181. Brian Rivera on the Flow System

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The traditional approaches to the structure and management of firms are becoming barriers to customer value. The Austrian capital theory approach recognizes that all value in the corporation flows to it from the value experiences of customers. Therefore traditional organizational design — centralization, hierarchies, divisions, bureaucracy, command-and-control — insofar as they are poorly aligned with customer value actually detract from the value of the firm.

There are alternative approaches to business organization, several of which we have highlighted in Economics For Business. One well-articulated alternative is The Flow System (Mises.org/E4B_181_Book). We talk to one of the authors of the concept, Brian Rivera.

Key Takeaways and Actionable Insights

The first principle of all business organization is the delivery of customer value.

The superiority and broad applicability of the Austrian business model emanates from its value-dominant logic. The purpose of business is to facilitate a value experience on the part of the customer. Only value matters, and all else (resources employed, raw materials used, production costs, organization, supplier partnerships, etc.) follows. Austrian capital theory enables managers to identify value drivers (i.e. what resources, raw materials, production costs, organization, partnerships result in the most value for customers).

The focus of the Flow System is to deliver the best value to the customer through FLOW: the interconnection of complexity thinking, distributed leadership, and team science.

Flow is another term for entrepreneurial judgment.

In Brian Rivera’s book, The Flow System, flow is described as “a narrative of in-the-moment decision making of judgments”. It is entrepreneurial action and interaction with the environment, irrespective of structure. It’s goal-oriented adaptive and collaborative behavior of teams and firms.

The Austrian perceptions of the market as a flow, value as a flow and capital as a flow mean that the Austrian business model is perfectly consistent with The Flow System.

Mastering complexity thinking is fundamental to implementing the flow system.

Many business environments exhibit high variability and uncertainty. We’ve used the term VUCA to characterize them: volatile, uncertain, complex and ambiguous. All business managers and entrepreneurs can benefit from adopting a complexity world-view, and understanding business as a complex system.

Complex adaptive systems are open, continuously dynamic, evolving, learning, and responsive to external changes. They can oscillate between order and disorder, they’re non-linear and can’t be predicted or controlled.

Brian Rivera highlights a number of techniques to manage in such an environment, including:

Sensemaking: the development of narratives or storytelling to conceptualize the complex environment and develop an appropriate set of mental models. The question to ask is, “What’s the story?” — the story that can unite the firm and its partners around a shared understanding and shared purpose.

Weak signal detection: in complexity, signals are never clear; uncertainty is the norm and errors are always a possibility. Weak signal detection is simply intensifying the scnning of the environment for insights and noticing more, so that both threats and opportunities can be detected earlier to avoid surprise.

Action: the only source of real knowledge about the world is experience, and experience results from action. Therefore, The Flow System emphasizes action — the D and the A in the OODA loop.

The Flow System employs a new definition of leadership: distributed leadership.

Distributed leadership is described as leadership that extends horizontally, vertically and every place between. The tools of leadership are not structures (such as hierarchy and top-down management) but methods:

  • Psychological safety
  • Active listening
  • Intent
  • Shared mental models
  • Bias towards action
  • Collaboration
  • Mentoring.

Perhaps the most essential factor is psychological safety among team members. It’s a group property — a shared belief in which the team is safe from interpersonal risk taking. Individuals can speak up, take risks, and experiment without fear of criticism or reprisal so long as every action fits within the shared belief framework. There is no command structure, and teams are the building blocks of the organization.

There’s a new field of team science for collaborative functioning in the workplace.

Team science is multi-disciplinary. Teams are necessary for the development of solutions in many problem areas, and the research behind team science has been conducted in many fields (ecology, healthcare, organizational science, psychology and more).

A team is a collection of individuals with a shared goal, who interact and are interdependent in their tasks, who have different roles while sharing responsibility for outcomes, and constitute a social entity embedded in a larger system (a business unit or corporation) requiring them to manage relationships across organizational boundaries.

A major section of the book The Flow System is devoted to an overview of the current state of team science as it relates to business organizations, covering team size and composition, teamwork, team processes and team transitions, team culture, team effectiveness, and combining teams for multi-team scaling.

