How freedom brings economic prosperity at every level: macro, micro and nano.

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The Fraser Institute, a Canadian think tank, has long championed the connection between economic freedom and prosperity for countries. Their annual Economic Freedom of the World Report analyzes data from over 160 countries to rank nations based on key indicators like government size, legal system integrity, property rights, freedom to trade internationally, and regulatory efficiency. The findings are clear: nations that prioritize economic freedom tend to experience higher levels of GDP growth, greater income equality, and improved quality of life.

Copyright 2024 The Fraser Institute

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Economic freedom, as defined by the Fraser Institute, means individuals and businesses have the ability to make their own choices—what to produce, consume, and trade—within a framework of stable property rights, low taxes, and minimal government intervention. This environment fosters innovation, incentivizes investment, and allows for efficient allocation of resources. When entrepreneurs and firms face fewer barriers, they can respond to market demands and capitalize on opportunities, creating jobs and driving economic growth.

Empirical evidence supports this theory. Countries ranked in the top quartile of economic freedom, such as Singapore and Switzerland, consistently outperform those in the bottom quartile in terms of GDP per capita, poverty reduction, and life expectancy. For example, the Fraser Institute reports that the average income of the poorest 10% in the most economically free countries is significantly higher than the overall income in the least free countries. This suggests that economic freedom benefits all segments of society, not just the wealthy. The Fraser Institute’s data highlights that a baseline level of freedom is essential for sustainable prosperity, creating an environment where people and businesses can thrive.

Freedom in Firms: A Catalyst for Economic Thriving

At the level of the firm, the connection between freedom and economic performance has been increasingly recognized by business thinkers like Doug Kirkpatrick and others. They argue that giving employees greater autonomy—freedom to make decisions, experiment, and innovate—leads to stronger collaboration, faster problem-solving, and ultimately, better business outcomes. In other words, increasing freedom by loosening the grip of bureaucracy and rigid hierarchies can unleash a firm’s full potential.

Firms that embrace employee freedom often operate on principles of trust and self-management. For example, companies like W.L. Gore, the makers of GORE-TEX, and Brazil’s Semco have long rejected traditional command-and-control structures in favor of decentralized decision-making and collaborative cultures. Employees in these environments are encouraged to act as entrepreneurs, take ownership of their work, and coordinate directly with colleagues to achieve shared goals.

The results speak for themselves. Research shows that firms with higher levels of employee autonomy experience stronger engagement, reduced turnover, and more robust innovation pipelines. Employees given the freedom to think creatively and take calculated risks are more likely to generate ideas that drive revenue growth or cut costs. A Harvard Business Review study on self-managed teams found that such approaches also improve agility, enabling firms to respond to market changes more quickly.

Freedom within firms doesn’t mean chaos. These organizations typically replace rigid rules with clear principles and shared values, providing just enough structure to align efforts while avoiding micromanagement. This balance allows firms to maintain focus while encouraging adaptability and creativity.

Shared values are key to this level of effective implementation, where organizational freedom fosters innovation, strengthens employee morale, and positions the firm for sustained economic success in a rapidly changing world.

Individual Freedom and Peak Performance

At the individual level, freedom is the key to unlocking human potential, creativity, and fulfillment. Psychologists and thinkers like Mihaly Csikszentmihalyi and Daniel Pink have highlighted how autonomy enables people to perform at their best, not just for personal satisfaction but also as valuable contributors to broader progress and improvement.

Csikszentmihalyi’s concept of flow illustrates how freedom allows individuals to reach a state of optimal engagement. Flow occurs when a person tackles a challenging yet achievable task, fully immersing themselves in the process. This state of deep concentration and creativity not only leads to exceptional performance but is also profoundly fulfilling. Freedom is central to this: individuals must have the autonomy to select tasks that match their skills, set their own pace, and solve problems creatively. Constraints like micromanagement or rigid procedures disrupt flow and diminish both productivity and satisfaction.

