Technology Is Evolutionary, Entrepreneurship Is Revolutionary. In Combination, These Forces Change The Structure Of The Economy.

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Technology evolves. It’s an unnerving thought. Technology is developing along pathways that are not necessarily planned or directed or even anticipated. Humans are not in charge of technology’s development. The emergence that occurs within complex adaptive systems delivers unexpected outcomes, including great leaps (sometimes called phase changes in the language of dynamic systems), changes in direction, and periodic irruptions and frenzies of development where intensity of investment results in surges of change. Carlotta Perez explains this in Technological Revolutions and Financial Capital.

This interpretation of technological change is the result of viewing the economy and markets and the technologies within them as ecosystems bringing new understanding. The ecology view establishes the system as the primary unit of analysis, asking how it operates, how it grows, how it keeps in motion, and where its energy comes from.

Economies and markets and technologies are a particular kind of system, called Complex Adaptive Systems (CAS for short). A CAS is a system that adapts to become better suited to its environment, and therefore to survive and thrive.

As Eric Beinhocker points out in The Origin Of Wealth, we can observe this evolution in real-time in our own lives.

….automobiles progressing from the Model T to a modern car jammed with microprocessors, or mobile phones progressing from suitcase size to “so small I forgot I had it in my pocket” size. (The) airplane is related to hot-air balloons, dirigibles, and hang gliders in a sort of phylum of artifacts for flying. 

Eric Beinhocker, The Origin Of Wealth, P265

Technological evolution works in both directions.

We can also observe technologies going “extinct.” For example, in the middle of Washington, D.C., one can find the remnants of an old nineteenth-century canal system that in its heyday was packed with barges full of coal, food, and other goods. Today, the canal is used as a jogging trail, but one can still see a few old barges tied along the side, lovingly preserved, like stuffed mastodons in a museum of extinct technology species.

Ibid

In biology, evolution is said to advance via mutations – new combinations of genetic source code that are generated randomly and survive, if they do survive, by proving their fitness, the capacity to thrive in a hostile changing environment. Plants and animals and all biological entities must become more efficient, more effective, stronger, tougher, faster, or whatever it takes to avoid predation and extinction. 

In technology, evolution progresses not so much via mutation as combinatorial tinkering. Everything in a new technology already existed in some form. The car jammed with microprocessors was new, but cars and microprocessors already existed. Some inventor combined them and some entrepreneurs took the combination to market as an innovation that made drivers’ capabilities greater and their lives better. Every component of Elon Musk’s reusable SpaceX rockets existed, but it took an inventor to conceive of and implement the idea of re-landing and re-using rockets, and an entrepreneur to implement it.

Brian Arthur writes:

If evolution in its fullest sense holds in technology, then all technologies, including novel ones, must descend in some way from the technologies that preceded them. 

W. Brian Arthur, The Nature Of Technology, P20

He explains how this “heredity” works.

Technologies inherit parts from the technologies that preceded them, so putting such parts together—combining them—must have a great deal to do with how technologies come into being. This makes the abrupt appearance of radically novel technologies suddenly seem much less abrupt. Technologies somehow must come into being as fresh combinations of what already exists.

Ibid

Economist Joseph Schumpeter realized that combination and recombination is the mechanism for economic growth and progress. He wrote that change in the economy arose from “new combinations of productive means.” In modern language we would say it arose from new combinations of technology.

Brian Arthur observes

that novel technologies arise by combination of existing technologies and that (therefore) existing technologies beget further technologies, can we arrive at a mechanism for the evolution of technology? My answer is yes.

I will call this mechanism evolution by combination, or more succinctly, combinatorial evolution.

Ibid

The SpaceX reusable rockets story reinforces the example of evolving technology through combination and recombination, while also illustrating a different point about markets and commercial innovation. While technology is evolutionary, its application in new forms of commerce and business is revolutionary. Relanding and reusing rockets is revolutionary if you are in the market for rocket-delivered payloads and logistics.

Similarly, electric vehicles – another Elon Musk initiative – is a further evolution of the automobile, but the autonomous vehicle will be revolutionary because it changes the market by eliminating the need for a driver, or for a driver to be unproductively engaged in piloting a car. Now users of cars will be able to spend their time more productively, probably connecting to knowledge and information that furthers commerce rather than reading a gas gauge and a speedometer and a trip meter.