Here’s a sample concerning the functions of shared leadership in a team:

  • Compelling team purpose — exceeding individual goals.
  • Members work jointly to integrate their complementary talent and skills.
  • Outcomes are collective, joint efforts.
  • Members adapt their working approach to each other.
  • Mutual accountability plus individual accountability.

Core principles and attributes of The Flow System.

  1. Customer first
  2. Value is a flow
  3. Complexity thinking, distributed leadership and team science can facilitate the flow when they are interconnected and synchronized.

Additional Resources

E4B Knowledge Graphic — “The Flow System Guide” (PDF): Mises.org/E4B_181_PDF

theflowsystem.com

flowguides.org

The Flow System by by John Turner, Nigel Thurlow, and Brian Rivera: Mises.org/E4B_181_Book

Teams That Work: The Seven Drivers Of Tea Effectiveness by Scott Tannenbaum and Eduardo Salas: Mises.org/E4B_181_Book2

A Million Regulations: The Narcissism Of Government.

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Professor Deirdre McCloskey, in a recent book, tells us that

The US federal government has in place over a million regulations. One million. The Democrats say, “Add more bureaucrats….” The Republicans say, “Add more police….”

Beyond Positivism, Behaviorism, And Neoinstitutionalism In Economics; Deirdre Nansen McCloskey; The University Of Chicago Press; 2022

The Code Of Federal Regulations is 220 volumes. The hubris of a government that can concoct so many ways to control us is quite striking. They have regulations about the food we can eat, and the packages it comes in, and the ingredients listed on those packages. There are regulations to control the clothes we wear, the fabrics from which they are made and the shops from which we buy them. They control the cars we drive and the oil and gasoline we put in them and the tires we put on them. They control the medicines we take and how we access those medicines. They control the glass in the windows through which we look at the world, not to mention all the other materials with which we build our houses, and the tradespeople and practitioners of crafts whom we hire. They control the media from which we gather information. The Federal Register Index has a span from Actuarial Services to Workers Compensation Programs. There is not a single detailed aspect of daily economic life for which our hubristic government bureaucrats do not have a regulation or a rule.

The cost of this regulation is enormous, and about to become overwhelming. In a 2016 study, the US Chamber of Commerce Foundation estimated the direct cost of government regulation at $1.9 trillion, about 10% of that year’s GDP. (And, since GDP includes government spending, this is most certainly an under-estimation of the burden on private enterprise.)

Possibly more important than the direct cost is the economic waste. All regulations are an extraction from the economy. They require the allocation of administrative personnel and time to the useless tasks of compliance – filling in the forms, filing the completed forms, gathering and tracking the data the government requires for reporting, and informing others in the organization what they need to do to ensure the firm remains in compliance. These people could all be doing something productive instead. Consequently, production that could take place is excluded or neglected, and the economy is smaller and poorer and slower-growing.

And this definition of waste does not even include the wasted dollars paid in fees, and in fines for late filing, inaccuracy and other infractions.

Why does government impose this idiotic waste? For example, as an alternative, government could just impose some kind of a flat tax on GDP or gross revenues from sales, but not go to the trouble of designing, publishing, imposing, enforcing and administering their idiotic rules. Such a tax could sustain government at scale and pay for plenty of bureaucrats’ jobs, pensions and healthcare plans, without all the work.

It’s clear, then, that they enjoy the control.

It makes bureaucrats feel powerful. Their decisions are final. They dictate how the economy performs. They dictate whether or not businesses can grow. They dictate how cars are built and how cows are milked. They have ultimate power. These seedy, weedy mediocrities probably couldn’t qualify for a real job in an honest company that applies meritocratic measures to reward those who add value and discard those who don’t. Yet they are in total control. What could be more admirable? What could be more relevant to elevating themselves above the masses? Self-serving by making the regulations more complex and more all-encompassing is a natural behavior for them, and so obviously good for the economy and the country. The country needs controlling.

Over-regulation destroys much. It especially destroys the discovery and serendipity that characterizes the entrepreneurial economic activity that brings us innovation and growth.

