongoing for all travelers and for the air transportation system, with the conversations becoming smarter and smarter and more and more informed as more data flows.

Professor Arthur sees this digital infrastructure, and the conversations running through it and the automated processes it enables, as “the second economy”. It does not produce anything tangible, but it enables a lot of tangible outcomes. It helps architects design buildings and helps construction companies and contractors to build them. It tracks sales and inventories and supports transportation systems to ship goods from one place to another. It supports banks making loans and doctors conducting surgeries. It’s a kind of neural system. It provides intelligence – a neural layer that can sense and compute information and respond and make appropriate changes. Rapidly, this neural layer will develop more and more intelligence to support what people do in the physical economy.

There’s a worry that he cites – and which is shared with many intellectual commentators: that there is an adverse impact on jobs. The greater productivity enabled by the neural layer of the economy means that overall physical output requires fewer people to produce it. Physical jobs for people will disappear. He calls for the welfare state to compensate for this development via income and wealth redistribution schemes. 

But there is a totally different way to look at, and to welcome and celebrate, the development of the second economy. It is that those disappearing jobs will be replaced with entrepreneurship. The new, digitally-evolved neural layer will empower more creative entrepreneurship and more innovative value generation. Value is a subjective emotional experience of human beings, not of machines. It requires human empathy to understand the search for value, the desire for more satisfactory experiences, and it takes empathy to imagine and design the new solutions and offerings that can deliver this betterment in a human context. That’s the value that comes from entrepreneurship. What’s exciting about the new digital layer is that it helps entrepreneurs to generate more value.

Jim Spohrer, the Director Of Research at IBM’s Almaden Research Lab and head of Cognitive OpenTech, talks about digital assistants for entrepreneurs, and A.I.-based cognitive mediators capable of supplementing entrepreneurial capabilities – making entrepreneurs better at gathering the knowledge that they need to do business, better at negotiating, better at building business models and better at deploying them in new ways to serve customers. In Jim’s imagination, we’ll all have 100 smart digital assistants to help us in the near future. What will we be able to achieve? What will 1,000 entrepreneurs each with 100 digital assistants be able to achieve? How about 1 million or 10 million such augmented entrepreneurs?

One thing we can probably predict with confidence: those entrepreneurs with digital assistants will achieve more than the jobs displaced by automation. In fact, we can expect a new army of entrepreneurs to ride on the neural layer that Brian Arthur describes. They’ll be more empowered and more innovative and better at serving customers than the status quo of performing jobs in a hierarchy.

The best use of the term “Second Economy” is not for the digital automation infrastructure that is developing. We can make better use of the term to describe the entrepreneurial small and medium sized enterprises (SME), newly empowered by digital assistants, and newly expanded in numbers by people transferring from the jobs economy to the entrepreneurial economy. Together, this new service system will unleash new cascades of value-generating innovation for their customers, their communities and their employees. SME’s are already the second economy, in that they account for 50% of GDP and over half of new job creation in the U.S. They are already creating new economic value at a fast rate, yet they are largely forgotten while economic analysts focus on FAANG corporations and the New York Stock Exchange and the S&P 500.

In fact, we can expect that SME’s utilizing the digital assistance of the neural layer of the economy will become the First Economy, leading the way in innovation, job creation, and economic growth. The economy evolves as technology evolves, and the next cycle will raise digitally assisted entrepreneurship in first position.

117. Jim Spohrer on The Entrepreneurial Future In A World With Cognitive Assistants.

/0 Comments/in /by

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. Jim currently is the Director of IBM’s Cognitive Opentech Group (COG). On the E4B podcast #117, he shared 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 & 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, i.e. 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 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 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: Buy the Book

“T-Shaped Individuals” on Slideshare: View Slides

Service Thinking: The Seven Principles to Discover Innovative Opportunities by Hunter Hastings and Jeff Saperstein: Buy the Book

IBM Icons Of Progress: Browse Icons of Progress

Welcome To The Cognitive Era (PDF): Download PDF

The Austrian Business Model (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

Apple Podcasts, Google Play, Stitcher, Spotify