The New Economics: Harnessing Complex Adaptive Systems for Business Growth

The new science of complex adaptive systems in economics has transformative potential for business. This new science reveals how competitive entrepreneurial exploration of new technologies, products, and services can drive continuous economic growth. Think of it as a new law of economics, centered on the roles of value and selection in evolving entrepreneurial systems.

Traditional economics has struggled to identify unifying laws. However, the science of complex evolving systems provides a fresh perspective. An evolving system comprises many interacting components that increase in diversity, distribution, and patterned behavior over time. This seems to contradict the second law of thermodynamics, which states that natural phenomena become increasingly disordered over time.

A New General Law of Economics

By applying the principles of complex evolving systems, we can identify a new general law of economics: the emergence of new economic value over time, driven by competitive entrepreneurial discovery.

Characteristics of Evolving Systems in Economics

Analyzing the economy as a complex evolving system reveals three key attributes:

  1. Resource Configurations: There are countless ways to combine resources and inputs into new configurations.
  2. Discovery Processes: These processes generate new configurations.
  3. Selection: Certain configurations persist due to their value.

Increased order in such a system results from selection: some configurations have advantages that make them more likely to endure. Similarly, the economic system evolves through the selection of advantageous configurations.

The Economic System as an Evolving System

In economics, new configurations emerge from the diverse resources and capital structures. Entrepreneurship drives the discovery process by experimenting with new combinations. The end-user market then selects for value, ensuring that only the best configurations survive.

Therefore, the three characteristics of evolving systems—component diversity, configurational exploration, and selection—are fully demonstrated in the economic system and underpin the law of increasing value. This law can be generalized: economic systems with many interacting agents display an increase in diversity, distribution, and patterned behavior when numerous entrepreneurially generated configurations are subjected to value selection pressure. Value is the universal basis for selection in economic systems.

Three Orders of Value Selection

  1. Foundational Value: Configurations evolve to a point where they can self-maintain, with no need for reorganization or recombination. This value is associated with reliability, repeatability, trust, reputation, and ethics.
  2. Adaptive Value: Entrepreneurship drives knowledge building and information processing, supporting the creation of new configurations. Economic entities adapt dynamically to market changes, leading to growth, innovation, and competitiveness.
  3. Evolutionary Value: In complex systems, entirely new functions can be imagined and created, opening up new possibility spaces. This value is associated with the ability to invent new functions continuously.

Selection as the Key to Evolution

Selection is the primary enabling constraint in this model. A system will evolve, or increase value creation, if many different configurations are subjected to selection for value. For this to occur, markets must be free to select, entrepreneurs must be free to innovate, and selection pressures must be allowed to intensify.

Underlying Principles

  • Information Richness: Greater and faster flows of knowledge and data can open new possibility spaces for value creation.
  • Selection Pressure: The competitiveness of the market system is crucial for driving value creation.
  • Potential to Evolve: Systems vary in their potential to evolve. Increasing current value can enhance future value potential.
  • Rate of Change: The evolution rate can be influenced by increasing the number and diversity of interacting agents, the number of different system configurations, and the selective pressure on the system.
  • Interdependence: Evolving systems are overlapping and interdependent. Information transfers within these systems create an “information field.”
  • Value Selection: Systems that select based on Foundational, Adaptive, and Evolutionary Value will see increased value creation.

Understanding and applying these principles can help young professionals navigate the complexities of modern business economics and drive continuous growth and innovation.

The Value Creators Podcast Episode # 43 Understanding the Decline of Customer Capitalism: The Impact of Financialization and the Importance of Empathy in Business (The Learn-It-All Podcast Repost)

This episode is a repost from The Learn-It-All Podcast (Spotify | Apple Podcasts)

The decline of customer capitalism and the shift in support for capitalism among young people highlights the need for a cultural transformation in business and economics. By prioritizing customer value, fostering empathy, and empowering employees, businesses can build stronger relationships with customers and drive long-term sustainable growth. The future of customer capitalism lies in understanding and meeting customer needs, leveraging technology to enhance the customer experience, and reforming business education to prioritize customer value creation.

