163. Joe Matarese: Entrepreneurial Solutions To Medical Tyranny (Part 2, The Solution)

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The medical care industry is so restrictive of individual freedoms — those of both of doctors and patients — that we can legitimately classify it as tyrannical. As is always the case, the solution will come from entrepreneurship, the creative and innovative response of individuals, doctors and teams and firms and their new business models to the dissatisfactions of patients and users of today’s system.

Joe Matarese is one of those innovative individuals. In episode #162 of the Economics for Business podcast, he described the nature and cause of the problem. In episode #163, he surveys the entrepreneurial solutions, some of which are beginning to emerge and some of which still lie in the future.

Key Takeaways and Actionable Insights

As with all entrepreneurial solutions, the consumer is in the driving seat.

The consumer — in this case, the patient — are clear in what they want, and what they don’t always get: quality care, accessible and convenient, at an affordable price.

Their definition of quality includes the alignment of interests between medical professionals and patients. Accessibility and convenience result from timely response to patient needs as opposed to lines, waiting rooms and delays. Affordable prices will arise when pricing is open as opposed to hidden behind the veil of insurance, co-pays, and healthcare-as-a-benefit rather than as an economic good.

Direct Primary Care is the business model that aligns doctor and patient interests.

The new emerging model of membership-based primary care (see BigTreeMedical.com) is a doctor or a small team of doctors setting up an independent practice and recruiting a customer base of subscription-paying patients. In return for a monthly or annual subscription, the patient enjoys access, and one-on-one consultations on demand (usually via tele-medicine visits). The doctor is often networked into a pharmacy (or the practice obtain a pharmacy license) so the patients access to drugs is facilitated, and the prices of drugs to the patient can be lowered.

Most importantly, the patients are able to build a strong relationship with their primary care doctor. Health monitoring can be closer and more personalized, and early treatment — one of the most important variables in medical care efficacy — can be facilitated.

The direct primary care practice is networked into specialists and treatment centers so that the doctor and patient together can choose the treatment pathway that is best for the individual — tailored to individual circumstances and needs.

Personalized technology supplements the Direct Primary Care model, greatly enhancing the health outcome benefits for the patient.

The direct primary care model and one-on-one patient-physician relationship provide the ideal conditions for the deployment of modern personalized technologies. Condition-monitoring watches and wristbands and other wearable or portable consumer electronics can provide the doctor with monitoring data and send an alert for any change in condition or abnormal reading. The doctor or patient can call for an immediate diagnostic consultation.

A direct primary care practice can be networked into an imaging center and a testing center for supplemental data acquisition — many of the new devices are mobile and can come to the patient, rather than vice versa, or can provide more immediate and convenient accessibility.

Personalized networked tech provides a new infrastructure for patient-directed monitoring and analysis (whereas the Obamacare “standard of practice” protocol predetermines what tests and diagnostics a patient can access, locked behind a bureaucratic gateway).

An entrepreneurial ecosystem of services will emerge to support the Direct Primary Care model.

The opportunities for entrepreneurs in the new medical care ecosystem are, to use Joe Matarese’s word, endless. He cited, as an example, the Surgery Center Of Oklahoma (SurgeryCenterOK.com), which posts cash prices for surgeries online (no hidden fees), and can usually provide service within 24 hours. They take no insurance and patients pay cash. On a broader geographic scale, medical tourism destinations with open pricing give patients the opportunity to find best pricing and provide the latest equipment and top doctors.

There are cost sharing services such as Sedera (Sedera.com) that offer new ways for patients to pay for healthcare in a peer-to-peer sharing of large unexpected medical costs. Sedera’s Cash Pay Directory provides educational resources and shopping tools to “help members become savvy healthcare shoppers”.

There are negotiation vendors who help patients to get fair pricing on medical bills from the big hospital conglomerates. There are online pharmacy vendors, like Mark Cuban’s Cost Plus Drug Company (CostPlusDrugs.com), to help patients shop for the best drug values.

There are entrepreneurial services like Freedom Health Works (FreedomHealthWorks.com) to help Direct Primary Care doctors with billing systems, office tech and the business infrastructure for a modern practice.

In the entrepreneurial world of healthcare, entrepreneurs compete to provide the best and most affordable services ecosystem so that patients can enjoy the best healthcare.

Open pricing and cash payments are an important component of the new system.