And the damage is not restricted to the immediate effect of regulation. The damage compounds over time, as Dr. Per Bylund of Oklahoma State University emphasizes. Every regulation distorts economic activity, and shifts the interaction of supply and demand, and the interactions of entrepreneurs and customers, for as long as it is in place, multiplicatively compounding the damaging effect as each over-regulated period succeeds the previous over-regulated period.

Rent control is an easy example to think through. Rent control in a city immediately changes the economic calculation of an investor who might otherwise plan to build rental housing or invest in upgrades to an existing investment. The net present value of future cash flows changes and so the return on investment calculation changes. The investor may decide to invest in rental housing in another city where rent control does not apply, thereby permanently changing the relative economic relationship between the two cities in terms of the quality of life of citizens, and relative attractiveness to employers. Or the investor may decide to invest in an entirely different line of economic activity, thereby distorting the relationships between the rental housing sector and other sectors.

When the investor decides not to invest in the housing stock of the rent-controlled city, that housing stock will decline in relative and absolute quality. Renters may choose housing outside the rent control zone if its quality is better or more stable. Those renters may have to commute further. The markets for transportation and cars and gasoline are thus distorted. Perhaps the commuter spends less time with family as a result of the longer commute, and the kids suffer in academic achievement while the quality of life of the commuter declines because of frustration and boredom. Spending more on commuting may result in spending less on entertainment or clothing. In all cases, the demand functions and preferences of individuals are distorted with ripple effects through the local economy. These ripple effects can become tsunamis as the regulatory damage compounds over time: cities become wastelands, wastelands become criminalized, criminalization becomes social breakdown, social breakdown becomes violence.

The narcissism of government is that they don’t care one iota about these economic distortions. They care about being seen as policy designers, as engaged in that they call action, doing something. They care about appearance, not results or outcomes. When the outcomes we describe come about (as they have in many cities across the USA), politicians engage in narcissistic denial. It can’t be us. It can’t be our fault. Someone or something else must be to blame. Just look at us, we are so committed to doing the right thing.

How we wish we could expel the narcissists from government.

180. Raushan Gross On the Newly Emerging And Newly Enabling Institutions Of Entrepreneurship

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Entrepreneurship today is a movement, a welling-up of new economic creativity, combined with a great desire for economic freedom and the joys of self-reliance and discovery. The movement is newly empowered by enabling institutions that simply weren’t around a few years ago, including the internet and its digital economic platforms. Professor Raushan Gross is a great observer and great documenter of this entrepreneurial surge, and he joins the Economics For Business podcast to share some of his original and distinctive observations about the very human aspects of his new entrepreneurial studies.

Key Takeaways and Actionable Insights

Let’s not over-theorize and over-professionalize entrepreneurship: it’s people finding new ways to thrive by creatively serving other people.

There’s an explosion of university entrepreneurship programs, entrepreneurship research and entrepreneurship methodologies. There’s an attempt to professionalize entrepreneurship, to make it a product of business schools.

Raushan Gross sees things differently, through a humanist, subjective and ethical lens. He looks at the culture of entrepreneurship, the social movement of individuals making their way in life in a new manner, seeing new opportunities to make their lives better for themselves and their families by making life better for others.

There’s a newly emerging set of institutions and a new class of entrepreneur: the digitalpreneur.

Economists take an interest in how institutions shape behavior and economic activity. They see institutions as constraints. They sometimes call them “the rules of the game”. Professor Gross has a different take. The new institutions of entrepreneurship — the internet, digital platforms, e-commerce, digitization in general — are not constraining; rather, they are openings to a new space with new possibilities. This digital space is welcoming. There’s abundant knowledge to be shared. There are new ways to think about access to resources, about production and marketing and organization. There’s a new world of price signals, much more flexible and fast-changing, and the route to cash flow and profit is faster.

Professor Gross identifies digitalpreneurs as a new economic class: not higher or lower, not defined by their origins or background, free to move at any speed and to access any place in their relentless, unbounded pursuit of entrepreneurship.