In this episode of the Learn It All podcast, guest Hunter Hastings, an economist, venture capitalist, and author of “Aberrant Capitalism: The Decline of Customer Capitalism,” discusses the decline of customer capitalism and the shift in support for capitalism among young people. Hastings emphasizes the importance of customer-centric business practices, the impact of financialization, and the need for empathy in business. He advocates for a reform in business education to prioritize customer value creation and introduces an online course aimed at teaching these principles. The conversation also touches on the potential of AI in enhancing customer experiences and the importance of capitalism in improving well-being.

Hunter Hastings’ insights provide a valuable roadmap for businesses and entrepreneurs looking to navigate the evolving landscape of capitalism and create meaningful value for customers. By embracing the principles of customer capitalism, businesses can not only thrive but also contribute to a more empathetic and customer-centric society.

Resources: 

Connect with Hunter Hastings on LinkedIn

To download the book: Aberrant Capitalism: The Decline of Customer Capitalism

The Online Value Creators Course: Valuecreators.com

Connect with Damon Lembi on LinkedIn

Connect with Darren Bridgett on LinkedIn

Knowledge Capsule:

Hunter’s Motivation for Writing “Aberrant Capitalism”:

  • Young people’s declining trust in capitalism, favoring socialism over capitalism.
  • Issues with corporations losing empathy and trust, while small businesses still maintain high trust.
  • Historical context of corporations beginning in the 19th century and the shift from entrepreneurial goals to managerial control.

Concept of Customer Capitalism:

  • Customer capitalism prioritizes creating value based on customer well-being and experience, reversing the traditional producer-outward approach.
  • The model emphasizes working backward from customer needs to develop products and services, as exemplified by Jeff Bezos’ approach at Amazon.
  • Financialization has shifted corporate focus from customer value to shareholder value, leading to a disconnect between corporations and their customers.

Self-Management and Team Empowerment:

  • Traditional top-down management stifles innovation and responsiveness, while self-management empowers employees closest to the customer.
  • Teams should be equipped with customer data to drive innovation and improve services, fostering a culture of continuous improvement.
  • Empowering employees enhances customer satisfaction and value creation by aligning company operations with customer needs.

Critique of Traditional Management:

  • Traditional management focuses on control, efficiency, and cost reduction, often at the expense of customer value.
  • Entrepreneurial approach required for adaptability and responsiveness to customer needs.
  • Problems with reducing people to mere cost factors and the historical impact of Taylorism.

Empathy and Value Creation in Business:

  • Empathy with the customer is crucial for effective value creation.
  • Economic value should be subjective, based on customer perception and experience.
  • Importance of maintaining an entrepreneurial ethic within large corporations.

Explanation of Financialization:

  • Financialization diverts value from the customer to the financial sector, causing the productive economy to decline.
  • Corporations focus on maximizing shareholder value, often at the expense of customer value.
  • Practices like stock buybacks divert funds from R&D and innovation to shareholder payouts.

Empathy in Business:

  • Current business practices prioritize financial markets over customer needs.
  • A cultural transformation in economics and business operations is needed, focusing on qualitative and subjective measures of value.
  • Business education should emphasize customer value creation, empathy, and design-driven innovation.

Reforming Business Education:

  • Traditional business education focuses on financial management, efficiency, and administration, neglecting customer value creation.
  • Hunter advocates for a shift to teaching principles of value creation, empathy, and innovation.
  • His online Value Creators course aims to integrate these principles into corporate training and management practices.

Impact of AI and Technology on Business:

  • AI and large language models offer opportunities for entrepreneurship and human-centric value creation.
  • Technology platforms can democratize business opportunities, allowing smaller organizations to compete.
  • Hunter shares his optimism regarding AI enhancing human contribution and individualization in business.

Show Notes:

0:00 | Intro
1:21 | Hunter’s Background
2:50 | Inspiration Behind Aberrant Capitalism
8:01 | The Concept of Customer Capitalism
9:34 | Self-management and the Concept of Flow 
11:05 | Impact of Management on Entrepreneurship 
17:06 | Subjective Value: Innovation and Marketing 
18:25 | Problem Solution: Example
20:49 | Title of Book: Empathy Defined
23:35 | Financialization
26:15 | Wrong Things are In Charge: What’s the Future of Economics and Business?
28:27 | Reforming Business Education 
31:53 | Embedding Principles in Managerial Training 
33:08 | The Potential of AI for Entrepreneurship
36:26 | Customer Value VS Shareholder Value
38:23 | Hunter shares that Economics has Different Flavors 
39:23 | Wrap-Up: Surprising Thing about Hunter