A big problem, perhaps the biggest problem, with the current medical care system is that the price system is not able to work in the way that it works in free markets. As Joe put it in episode #161, medical care system is “price-less”. Because payments are made by a third-party payer and not by the individual consumer, pricing becomes opaque to the user and economic calculation is rendered impossible. The third-party payment veil has resulted in price escalation and price manipulation and multiple prices for the same procedure at the same facility depending on whether the payments are immediate or deferred and the degree of bureaucratic and regulatory involvement.

If patients were to pay cash for treatments, they could make better decisions about exchange value. Catastrophic insurance for unexpected and rare events would make the use of insurance more like its application in car insurance and fire insurance — a properly priced optional spreading of risk for unexpected future events.

Consumers and physicians will collaborate in the creation of a parallel system for medical care.

Joe Matarese believes the status quo medical care edifice is too rigid and entangled to reform. The solution lies in a parallel system. If consumers activate their demand for improvements in quality, accessibility, convenience and payments systems, entrepreneurs will respond with new market-based offerings. Customers will flock to them because of the benefits they perceive in contrast to the current system. Market feedback loops of satisfaction and dissatisfaction will rapidly fine-tune the new parallel system to a higher level of value and acceptance. Joe estimates that to will take only 5-10 years for the new system to take over.

Additional Resources

“Entrepreneurial Solutions to Medical Tyranny” (PDF): Mises.org/E4B_163_PDF

Medicus Healthcare Solutions: MedicusHCS.com

How Can Big Companies Act More Entrepreneurially? Install A New Value Engine.

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Austrian economics recognizes the function of entrepreneurship as the driver of the market economy. It’s the process that recognizes consumer dissatisfaction – the experience they always have of knowing that something better than today’s status quo is possible but not knowing how to create it for themselves – and, with insight and brilliance and flair and a lot of experimentation, translates that expression of dissatisfaction into a design for a new offering, a product or service that will deliver the better experience the consumer craves. Entrepreneurship economic alchemy.

We tend to associate entrepreneurship with small, new, and fast-growing businesses. Disruptors. Gazelles. They’re on the fringe but aiming for incursion.

Yet this perception can’t be right. Entrepreneurship is the generation of new economic value, the improvement of lives in all kinds of ways all over the planet. Innovation and improvement are abundant and ubiquitous. Entrepreneurship is much more broadly distributed than just startups and small businesses.

In fact, many big companies deliver innovations and improvements to customers. Apple and Amazon, to pick a couple at random from the beginning of the alphabet, have consistently delivered both fundamental and incremental innovation in products, services, interconnections, and infrastructure. They have generated genuine customer value – improved lives through enabling greater productivity, resourcefulness, knowledge-sharing, convenience, low cost and new capacities for work, leisure and interconnection and collaboration.

But those same companies are burdened with the edifices of bureaucracy: the middle management layers that strangle the creativity of front line producers; the internal rules and regulations that crush creativity and flexibility and adaptiveness; the compliance functions of HR and finance that prevent exploration; the fixed allocation of resources that mandates against experimentation. In a modern dynamically complex economic system, bureaucracy can be destructive of future potential and sometimes fatal to it.

The entrepreneurial large company sustains innovation and destroys bureaucracy. We can highlight a few ways in which this can be brought about, although, of course, a complete cultural reversal will be required to bring about the end of bureaucracy entirely.

Bring customer value inside the firm.

The purpose of a firm is to facilitate customer value. For leading innovators, the concept of customer value is not simply an external outcome to be targeted, it’s an internal standard to be measured.

For example, the Vision and Mission for Microsoft under Satya Nadella’s leadership are:

  • VISION: to empower every person and every organization on the planet to achieve more.
  • MISSION: to help people and businesses throughout the world realize their full potential.”

Steve Denning at forbes.com writes:

Nadella gave operational substance to the abstract concept of empowering customers. Nadella embraced the idea of empathy and understanding customers and anticipating their unexpressed needs. He lived the mission and insisted on measurement to ensure that it was real. 

As Brad Anderson, Corporate Vice President of Enterprise Client and Mobility at Microsoft said, staff found that if they were having a meeting with Nadella, they had to begin with the numbers of customer usage, not technology, schedules, sales or profits. This underlined the principle that customers were truly number one. It turned Nadella’s concept of empathy into something tangible and measurable.

“When you go in to talk to Satya,” said Anderson, “you start with the customer. ‘What’s the customer’s problem? What are they trying to solve? How are we making their life better?’ And so, this concept of customer obsession and being really close to customers has been incredibly important.”

https://www.forbes.com/sites/stevedenning/2022/03/13/how-measurement-makes-deep-purpose-work/?sh=5f154094514c

Make Marketing the primary capability.

