Socialism favors big business; capitalism is entrepreneurial.

The Road To Socialism And Back is a fascinating real-life case study from the Fraser Institute about the differential impact of market capitalism and socialism on both production and consumption. It focuses on Poland, which had been a free market economy until the Second World War, then transitioned to a Soviet-style centrally planned socialist economy under USSR hegemony, and then transitioned back again after 1989 to a market economy.

There are lots of eye-opening statistics to highlight the impact of a socialist economy on the lives of consumers. For example, there were only seven telephone lines per 100 inhabitants in Poland in 1986 compared to 33 per hundred inhabitants in nearby Greece, and approximately 50 per household in the USA. The wait for housing was up to 30 years, twice as long even as the Soviet Union. The number of cars per 1000 people in 1980 in Poland was 64, compared to 350 per 1000 people in Switzerland at that time. GDP per capita in 1986 was roughly $2000, compared to $19,282 in the USA.

One of the observations in the Fraser Institute report is the socialist Polish economy was dominated by big businesses, which were heavily subsidized, and small and medium-sized businesses were discriminated against. 

The investments in a specific year were determined by the long-term plan and current projections of growth. These investments were generally directed at the capital goods industry and heavy industries, especially steel, chemistry, and coal, at the expense of the consumers’ desires (Piatkowski, 2013). The few, predominantly agricultural, private firms that did exist were deprived of financial resources available to state firms, thereby constraining private firms’ abilities to compete with state companies.

The favored large state companies were given increased subsidies and favored access to more resources whenever they missed their production quotas. The logic was that the production target was everything in the central plan, so more resources must be granted to the large firms theoretically capable of delivering it, especially when they fall short.

This adversely affected both the quantity and quality of output. The problem got worse over time as the least profitable industries in Poland received the most financial support and attracted the most workers, siphoning resources away from more profitable enterprises. And if the experience of Hungary is any guide, firms with the most political clout (as measured by the size of fixed assets and employee involvement in the party) received the most aid. Large firms dominated socialist economies. While construction firms with 500 or more employees were only about 16 percent  of the industry in capitalist economies, they represented over 70 percent of the industry in Poland and other socialist countries. 

When Poland transitioned back to a market economy, most notably after political changes in 1989, many of these large firms with negative value-added production went bankrupt when they faced competition in the absence of state-supplied loans and subsidies. That is, the value of the inputs that these firms used was higher than the value of their outputs, indicating inefficient production. 

Economist Ludwig von Mises had a simple insight which the socialist central planners ignored or misunderstood: close their eyes to the economic problem: the capitalist system is not a managerial system; it is an entrepreneurial system. Capital can only be efficiently allocated when consumers and customers are free to signal what goods and services they deem most valuable, and when producers are free to allocate and reallocate capital to those most valued uses and thereby, through market-sensitive capital allocation, compete for the customer’s dollars. 

Socialist central planning cannot respond to these signals, and in fact, represses them. But the favoring of the biggest corporations, and their failure to respond to market signals, is not entirely limited to socialism. Western capitalism has been favored by the rise of entrepreneurially-owned and led firms who brought new capital combinations to market, harnessing new technology to bring new benefits for which customers clamored. From John D. Rockefeller’s Standard Oil, which brought affordable illumination to homes across America, extending their days and their family time and expanding their productivity; to Henry Crowell’s Quaker Oats company who brought those families safe, wholesome and nutritious food; all the ways to today’s Elon Musk, saving the planet with electric cars and solar power – entrepreneurially-led companies have shown the way to prosperity by starting small and growing because they served customers and thereby attracted capital.

But there is a danger that when corporations get to be large, they start to face the same inefficiencies that dogged the Polish socialists. Big companies start to develop their own central planning units (it’s called strategic planning or budgeting, but it’s the same in principle), they grow large bureaucracies that are not producing but constraining production, they resist innovation to protect their existing businesses (it’s called defending market share), they lobby government for subsidies and regulatory or legislative protection, and they misassign capital to activities such as dividends or share buybacks instead of investing in future innovation.