Daniel Pink extends this idea by showing how autonomy, mastery, and purpose are the driving forces behind individual motivation. People are most engaged when they have the freedom to work on tasks that matter to them, develop and refine their skills, and contribute to something larger than themselves. This sense of agency transforms work from a mere obligation into a source of meaning, encouraging innovation and continuous improvement.

The evidence backs this up. Studies reveal that individuals with greater job autonomy report higher satisfaction, creativity, and performance. Autonomy also fosters resilience, enabling people to adapt to challenges and learn from failure, a critical trait in today’s fast-changing economy.

In essence, freedom doesn’t just enable individuals to perform better—it empowers them to grow, innovate, and find fulfillment. By creating environments where people can exercise autonomy, whether in firms or society at large, we unlock their capacity to contribute to economic and social progress in ways that rules and rigidity never can.

Freedom and flow in Kinetic Flow State Organizations (KFSOs).

There is a movement toward a new framework for business organization that recognizes and embraces the power of freedom. In his book Freedom and Evolution, Professor Adrian Bejan explains how all the evolving designs in nature – trees, river systems, animals – improve over time because they are free to flow: to discover, through change and experimentation, the best way to utilize their energy and thrive. The KFSO (Kinetic Flow State Organization) follows this law. Kinetic refers to the freedom to move, to always be moving, to be dynamic in principle and practice. Flow state refers to the combined flow of actionable knowledge through the organization to every individual and team, and the flow that those individuals experience when immersed in the task of applying that knowledge for value creation, where they all share purpose and each find personal meaning.

The business world is just beginning to understand the value-creation power of freedom, and to regret the century during which command-and-control management repressed that freedom at the cost of reduced productivity, growth and economic well-being. Exciting times are ahead.

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How freedom and autonomous action in business organization bring new levels of value creation.

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The critical attributes of the modern business organization are freedom and free-flowing action. Organizational design is evolving towards unleashing a live flow system where change is implemented without barriers so that customers can experience more and more value, resulting in more and more revenue flowing to the firm, for both profit and reinvestment.

Freedom and free flow, in many ways, represent the opposite goals to those of traditional organizational design and management systems. For 150 years, management science has aimed at control rather than free flow. Initially, the goal was control over workers in the factories of the Industrial Revolution. Then came the era of bureaucratic control through rules and fixed processes, as taught in business schools under the rubric of “business administration”. The rules and processes came to be embedded in software, resulting in an even deeper, more embedded control. Subsequently, control extended to financial outcomes. Stock markets demand accurate forecasts of quarterly revenues and profits, and compliant firms and their management teams deliver them, in the form of managed earnings. And, as the very top level of control, government adds a layer of regulations that management bureaucracies embrace as a reason for tighter and tighter administration.

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There are many current changes that influence a movement away from control as the rationale for management.

A New Systems Science: Systems science didn’t exist when business school curricula were first written. Systems science reveals that the behavioral patterns generated in large complex systems – such as the business outcomes for the organizational systems we call firms operating within the larger system we call the economy – are entirely unpredictable. They can’t be managed and they can’t be controlled. The term that is used in the science for such outcomes is emergent. In other words, things just happen and we can’t really explain them. We know that emergence is a result of the uncountable number of interactions of a large number of individual agents (such as company employees, supplier employees, customers and government bureaucrats) and other elements (such as pricing, marketing channels, distribution systems, generative web platforms, and technological advances). The sheer volume of these interactions, each of which leads to an unpredictable future, can’t be tracked, monitored, analyzed or even recorded. The best we can do is describe some historical emergent patterns and wonder if they’ll ever be repeated. (For example, there’s a concept of the science named strange attractors, which suggest that some patterns almost repeat but never exactly. Weather is one example.)

A new law of physics: A Forbes article from 2012 announced: “There’s A New Law in Physics and It Changes Everything”. It referred to the Constructal Law, defined by Adrian Bejan, which tells us that, while emergent patterns are not predictable, there is a law that governs how they emerge. All organizations are flow systems, and they change their configurations over time so that they flow more easily (or, if they can’t, they die). To change configurations requires the removal of barriers to free flow, just as a river, over geological time, carves its way to the ocean by overcoming, circumventing or eroding barriers. In human time, we are required to do the same in our business organizations to avoid their death and promote their free flow.