It’s not the technology that changes human behavior, it’s the change in markets that incentivizes new behavior. The introduction of the mass-market automobile resulted in the creation of new roads, better tires, gas stations, new delivery routes, and new jobs for mechanics (once they learned the requisite new knowledge that the automobiles precipitated). Similarly, the introduction of steam locomotives for railways created a steel industry for rails, new goods delivery routes and delivery options, new settlements along the rail lines, as well as a components industry and a coach building industry. It made possible the shipping of refrigerated beef from the Midwest to the East Coast and oranges and orange juice from Florida to New York.

Behind all these innovations stands the entrepreneur. The entrepreneur often does not create the new technology – that’s usually an engineer or a tinkerer of some sort. The entrepreneur is the revolutionary, overthrowing the old way to introduce the new. As Schumpeter described it:

The fundamental new impulse that sets and keeps the capitalist engine in motion comes from the new consumers’ goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates … that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one. This process of Creative Destruction is the essential fact about capitalism. .

Joseph A. Schumpeter (1942), Capitalism, Socialism, and Democracy: 82–84.

The entrepreneur is a revolutionary as a result of acting. The entrepreneur must bring into being a new act of consumer behavior. That in itself means their abandoning some other behavior. Another supplier was enabling the original behavior. That supplier’s business is now interrupted. So that supplier generates a new response, a new offering, another revolution. Entrepreneurship is continuous revolution in markets. Without entrepreneurs, technology would continue evolving because of the heredity principle of recombination, but markets would remain static without entrepreneurial introduction of new techniques and commercial methods that change people’s behaviors. Technology alone can’t do that.

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

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

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

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

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

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

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

Bring customer value inside the firm.

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

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

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

Steve Denning at forbes.com writes:

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

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

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

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

Make Marketing the primary capability.

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

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

Establish a marketing-orchestrated co-creation process.

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

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

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

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

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

Business As A Flow Requires New Management Techniques

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

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

Business is a flow, inside an evolving ecosystem. 

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

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

Strategic orientation is a selection mechanism.

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

The Austrian mental model for business is experimentation and exploration.

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

The business mode for experimentation is action.

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

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

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

The only planning is discovery.

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

There is a requirement to remove all barriers to change. 

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

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

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

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

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

Inspired By Capitalism, Not By Inspirational CEO Speeches.

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There are many conversations going on about the purpose of firms. Should it be the single-minded pursuit of shareholder value, as Milton Friedman is adjudged to have advised? Is it to create value for all stakeholders, including employees, neighbors, and lobbyists for the natural environment? Or is it solely to create customers by bringing them value, especially through innovation, as Peter Drucker famously proposed?

There is another entirely different point of view, and it comes from environmental economics, looking at business as a component of the great ecosystem we call the economy. The purpose of a firm is to survive, just as the purpose of any species in the great ecosystem we call nature is to survive. Survival can sound like a mundane and unambitious goal when we evaluate it in the hyperbolic language of business literature. Business should be about achieving great and altruistic things to change the world or save the world, eliminate poverty, reverse climate change and elevate the quality of life.

In fact, survival in any ecosystem is brilliant and rare. When we look at species over the long time frames employed in anthropology, we find that very few survive. To do so, they must evolve better. They must innovate and improve continuously to achieve greater fitness to operate and thrive in a rapidly changing ecosystem in which many competing species are also aiming to survive and thrive. Competition generates greater fitness. Some succeed, most fail. Those who survive contribute more to the overall good of the ecosystem as well as finding sustainable niches for themselves. It’s a great achievement to survive, and it requires making a great contribution.

We can confirm that survival is rare for firms, too. In the original Forbes Top 50 corporations from 1917, only 2 have survived under their own name or largely their own name: American Telephone And Telegraph, and General Electric. No-one would argue that these two companies, now better known as AT&T and GE, look anything like they did in 2017. But they survived. The other 96% did not.