Today’s entrepreneurs are rewriting economic history: from the invisible hand to the visible hand to the digital hand.

Adam Smith introduced the metaphor of the invisible hand — the concept that individual economic actors and firms entrepreneurially pursuing their own profit goals generate the economic system we call free market capitalism, with benefits for all of society. Friedrich Hayek expressed a similar idea as “spontaneous order”. The invisible hand guided the rapid growth in real standards of living of the industrial revolution.

Then the visible hand imposed itself: the concepts of management control, and of planning and centralization. Creativity, innovation, and rapid growth were suppressed, while bureaucracies expanded. We got “Bullshit Jobs”, in David Graeber’s locution, from which creativity and caring were expunged.

Professor Gross takes us beyond both the invisible hand and the visible hand to the digital hand, which gently guides digitalpreneurs to participate in or even create new markets. The digital hand is generative. It enables digitalpreneurs to operate their own digital platforms, to construct their own digital economy, to assemble their own economic knowledge and to find their own unique place in the knowledge economy. The digital hand opens up new pathways to economic freedom.

Digital entrepreneurship can be conducted at any scale, but watch out for the dead hand.

Where are the corporations in their embrace of digitalpreneurs? Certainly, there are the new digital corporations like Amazon and Google who seem willing to hire members of the new class and turn them loose in creative experimentation. But what about the old economy corporations who need to make the transition to the new world? Are they hiring entrepreneurs? Are they enabling entrepreneurs, freeing them from bureaucracy and from the command-and-control hierarchy? The evidence so far is that they are not.

How to integrate the entrepreneurial orientation into a corporate organization remains an unsolved mystery. How can the corporate advantages of reach and scale be leveraged to further realize the senses of purpose and meaning that drive entrepreneurship? How can corporations shift to the entrepreneurial culture?

They need to find ways to eliminate what Professor Gross calls the Dead Hand — bureaucracy, regulation, control, risk-aversion, centralization, procedures, and rules.

But corporate culture is not the only barrier to the realization of the entrepreneurial society. There are other cultural barriers to overcome.

Professor Deirdre McCloskey is famous for her analysis that the catalyst for what she calls The Great Enrichment — the 3000% increase in real standards of living in certain Western countries from 1800 to the present — was a change in how we talked about entrepreneurship. The perceptions and descriptions of the bourgeois life of commerce transitioned from scorn to admiration. Entrepreneurs came to be seen as bold and innovative, a force for good, providers of desirable services enhancing the quality of life.

Professor Gross sees a fresh need for such a change in language and cultural support for the new age of digital entrepreneurship. One example he gives is the language of venture failure. Initiatives that are concluded early or don’t hit some target or don’t attract sufficient buyers or don’t generate enough profit to be sustainable are deemed “failures”. This characterization tends to lead to erroneous conclusions about risk (as in risk of failure) and about the people who engaged in the initiatives (“failures” or, worse, “losers”).

There’s a much different and better way to frame the same data as learning, and augmenting the pool of knowledge. When we think of entrepreneurship as a flow, we can visualize how information flows from the past to the present, elevating the intelligence of every entrepreneur and every firm that’s operating today. Not only does knowledge flow, it compounds, so today’s entrepreneurs can be exponentially more informed than their predecessors.

The more we adopt this win-win cultural approach to cumulative entrepreneurial knowledge-building, as opposed to the win-lose language of failure and success, the closer we’ll come to the beneficent entrepreneurial society that Adam Smith imagined, before he was so rudely interrupted.

Additional Resources

Join Economics for Business today and receive a free copy of The Emerging Institutions of Entrepreneurship eBook by Raushan Gross: Mises.org/E4B_Join

179. Mark Packard On Entrepreneurial Valuation, Part 2: How Entrepreneurs Create Value

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There is an excellent, deeply researched, Austrian economics-founded theory of customer value: the value learning cycle, which we explored thoroughly in Episode #178 (Mises.org/E4B_178). How do entrepreneurs and executives apply that theory to create customers, delight them, and grow strong brands and businesses? That’s the subject of the second part of Mark Packard’s business handbook for value creation, Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers (Mises.org/E4B_179_Book).