The new economics: The misguided pursuit of control of complex systems has been evident in economics for most of the twentieth century, and it persists into the twenty-first. In economics, this quixotic folly is often called central planning. It’s the mindset that focusing on just a few variables in a mathematical model can predict and control the outcomes of the trillions or quadrillions or sextillions of economic interactions of people and prices and transactions and exchange in the economy. There’s a much humbler brand of economics that aligns with systems science and the constructal law; economist Brian Arthur calls it Complexity Economics, drawing on a long history of what used to be called, especially by economist Friedrich Hayek, spontaneous order. The essence of the new economics is the recognition that economic decisions are subjective, made by individual humans via a form of economic choice that is qualitative rather than quantitative, pivoting on how they feel, not on price calculus. Subjectivism, whether applying to consumers in markets or employees in organizations, does not lend itself to control. Rather, it contributes to emergence.

The new business models: The concept of business models sounds like the kind of complex strategic thinking to be learned in business schools. The analysis-heavy approach of corporate management is directed towards quantifiable business model optimization. But as serial entrepreneur Mike Lynch observed, when talking about building brilliant businesses, “be very careful of the modern corporate culture, which is all about over-analysis”. Businesses will fail at innovation if they over-analyze, said Lynch. An example at hand is the business model that’s called “network effects” – a business that grows because the fact that many people and transactions are connected to it via the internet causes many more to see the benefits of connecting and networking and transacting, such that all other smaller networks are severely disadvantaged. Another related business model is the generative platform, that enables user generated ideas, content and innovations in many more forms and applications than were ever envisaged when the platform was first built. Users autonomously create business growth without any brilliant strategizing on the platform owner’s part. The new business models are emergent, and not the product of corporate control (even though incumbents are often accused of exactly that).

Accelerated speed of innovation: Innovation is the application of new knowledge in new ways, producing change. While change has always been with us, the generation and processing of new knowledge is accelerating. There is an increase in computing capacity, and a similar increase in computing power, as well as faster and more widely distributed networks for knowledge exchange. Whether we consider artificial intelligence, or machine learning, or bio-medical and neuroscience advances, or simply food science and transportation, it’s easy to recognize accelerated speed of change as our normal environment.

Innovation in business organization: KFSOs.

It is in the context of all these changes that a new way of thinking about business organization is required. That form is the Kinetic Flow State Organization or KFSO. It represents a revolutionary break from traditional organization design.

Kinetic: A modern business organization must be designed for movement, for continuous change resulting from internal innovation initiatives to keep ahead of external market changes. Traditional business organizations have been designed for structural strength, with a hierarchy of authority, divisionalized functionality, tight rules for business processes, a compliance bureaucracy to enforce the rules, and top-down planning for the allocation of resources.

A kinetic organization rejects such structure because it slows down movement and innovation. Kinetic organizations recognize that unbridled individual innovation actions bring the benefits of movement and change to the whole organization. As a business organization develops in this way, it moves more, produces more and generates more value for customers and wealth for shareholders when individuals are endowed with freedom, free inquiry and questioning, freedom to experiment, and freedom to self-correct via feedback from the marketplace. It is evolution with freedom that generates easier flow, as Professor Bejan would put it, and better business performance. Free individuals assemble and reassemble themselves into a better flow architecture. In kinetic organizations, creative individuals recognize the calling and the opportunity to generate new ideas and carry them into the market.

Flow state: Movement is transferred from individual to individual and diffused throughout the organization, in teams, in projects, or in movements of internal improvement. One of the most important elements of Bejan’s constructal law is the removal of obstacles in flow design – and once removed, the obstacles are forgotten. The new design, without obstacles, flows better, and therefore becomes broadly adopted and persists over time. Innovation events spread throughout the whole firm, as individuals open flow channels. All local innovations open the gate for a new liberated channel into which more innovators flow. More value and more wealth are produced, attracting more resources and more investment. Locally then globally is how flow spreads and accelerates. This is the opposite mindset from top-down planning, pyramids of authority, and resource allocation through planning. Flow is action.

