A new worldview for economics and business.

It’s exciting to live through a time of changing worldviews – when what we used to believe is shown to be wrong, and is replaced by new beliefs that are often still emerging and therefore somewhat open-ended. New doors open, new possibilities present themselves, there’s new energy.

The science of physics experienced this change of worldview in the later parts of the twentieth century and is still exploring new worlds in the twenty-first. The old worldview was Newton’s: that the universe was a machine, its motion and planetary interactions governed by unbreakable mathematical laws. This mechanistic view extended to all of natural and human life – whatever we examine, we look at it as a machine and try to figure out how it “works”, how the parts into which we can reduce the machine function together, and how it can be tuned for better performance. This mechanistic view extended to people and organizations, where we called it “management”.

Fritjof Capra, in The Tao Of Physics, writes about “the fundamental change of worldview that is now occurring in science and society…..the unfolding of a new vision of reality”. The change stems from the discoveries of quantum physics, where the traditional idea of a material substance is replaced, and concepts of space, time and cause-and-effect are radically transformed. The machine-like image of how the world works is replaced by an image of dynamic flow; the world is forever in motion, time and change are essential features, and all phenomena are interrelated rather than separate, so that a change in one component affects all others, and hence affects the whole, which in turn re-affects the components through never-ending recursion of feedback loops. Quantum theory and relativity theory forced the world to change its worldview. There are no “basic building blocks” of matter that we can isolate, just a complicated web of waves and patterns of energy. The new world is not precise or predictable or measurable. it’s a world where opposites we don’t understand and can’t conceive of co-existing nevertheless apply. It’s a world of probabilities where there are multiple possible futures at any point, and therefore the possibility of many presents. It’s a bit spooky, as Einstein put it.

The world of economics and business is on the threshold of such a change in worldview. The same Newtonian mechanistic and mathematical approach that was applied in physics has been adopted in economics. The economy was viewed as a machine, churning out a numerical output identified as GDP. The efficiency of this machine could be calculated using algebra and equations. A certain amount of capital combined with a certain amount of labor and a factor that represents technological progress became the “model” for how the economy works. Within this larger machine were smaller component machines called firms, which combined capital and labor and technology in smaller and distinctive ways to contribute to total output. These machines were “managed” for high performance – organized as hierarchical command-and-control structures where the managers at the top who had all the equations and plans and visions instructed and directed the lower orders on how they should act. The worldview was quantitative and positivist, a word which we can translate as “there’s an equation that explains everything”.

The quantum equivalent in economics and business is the growing recognition that numbers and equations and top-down command and control management have no place in a system composed of human factors not machine parts. The economy is just such a system and firms are such systems. The appropriate worldview is the opposite of quantitative and positivist: it’s qualitative and subjectivist. Physicist Richard Feynman captured the difference in a well-turned phrase: “Imagine how much harder physics would be if electrons had feelings.” There could be no laws of physics, no continuity of data streams, no capturing of behavior in equations and algebraic symbols. 

Economics and business concern humans. They are artifacts of human action and cultures of human feelings and emotions. The basic unit of analysis is the individual, both as worker and producer and as end-user, consumer and evaluator. Individuals are guided by their feelings, which change over time, and as context changes, and as they interact with others whose feelings are in play. The purpose of the economy is not to produce GDP, but to produce well-being, that feeling among individuals that they are better off compared to previous time periods and compared to alternatives. The economy gives individuals choices rather than giving them output. Firms are collections of individuals doing the same for customers – presenting them with choices and the proposition that making the choice will enhance their well-being – and for each other. The firm is a collaboration of people with aligned mindsets and shared assumptions and values engaged in offering well-being to others. There are no equations to help, and no hard-number metrics. There is subjective calculation – that well-being can be assessed, and can be monitored for its direction (getting better or worse) and its intensity (deeply felt as satisfaction or softly felt as contentment). There’s also the opposite assessment of unease or disquiet, which is the signal to the entrepreneurial firm that there’s the opportunity to generate new well-being that’s currently missing. There’s a market reward for getting this right, when satisfaction turns into willingness to pay and cash flows to the firm that makes well-being more possible and accessible for its customers.

These market rewards are flows, not to be measured by looking back over time at the end of the quarter or the year, but by looking forward to the future satisfactions that will keep the cash flowing, or sensing some fade in satisfaction which calls for innovation and an improved value proposition. Management is caring – caring about the customer experiencing value and feeling satisfaction and being confident in their choices. This is the new worldview. The old one brought with it the perception of capitalism as extractive and exploitative because there was no caring there, just numbers and equations. We are happy to move on.