Marketing has been trivialized in business schools and in business thinking as communication of a company’s promise to the customer in persuasive terms. But its original role was to better understand markets, and how they generate value by aligning the value creation wants of the customer with the value facilitating capacities of the producer. As Fernando Monteiro D’Andrea and Fernando Bins Luce write, Marketing deals with everything that is relevant for the imagination, production, communication, and distribution of goods or services that might be valued by a group of customers.

This is a broad mandate. Marketing as a capability – spread through the firm and not just located in the Marketing Department – is charged with listening to the customer and deducing unaddressed wants from conversations about dissatisfaction, spreading this understanding throughout the firm to enable innovative responses, organizing all the responses into an offering to take back to the customer, and monitoring experience with the new offering, thereby opening the next feedback loop. Marketing is the dynamic integration of customer value and the productive capacity of the firm. It’s a core competency, not a department.

Establish a marketing-orchestrated co-creation process.

Value is co-created. Only the customer can identify value gaps from their own subjective perspective, even though they can’t articulate what will fill the gap for them, since it hasn’t been invented yet, and they are not the inventor. Only the producer has the resources to invent the new solution, recombining resources in new ways, experimenting with R&D, testing and perfecting. The integration of these two perspectives on value is co-creation. It’s ongoing dialogue, a mutual exploration of value potential and a shared development of value realization.

To follow the Microsoft example of empowering customers requires customers to imagine what they’d like to achieve and to illuminate what’s missing in current products and applications, and it requires listening and attentive producers who can creatively translate this information into innovation ideas. The orchestrator for this shared responsibility is Marketing – the capability, not the department.

Integrate Operations, Finance and HR into the co-creation flow.

In order to leverage the entire productive capacity of the firm in innovation, the orchestration process must engage all the parts. In addition to marketing, these are usually identified under the broad headings of Operations, Finance, and People, the latter usually being called the HR function. All of these functions need to be integrated into the flow of co-creation of value. As Cabrera Research Lab reveals from their study of firms as complex systems, this integration is achieved by getting all members of the firm in every function and every role aligned around the same customer-first mental model. Alignment confirms the vision and mission of value creation. That’s what Satya Nadella has done at Microsoft.

With these four organizational steps accomplished, corporations of all sizes can drive value creation with a new engine.

162. Joe Matarese: Medical Tyranny and Its Entrepreneurial Solutions (Part 1, The Problem)

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Medical care in the US exemplifies how the perverse effects of accumulated, self-reinforcing economic errors can render a system dysfunctional for consumers. As CEO of Medicus Healthcare Solutions, Joe Matarese has seen the current system from the inside — working and interacting with thousands of hospitals and thousands of providers, primarily doctors, around the country, dealing with processes, bureaucracies, government reimbursement procedures, and the full gamut of the producer side of the medical care system. In Part 1 of a two-part podcast series, he gives us the informed insider’s view.

Key Takeaways and Actionable Insights

Many forces combine and interact to produce the medical care system we experience today.

Politics: As in almost all cases of market destruction, politicians are highly responsible. They have decided that the medical care of individual citizens is an appropriate field for their interventions, and they meddle in their usual ignorant and incompetent fashion. Dr. Scott Atlas of Stamford University was one who documented some of this glaring incompetence and its resultant creation of the crisis response to the COVID-19 pandemic in his book A Plague Upon Our House. The impact of political incompetence on individuals’ experience of medical care is not limited to COVID-19, but Atlas’ book provides one excellent example.

Regulation: Politicians don’t just meddle; they legislate and regulate. The Affordable Care Act of 2011 is a particularly significant milestone. It created a regulatory environment in which it became virtually impossible for independent physician groups to function. Smaller and rural hospitals could not survive the regulatory burdens imposed, and many closed or were acquired by larger hospital groups. The resultant consolidation and anti-decentralization led to centralized decision-making (particularly evident in the COVID-19 pandemic, but much more broadly impactful than just that event) to the effect that individual doctors are told how to practice and how to treat their patients. The one-on-one doctor-patient relationship that flexibly exercises the experience of the doctor on behalf of the individual needs of the patient and their particular condition Is no longer operative. Doctors now apply a centrally designed pre-determined “standard of care” (and are even told by the AMA what “woke” language to use when interacting with their patients).

