Twice The Well-Being, Twice the Production, Twice The Love.

The purpose of an economy is to facilitate the feeling of well-being for its participants. That’s different than the official version, of course, which is to grow GDP, a combination of government spending and consumer spending on produced goods and services. 

GDP is reported as an agglomeration of all kinds of constructed numbers. We’ll-being is not measurable but its qualitative dimensions can be drawn by gauging the sentiment of citizens. The sentiment gauges are currently registering some weakness.

Well-being is produced by the private sector of the economy. There’s a well-established, time-tested proven system for doing so. It starts with the evidence of negative well-being. People exhibit an unease, a vague feeling that things could be better than they are. This vague feeling is the genius of the consumer. The human drive for betterment, to trade current circumstances for a new set that might feel more pleasant or more satisfying, is the energy of innovation, technological progress, economic growth, and civilizational advance. It’s an amazing feat of imagination, being able to see, in the mind, a future that doesn’t already exist. A counterfactual, as the scientists sometimes put it. The consumer’s imagined counterfactuals create new possibilities. 

On the production side of the private sector, there exists the function of entrepreneurship. Entrepreneurship is an act of individuals, either solely or in groups and teams, often in the form of firms and business corporations. Firms sniff out consumer unease. It’s what they do. It’s their purpose. Informed by this discovery of unease, entrepreneurs get to work to relieve it. They do so via innovation, designing a new proposition they can share with the consumer: will this work for you? will this make you feel better? have you considered this? If they get any feedback (“Yes, I’ll buy it.” “No, that’s not good enough.”) it informs a continuous change and improvement process until the offering is right for the consumer. 

In economics, the experience the consumer feels is called value. We can call it well-being. The feeling that things are getting better, that there are new options and new choices, that someone is listening and responding. This feeling is produced by the entrepreneurship of the private sector.

The other part of the economy is government and what government subsidizes. Government does not produce anything. That’s not its purpose. It extracts from the production of the private economy, via taxation, via debt creation, via regulation (limiting choices for both entrepreneurial producers and their consumers), via the diversion of resources (employing people as bureaucrats who could be much more usefully productive in the private sector), and using technology and capital that could also be deployed usefully for private purposes. Government spending as a percentage of GDP is a proxy for the ratio of government extraction to total production, and that number in 2020 was 44%

Making things worse, the government monetizes its debt via the Federal Reserve, thereby increasing the money supply in the economy. This money is depreciating at a constant and rapid rate. Saifedean Ammous in The Fiat Standard smooths out his estimate of monetary inflation at 7% per annum, which is enough to halve the value of anyone’s dollar holdings in 10 years. So the value of savings in the private sector that could be re-invested in innovation and creating new capital – which is what produces more well-being for people – is halved every 10 years.

We can safely say, as an approximation, that the activities of government mean that production in the US economy is at half the level of its potential. Consequently, entrepreneurship is at half the level of its potential. This implies that the well-being achievable by people as a result of entrepreneurial production is at half the level it could be. We could see twice the level of well-being from twice the level of production were it not for government crowding out entrepreneurship. 

And since entrepreneurship is love in action, the level of love in society is halved. Entrepreneurs work on empathy – they’re like angels, understanding what people want, and what dissatisfactions are burdening them, and then working hard to help people shed those burdens. They love their customers, and seek to earn customers’ love in return. It might be called customer service, or customer loyalty, or customer satisfaction, but in reality, it’s love. The greater the level of entrepreneurship, the greater the love. 

So there is potential for twice the well-being, twice the production, and twice the love compared to what we experience today. If we can attract more people to entrepreneurship, and point more consumers to the enjoyment of entrepreneurial output, we’ll go a long way towards achieving the kind of society we’d all love.

152. Laura and Derek Cabrera: Building An Entrepreneurial Business Culture With Systems Thinking

Why do entrepreneurs start businesses in the first place? They have a vision for the future and seek to work with other people to bring it about. Those other people may be colleagues and employees, directors and investors, suppliers, and customers. Organizing this multivalent work is hard. Thinking of your organization as a complex adaptive system yields new understanding and a new approach to organizing that results in improved goal achievement.