Flow is also a better mindset and experience for everyone who works in such an organization. Here, we turn to another sense of flow, the psychic sense. Mihaly Csikszentmihalyi, a researcher in psychology, documented this state of flow as a deep state of focus and immersion in an activity, where individuals experience a high degree of satisfaction. In business, when there is freedom, autonomy, meaning and commitment, individuals can become more fully absorbed in their work, leading to heightened innovation and stronger connection to a shared intent. Traditional organizational models tend to produce the opposite mindset: disengagement and alienation. Gallup has reported that around 77% of employees are not engaged today: apathetic towards both their jobs and their companies. The major cause is bad management. KFSOs can solve this problem.

Organization: The fear that management scientists express, and which they try to instill into the rest of us, is that individual freedom to act will result in business anarchy and chaos. There will be no organization if it is not imposed from above. The opposite is true: better organization emerges when it is free to evolve based on individual actions. In systems science, this phenomenon is known as self-organizing. Free individuals engaged in flow activities show a universal tendency to coalesce, to join each other and to cohere in teams and groups and associations to create easier flow. Organization is the manifestation of freedom, as individuals make configuration choices that enhance their shared productivity. Actionable knowledge flows from those who have it to those who seek it, providing them with the resources to become freer and more productive. A firm is a complex of live flow systems with self-organizing properties. These firms attract the special individuals who seek to make change through new thinking and free exploration and the removal of obstacles to progress. Everyone coalesces around these special individuals. Shared intent binds the freely morphing configuration.

In contrast to conventional management wisdom, the firm can produce more and create more value and more wealth, and last longer, when it is endowed with the greatest possible degree of individual freedom to act in the pursuit of a shared intent. This is the promise of the KFSO.

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All future jobs will be value creation jobs.

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The management revolution (a term coined by the primary historian of 20th-century management, Alfred D. Chandler) generated a lot of bureaucracy or, as London School of Economics professor David Graeber puts it, “Bullshit Jobs.” These jobs tend to be located primarily in the bureaucratic cores of the corporation: HR, finance and accounting, and legal/compliance. According to Graeber, these jobs are unfulfilling for the individuals doing them, yet deliberately designed that way by management to implement approved methods and procedures.. Those jobs are not there to create value, but to exercise control.

Graeber estimates that, in some firms, like banks, the proportion of jobs that can be classified this way is as high as 75%, and that 40% is a reasonable estimate of the average proportion.

There’s a good chance these jobs will be gradually eliminated in the future.

The problem of bureaucracy arose directly from the practice of management. In the early phases of corporate capitalism, firms were entrepreneurial rather than bureaucratic. Founding entrepreneurs drove expansion through leadership. Divisions and functions were run by mini-entrepreneurs, responding to market signals more than to bosses. Of course, they needed bookkeeping and support systems, but these were operational rather than bureaucratic.

Eventually, scale and new complexity required new forms of organization. More managers were hired. Eventually, managers took over, as the entrepreneurs exited. The 20th century was the century of management – but, as economist Ludwig von Mises pointed out, the capitalist system, properly understood, is an entrepreneurial system, not a managerial system. So capitalism itself – the system of creating value for customers and reaping the entrepreneurial rewards conferred by market approval – became distorted to shift the balance of outcomes to favor the managers and investors.

That’s where bureaucracy and bullshit jobs came in. Managers sought control: over the uncertainties and unpredictable outcomes that are typical of entrepreneurship; over the variability in consumer preferences; and over the short-term financial results of the business, because the financial markets’ demand for reliable consistency became predominant. Control was thought to come from processes, procedures and methods, documented in the bureaucracy and implemented through the authority of the hierarchy, limiting individual autonomy to adherence to tightly written job descriptions and rules of conducting business. Plans were developed at the top and executed through orders and instructions at the base of the pyramid. This philosophy was enshrined as business administration, and masters’ degrees were awarded for it.