Bureaucracy: With regulation comes bureaucracy. Central to the medical care system is the CMS bureaucracy — The Centers For Medicare And Medicaid Services. (You can visit the behemoth at cms.gov — it’s instructive to see the breadth and depth of its reach.) This is the home, for example, of the code lists that govern medical care billing and payment policies. Every doctor must code every patient interaction and every procedure, and the code triggers a specific billing amount. The care that doctors can give patients is governed by these codes and standard-of-care protocols rather than the heuristics an experienced doctor uses to treat individual patients in individual circumstances.

Perverse incentives: Out of the regulatory bureaucracy comes a cascade of perverse incentives. The billing code system leads to one of them: hospitals and doctors will lean towards treatments and billing codes that result in the best billing and revenue outcome for them, rather than what is best for the patient. Similarly, with the fee-for-service model of the Affordable Health Care Act, there’s always the incentive to provide the service or procedure that generates the best fee.

Financial Engineering: The worst financial engineering of the medical care system is the tying of health insurance to employment, and the general misuse, misunderstanding and mispricing of insurance that results. Insurance is appropriate for classes of events (like car accidents or house fires) which are known to have distributed incidence but unknown in terms of where and when they will take place. Individuals pay into an insurance pool that can be drawn on when an unlucky individual encounters an incident; we all hope we will never have to draw on it. In health care insurance, individuals pay for coverage which they know they will draw on. They expect insurance to pay for routine things they should really pay for out of individual income or savings. Medical insurance coverage is appropriate for rare or catastrophic events, but not for everyday health maintenance. In fact, insurance totally obscures the market for health care.

The combined result of all these forces is the elimination of economics from medical care.

No free market: Medical care is the epitome of interventionism. There are no unregulated voluntary exchanges between buyer and seller, in this case patient and doctor. Every interaction is regulated, bureaucratized, coded, and distorted by financial engineering. Most importantly, there is no free market pricing. Prices are the indispensable signaling and information exchange mechanisms of markets; when they are suppressed, markets can’t function. The medical care system is, as Joe Matarese puts it, price-less.

No entrepreneurship: The function that solves consumer problems in markets is entrepreneurship. Entrepreneurs identify customer dissatisfactions and devise and present solutions for consumers to choose from. Entrepreneurship can’t operate in regulated healthcare. It is suppressed. Joe pointed out that, in the few corners where an entrepreneurial breakout has occurred — he mentioned medical tourism, Lasik eye surgery, cosmetic surgery, and The Surgery Center Of Oklahoma (SurgeryCenterOK.com) — prices have been lowered, quality increased and value spread wider and wider in the market, reaching more and more consumers.

Repressed Innovation: A major output of freely priced entrepreneurial markets is innovation. Entrepreneurs bring improvement in the form of new services and offerings, improved processes, and the application of new scientific discoveries. The innovation process is highly repressed in US Health Care, as in, for example, the FDA’s long and arduous bureaucratic process for approving new drugs resulting in delays in their adoption costing millions of lives.

Replacing the free market is an edifice of massive, plodding, constraining entities.

The top of the monstrous pile can probably be assigned to Big Pharma. The massive amount of funds flowing through the pharmaceutical companies empowers their commandeering of the medical community. Government healthcare agencies such as CMS, FDA and VA take up their entwined cronyist positions related to Big Pharma and Big Hospitals. Big Insurance is the financial engineering for the edifice. The bureaucracy regulates them all, but from a position of having been captured through the lobbying process. The patient sits at the bottom of this stack, squeezed by its weight, restricted by its rules, and constrained from receiving individualized care even though doctors and nurses are capable of providing it.

The COVID-19 experience was an instance of the negative consequences of regulated, bureaucratic, perversely incentivized and politicized medical care.

The standard four pillars of a medical response to the COVID-19 pandemic would have been:

  1. mitigation
  2. early outpatient treatment
  3. hospital treatment
  4. vaccination

Instead, we were bureaucratically and politically accelerated towards a mass vaccine solution, satisfying the perverse incentives of Big Pharma.

Mitigation could have embraced healthy lifestyles, nutraceuticals, and some stratifying of risk by patient age. Instead, it was botched with ridiculous and useless mask mandates and pointless (and damaging) lockdowns.