Happily, Mises’s insight always applies. There will always be innovative entrepreneurial firms to ensure that the capitalist system is driven by market preferences and not central planning. There will always be a Tesla to beat General Motors, and a Walmart to beat KMart, a Netflix to beat Blockbuster and a Microsoft to beat IBM. And in time, as those entrepreneurial firms mature, they’ll start to show symptoms of misallocation of capital (Apple, for example, is notorious for its excessive use of share buybacks to allocate capital to share traders rather than innovation) and new entrepreneurial insurgents will take their place.

It’s not only socialist economies that suffer from the inefficiencies of big firms. But in the capitalist economies – so far – there’s always entrepreneurship to provide competitive balance and refreshment of the capital stock.

Entrepreneurship: The most important – and misunderstood – economic function for all businesses.

Entrepreneurship is often misunderstood as starting a new business from scratch, or sometimes as owning and operating a so-called small business. Entrepreneurship is not usually understood by most people as a function within big business. 

In fact, entrepreneurship is not only a function of all businesses of all sizes and all levels of maturity, from new to established, it is their most important function. Entrepreneurship gives businesses their most critical success factors.

Customer Value Creation

All the buzz in the business press and the financial sector is for shareholder value maximization. This doctrine holds that the purpose of business is to please and reward shareholders first. That’s mistaken on multiple fronts. Firstly, customers are the only reason a firm exists – without customers, there is no business. The only way to grow is to add more customers and increase the revenue that existing customers are willing to generate by buying the firm’s products and services. They do that when they experience value – the feeling that they’re better off having made the purchase and experienced the benefits than they would have been had they not done so. The experience must meet their prior expectations otherwise they won’t come back. Successful businesses pursue customer value maximization, not shareholder value maximization.

Customer Centricity

The process of Entrepreneurship is one of working from the customer backwards. It defines the purpose of any business firm of any size as pursuing new value for customers, and receiving the market’s rewards for doing so. At the core of entrepreneurship is choosing which customers to serve and developing an understanding of them and their preferences and wants so deep as to constitute a competitive advantage over all rivals. 

There are examples of brands and companies forgetting about their customers. The recent controversy over the Anheuser Busch brand Bud Light’s wading inappropriately into transgender politics seems to be a result of them insulting their own customers (whom they referred to as fratty). Those customers responded with a boycott.


Entrepreneurship is not magic and it’s not luck and it’s not purely the result of pouring venture capital into new tech ideas. It’s a function of knowledge-building. Specifically, it is the combination of two kinds of knowledge: customer knowledge and technical knowledge. Entrepreneurial firms are unceasing in their investment in acquiring customer knowledge to develop a unique and competitively advantaged understanding of customers’ needs, preferences, hopes and fears and dreams. They combine this knowledge with an equally deep and detailed mastery of a particular technical solution to deliver on these customer needs and preferences. It’s the combination of the two kinds of knowledge that results in commercial solutions that win in the marketplace. Entrepreneurship is accumulated and polished knowledge.


Entrepreneurship exhibits the property of never standing still. There is no end point. There is only endless improvement, demanded by customers who are continuously learning what’s possible for them, and competitors who are striving to earn that customer’s dollar. In business terms, this means that innovation is imperative – always making the customer’s world better, always investing in new capital, new technology, new designs and new presentations. 

Many large companies exercise this form of entrepreneurship – we can think of Apple and Amazon but also of Ford and Boeing and Procter and Gamble. But maybe we exclude companies like Mars who continue to present customers with their horribly unhealthy candy bars while innovators like Lily’s are exploring and experimenting with non-sugar sweeteners to deliver a new kind of experience for sweet-toothed, health-conscious consumers.  Big corporations can be entrepreneurial, but not all are committed to the pursuit of new value.

Decentralized organization

Entrepreneurship is built on individual creativity and imagination. It can be achieved in teams of people working together, and therefore in firms and corporations that prize individual contributions and empower them to collaborate in agile, self-organizing teams that cross-functional silos and don’t respect hierarchical control. This is very difficult for conventionally structured corporations, but the new innovative firms of the digital era start from concepts of flat, networked organizational structures that enable the unobstructed high-speed flow of information. Tesla/SpaceX is a leader in this type of management. Steve Denning, writing at, describes Tesla/SpaceX as 

  • A firm where all managers and staff are expected to work as entrepreneurs, 
  • With no budget limits or constraints on spending. · 
  • No job descriptions. · 
  • No approvals needed. · 
  • Performance reviews done by the staff, not by bosses. · 
  • Practically no managers.