Key Takeaways and Actionable Insights

Entrepreneurs can’t directly access the customer’s mental model, but they can apply empathy to run simulations.

Entrepreneurial empathy is the ability to see the world through the mental model of the customer. We all see the world through mental models rather than directly, and each of us has our own, unique mental model. But mental models can also be shared and aligned. A mental model is a way of thinking about real situations or about the real world. It’s quite possible to describe someone else’s mental model. We can first ask them questions (“How do you think about your current situation?” “What do you do when the car you drive gets to 50,000 miles on the odometer?”) and then run hypotheses or ideas through the model that emerges (“How do you like this?”, “How does this make you feel?”, “Would you buy this product?”)

Empathy is knowledge-based, and therefore can be practiced by any entrepreneur.

It’s not the case that some people are more capable of empathy than others. Since empathy is knowledge-based, it can be learned, developed, and trained. It’s a process of filling different buckets of knowledge about your customer. There’s factual knowledge about them, as well as factual knowledge about their consumption or usage (e.g., location, frequency, any reports, or ratings they’ve provided). And then there’s experiential knowledge — what an experience felt like to them.

Only the customer has this experiential knowledge, only they can feel it. But if the entrepreneur can understand the customer’s mental model, it’s possible to simulate what that experience might feel like — feel what they feel. It’s possible to get closer and closer by experiencing it yourself: eating the food you’re offering them or the beverage you’ve designed, using their mental model rather than your own. The customer’s experiential knowledge is tacit — it can’t be communicated directly — but entrepreneurs can get closer to it through simulation, and interpret it through empathic technique.

Be aware that there is always the risk of what Mark calls interpretive loss — we listen or observe but we don’t interpret the data properly or fully. Our downloadable pdf provides direction on where interpretive loss occurs and how to safeguard against it.

There are some techniques to reinforce the accuracy of empathic investigation.

  • Lead users: In every category, there are users who feel needs and experience unsatisfaction / dissatisfaction more intensely. Give investigative priority to them.
  • Contextual in-depth interviews: Communication can be more productive using specific techniques from our E4B tools library. The contextual in-depth interview technique is one of our useful tools.
  • Ethnographic deduction: Ethnography is the technique of observing users in action. It’s a better tool than a survey or questionnaire — what users do is more informative than what they say when answering surveys. Researchers deduce motivations from observation.
  • Behavioral data: Some data streams can be the equivalent of ethnography — observing users buying or searching as an indicator of their needs, preferences, and concerns.
  • Entrepreneurs can also learn from themselves: We are all both consumers and producers. In the categories that are most important to you, observe your own behavior as a user. Be aware of your concerns as a customer. Make your empathy channel customer-to-customer.

From value propositions to innovation.

Developing a value proposition is a problem-finding process. Designing an innovation is a problem-solution process.

Problem-finding is the development of knowledge of a problem to be solved from the customer’s perspective, using the experiential learning from the mental modeling exercise. A problem is not the same as a need — it’s a specific gap in the solution landscape of products and services from which the customer can choose, a gap that can be filled with a new solution yet to be identified but capable of identification.

Problem-solving is the application of resource knowledge and technical knowledge to identify a new solution. The entrepreneur must navigate multiple uncertainties to arrive at a solution — demand uncertainty (is there real demand?), technical uncertainty (will it work?), resource uncertainty (will I be able to gather the resources to get to a solution?), capability uncertainty (can I do this?), and competitive uncertainty (will someone else beat me to it?).

Mark’s book includes a multi-step process for problem-solution creativity. One of the most interesting is knowledge combining.

What’s a pancake boat? It’s a combination of two very basic words and ideas that represents the potential for something new. Perhaps a very flat-profile boat for floating under low bridges. Or a breakfast barge touring the harbor. The point is the combination. When entrepreneurs can combine technological knowledge with problem knowledge, it’s possible to invent a new solution without inventing a new technology.