Early outpatient treatment for those infected would have recognized the “golden window” of outpatient treatment in the first two or three days of the case to reduce the need for later hospitalization, as documented by Dr. Serafino Fazio and others in a published paper (see Mises.org/E4B_162_Paper), with drugs like ivermectin and hydroxychloroquine, but these were ridiculed, and their use repressed. By the time hospital treatment is needed, the condition has changed from one of inflammation and clotting to pneumonia and lung infection, with potentially worse outcomes. The use of remdesivir was centrally authorized, and this drug is much more expensive and risks worse side effects than the early treatment drugs.

The four pillars were abandoned for the centrally planned decision of mass vaccination.

There is a pathway out of medical tyranny.

Principles of Austrian economics can help us find the way out of the current situation. Some of the principles we might apply include:

Let free markets operate: The medical care edifice refutes and represses free markets and market pricing. The first step in a solution is to restore markets to medical care.

Customer sovereignty: Markets are built around the consumer as “the captain of the ship”, determining the purpose and direction of the voyage. Consumers would exercise their sovereignty in a one-on-one relationship with their primary care physician.

Decentralization: Decisions in markets are made close to the customer and not via centralized bureaucracies.

Network versus hierarchy: Austrian economics views markets as networks of specialized nodes connected by 2-way information flows and provider-consumer interactions. The medical care edifice is a hierarchy not network.

In Part 2 of “Entrepreneurial Solutions to Medical Tyranny,” Joe Materese will identify some specific ways that we can build a parallel system outside the edifice to bring back consumer sovereignty and free markets.

Additional Resource

“Entrepreneurial Solutions to Medical Tyranny” (PDF): Mises.org/E4B_162_PDF

Medicus Healthcare Solutions: MedicusHCS.com

161. Connie Whitman: Turning Experience Into An Intellectual Property Business

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Your individual experience is a business asset. Life is teaching us more than we sometimes realize. An insightful analysis of what we’ve experienced, combined with purposeful translation, can generate unique intellectual property on which to base a unique approach to business. Connie Whitman joins Economics For Business to share her experience and her development of a thriving, resilient, and adaptive coaching and training service.

Key Takeaways and Actionable Insights

Experience is an asset that reveals our business superpowers.

Life teaches us whether we fully realize it or not. While climbing the job ladder at a firm may seem like the pursuit of credentials and titles, it’s better understood as an accumulation of knowledge and learning that can be applied in the future in entrepreneurship.

Connie Whitman enjoyed a 20-year career in financial services up to the SVP level. It was her customers who pointed out to her what “superpowers” she was developing — a distinctive capacity to assist all parties in a complex collaborative contract to fully understand the benefits accruing to each one of them individually and all of them collectively.

We all can have these superpowers, but we don’t always realize them until a third party points them out, through asking for input or advice or seeking us out or praising us. It’s important to learn the right kind of self-assessment — and to learn to listen to others’ assessment of us — so as to be able to understand our own superpowers.

We can translate our experience into intellectual property that forms the basis for an entrepreneurial business.

Connie Whitman transformed her experience into both a brand philosophy and a scalable methodology.

Connie knew from her experience in business that the function entitled “sales” is often viewed negatively: sales activities and salespeople might be accused of rapaciousness and avarice, however unjustified such accusations may be. She intended to develop a service in coaching and training in the sales field, and so it was important to distance herself from these misperceptions. Her counter was selling from a place of love: relationship selling based on love, respect, and integrity. Selling is the construction of an “everybody wins” proposition. It’s an honorable implementation of the entrepreneur’s ethic of service. Anyone using Connie’s techniques would evoke for themselves a feeling of pride and self-respect that the critics of the sales function try to deny.

She crafted a methodology for selling from a place of love in the form of a seven-step selling process. It is replete with Austrian principles of subjectiveness, empathy, and customer sovereignty.

Preparedness: Planning in advance to assemble all the knowledge and understanding available to make you informed and ready; anticipating what the customer will want to know and is likely to ask.

Connecting: Using empathy to connect on the basis of what’s important to the customer in order to establish credibility.

Exploring: Asking questions to learn as much as possible about the customer’s needs and preferences in the context of their current circumstances.

Active Listening: Connie’s phrase is “be present” — listen intently and indicate that you have heard accurately by asking follow up questions to further explore customer needs.

Presenting Solutions: Framing all value propositions as a solution — reliving customer unease.

Confirming: The process of closing the sale, actively asking the customer for their business.

Following up: Consistent, persistent, and respectful (CPR) follow up to confirm satisfaction and potentially extend the relationship.

Connie’s method has evolved and improved over the years — nothing is ever fixed, and all businesses adapt and learn. Yet this intellectual property developed from experience has proven to be solid capital generating both revenue flows and client satisfaction, not to mention word-of-mouth recommendations and references.