This is how entrepreneurship replaces conventional forms of management.

Entrepreneurship is not only the most important economic function for business, it’s the pointer to the future of business and value creation for all companies.

100% economics, zero percent politics. It’s the way forward.

So much money and energy have been poured into politics in the last years and decades. What has it achieved? Dysfunction, debt, deficits, disrespect for America and its institutions, disdain for its politicians, and division between Americans.

Politics is poison. It is corrosive acid persistently poured onto the faces of a prostrate and powerless citizenry. It is evil, and it corrupts all the people who practice it.

Our proposal is for an end to politics and a replacement with the thought processes of economics, the science of human thriving. We’d prefer everyone to stop thinking in political terms and start thinking in economic terms. Here are five principles to begin with.

Economics is about creating value for others. Politics is the destruction of value.

In thinking economically, we investigate how we can create value for others. This is the definition of productivity and it’s the way we earn. The nexus of value is the mutual voluntary exchange. It must be an exchange – we receive reward in return for giving valuable service. It must be mutual – both parties feel they are better off as a result of the exchange, that’s why they enter into it. And it must be voluntary; force and coercion have no place and make no sense in the assessment of value.

Politicians produce nothing. Governments produces nothing. They either destroy value through regulation and restriction, or they confiscate it for their own purposes, which include redistribution of the value produced by others to those who vote for them.

Economics operates on empathy. Politics operates on disagreement and antagonism.

To design a mutual voluntary exchange requires empathy, or what Adam Smith called fellow-feeling. Since value is subjective – a perception on the part of the buyer in the exchange – it is necessary for each participant to understand the subjective preferences of the other. Empathy is getting inside the other’s head, walking in their shoes, understanding how they feel. Ultimately, this produces sympathy for their situation and understanding of their way of thinking. It breeds tolerance.

Politicians seek to divide. There must be losers so that their side can win. They identify what their own supporters dislike in the policies and communications and style of the other party, and then they focus – relentlessly, viciously, hurtfully – on those differences. Successful politicians generate hate among 50% of the voters, and, although they don’t care about it, among the majority of citizens, since most don’t vote. Hatred and mutual antagonism are their stock in trade.

Economics succeeds through the natural collaboration of people. Politics succeeds by exercising power over people.

In the pursuit of mutual voluntary exchanges, and in building firms and supply chains to bring better products at lower cost to more and more people, economics builds on the natural collaboration of mankind. It’s how we built a system that has raised the standards of living of so many billions of people, including transcending poverty for most.

Politicians do not want people to rise. They want them to be dependent on government welfare, government bureaucracies, and government education. They want power over people, and to that end, they must divide people and disallow collaboration. They create antipathy where it never existed before. They make us live in political slavery to a government we don’t want and rules we never agreed to.

Production is the economic measure of success. Politics is consumption without production.

The wealth of an individual, a family, a neighborhood, a town, a state or a country is what it produces. We exchange what we produce for other goods and services, many of which we consume, but production comes first. Production is what we live for, and what we work for. We sacrifice leisure time and other consumption opportunities now, in order to produce and lay down a store of savings that we can consume in the future when we hand the reins of production to another generation. Ultimately, we aim to produce happiness. We certainly don’t aim to consume it – otherwise it would quickly be gone.

Politicians don’t produce, and they don’t want citizens to focus on production as their primary activity. They want us to consume, and to be dependent consumers. By producing money out of thin air, by redistributing the fruits of production of a minority of citizens to a majority of citizens, they create a culture of consumption. Economists call this high time preference: politicians want a citizenry that is dependent, complacent and slothful and will demand everything now without working for it. That way, politicians can exploit their monopoly over money and their unconstrained debt and deficit spending in order to create a mirage of consumption without production. Whereas economics prizes the future, believing in an ability to make it better, politicians fear the future and focus completely on the present. Their scheme can not last, so they can’t even contemplate the future.

Prices and profits are the information signals of the free market. Politicians suppress both.