Survival, therefore, is a great achievement, especially over an extended period of time. Why is it so disdained? Because it does not fit the modern business mold of the inspirational CEO. Modern business literature does not contemplate survival and all the adaptations and innovations and systematic explorations of possibilities and competitive fitness trials it entails. Today’s commentators prefer the metaphor of the inspirational talk of the sports coach at half-time to the losing team that has fallen behind but is eager to turn things around. They don’t know how, but the coach knows: it’s about emotion, not content. The team must be inspired. He or she gives the inspirational talk. Reach for the stars! Now is your time! You can do it if only you recognize your own powers!

Systems thinking, it is said, can’t achieve this emotional inspiration. Mere survival can’t compete with the inspirational comeback against all odds. It lacks spirit. It’s not elevating enough.

Survival in evolution is an algorithm: differentiate, select, amplify. Different species emerge through genetic mutation and development, they are selected by their environment via their greater or lesser fitness, the less fit ones die off and the more fit ones learn from the outcome and replicate and innovate. It’s the same for corporations: they differentiate via their business models, products and services and brands; the selection process of consumer selection (buying or not buying) and competitive striving weeds out those that are less fit, and the strong ones find ways to grow and improve and earn profits.

Uninspiring? I think not. In fact, a CEO could even turn the evolutionary algorithm into an inspiring speech at the annual conference.

Friends, colleagues,

I believe deeply in capitalism, and I believe you do, too. Capitalism is the human system that has proven to improve all lives, to deliver prosperity, comfort, and peace; to enable individual and shared achievement; to produce great industries and great art, great and sustaining infrastructures of transportation and production and supply; to facilitate great art; to advance great technologies and produce great cultures; to elevate families, communities and civilizations.

Corporations play a vital contributive role in this system. They make it work, by transforming human knowledge and research and curiosity and drive into outputs of goods and services and innovations that are the substance of capitalism and of civilization. The great buildings, the great cities, the great networks, the great machines, the great discoveries of healthcare, the great institutions of learning, the great books, the great scientific achievements are all – directly and indirectly, and mostly directly – the outputs of corporations. The human mind developed corporations to do the job of production.

To earn a lasting position in the system of capitalism, a corporation must meet great demands and sustain high – indeed increasingly high – standards. First, it must be different and better in serving its customers. In the system of capitalism, customers are given the privilege and the power of choice. They have many products and services to choose from, and many corporations to choose as providers. They choose those that serve them best, and a corporation must meet that standard. And it must meet the standard not just today, but tomorrow and far into the future. Because of the nature of competition – where many corporations strive to meet the customer’s standard better – every corporation must improve its service every day. To sustain a shared future, it must improve continuously not just day after day, but year after year, and decade after decade.

Your corporation – and therefore, you, since you are this corporation – chooses to meet this ever-rising standard. We choose to compete by being better at serving customers in our chosen field, a field that they originally designate for us by expressing their desires, and in which we co-create a better future together.

It is the nature of things that we can’t perfectly forecast this future. So, in collaboration with our customers, we employ your creativity in devising and running experiments in improving lives even further than they have been improved to date. The purpose of these experiments is discovery, to find out new paths to prosperity and, in the spirit of differentiation, to go where no corporation has gone before. How will we know if we have cut a worthwhile path – customers will tell us, they will celebrate and reward our creativity, and they will enjoy the new place we have discovered together. We in the corporation will feel fulfilled when they do.

When we  – jointly with our customers – identify that rewarding new place, we will enhance it, build further, strengthen it and adorn it and develop it and make it even more attractive. The genius of our customers is that they point the way, always encouraging us to be better, to do more, to find new creativity. We will never cease in our efforts to live up to their genius.

I am delighted that all of us in this corporation are united and aligned in this great journey to the future and I believe that, if we continue to meet the customers’ highest standards, we can continue the journey for decades, and for generations.

Uninspiring? I think not. Capitalism is the ecosystem. The corporation is a species. Meeting great demands and raising standards is survival. Differentiating and innovating and improving is the strategy. Customers are the judge. Creativity is exploration. Multi-generational success is the goal. It’s systems thinking. Survival is the rare and brilliant outcome, cheered on by customers and continuously stimulated by competition.

Seven Business Secrets Of Austrian Economics.

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There’s a brand of economics that goes by the name, in academic circles, of Austrian economics. If I was the brand manager, I would re-brand it, in much the same way that Chrysler (now part of Stellantis) rebranded their truck line from Dodge To RAM. The RAM name is far more communicative of important core attributes like sturdy engineering, power, reliability, and assertiveness than is Dodge. RAM sales have been robust, and so, while we wouldn’t claim to know cause and effect, we might assume that the brand name did not hurt and may have helped.