This phase of business is coming to a close. There are many reasons why, and we can focus on two of them.

  1. New value creation business models: the digital business models of the new era are characterized by direct connection to customers. Every time a user enters a search term, or a consumer purchases on a shopping site, or a corporate employee works on Slack or Salesforce, the behavior and the content are directly and immediately captured by the data engine. Insights about actions and preferences can be generated through pattern recognition in the feedback loop, and any improvement or enhancement that the end user requires can be provided as a digital response. It’s user-guided continuous improvement. The customer is back in direct charge. When we say that customers are the ultimate value creators, this is what we mean. By their actions and statements of preference, they bring new improvements and, therefore, new value propositions into being. If they are dissatisfied, they communicate it, and perhaps look elsewhere for greater value. The customer is genuinely the boss. There’s no need for business administration – it’s superseded by direct connection to the customer without intermediation.
  2. The bullshit jobs can be automated: The advances in software headlined by business process automation and supplemented by machine learning and AI will gradually eliminate bureaucracy. Standard practices, sequential processes, form-filling, performance measurement, reporting, monitoring, authorization, accounting, budget management, and more will be performed by software rather than by managers.

So what does that leave? The most important jobs of all: value creation. Highly automated, digitally-enabled firms will require the customer insight, entrepreneurial judgment, design creativity, and empathic responsiveness that value creators bring. Value creators bring the characteristics and behaviors that are critical to business success.

  • They constantly keep value in mind: how can customers’ needs be better satisfied in a world of constant change and aggressive competition?
  • They demonstrate the entrepreneurial mindset, favoring action and experimentation rather than cautious calculation.
  • They recognize empathy as a core business tool for creative entrepreneurship, and they refine their empathic diagnosis by carefully assessing the customer experience from the customer’s perspective.
  • They collaborate harmoniously without competing for titles or recognition; they make great team members.
  • They pursue continuous innovation, never stopping, never complacent.
  • They can design innovations through a process of working backwards from the customer experience.
  • They understand marketing as building trust through relationships, and not as a mechanical process of lead generation and conversion.
  • They are masters of subjective calculation: estimating the value of future assets based on future customer satisfaction.
  • They appreciate that tacit knowledge accumulation rather than data is the source of advantage for a firm, and they error-correct their knowledge by constantly questioning and challenging.
  • They are not constrained by conventional organizational design and structure, recognizing flow as the mindset that transcends both.

The Value Creators online business course aims to elucidate and teach these principles through the lens of entrepreneurialism rather than business administration.

The New Economics: Harnessing Complex Adaptive Systems for Business Growth

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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.

Components Of The New Management Paradigm.

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The traditional methods and ways of thinking of strategic management are no longer viable.

They assume that exogenous causes and causal interrelationships can be shaped and utilized to produce objective factors of business performance. Superior management can result in superior performance through identifiable combinations of observable causal factors.

The modern science of complex evolving systems, represented by Austrian economics in social sciences, compels recognition that business outcomes are emergent rather than resulting from identifiable causal factors. Human action, by both customers and employees, occurs in complex interactions of dynamic interpersonal coordination, the results of which are unforseeable. It is the beliefs, perceptions, expectations, imagination and intentions of individuals that combine and interact unpredictably in business reality. Strategic business success is highly uncertain in this context and impossible to sustain.

A new strategic management paradigm is called for.  The components are:

The philosophy of subjective value. Human beings seek value, defined as an improvement in self-perceived well-being. They constantly seek a desired state to replace a current state that is deemed less than perfectly satisfactory. Businesses thrive when they are able to facilitate customers’ feelings and experiences of value. The performance of a firm, and any structure or methods it adopts, are 100% determined by the perceptions of its target customers. Any change in these perceptions will result in changes in firm performance. Dynamic business energy emanates from customers, not from strategy. 