Business-building is a function of your network — another piece of intellectual property born of experience.

You meet many people in your professional career and you make many connections. Your network is another IP asset. It’s one you should groom and keep fresh and active, turning it into another business asset.

An IP business can be lasting, but you may have to refresh the infrastructure.

Connie’s in-person, face-to-face business model was challenged during the COVID pandemic. When business travel stopped, and a lot of sales training budgets were cut. The IP remained valid. The market signal was for her to digitize the business. She took classes and hired consultants to learn how to achieve domain authority. She educated herself on the technology required for digitization of her individual business model, and the processes for digital engagement that were consistent with her 7-step process and principles. The result has been further growth, and the continued fulfillment of pursuing her business goals, and realizing new ones.

Your entrepreneurial IP business can become your most fulfilling experience.

Connie describes her entrepreneurial experience as immensely fulfilling — the most rewarding thing she has done in her life. It’s the realization of the value accumulated over a career, and the new value shared with clients in providing service to them. It has been tremendously hard work, of course, and has required some challenging resource allocation decisions — of both time and money — but the reward greatly exceeds the sacrifice.

Additional Resources

“Connie Whitman’s Seven-Step Sales Loop” (PDF): Mises.org/E4B_161_PDF

ESP—Easy Sales Process by Connie Whitman: Mises.org/E4B_161_Book

Connie’s website: WhitmanAssoc.com

Changing The Sales Game podcast: Mises.org/E4B_161_Pod

Business As A Flow Requires New Management Techniques

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There are many calls to recognize that we are in a new age of business. It’s variously been called the age of agile, the digital age, and the fourth industrial revolution – and there are no doubt a few more such terms being bandied about. All these terms are illustrative of a need felt by business theorists to identify boundaries – beginnings and ends, where one thing starts and another terminates. We must, we are told, stop doing one thing and start doing another.

There’s an entirely different and better approach to managing business in a dynamic, complex ever-changing environment and that is the approach framed by Austrian economics: business as a flow. It’s always been complex, always been dynamic, always been changing. It’s just the way business writers describe it and classify it and think about it that has been static. Austrian economists have a better perspective.

Business is a flow, inside an evolving ecosystem. 

There is no beginning, and no causality for the current state. The system (what systems thinkers call a complex adaptive system or CAS) causes itself. We are all in the flow, the constant flux. There is no snapshot, only constant motion. Firms are CAS embedded in the CAS of the market embedded in the CAS of the economy. The constant motion of flow and change is the normal mode.

Management technique has not been able to keep up. Management technique prefers the static constructs of strategy and plans and structure. Strategy is an attempt to freeze business dynamics and specify how to act amidst constraints that can be identified, written down, and mathematicized. In reality, there is no time for planning or to make a plan, and no time for strategy in the sense of preparing a strategy document. Management technique is not well-aligned with reality.

Strategic orientation is a selection mechanism.

Businesses select the information they prefer to process and their ways of processing it, and they select the interactions with the environment that they choose to monitor and process. Selection mechanisms are dangerous and sub-optimal. They may select the wrong items, or mis-weight them, or mis-process them. They can’t get it right. Strategy is a loser before it leaves the starting gate.

The Austrian mental model for business is experimentation and exploration.

Rather than strategic selection mechanisms, the implication of business as a flow – embracing the reality that the future is unpredictable and there are many potential futures – is to keep the firm in constant motion. This means continuously searching the business model design space for new ways to operate. A business is a portfolio of experiments. The flow is to run as many experiments as possible, read the results quickly, and reorient to the next new way of operating.

The business mode for experimentation is action.

If experimentation has been well-adapted, the firm will have a wide range (but not an unlimited range) of experiments to run (ideally non-correlated) and the mode is not to analyze or strategize or plan but to act and implement. The goal is optionality – as many options available as possible. Action must be prized and promoted above analysis.

Firms need tight, fast feedback loops to read the experiments quickly.

The US Marine Corps  – an institution for operating in highly dynamic and uncertain environments – has a system of After Action Review (AAR). After a mission (a form of experiment) has been completed, participants and managers (i.e. officers and staff) gather to identify accurately “what happened”. The AAR is factual. There is no place for rank or personal criticism. Only for facts. Once the facts are agreed, then some deduction can be applied (why did that happen?) Firms should adopt the same practice. Feedback loop information must flow quickly through all levels and divisions without restriction. The result must be better alignment of the actions of the firm (or the military unit) with the reality of the external environment.