Mark has two suggestions to help with knowledge combining. One is to become interested in technologies. If you are having a hard time devising a solution, it’s probably because you are not familiar enough with technologies that are already available to do so. Find tech websites that can keep you up-to-date on the latest discoveries and applications. The more you understand about the properties and capabilities of resources and technologies, the better you can leverage those properties and what they do.

The second suggestion is a specific method. List as many different resources, technologies, and skills that you know about — software skills, hardware skills, people skills, technologies you’ve worked with, processes you’ve worked with, etc. Keep the list updated.

Then turn to the problem you are trying to solve. Mentally step through all the resources on your list and bring each of them into active memory. Try to think of a possible solution using each one. Keep going through the whole list. You’re bringing technical knowledge schemas forward while holding your problem knowledge in active memory.

Do any of the solutions stand out? Are there any that are truly outside-the-box? Are any of them impossible with current technology? That’s good. Do more research. You might find a breakthrough answer.

It takes time, commitment, and resources, but when you are passionate about the entrepreneurial process the effort will pay off big time.

Entrepreneurs get inside the mind of the customer to make the world a better place.

The goal of entrepreneurship is to enhance and improve the state of well-being experienced by customers. To achieve this goal, entrepreneurs aim to understand the customer’s mental model, and run creative solutions — potential futures — through it to simulate the customer’s new experience. It’s a counter-factual exercise, but entrepreneurs can improve their capacity, and their odds of success, with practice, commitment, and the use of some of the cognitive techniques Mark Packard recommends.

Additional Resources

“Contextual In-depth Interview Technique” (PDF): Mises.org/E4B_179_PDF

“Interpretive Value Learning” (PPT): Mises.org/E4B_179_PPT

Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers by Mark Packard: Mises.org/E4B_179_Book

Government Economics Versus People Economics

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Economics is beautiful. It’s the science of prosperity – how every individual in an economy can find their way to prosperity by collaborating and exchanging with other like-minded individuals for mutual benefit. The essences of economics include individualism – people helping people; betterment – everyone always seeking a higher level of well-being for themselves and for others; value – the feeling experienced when that higher level of well-being is attained; creativity – the new, never-tried-before ideas that humans are capable of generating; learning – no-one knows, controls or can predict the future, but new knowledge is continuously generated and shared through experience. Learning, creativity, the search for betterment and the pursuit of new value make economics an exciting, dynamic discovery journey of innovation and new horizons. 

We might call this form of economics “People’s Economics”. It’s the science of making people’s lives better. In his book Factfulness, Hans Rosling lists 16 Bad things Decreasing (including children dying, hunger, and plane crash deaths) and 16 Good Things Increasing (including literacy, access to electricity and safe water, and immunization). His point is that the individual drive for betterment and the search for better value – i.e., the science of economics – are the source code for global progress and human thriving. The dynamics behind this progress include experimentation, collaboration, feedback loops, and entrepreneurship – what complexity scientists call “explore and expand”: keep randomly trying things that might work, and expand resource allocation to those that do.

There’s another version of economics that we’re all more used to and more exposed to. That’s government economics. It’s the opposite of the science of prosperity for individuals or the individually-initiated drive for betterment and the search for value. The focus of this form of economics is not individual people and their personal pursuit of well-being. It focuses more on aggregates – meaningless contrived statistical roll-ups such as GDP. Individual people are meaningless in GDP. It focuses on government policy: the government’s fetish for control over the individual in economic terms knows no bounds. Government has explicit and detailed rules to control everything that is produced and everything that is used or consumed. There are government rules about the size of your breakfast cereal package and the ingredients listed on it. There are government controls that govern the car you drive and the airline tickets you buy and every element of your healthcare. And the government’s second major interest in the economy, after controlling it with regulations, lies in extraction: taking, via taxes, tariffs, and fees, the fruits of the economic activity of private producers that remain even after regulation has strangled productive possibilities.