Converting knowledge into value. It follows that customer knowledge and understanding are the vital, scarce resource of the business firm. There are no structural competitive advantages, but it can be the case that the combination of people in one firm share knowledge and understanding that is more functional for the task of conversion into value via innovation, service and relationship. The law of increasing functional information guides the market systems selection of the best value-facilitating firms.

Entrepreneurship (rather than management) is the business function for conversion of knowledge into new value. It is a non-linear, non-processual act of co-ordinated and creative imagination. It can be advanced and accelerated by identifying and continuously renewing insights into customers’ motivations, purposes and values, and composing and recomposing new value propositions for them to choose from. Entrepreneurial capacity consists of skill in designing business propositions and in stimulating customers’ choice of those propositions. During the act of designing the value proposition, the customer’s choice lies in the future, and so is unknown and unknowable. Entrepreneurial imagination is the cognitive connection of the present offerings and future choices. It does not result from traditional strategic management or planning.

Innovation is a necessary condition for business persistence. In the dynamic swirl of rapid change and inscrutable complexity, continuous innovation is required to stay relevant to customers and to stay coherent with the environment. This is continuous improvement in a value proposition to match continuously increasing knowledge on the customer’s part of what they can want and demand. There are opportunities beyond persistence – adaptive innovators can respond to the changing environment with new value propositions that exceed the expectations of customers, i.e. incorporate new knowledge before it’s widespread. And the truly evolutionary businesses can make leaps of innovation that introduce true novelty to the market. The market may select the novelty or reject it; successful new businesses and new products are those that qualify for selection. The market is always evaluating and always selecting.

Nothing in this process can be predicted or projected. Strategic planning is powerless. Discovery, not planning, is the dynamic of innovation in business.  Discovery requires the humility of relinquishing certainty and control, and the creativity of generating new ideas and combinations for testing and experimentation. There is joy in discovery, and we must learn to love feedback loops, the conduits from the customer and the marketplace that tell us how our experiments perform in evaluation. Humility and empathy are not the central focus of traditional strategic management. We hear much more about heroic business leadership and the intellectual superiority of planners and strategists. But discovery is not driven by intellectualism but by action – run lots of experiments, gather fast feedback, determine what works, and incorporate it into the next epxeriment, until a new value prososition emerges that is robust enough to commercialize.

Complexity is the overarching organizational metaphor. Complexity can’t be tamed or managed. Simple imagery fails to convey any meaning. For example, when there is discusion of market share, or growth rates, or 5-year total stock market returns, or even quarterly revenue, it’s meaningless in the context of complexity. Complexity is a swirl of ongoing interactions between people and their contexts, constrained by rules, norms, institutions, events and things, with emergent and unpreditable outcomes triggering new emergent responses which further accelerate change and make it even more chaotic. Businesses can’t snapshot the swirl of complexity, or choose just a few developments to respond to. They must act intuitively to find islands of order in the raging sea of chaos.

The new form of organization for complexity is autonomy. In the new paradigm, firms gradually learn how to auto-organize, eschewing structure and hierarchy and management authority in favor of self-management by employees and team members. Teams self-assemble around functions like marketing and branding or operations and delivery or finance, and role map the collaboration that will optimize the combination of specialist talents in pursuit of a shared purpose. Purpose is the binding force, rather than position in a hierarchy or on an org chart or the authoritarian directives of management. 

Subjective value, knowledge conversion, entrepreneurship, innovation, discovery, complexity and orgnizational autonomy – these are the components of the new management paradigm. 

The Dawn Of The Post-Managerial Era.

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In Aberrant Capitalism, Steve Denning and I chart the ascent, dominance and now decline of managerialism, the approach to running business corporations through bureaucratic systems of management control. Happily, we see the end of the managerial age and the dawn of a new post-managerial era.

Aberrant Capitalism begins with a quote from economist Ludwig von Mises:

Those who confuse entrepreneurship and management close their eyes to the economic problem. The capitalist system is not a managerial system; it is an entrepreneurial system. 