The only planning is discovery.

Planning tries to predict and control. Neither of these is possible amidst constant flow. The alternative is finding out what works and betting more on it. It’s the mode of explore and expand: keep running experiments, discovering what happened, and reallocating resources to what works by removing them from what doesn’t work.

There is a requirement to remove all barriers to change. 

Firms must accept and embrace mutation. The shared mental model must include “no barriers to change”. Businesses can create measurements for how well barrier removal has been accomplished – e.g., surfacing problems is a rewarded activity, response to problems raised is fast, the portfolio of experiments is reviewed and revised quickly, action is taken quickly. These are the measurements that matter.

Sometimes, some level of repeatable patterns can be combined with change. 

The firm may develop a reliable, repeatable revenue stream that emerges from one or more of the experiments. It can develop a management frame for continuing and maintaining the reliable revenue stream, recognizing that the reliability is short-term only, while exploring in other parts of the firm. They can do both. This duality is, by definition, inefficient. Efficiency is not a useful goal. It can be a cost-improvement strategy for the reliable revenue stream businesses but not for the firm as a whole.

Management technique is trying to catch up with business-as-a-flow.

Most of business-as-a-flow contradicts the management techniques and strategy approaches taught in business schools and advocated in the “great man / great woman” style of business biographies. Management technique needs to catch up, even while business stays in motion. Complexity theory has replaced management theory.

160. Laura and Derek Cabrera: Systems Thinking For Business

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Entrepreneurs can realize their goal to think better, think Austrian by taking a systems thinking approach. We can ditch linearity and hierarchies in favor of distributed networks and webs of causality and create better knowledge – more aligned with the real world — and better mental models. Professors Laura and Derek Cabrera of Cabrera Research Lab and Cornell University — leading authorities on systems thinking — speak to Economic For Business on the application of systems thinking for entrepreneurs, and everyone.

Key Takeaways and Actionable Insights

There’s a crisis in thinking in the business world.

Laura and Derek Cabrera have conducted deep research in the field of business thinking, and they’ve identified both the problems and the solution. The problems include reductionism (we’re taught to think about parts of systems instead of the system as a whole); hierarchical organization of thinking (versus complex distributed networks); thinking in categories versus breaking down part-whole groupings; thinking in terms of liner cause-and-effect versus webs of causality; and the prevalence of bivalent logic (right/wrong, black/white) rather than the multi-valent logic of many right answers.

This way of thinking is not well-aligned with the realities around us. The solution is systems thinking — the thinking of complex adaptive systems.

Systems thinking aligns with how the real world works.

Our mantra at Economics for Business is Think Better, Think Austrian. Systems thinking is better thinking (and Austrian economics fully embraces complex adaptive thinking — what Mises called constant flux and Hayek called spontaneous order and Lachmann called the market as a process of combination and recombination).

Systems thinking defines complex adaptive systems in this way:

Autonomous agents follow simple rules based on what’s happening locally around them, the collective dynamics of which lead to the emergence of the complex dynamics we see.

This description is actually a mental model of a complex adaptive system. The products of systems thinking are mental models. None are perfect representations of reality, but they help us when they are better representations of reality.

Four simple rules of systems thinking produce better mental models.

By following 4 simple rules, over and over again, anyone can become a practiced and adept systems thinker. The rules are captured in the acronym DSRP.

D is for Distinctions. Systems thinkers make distinctions between different things and different ideas. We can make distinctions between different customers, different costs, different sales channels, different suppliers, different employees. We identify boundaries, what’s inside and what’s outside. We differentiate, compare, and contrast.

S is for organizing ideas into systems of parts and wholes. Everything is a system because it contains parts. Every e-mail contains words that contain letters made up of pixels. We construct meaning when we organize different ideas into part-whole configurations. We split things up or lump them together in systems of context. We group, we sort, we classify, we assemble.

R is for identifying relationships between and among ideas. We can’t understand much about anything without understanding the relationships between or among the ideas or components. Relationships include causal, correlation, feedback, inputs/outputs, influence, etc. Fundamentally, relationships are action and reaction. We live in an infinite network of interactions, including between our own thoughts, feelings, and motivations. We connect, interconnect, associate and join.

P is for looking at things from different perspectives. When we make a distinction or identify parts and wholes or identify a relationship, we are always doing so from one particular perspective, made up of the point from which we are viewing and the thing or things in view. Being aware of the perspectives we take is paramount to understanding ourselves and the world around us. If we change the way we look at things, the things we look at change. We frame, we interpret, we empathize, and we negotiate from a perspective.