Why does government economics dominate the economic conversation? First, the government employs most economists and subsidizes their research. Most Ph.D. economists are employed by the Federal Reserve and government departments either directly, or as paid consultants and advisors. Most economic research and the papers published by universities and think tanks are subsidized or directly paid for by government grants of various kinds. Economists are paid to do government economics. And secondly, of course, government controls the media through which we get most of our economics information, through the statistics it publishes and how these statistics are covered by mainstream media. All mainstream paid media require government statistics to report on and debate, and government economic policy to publicize and weigh (don’t worry, it’s all good, they tell us). They can’t question the existence of the Federal Reserve when Federal Reserve policy and actions provide them with so much airtime content and therefore so many advertising dollars.

Any of us can switch to people economics. It’s simply a matter of reframing. Frame the economic knowledge you have and the news that comes your way through the lens of individual end-users and individual producers, both people-as-producers and firms-as-producers. For example, take the question of whether or not there is an economic recession. The government statistics say no, not yet. Some of the commentators on “macro” economics believe we are in a recession. To decide the question, look through the lens of you. Do you have a job? Does that generate cash flow for you? Are you consuming? Are you consuming less or more? Is your mortgage rate locked in, or floating? These and other personal questions determine your economic condition and economic outlook, not the statistically-contrived movements of some meaningless aggregates.

You can use the same personal assessment for price inflation. Are things you buy more expensive than they were a year ago or six months ago? All of them, or some of them? Are you able to cut back on some expenditures that don’t seem as necessary as they once did? Can you make substitutions? Can you adjust? The level of price inflation that’s painted as a “national” level is a government number. It signifies nothing about your personal inflation, or your family’s. Your inflation is not determined by the national prices of eggs or gas or any other single item, but by the monthly or weekly dollar expenditures for household expenses. Some of these are fixed and some are variable and you manage accordingly. You economize. You calculate and recalculate and re-evaluate. 

Similarly, on the production side of the economic equation, People’s Economics applies at the individual level. The driver of economic production, innovation, and growth is entrepreneurship. This is a function that any individual can perform. Trading labor hours for a wage is entrepreneurial if the combination of revenue and psychic reward is greater than the individual’s perceived cost of doing the job. Working for a corporation can be entrepreneurial so long as the work is done in a value creation mode as opposed to a bureaucratic mode; bureaucracy is non-productive. Entrepreneurship can be pursued by any business owner, co-owner, or investor, so long as the focus is on producing customer value (as opposed, for example, to maximizing shareholder value).

There are a few economists who recognize people economics. Professor Deirdre McCloskey of the University of Chicago calls it humanomics, and she’s campaigning for an end to the kind of false measurement that characterizes GDP and the centralized control of people that is the driver of government economic policy. She favors individual creativity and discovery as the drivers of economic growth. She calls for liberty from policy.

The entire Austrian school of economics, of course, is the antidote to government economics, built on the consumer as the originator of value – discovering what to want – and the entrepreneur as the producer of value – meeting the consumer’s newly discovered wants with innovation.

The economics profession has a lot to answer for. Mostly, it should cease to debase itself and stop selling itself to governments. We can then rediscover the beautiful science of prosperity.

178. Mark Packard On Entrepreneurial Valuation, Part 1: Value Learning

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Getting into the minds of customers is the universal need of everyone in business. A new book by Mark Packard, Entrepreneurial Valuation, provides a new understanding of how customers identify value in the constant, never-ending flow of the value learning cycle. Mark joins Economics For Business for a two-part episode on how entrepreneurs can better understand value in order to delight customers.

Key Takeaways and Actionable Insights

Getting into the minds of customers is the universal need of everyone in business.

The business world is enthusiastically adopting the insights of Austrian economics. They appreciate the unique economic perspective that can help grow and strengthen customer-facing businesses — and that means all businesses. Professor Mark Packard is presenting his insights on customers and how their minds work when choosing what to buy in a new book, Entrepreneurial Valuation, with the sub-title An Entrepreneur’s Guide To Getting Into The Minds Of Customers (Mises.org/E4B_178_Book). It’s a business book for every business and every businessperson.

The first step is to experience value as customers experience it. They learn it.