Laura and Derek Cabrera of Cabrera Research Lab are dedicated to sharing research findings that enhance the capability of any organization to reach business goals. They join the Economics For Business podcast to do some sharing with the E4B community.

Key Takeaways and Actionable Insights

Systems Thinking resolves the mismatch between the way the real world works and the way firms think it works.

World hunger is a wicked problem, yet there is enough food to feed the world. We don’t have the right mental model to account for all the social, economic, political, motivational, and cultural issues that shape the problem.

In the same vein, systems thinking in business is about building mental models that better align with the real world. Laura and Derek Cabrera provide an introduction in Systems Thinking Made Simple, and they mentioned some of the important changes in thinking that businesses must embrace to enter the new world of possibilities that systems thinking opens up. The first step is to recognize that LAMO thinking is inappropriate for a VUCA world.

The real world is agnostic about human endeavors

VUCA WorldLAMO Thinking
The real world is non-linearbut we think in linear ways.
yet we tend to look sat things through a human-centered (anthropocentric) lens.yet we tend to look sat things through a human-centered (anthropocentric) lens.
The real world is adaptive and organicyet we tend to think mechanistically and the metaphors we use reference machines (e.g., a universe like clockwork; mind is a computer).
The real world is networked and complex with a sprinkling of randomnessyet we think of things in ordered categories and hierarchies.

All businesses are complex adaptive systems. We have no choice in the matter. An organization is a living, breathing thing, organic — lots of individuals dynamically making decisions that roll up into the complex system. It’s not a machine.

An implication is that business executives and managers can’t operate on outcomes directly (e.g., via business “planning” or business “strategy”). Outcomes are emergent from the system and can be worked on only indirectly.

The traditional mental model for business organization is flawed.

Laura and Derek capture the traditional mental model for organizational management in the acronym PCCU: Plan, Command, Control, Utilize.

Plan: Businesses create plans for the future, often in great detail, with rigorous discipline, and lots of numbers and projections. But the real world is changing too fast, and outlining detailed steps to reach a goal amidst rapid change introduces biases that can occlude opportunities for rapid and profitable adaptation to change.

Command: Hierarchical organization designs assume a military metaphor of command. Organizations are much more organic in the real world, tempered by social influence, compliance, resistance, and rebellion. Better to think of then organization as a network and a culture.

Control: Management likes to feel like it is in control, but the control paradigm is both unrealistic and unresponsive to organic change.

Utilize: The most detrimental organizational construct is the Human Resources department. Treating people like resources to be utilized is unsustainable. People are independent agents in the system who wish to co-evolve to a place where their individual goals and those of the organization are well-aligned.

The mental model for how complex adaptive systems work is Simple Rules.

The great insight from complex adaptive systems thinking is that organizational behavior isn’t directed by leaders, but driven by followers. What are they following? Simple rules.

We can think of an organization as a superorganism. It self-organizes by following simple rules that guide the actions of individual agents in variable contexts. Autonomous agents follow simple rules based on what’s happening locally (that is, around them), the collective dynamics of which lead to the emergence of the complex, system-level behavior we observe: adaptiveness and robustness.

The simple rules for successful adaptive organizations are summed up as V-M-C-L.

Vision: A seeing thing. Something we all see in the future, where we are headed. Not a tagline, not a statement on a website, not a corporate word salad. A vision is a shared mental model that everyone in the organization can see and articulate and align with. It’s in their hearts and minds. It gets employees excited and connected.

Mission: A doing thing. A mission is something that you do repeatedly over and over again to bring about the vision. It directs the work in the organization, with clarity about who does what. It’s clear, concise, easily understood and measurable.

Capacity: The organization must have the capacity to do the mission: the energy, the resources, the skills. Capacity is a system of systems all connected and working together, focused on, and directed towards doing the mission.

Learning: Learning is critical to expand capacity, reinforce mission and refine vision. It is the adaptive function. Organizations must love learning – seeking unvarnished feedback from the outside world as input into making the changes that are needed for improvement. This means loving reality and being brutally honest about the current state. Learning means improving mental models, and embracing the possibility that your current model is wrong.