Systems thinking is not a set of steps but a set of rules, and from the interplay of these rules emerges the dynamics of systemic thought.

There are four types of action for systems thinkers applying the DSRP rules.

1) See Information and structure.

To construct meaning and mental models, we take in information and structure it. It’s important to recognize the difference between the information and how we structure it. A good way to do this is visualization: use whiteboards or sticky notes or software to map out systems and parts (e.g., boxes within boxes on a chart) and relationships (lines between the boxes). This physical manifestation of a system can help create new knowledge and point to solutions.

Laura and Derek told the story of a large conglomerate business that, by visualizing its divisions and functions and the information flows between them, was able to identify redundancies, see where communications and information was lacking or blocked off, and design a new and improved structure.

2) Use common patterns in the structure of mental models.

Laura and Derek use the term cognitive jigs: forms of information structuring that can be used again and again. A list is one type of cognitive jig. It can be used to order priorities or structure wholes into parts. Similes and metaphors are jigs. There’s another called a relationship distinction system (RDS) that can help solve silo problems in organizational design by identifying required relationships and the people responsible for them, and the resources required to operate the relationship. Excel spreadsheets and tables are jigs. Look for useful cognitive jigs and use them over and over again. They increase the efficiency and speed of thought.

3) Make structural predictions.

Austrians are wary of predictions because we know the future is uncertain. Here, we are not talking about predicting the future, but predicting the possibility of new knowledge existing after restructuring information. For example, a new relationship opportunity could emerge if we change our perspective. A new understanding could emerge if we break something that we were treating as a whole into its parts. We can identify gaps in our current thinking and make a bet that there’s something positive in changing that thinking. We can create new knowledge.

4) Embrace the logic of and/both.

We are taught bivalent logic: there’s right and wrong, there’s black and white, there’s X and Y. There’s an alternative: multivalent logic. There can be more than one right answer. There can be a continuum rather than fixed points.

One example of multivalent logic applies in the analysis of what customers want. They have a variety of preferences, ordered in different ways at different times and in different contexts. They are continuously learning what to want, and always making trade-offs. Bivalent logic won’t help entrepreneurs understand customers’ choices or decision-making processes.

Another example of bivalent versus multivalent logic is cause and effect compared to a web of causality. We tend to think of cause and effect as neighbors on a timeline. The cue ball of cause strikes the colored ball of effect and moves it in a designated direction. But it’s more realistic to think of the events of our lives or our business having multiple causal factors. There are so many mediating factors and external and internal variables that lead us to be more systematic in our thinking about them. Purposely look for webs of causality rather than shoehorn observed phenomena into a linear causal model that doesn’t match the reality of the world.

Systems thinking includes the recognition of individual subjective purpose and intent.

The perspective of methodological individualism leads Austrians to worry about whether systems thinking is well-aligned with Austrian thinking. I asked Laura and Derek this question. The response: “I would say that’s precisely what systems thinking entails — the notion that each individual agent is following simple interaction rules with other agents, and that those interaction rules are leading to the system and its emergent properties.

An example of an interaction rule from Austrian economics: humans act in order to improve their circumstances. Another is that they use their own subjective value system to determine what is an improvement. The action axiom, subjective value, opportunity cost in choosing between alternatives, profit and loss and the context of constant change are the simple rules of Austrian economics.

Practice, practice, practice.

Systems thinking is something everyone should be able to do. It can be practiced. Our brains are already building mental models about the world. It’s already in us and so it pays to be aware of it. 

It’s like any exercise: more reps make us stronger. Look at anything through the DSRP lens when you are feeding your dogs or driving down the highway observing billboard advertisements. Make the neuronal pathways of DSRP second nature.

This can occur at the level of individual learning or of organizational learning. In episode #152 (Mises.org/E4B_152), we discussed the organizational model of VMCL — an organization using learning to acquire the capacity to do its mission every day to achieve its vision.

Additional Resources

“How to Become A Systems Thinker” (PDF): Mises.org/E4B_160_PDF1

“Practical Systems Thinking Actions and Behaviors” (PDF): Mises.org/E4B_160_PDF2

Systems Thinking Made Simple: New Hope for Solving Wicked Problems by Derek and Laura Cabrera: Mises.org/E4B_160_Book

Cabrera Research Lab: CabreraResearch.org