Ludwig von Mises (Human Action 1949)

Business has been confused about this problem for over 100 years. In the golden age of entrepreneurial capitalism, which we can locate in the second half of the nineteenth century, at least in the US, the great corporations were led by entrepreneurs, not managers. The unicorns of their time, these fast-growing corporations harnessed new technologies on behalf of customers to elevate the quality of life. The entrepreneurial leaders of the time saw the market-generating potential of steam engines, railroads, electricity distribution grids, oil refining, long-distance communications, mass manufacturing, packaged food, and advertising. They turned these inventions into commercial innovations and built an audience of happy customers enjoying new experiences ranging from affordable illumination to trans-continental travel. The range of goods and services available to customers expanded, quality went up, and prices went down. 

This was a pre-managerial age. The individual owners and founding partners of the great corporations were visionaries who imagined a great and happy future of high achievement and fulfilling lives for Americans. John D. Rockefeller of Standard Oil, for example, consciously aimed at producing and distributing “the best illuminator in the world at the lowest price” because “we are refining oil for the poor man, and he must have it cheap and good[1]”. He viewed the kerosene he manufactured as a civilizer, “promoting among the poorest classes …a host of evening occupations, industrial, educational and recreative …(carrying) more cheap comfort into more poor homes than almost any discovery of modern times” (The Myth of the Robber Barons, Burt Folsom)

This is the entrepreneurial mindset: placing the highest priority on customer needs and devoting the entire supply chain to their purpose. Standard Oil required staffing and organization, of course. Rockefeller paid higher than market wages and gave long vacations so that he could attract the right people and then delegate responsibility to them. He knew that good work and good ideas were priceless.

In the twentieth century, the entrepreneurs exited their businesses due to old age or death or via a sale. Professional managers took over, ushering in the managerial age. They changed the function of management from the mass production and mass distribution that made civilizing innovations and the experience of well-being available to all. They focused instead on control, which is a benefit for managers, not for customers. The tools of control included:

Central planning: managers believed that business plans and resource allocation decisions should be made by a planning and budgeting committee or group following the direction of the top officers of the company. There were some feedback loops, but they were slow and data science was not far advanced and so the feedback was low in information and high in noise. Nevertheless, central planning advanced, even though CEO’s like Reginald Jones of GE admitted that he “could not achieve the necessary in-depth understanding” of his own planning department’s plans. (Aberrant Capitalism, p37)

Hierarchy: The transmission mechanism for the centrally-developed plans was hierarchy.  The top officers told the VPs reporting to them, who communicated to their directors and managers, and front-line employees. Dissent (which we might also call creativity or what John D. Rockefeller called good ideas) was discouraged. Hierarchy was the reason for slow, noisy feedback.

Bureaucracy: To administer both the implementation of plans and the management of the hierarchical organization, management introduced bureaucracy, which had, hitherto, been a method of government rather than business. The purpose of bureaucracy was not customer service or satisfaction, or even an observable contribution to corporate profits, but compliance with rules and regulations. There are no rewards in bureaucracy for initiative or innovation. The goal is not to adapt to changes in the marketplace, but to try to constrain the marketplace to follow the bureaucracy’s rules. 

Financialization: Over the course of the twentieth century, managers became more reliant upon the financial sector for debt and credit, and delegated some of their control powers as part of the trade. The short-termism of quarterly earnings targets, the allocation of funds to share buybacks and dividends rather than to R&D investments, and the adoption of the mantra of shareholder maximization – which stands in sharp contrast to the customer-first ethic of entrepreneurship – are all consequences of ceding primacy to the financial sector. 

Management Slack: Nobel prize-winning economist Oliver Williamson used this term to describe the discretion acquired by management organizations to use resources for their own benefit rather than for the customer or for company profits. The range of slack is wide, from oversized offices and managerial perks, to lavish salaries and pension, to the use of corporate jets. Williamson suggested that managers would deliberately add costs to hire unnecessary staff because the increased size of a department would result in more prestige and power for the department head. Management slack became a form of insider self-dealing: more for the managers and less for customers, investors and employees.