The system of economic freedom is quite simple. Prices are the signals that consumers send to producers to indicate that they perceive value. If a producer receives a price that more than covers the cost of production, we call that profit. It’s a signal that the producer has created value with the resources he or she has used. If there is no profit, the producer will rearrange production until there is a positive profit signal, or move on to another business to try a new way to create value. These two signals keep the economic system based on creative entrepreneurship humming. They have produced all of human economic progress.

Governments and politicians try to suppress both signals. They won’t tell us the price of TSA, or  the FDA, or nuclear weapons, or a President’s travel on Air Force One. They also want to control prices in markets such as that for labor (via minimum wage legislation), pharmaceuticals (via regulation) and many more. And they certainly would not operate on the profit principle in their monopolistic supply chains of education or building roads or managing national parks or invading Afghanistan.

100% Economics, Zero % Politics.

The mantra of 100% economics and zero percent politics may seem idealistic and distant. But we are focused on the individual. If one person can start thinking and living this way and making progress towards the goal, then another can, and another and pretty soon we have a movement. Let’s at least start contemplating the possibility.

WSJ Has No Respect For Entrepreneurial Businesses, Even When Reporting Their Success.

The Wall Street Journal (June 26, 2023) reported on its front page that “small companies have been responsible for all of the net job growth in the US since the onset of the Covid-19 pandemic and account for nearly 4 of 5 available job openings”. They’ve hired a net 3.67 million people, while larger establishments have cut a net 800,000 jobs during that same time period. “Small businesses are literally holding up the job market”, said Aneta Markowska, chief economist at Jefferies, who compiled the data.

Disregarding the size-shaming of referring to these powerhouse growth-producing businesses as “small”, this should be all good news, shouldn’t it? Well, not in the eyes of the Wall Street Journal. The surge of hiring by these businesses “can be bad news for markets” (by which they mean the casino stock trading markets of Wall Street). All this hiring is driving inflation, and may complicate the Federal Reserve’s efforts to cool that inflation, according to WSJ. The Fed wants to “slow down the labor market and weaken the economy” and small business job creation gets in their way. But don’t worry, say the WSJ reporters, “The Fed has said it plans to continue to increase rates this year ….to slow the economy” and hit these pesky small businesses with a downturn that will reverse their annoying optimism.

This is all typical of the financial establishment. The growth of the financial sector in the economy comes at the expense of the productive sector. A recent Bank of International Settlements (BIS) analysis shows a negative relationship between the rate of growth of the financial sector and the rate of growth of total factor productivity. The so-called small businesses highlighted in the WSJ report are, in spite of the expanding financial sector, bringing economic growth to the nation, and creating jobs for breadwinners and their families, reducing welfare dependence. They are producing new value, which is what entrepreneurs do, and generating new sales and revenues by pleasing customers. The financial establishment can’t stand it!

The growth of the financial sector, focused on stock trading and bond trading related to the few thousand companies in the quoted market indexes is detrimental to the productive economy and the 6+ million employer businesses that comprise it. The trading has nothing to do with financing productive investment in innovation. Once a company has completed an IPO, it generally never goes back to the stock market for equity financing. For example, the only money that Apple has ever raised from the public stock market in its history is the $97 million realized from its IPO in 1980. All of the stock splits and stock buybacks since then have been for the benefit of stock traders (don’t call them investors – they’re not) and incumbent management who grant themselves stock awards and stock options. There are accounting years when Apple has often spent a sum greater than its net income on stock buybacks. In other words, it is diverting resources away from productive investment and into stock market manipulation.

While “small” entrepreneurial businesses are innovating, creating new value and new jobs, the big corporations entangled in the financial sector are destroying jobs and extracting value through their manipulation of stock markets and stock prices. The Wall Street Journal reports admiringly.

The True Story Of Capitalism.