Austrian economics got its name way back in economic history when the rival, incumbent brand of German economics got annoyed at the disruptive thinking of some young economists from the University of Vienna, and dismissed their ideas as merely “Austrian”. To the Germans, Austrian meant a smaller, subsidiary, irrelevant group that had no place on the world stage.

The disruptive body of thought stuck, however, and made great strides, because it’s more useful to real people than conventional academic economics. It provides better mental models to work with. For producers, Austrian economics is the economics of entrepreneurship and value generation. For consumers, Austrian economics is the economics of individual satisfaction.

From the point of view of entrepreneurial business, of any size from single practitioner to start-up to mid-size to mega-size, here are seven secrets of Austrian economics that can be usefully applied for the achievement of business success.

Understanding Subjective Value

The purpose of business is to generate value. Austrian economics enables businesses to understand value in a new way, and, consequently to generate more of it. Curt Carlson, the authority on value creation, weaves wonderful value stories. in one of them, he imagines the iPack, a wheeled robotic suitcase that will follow you through the airport without effort on your part, via its electronic tether to your iPhone. He goes further, to imagine the iPack understanding your calendar well enough to ship itself to Singapore to your hotel to await your arrival. 

Where is the value? It’s not the physical case, and it’s not even its functionality, beneficial though it will undoubtedly be. The value is the feeling that’s created in the mind of the customer, both in the form of anticipation of relief of a travel hassle (“What a great value that will be! I’ll gladly pay for it”) and in the after-evaluation of the experience (“That was the most convenient trip ever!). Curt writes:

It is the space in the minds of potential customers. It is important to them because they have an imagination and an expectation for continuous betterment. The white space for iPack is future travel, which customers can imagine (going to Singapore through Hong Kong – what a hassle) and they have expectations for betterment (wouldn’t it be great if somehow I didn’t have to carry my bag).

Understanding value as a feeling, as the expectation of delight and the evaluation of that delight, unleashes the value generation process. 

Customer Sovereignty

In the value generation process, the customer is the boss. What the customer says, goes. If a business is unable to conjure the anticipation of delight, new products and services will not be adopted; they’ll never get off the ground. If the business does conjure the anticipation of delight but does not deliver, resulting in disappointment, the customer will not only walk away, they might even destroy the business’s reputation with negative word of mouth. The customer truly decides what is produced, and what succeeds in the marketplace. They decide on prices by establishing their willingness to pay – there’s no point in setting a price that’s higher than this level.

The full acceptance of customer sovereignty changes completely the traditional way of thinking about business. It is typical to think of business as production, as a sequence of steps from conceptualizing a future value, through designing a way of delivering that value, to realize it through exchange in the marketplace. It’s a forward-facing sequence of producer-driven action. 

But the opposite mindset is the right one. The true nature of business is working backwards from the customer experience, which is where value originates. If there were no customer experience, there’d be no value.

Entrepreneurship

Who creates value and how do they do it? Obviously, customers are key to value, because they are the ones who experience it. They need a partner because they can’t conjure up value by themselves. They need a producer. That’s the role of the entrepreneur. The entrepreneur – or the entrepreneurial process when it takes place in companies and corporations – performs the function of sensing what consumers and customers want, doing the hard work of designing and producing it, and presenting it to the customer as an option for them, a new choice, a better alternative. There’s uncertainty on both sides. The customer doesn’t know what to want (they couldn’t have designed an iPhone before Apple made one, they just knew they wanted a better phone experience). And the entrepreneur doesn’t know for certain that what they design will align perfectly with what the customer wants. This coming together in eventual alignment is the beauty of entrepreneurship and also its risk.

Entrepreneurship requires a very special empathy between producer and customer, and when this empathy results in what economists call exchange – willing buyer, willing seller, both happy – there is progress, and the world is a better place.

The entrepreneur doesn’t exist in conventional economic textbooks or theory. Entrepreneurship is at the very heart of Austrian economics. Austrians see that entrepreneurship creates betterment, economic growth, happiness, and satisfaction.