In their book Flock Not Clock (see Mises.org/E4B_152_Book), where there is a detailed exposition and explanation of V-M-C-L, Laura and Derek cite the example of the app My Fitness Pal.

Vision: Healthy living is the new normal

Mission: Facilitate and motivate healthy behavior choices

Capacity: Build mission-critical systems: design, engineering, R&D, sales, and marketing, etc.

Learning: Feedback on whether living healthy is getting easier, whether more people are making healthy choices, whether more people are feeling joyful and powerful as a result.

Think of the elements of V-M-C-L as a pyramid you can construct from first principles: Thinking drives Learning, which drives Capacity, which drives Mission, which brings about Vision.

The emergent result of V-M-C-L is culture.

Laura and Derek talk about training people to think in order to be able to learn. The first step is often unlearning the misleading mental models we’ve been taught to believe. When people start to think about mental models, they can recognize their own and those of others, and make comparisons, make changes, and find common ground.

If your mental model about your current situation is real — “brutally honest,” as Derek put it — then the chance of changing that situation for the better is good. You’ll be able to identify a path out.

Culture can be built around the simple rules of vision, mission, capacity, and learning, by purposely constructing the four mental models of V-M-C-L. There is enormous organizational and economic power in the new understanding of complex adaptive systems and how they work in getting a group of disparate people to work together towards a goal as if they are a single unified organism.

Additional Resources

Sign up for Laura and Derek’s Vision-Mission Bootcamp:  Go.CabreraResearch.org/VMBootcamp

Visit Cabrera Research Lab online at CabreraResearch.org and on LinkedIn (Mises.org/E4B_152_LinkedIn).

“20-Point V-M-C-L Checklist” (PDF): Mises.org/E4B_152_PDF1

“Constructing the VMCL System” (PDF): Mises.org/E4B_152_PDF2

Flock Not Clock: Align People, Processes and Systems to Achieve Your Vision by Derek and Laura Cabrera: Mises.org/E4B_152_Book

The Starting Point For Business Is Choosing the Customers With Whom You Will Share The Value Generation Journey.

How do businesses get started? Or innovation projects, or marketing campaigns, or any other type of commercial value generation?

The conventional belief is that the starting point is an idea. The idea of the iPhone or the Tesla or Lily’s stevia-sweetened chocolate bar. Ultimately, the idea will turn into a new product or service that “reveals to the market what the market did not realize was available” as economist Israel Kirzner phrased it.

But this conventional view is actually a misunderstanding of how business works. Business is an activity with a goal: to create and retain customers. The first step in the process is to imagine a future benefit – an experience that’s better than today’s for which a customer will happily pay. An experience is in the mind; the design of the experience is for someone. It’s for a customer. Hence the customer is the starting point.

Empathic Design.

To be successful requires the exercise of empathy. The customer’s experience is not the same as that of the individual or team that’s working on the innovation project or the marketing campaign. It’s subjective and individual, as is the concern with a current experience not being quite satisfactory enough. An innovator must “get inside the customer’s mind” in order to develop some understanding of what dissatisfaction feels like and what form future expectations of something better might take. Empathy enables the innovator to construct a mental model of how the customer’s mind works, how they think, how their preferences are arranged, how they feel about different choices – how they “tick”. To build such a mental model requires a focus on one customer – perhaps an ideal customer, but certainly a real person – in order to perfect it and make it accurate. Then it can be stretched and expanded to apply to a group or a market segment, recognizing that, in the process of expansion, the model becomes less and less accurate for any one single customer. That’s why businesses start with just one customer.

With a mental model in hand, the innovator advances through a design process – designing a future experience that will deliver a future benefit. It’s not all engineering, and it’s not entirely science; there’s a lot of art in it. Art is that part of design in which the designer proceeds on their own initiative without input from a buyer. Van Gogh didn’t seek instructions on what to paint and how to paint it. But there is a limit to how much art can go into your innovation. The customer has the final say, exercised through the action of buying or not buying.

Empathic Engineering.