The late twentieth century demise of big, bureaucratic corporations like GE and IBM can be attributed to internal developments along these lines: the accumulation of greater weight of bureaucratic, hierarchical management eventually over-burdens the creative engineers, operators and salespeople. They can no longer function as well as they need to for the benefit of customers.

What will change in the 21st century

The end of the managerial era is a consequence of the new business models that are made possible by digital enablement. Customers are now directly connected to the firm – think of amazon or Airbnb as examples – in such a way that their wants, desires and preferences are instantly and effectively implemented. The customer is the boss, not in the sense of sitting atop an authority hierarchy, but in the sense of controlling the fate and operations of the firm. Economists have always recognized this role for customers in theory: here’s a passage from economist Ludwig von Mises in 1949:

The real bosses, in the capitalist system of the market economy, are the consumers. They, by their buying and by their abstention from buying, decide who should own the capital and run the plants. They determine what should be produced and in what quantity and quality. Their attitudes result either in profit or in loss for the enterpriser. They make poor men rich and rich men poor. They are no easy bosses. They are full of whims and fancies, changeable and unpredictable. They do not care a whit for past merit. As soon as something is offered to them that they like better or that is cheaper, they desert their old purveyors. With them nothing counts more than their own satisfaction.

This is a passage of incredible vision. It has taken 75 years for business practice to catch up to Mises’ theory of the market system. The mechanisms for the catch-up are digital enablement of the direct connection to the customer, A.I. processing of the resulting data flow, and the interconnection of people and functions in the firm who can respond to the insights from the data flow with hyper-personalized service and precise targeted innovation.

In this digitally enabled world, there are three new dimensions of the economist’s “boss customer”:

The customer can command and receive a personalized experience. 

The old management method was to try to predict what customers might want in the future, by asking them questions about their dissatisfaction with today. But customers are not in a position to imagine and design the future; they don’t have the expertise or the information. 

The new method is to deduce the customer’s preferred personalized experience from their present-day behavior: the searches they conduct, the purchases they make, the websites they visit, their offline behavior as they work, shop and travel. All these activities generate behavioral data, and hyper-automation can instantly energize a supply chain to deliver on the needs highlighted by the resultant data patterns. It is digitized customer behavior data that provides the energy for the system, not their expressed attitudes or opinions.

The customer can add many layers of expectation to their desired experience.

Through their behavior, customers can express not only what they want but many other dimensions of how they want it: where and when and how fast, in what kind of packaging, using what kind of delivery method, accompanied with what level of messaging, with what kind of service wrapper (e.g. insurance), with what kind of return policy and what level of ease-of-return process. These and many more expectations are to be met, or the customer might look to alternatives on all those dimensions. The customer is the selection engine for best service and best experience, and operates with the confidence that alternatives are available.

The customer is the creator of value in the new value system.

The hyper-personalized experience plus the continuous layering and raising of expectations constitute value for the customer. It’s an ever-changing value benchmark because the customer is able to change it. They feel that they can always raise the bar. 

So now, when we talk about value creation, we must reverse the mental flow model that that term usually suggests. Value creation, traditionally, has been defined as firms creating value for customers. Today and tomorrow, customers will create value in their personalized experiences, based on their own requirements and expectations. 

The role of the digitally- enabled firm is facilitation, making the value experience easier, more convenient and closer to expectations. The concept of ’the digital friend”, a digitally enabled brand that knows the customer well and demonstrates empathy via a hyper-personalized experience, will be the model for value facilitation.

Central facilitation replaces central control.

Traditional management is a control concept. In this concept, resource allocation is controlled through the planning process, and then hierarchical organization structures and the command authority of title and position are deployed to ensure that subordinate employees follow orders to deploy the resources through implementation. Value creation resides in the plan, and the role of implementers is simply to ensure that value is not eroded through imperfect action.

This control-through-command won’t survive. The customer now commands. The structure of the firm must be flat and networked so that the customer’s commands can flow to where they can influence internal functions. Those functional centers respond to the customer, not to an authority structure. 

The post-managerial era has arrived, only 75 years after economists predicted it.

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