Action

Entrepreneurship is difficult, sheathed in multiple challenges. It has typically been portrayed as high-risk. Entrepreneurship might result in failure. Look at all the projects that are started and don’t succeed.

An entire tradition in business schools has been developed to purport to eliminate these risks. Business school professors sell their courses and lectures and books and presentations to present and future business managers on the promise of control and prediction. You can control the future with good planning and strategy, according to the professors, and predict the future outcomes.

Austrian entrepreneurship takes an opposite approach. The future is unpredictable, so the task is to find out what it will be, not to control and predict it. The axiom of entrepreneurship is action. Act, don’t strategize, and don’t plan. Action takes the form of experiments and explorations: try this, what about that? The entrepreneur reads the feedback data from the experiments (did the customer react positively or not?) and adapts to it, making changes and adjustments, or abandoning that experiment and trying another. This is the culture of the start-up as well as that of the agile management method. Fast, tight feedback loops replace the strategic planning process and the 100-page business plan.

Imagination / expectation

Conventional economics favors numbers and mathematical models. At the core of Austrian economics are imagination and expectation. Customers imagine a future that’s better in some way than today, but they’re not sure how it will come about. All they can communicate is their expectations. Entrepreneurs sense this, and imagine the kinds of new solutions and new services, and new products they can offer to meet consumer expectations.

Imagination is a robustly powerful business tool. Entrepreneurs can imagine new services that don’t exist, new processes that have never been used, new lines of code that might unlock some new functionality, and new organizations and structures that might unleash creativity. Their expectation is that, if they act, they’ll learn something positive and identify a future benefit.

Imagination is human, creative, and expansive. It’s about possibilities. Conventional economics tend to focus on scarcity, but entrepreneurial economics is much more focused on abundant possibilities.

Co-generation / value learning

Who produces value and who consumes it? That’s the kind of bi-valent logic that leads to restrictive thinking. Value generation is a collaboration. Customers need to be creative enough to imagine a better future, and to seek improvements in the status quo. Entrepreneurs need to be alert enough to understand customers’ yearnings and creative enough to think of new ideas that can potentially fulfill them.

There is a learning process for both customers and entrepreneurs. Customers are learning what to want, and entrepreneurs are learning what to offer them. They both learn by experience. The customer tries something new, experiences the usage of it, then stands back and evaluates that experience. That’s where value arises: in the customer’s evaluation. The entrepreneur observes and monitors that evaluation, seeking feedback from which to learn. Co-generation of value and shared value learning are the characteristics of Austrian economics at the level of the individual and the firm.

The Flow

An important underpinning to Austrian economic thought is to view markets and value and customer relationships as flows. The world, the economy, life, and business are in constant flux. There are so many actions and interactions that they can never be understood or captured in snapshots, such as today’s price or today’s market share, or today’s sales, or this month’s GDP figures. Snapshot thinking is static. Austrian entrepreneurs see the market and their business and the mind of the customer as flows. Always changing, never still. Perhaps a trend or a pattern can be detected, but these tend to be imagined by looking backwards then projecting the past into the future and this is dangerous. The flow is not predictable or projectable. The best entrepreneurs embrace the flow, keep the pace of their experiments high, make continuous adjustments and adaptations and revel in the unrestricted wonders of adaptation to complexity.

These are just seven of the ways in which Austrian economics is applied in creative and innovative businesses. More and more entrepreneurs – both inside and outside corporations – are adopting the principles of Austrian economics.

The Coming Dominance Of Small Business.

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Anyone can create value with anyone else from anywhere: value is freely created. That’s the new feature of the emerging digital age of business. Digital technologies have been around for a while, but the digital business economy is just getting going.

More significantly, tomorrow’s structure of business promises to be much different than today’s. The path forward to a new, high-productivity future in the digital age is more likely to be paved by micro-startups than tech giants.

But the new structural patterns in business are not confined to technology industries. One example that comes to mind is the craft beer industry. Growing from a minuscule level of commercial significance in its industry in the last century, craft beer now represents about 25% of beer revenues in the US. Moreover, this new segment has introduced dynamic innovation in recipes, flavors, label design, bottle style, and usage occasions (like beer flights on brewery visits). Craft beers command higher unit prices and higher unit dollar profits. The big brewers are scrambling to keep up.