Many people today are skeptical about capitalism. Suspicious of it. In some cases, downright hostile. These people believe – or have been led by others to believe – that capitalism is bad for society overall. They believe that capitalism is extractive – it extracts work and effort from masses of people to produce financial reward for a narrow few, with limited benefit (or maybe a net deficit) left for those who do the work. A particular sliver of the financial elite has some specific techniques for extracting the vast bulk of available value for themselves via special tools such as hedge funds, currency trading, and all kinds of esoteric instruments. They believe the biggest corporations extract wealth for shareholders and executives to self-reward themselves with stock awards, stock options, share buybacks, and dividends. They believe that there is monopolistic control over markets exerted by these large-scale corporations. They believe that first-world countries and corporations take value from less-developed countries via resource extraction, cheap labor, and short-term economic activities that don’t leave behind long-term infrastructure or institutions. They believe the inequality of wealth and income in capitalism is deliberately and malevolently manipulated.

But none of this is the true story of capitalism. There are two good places to start in telling the real story. The first is 19th-century America. After the Civil War, the US was in economic expansion mode. The population was growing, supplemented by immigration, and was economically mobile, moving West, establishing cities, starting businesses, learning how to enjoy new lives. Technology was evolving, bringing new enablements for those new lives, including affordable illumination (from oil refining), rail transportation (from steel making and steam engines), better clothing (from sewing machines and new fabric technologies), better food (from mass manufacturing and mass distribution made possible by factory organization) and more. It was in this environment that great entrepreneurs invented customer capitalism. They identified the unstated, unmet needs of customers – such as affordable light for families at home at night for a better quality of life and extended productivity, safe and nutritious food, soaps for more hygienic washing, better communications – and designed systems of unprecedented scale and complexity that could be implemented to meet those needs. Factories, production lines, precision machines for manufacturing, international supply chains, secure packaging, mass distribution and mass marketing – these were all innovations of the times to serve customers in better and better ways. The energy behind these innovations came from a new invention, unique to America at the time: the corporation and its managerial methods. The entrepreneurs invented the managerial corporation because it was necessary to do so to harness the vast potential for value creation of their machines, factories, supply chains, and transportation and distribution networks. The challenge had never before been encountered, but the coordination enabled by new decentralized corporate management systems solved the problem. 

Customers were learning what they could want in the new world of technology, manufacturing, and economic expansion. Those corporations that were able to fulfill those new wants were the ones to thrive and grow into powerful commercial entities of a new type, size, and form. They became the engines of capitalism, doing far more to advance the capacity and achievements of the new country than anything than government could. 

At the same time, in the heart of Europe, a group of researchers in economics were discovering the principles that would guide the further development of customer capitalism as a system of organizing the economy. First, they established the principle of value that guides all economic production: value is in the mind of the customer. It’s not a number or a price, it’s a flow of life enjoyment, a flow of experiences becoming better and better over time, satisfying ever more needs and fulfilling ever more wants. The job of the corporation is to facilitate and sustain this flow.

The method of doing so, identifying value (what the customer is learning to want), and designing new and innovative ways to enable them to enjoy the future experience they are anticipating via a method called entrepreneurship, was another discovery of these economists. Another of their principles, a crucial one, is that entrepreneurial value generation is an adaptive, experimental and creative activity, and can’t be planned in advance or from the top down. This excludes government, as a central planning agency, from any role in customer capitalism, and also guides the private corporation in the design of their organization and processes to make them adaptive to feedback from customers and markets. Those that become bureaucratic and unresponsive are condemned to fading and failure. Continuous innovation is the only route to sustained success.

The early research came from the University of Vienna and has inherited the name Austrian economics over time. But the research tradition has continued in the US after many of the pioneers fled Europe to do their work in universities in the US. The continued further development of Austrian economics in the USA nurtures and enhances the innovative free market traditions of customer capitalism.

These two parallel streams of corporate commercialism in the US, harnessing technology and organization to profitably serve customer needs, and the continuous refinement of free market economic principles and institutions to make that commercialism viable, combine in the true story of capitalism. Capitalism is for the benefit of all: first and foremost for consumers, whom corporations and other producers are aiming to serve and please. The economic activity of doing so creates jobs and meaningful employment for many. Corporations aim to gain the support of the communities in which they establish offices and factories, improving community life, especially for the families that live and work and school their children there. And for investors, the success of corporations in serving customers can result in the profits that pay dividends and spark stock appreciation. And the system requires the institutional support of a prevailing set of economic thinking to strengthen the culture and mindset that attracts the best people to roles as entrepreneurs, managers, investors and workers.