This integration of art and engineering is why business analysts are beginning to explore design science. The design process is a series of steps aimed at producing something that can succeed in the market. The first design might be a sketch on the back of a napkin, the second one a memo, then a meeting to discuss the sketch and the memo, and then a team collaboration to develop specs and a prototype, with a design development path that accumulates more and more knowledge inputs until it produces a saleable product or service. The customer is involved at all times. They’re the point of departure – who are we designing for, what experience do they want – and involved at every step, until the ultimate one of a decision to purchase. Design is creative, and creative people can often come up with unprecedented designs – new knowledge that didn’t exist before. It becomes a science when each of the design steps can be tested.

Testing can be engineering or empathy. The engineering test is functional: does the design work, does it perform the task it’s supposed to, will it last or will it break, will it integrate well with the physical environment in which it’s going to be embedded? The empathy test is emotional: does it appeal to the customer, do they feel it can address their felt dissatisfaction with what’s available now, do they anticipate an experience they’ll enjoy and value? In the market, the emotional test is more important than the functional test. In design, it’s people first, things second.

The design process – from the sketch on the napkin to the first shipped product or first service – takes time. The value is realized at the end when the customer buys, but that is not the only point at which the customer is involved. It’s valid to think of the successive design stages as a journey – one on which a business invites the customer along, sharing every step, making joint choices and joint selections of features and design components, discussing and dialoguing, with a lot of “what do you think” and “what if we tried this approach”.

The Idea At The End.

The customer doesn’t know all the right answers. They don’t know the final destination in advance. They’re along for the ride so long as they are given input and so long as it is clearly their interest that is being pursued. Sometimes they need to be told what they can want, because they don’t know what’s possible; they don’t know what they can have in the future. The role of the business innovator is to reveal to them – all in good time – what they didn’t know was possible. The idea is at the end, not the beginning. The journey to get there is a shared mystery.

And there may be competing journey options. Other businesses may be offering a similar destination, a similar value, and a similar experience. It won’t be exactly the same so the customer must make a decision which journey they’ll ultimately complete. They’ll make comparisons, they’ll try to weigh the alternatives. Emotion will be the ultimate decider – the customer will feel like (rather than make a calculation) that one choice will lead to a better place than another.

Choosing the customer at the beginnig of the journey is the most critical decision a business team can make. They’re going to commit to traveling closely with that customer for an extended period of time. They’re going to listen calmly to every suggestion, every complaint, every expression of “that doesn’t quite do it for me” or “it’s not quite what I expected”. They’re going to led the customer lead them on twists and turns that might not ultimately lead to the right end-point.

You’d better love that customer. Choose wisely.

151. Mark Packard On Entrepreneurial Imagination: You Can’t Do Business Without It

Imagination is the first stage of any value generation journey — starting a development project, enhancing the customer experience, embarking on innovation, or building a business for the next year or the next decade. Imagination might sound like a fuzzy concept, but it’s a robust business tool, the engine of the entrepreneurial design process. Mark Packard joins the E4B podcast to put imagination into a business context and describe the possibilities it opens up.

Key Takeaways and Actionable Insights

Imagination is central to entrepreneurs and entrepreneurship, and to innovation and advance in all aspects of business.

We see business through mental models, as a kind of a movie our minds play for us. In this movie, we remember result and experiences from the past (which requires imagination) and we create images of what might have been, or, in the future, what might be. We know these images are not real, but they play through our mental model of business reality. They inform our plans and projects. We imagine cause-and-effect relationships between imagined concepts and ideas, and between actions and outcomes.

From new product development to efficient administrative processes, every aspect of business involves — and requires — imagination.

We can use imagination in simulating possible results.

Not only do we employ imagination in our regular business activity, we also use it for advanced complex modeling. We add new inputs to what we have constructed in our imagination — in the form of “what if” queries – to create a new mental model that’s different from the current one: a prospective reality that we can plan for and try to achieve.

As we try to achieve that prospective reality, we receive feedback in various forms, which we use adaptively to further adjust and improve the mental model we hold in our imagination. Imagination is dynamic, always changing.

Customers are also imagining, and entrepreneurs must imagine what they are imagining.