Size and scale are not the economic variables that matter for craft brewing. And industry dominance by a few mega brewers turns out not to be the natural structure for the beer industry. Creativity and innovation are what count, rather than manufacturing scale. In fact, according to Beverage Daily, “small is the new big” in brewing. 

Recipes are free – they come from the imagination. Raw materials are low cost. Brewing equipment can be purchased at low cost, borrowed, rented or made. There’s a flourishing online community of enthusiasts and experts and mentors to help with everything from P&L structure to sourcing. Entry to the industry is open. It’s easy to be a micro startup in brewing.

The trend in favor of micro startups is even more marked, of course, in digital technology industries. When production capital is code, which, like beer recipes, is a creative product that can be made from the imagination, then the “manufacture” of digital products is open to all.

More broadly, there is a raft of reasons for a surge in small business in the economy, in all industries.

A new relationship between people and capital.

In the traditional left-leaning depictions of capitalism, there are two separate groups: capitalists and the rest of us. Capitalists are privileged and endowed owners of production capital and financial capital, and the rest of us work for them. We can’t cross the divide from worker to capitalist. Nothing is further from the truth in 2022. Capital is now highly distributed and available and accessible for all. What used to be fixed capital is now rentable via the cloud – Amazon Web Services being the most notable example. No need to own servers and infrastructure. Entrepreneurs don’t need real estate or a storefront. Nor do they need a factory when they can 3D-print products, or rent factory time. Product designers are available for projects or by-the-hour through high-trust apps and services. 

It’s a similar world in financial capital. Lending platforms, angel investor networks, fintech apps and crowdsourcing are all available to channel investor money to promising startup ideas. The new relationship between people and capital operates in financial capital equally as well as it does in production capital, distribution capital and human capital.

Tho power of networks.

One of the great breakthroughs of the digital age is that anyone can connect to anyone else, and to any other resource. There’s no need to build a big firm; just assemble all the components required for one via digital interconnection. Entire supply webs from component manufacture to assembly to shipping to retailing and home delivery, plus the requisite financial services such as insurance, can be woven together digitally without any requirement for infrastructure ownership. There are expert, experienced organizers and integrators and managers for hire. Digital reporting facilitates real-time monitoring and control. 

Micro-specialization. 

Because all the support services are available and on-call, the startup entrepreneur is able to focus tightly and entirely on their one unique value-creation contribution. Peter Thiel in the book Zero To One, a foundational text for high tech startups, recommended that every business seek to be a monopoly, i.e. so highly differentiated that no competitor could match or replicate or under-price their product or service. 

Ever since 1776, when Adam Smith wrote about the division of labor in a pin factory that raised output by 1000%, business has understood that specialization can drive local productivity. Now, in the digitally networked economy, micro specializations can be interconnected for unprecedented multiples of global productive capacity. The individual nodes in this network, entrepreneurial businesses, seek more and more highly focused specializations to maintain and reinforce their differentiation, their pricing power, and their brand uniqueness.

What kind of businesses can sustain such productive specialization? Small businesses.

Knowledge availability.

Peter Drucker famously stated that business is knowledge applied to knowledge by knowledge workers. In the digital world, knowledge is freely available and shared at speed, and as new knowledge is created by A.I. or machine learning or experimentation, it is instantly distributed. Entrepreneurs who need knowledge can find it, or can locate someone with the requisite knowledge who knows how to apply it and how to combine it with others’ knowledge in some new combination that represents an innovation. 

Knowledge becomes a universal resource and less easy for big corporations to claim for their own.

Technologies 

Technologies are evolving at speed. Small business entrepreneurs don’t need to invent technology or even originate new uses; they just need to keep up with the evolution. The cloud, IoT, data science and advanced analytics, and robotics are just a few examples of a broad array of evolving technologies. Participation in the technology ecosystem keeps entrepreneurs on a leading edge of innovation without needing to be inventors. Entrepreneurial firms can move quickly and compete effectively by treating technology as a flow that carries them along rather than an investment that locks them in.

This, then, is the future for small business: get smaller, all the way to micro. Integrate with evolving tech ecosystems for momentum. Network with other specialists to form powerful business systems. Get infrastructure capital from the cloud and the internet, and financial capital from the fintech universe. The future structure of business is small and networked, not big and dominant.