Customer-focused corporations and the economics of entrepreneurial value creation are the true story of capitalism.

No businesses are “small”. They’re all productive nodes in a tightly connected knowledge-building value-creating network.

There are roughly 32 million businesses in the US, of which 99.9% are what the government calls “small”. This classification of business accounts for about half of GDP and of total employment (making it just as productive as “big business”), and usually more than half of new job creation (making it more dynamic than big business). It’s often where innovation first enters the market, since small business is more open to risk taking than big business. If we remove the Fortune 500 and the Russell 5000, we’ve still got 32 million, rounded up, so let’s think of them as a community.

Within the 32 million, there is a wide range of size, whether measured by revenue or number of employees. The government in the form of the SBA (Small Business Administration) uses a range of up to 500 employees and a revenue of $7 million per year. But they also relax this range in different classification categories; their “small” financial and insurance business range goes up to 1,500 employees and $38.5 million in revenues. Clearly, there’s no consistency or integrity in their definitions, and not much useful information.

A better way to look at these businesses is as an integrated network of productivity, information flow, knowledge-building, innovation and value creation. 


Dr. Samuel Gregg in his book The Next American Economy identifies the decline in the formation of new entrepreneurial businesses as responsible for the significant decline in American productivity. These businesses have an intensified motivation to be productive; it’s hard to get capital, so they need to make the most of what they’ve got and find agile ways to borrow, rent or originate capital. They can’t afford productivity-sapping bureaucracy. They find ways to accelerate cash flows. They adopt new technological innovations quickly so as to take advantage of productivity enhancements. Productivity is essential for them.


Bartley J. Madden in his book Value Creation Principles, identifies knowledge-building proficiency as the fundamental driver of firm performance. In the integrated 32-million strong network of businesses we are analyzing, information flows faster and more freely as a result of more network nodes, more connections between nodes, and lack of barriers to learning such as bureaucracy. These businesses know they must learn at speed, apply their learning fast and use it to serve customers better. There’s no learning time to lose.

Dynamic Efficiency:

Efficiency is an economic concept that hasn’t been very helpful for business in general. It tends to mean doing less with less: cutting costs, saving on inputs, not risking innovation, not attempting experiments with uncertain outcomes. But economist Jesus Huerta de Soto developed the contrasting concept of dynamic efficiency: fast adaptation to changing customer preferences, and rapid creation and adoption of new market knowledge, with an economy of time and agile decision-making.  This is the entrepreneurial method, and the way that the 32 million competes effectively with larger, better resourced but less agile firms.

Pure value creation:

Businesses generate cash flow as a result of the valuable customer experiences they enable. The value that customers perceive turns into willingness to pay, resulting in cash flow that is the life blood of small businesses who have less access to credit and debt to fund their working capital needs. The 32 million are acutely sensitive to cash flow, and therefore to customer value. They remove all obstacles to customer value, including bureaucracy, complicated service arrangements that obscure value visibility and take time, and any other obstructions they can identify. These businesses know that they must pursue pure value creation.

Customer focus:

The disciplines of dynamic efficiency and pure value creation demand an intense customer focus. The 32 million choose their customers carefully, develop a deep knowledge of them and their needs, nurture empathy to get on the same wavelength with customers regarding those needs, and are constantly listening for feedback and adjusting to any new signals that come through the feedback channel. This intensity of customer focus sustains the innovation and elevated quality of service that, in turn, secures continuity and strengthening of business relationships. That’s why these businesses are the backbone of the economy.

Unentangled with government:

The greatest barrier to all business-driven economic growth, progress and innovation is government. Both taxation and regulation are business-killers by intent. Big business becomes entangled with government. They develop big bureaucracies to comply with regulation, keeping them close to government and saddling the 32 million with disproportionate compliance costs if they’re forced to match big-business compliance practices. And big businesses assemble lobbying forces and budgets to design, write and pay for government approval for regulations that protect them and over-burden others. It’s this entanglement with government that condemns big business to permanent inefficiency, and also results in the kind of government-directed surveillance scandals that are currently being uncovered.

The 32 million is in no way small. It’s the vital, leading edge group that brings innovation, growth, development and dynamism to the economy. Let’s find another term than “small business”.