The purpose of business is to create value for customers. And for customers, the pursuit of value is everything. It’s life — a never-ending process of identifying what they expect to be valuable to them and trying to weigh up their choices between alternatives. Human beings are always valuing, all the time. In fact, Mark makes the point that we should think of value as a verb, not just as a noun. Value as a noun has a specific meaning: it’s an experienced benefit that constitutes a change in well-being from a state of unwellness to a better-off state. The benefit is the experience, and it can be ascribed to something that made us feel better off, which therefore has value.

Valuing — the verb form of value — refers to human beings constantly deciding what to do and what to choose based on their valuation process. And that process is learning — learning from previous value experiences, and learning from observing others. As customers, people are always asking: what makes us and others the best off we or they can be?

Entrepreneurs must have their own, complementary, value learning process: learning what customers value and, ideally, what they will value in the future.

Customers can be unsatisfied or dissatisfied. It’s important that entrepreneurs address these value states differently.

The default state for people is unsatisfied. We have unmet needs that we feel all the time. Mises called it a state of uneasiness. Needs like hunger can be satisfied in the short term, but the satisfaction degrades quickly. Needs like security or freedom or friendship may always be unsatisfied, or at least part of the time. There is always a state of greater well-being to aspire to.

Dissatisfaction is a different state. A customer may have applied their value knowledge — made a valuation — to predict a future value experience, and it falls short of their expectations. They made an error. This results in a feeling of dissatisfaction

Both states are opportunities for entrepreneurs: to meet a hitherto unmet need, or to substitute satisfaction for dissatisfaction via a new or better solution. It’s important to know the customer’s state of well-being and its source.

Customers have limited value knowledge and considerable value uncertainty, yet they must make value predictions.

Customers use the value knowledge they possess, from previous value experiences or observing others in the market, to try to predict a future improvement in well-being for themselves. What choices should they make to achieve this improvement?

How do they make the prediction? They perform a mental simulation of future value experiences. They imagine themselves having a future value experience with a particular product or service. Via the simulation, they form their predictive valuation: the benefit they expect to experience in the future.

When they actually use the product or service, they assess the actual value experience and compare it with the prediction, thereby updating their value knowledge. They ascribe to the product or service the satisfaction or dissatisfaction experience they feel. Or they might ascribe it to a set of circumstances or some other context. In any case, they have a new mental model: a new experience they can ascribe and use for future predictions.

Value learning is a cycle.

  • Self-assess to identify unsatisfaction and dissatisfaction;
  • Search for new value propositions with new satisfaction potential;
  • Compare the new value proposition with alternatives (and with others’ experiences);
  • Make an economic calculation: willingness to pay;
  • Purchase;
  • Usage experience — including objective value experienced in consumption and subjective value experienced as degrees of feelings of satisfaction (e.g., delight at exceeding expectations versus satisfaction at meeting expectations versus disappointment at failing to meet expectations);
  • Assess usage experience compared to value expectation;
  • Adjust value knowledge base and revise future expectations.

Austrian economics helps businesses get into the minds of customers to monitor and understand their value learning.

Economics is a much better discipline than finance on which to construct an approach to growing a successful business, because economics is the science of choice: how customers choose the ends they pursue and how they choose the means they perceive as best for attaining their ends.

It’s the Austrian school of economics that is most useful. Traditional economics believes that customers seek utility — what’s useful to them. But subjective value doesn’t reside in utility, it resides in the satisfaction that comes from the feeling of making the best choices. Behavioral economists believe that customers have a tendency to make poor choices (from the economists’ point of view) because of incomplete value knowledge.

But Austrian economists accept the customer’s mind as it is. The goal is to understand how customers choose and how they experience value in their everyday lives, how they negotiate value uncertainty, how they set expectations for the future and how they compare actual experience with expectations. What goes through their minds? To know that requires getting inside their minds, which is what Professor Packard is trying to help us to do with his new book.

Additional Resources

“Experiential Value Theory: How Customers Think About Value” (PPT): Mises.org_E4B_178_PPT

Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers by Mark Packard: Mises.org/E4B_178_Book

“Tools For The Value Learning Process” (PDF): Mises.org_E4B_178_PDF