We’ve highlighted in earlier episodes, the Value Learning Cycle that customers complete in the process of learning what to want and what to value (see Mises.org/E4E_44). The cycle begins with predictive valuation — consumers predicting to themselves how much value they’ll experience from the product or service a business is pitching to them. That’s imagination at work. If they buy and consume, value is an experience that results — and experience is a mental representation that includes imagination. Then in their post-experience valuation, customers adjust their mental model based on their new value knowledge. Future predictive valuations will be imagined with this updated knowledge.

Imagination is central to customer expectations of value and to customers’ decision-making.

Businesses use three kinds of imagination to make a value proposition.

Businesses develop value propositions for customers, utilizing 3 kinds of imagination: creative imagination (imagining the design of a future product or service that will deliver a valued customer experience); empathic imagination (imagining how the customer will feel as a result of the experience); and predictive simulation (imagining what the world will be like after pursuing the contemplated action).

Creative imagination is a combination of needs knowledge (what customers want) and technical knowledge (what can be produced with available resources). In both cases, more knowledge is an aid to the imaginative process.

Similarly, empathic imagination can benefit from more knowledge about the customer’s mental model, developed through relationships and conversations.

Predictive simulation is aided by rapid learning from testing and prototyping and developing design artifacts (like landing pages and A/B tests) that enable interim simulations of customer responses.

Imagination can’t be shared but visions can.

When we work on a team or in a firm, it’s productive to be aligned on the imagined future at which the group is aiming and is working towards. Strictly speaking, we can’t share imagination. Everyone’s imagination is subjective and individual. You can’t imagine what I’m imagining.

What can be shared is a vision, because it can be described in words developed from a shared language. Of course, every individual may interpret the meaning of the words differently, but with repetition, explanation and persuasive presentation, the group can get closer and closer to shared meaning. The vision becomes a cultural artifact — how we think in this firm, what we aim for in this firm, how we see the future in (and of) this firm.

Similarly, in selling value propositions to customers, businesses are trying to get those customers to share a vision. We persuade them with storytelling, whether it’s in the form of advertising, or PR or social media or the words printed on a package.

Rhetorical skills — being able to communicate in a way that enable other people to see and share a vision, and to adapt it to their own vision — are key to successful entrepreneurship.

Some people are better at imagination than others — but you can work on the skill set.

Many business icons are or have been symbols of great imagination at work, such as Steve Jobs in the past and Elon Musk today. They’re better at seeing the future than others.

But everyone who understands imagination at the foundational level, as Mark Packard explained it in the podcast, can get better at it, and train others to get better at it, too.

Imagination is a simulation run through our mental model based on knowledge we possess. One important step is to improve the knowledge set available for the simulation — better quality knowledge, more accurate knowledge, more detailed or intimate knowledge.

More needs knowledge and more technical knowledge will improve creative imagination. Keep up with new technologies and with consumer trends and marketplace developments.

More customer knowledge will enhance empathic imagination. Spend more time with customers. Use qualitative research (such as the E4B contextual in-depth interview: Mises.org/E4B_151_PDF) to understand their mental model better, so that the empathic simulations you run through that mental model will improve.

Predictive simulation is an act of imagination that improves with learning about what works and what doesn’t. Run more tests and new kinds of explorations. Explore, explore, and explore more. Don’t take your own predictions too seriously; rather, expect to be wrong in ways you never imagined. Be humble, be adaptive, be agile, and recognize that you do have to predict in order to act. Triangulate with what others are doing because they’re imagining too, and they may have more and better knowledge than you. Try to reconstruct their mental models and assess whether they’d be helpful for you.

Additional Resources

Elon Musk’s Imagination (Video): Mises.org/E4B_151_Video

“Subjective Value in Entrepreneurship” by Mark Packard and Per Bylund (PDF): Mises.org/E4B_151_Paper

“Empathy for Entrepreneurs: How to Understand and Identify Customer Needs and Wants from Their Perspective” (PDF): Mises.org/E4B_151_PDF

“Mark Packard on The Value Learning Process” (Episode): Mises.org/E4E_44