Why Do People Say Bad Things About The Capitalist System That Delivers Superabundance?

Consider this chart. It appears in a book entitled A Farewell To Arms: A Brief Economic History Of The World and illustrates the worldwide change in personal income over 3000 years.

We can think of increased personal income per person as pleasurable progress for all. Increased income is a proxy for many life improvements: better food and beverages, better shelter from heat and cold, better health and better healthcare, better education, better jobs, better transportation, better entertainment, expanded knowledge, greater freedom, and many more in a long list that covers all of life.

As the chart shows, the progress is recent. There was no progress in income per person for the first 2800 years or so depicted in this chart, and then a high energy surge of almost exponential growth in the most recent 200 years. The pivot point is the invention and introduction of capitalism. 

The pivot is often labeled “the Industrial Revolution” (as it is in our chart), referring to new forms of physical capital such as steam engines and factories that proved capable of producing more and better goods at lower and lower prices and creating the jobs that paid the wages that increased income per person and gave individuals the opportunity to become consumers. It was a technological revolution, a knowledge revolution, and, most importantly, an economic system revolution, the switch to capitalism.

Over the 200 years since the switch, capitalism has delivered more than personal income growth; it has delivered superabundance. That’s the term employed by researchers Marian Tupy and Gaye Pooley in their book of that title. Superabundance is defined by the phenomenon of us each needing to spend less and less time working to purchase more and more goods and services. It’s a new economics, not of scarcity but of abundance.

A similar story is told by Hans Rosling and Anna Rosling Rönnlund in their 2018 book, Factfulness. They provide us with long lists of “good things that are getting better, and bad things that are decreasing”. The former list includes child cancer survival, access to education, women’s rights, clean water, literacy and democracy. The latter list includes child labor, hunger, smallpox, oil spills, and many more.

These and many similar books and papers provide extensive data compilations regarding the improved lives we all enjoy as a result of capitalism. So why do so many people – students, intellectuals, democratic politicians, writers, celebrities, and cultural influencers in general – speak so badly of capitalism?

The authors of the books we’ve quoted put it down to human psychology, that we are wired to be apprehensive, skeptical, and negative even in the face of incontrovertible evidence to the contrary. Our negative affect comes from our time roaming around prehistoric forests in constant fear of being attacked by some predator. The Roslings point to psychology research that indicates that humans have a gap instinct. We are prone to divide the world in two (e.g. developed economies versus underdeveloped economies, or rich versus poor) and focus on the gap between the two extremes of perception we have just created. We don’t see a continuum and we don’t see continued progress for everyone.

It’s a little hard to accept this psychological perspective in the 21st Century, when there is so much data to refute it, but if we are looking to psychology for an explanation, we can certainly look at envy. According to Helmut Schoeck (in Envy: A Theory Of Social Behavior), envy is universal among humans.

Envy is a drive which lies at the core of man’s life as a social being, and which occurs as soon as two individuals become capable of mutual comparison.

From a perspective of envy, the absolute gains that capitalism brings are ignored and the perception that some gain more than others prevails. Envy itself is an individual emotion – a lonely one since it’s a rejection of relationships – but the great danger occurs when a culture of envy is cultivated. That’s exactly what happens in our educational institutions, both universities and high schools and even elementary and middle schools. A class of educators, resentful because they feel underpaid and underappreciated in the capitalist system that rewards innovative value-creating entrepreneurship more highly than institutional maintenance, teach our children that capitalism is unfair, extractive, and exploitative. 

The teachers are reinforced by the communicators in the media, the writers, influencers, and talking heads who find that anti-capitalist content is amenable to their customers who have passed through the channels of education and become permanently misguided by the perspective they absorbed there. The media continuously reinforce the disaffected envy of their audience, deepening it, extending it, and distorting reality even further. The negativity instinct in the media leads to selective reporting and downright distortion of facts.

And then the politicians and government bureaucrats pile on. Politicians have no interest in progress and improvement. Their stock in trade is to point out how the opposition is failing – undermining or destroying prosperity. They also feed on the idea of the gap – that their constituency suffers by comparison to whomever the politicians decide to compare them to: women to men, non-whites to whites, Southerners to Northerners, less-educated to more-educated, my constituents to your constituents. It’s always about the gap for politicians. And the notion of the gap leads them to anti-capitalist rhetoric: capitalism is responsible for these gaps, that wouldn’t otherwise occur. There’d be equality under alternative systems. 

Government bureaucrats can claim to fix the gap problem in a different system that they run. Call it socialism, call it public-private, call it interventionism or regulationism, call it the entrepreneurial state. Governments are anti-capitalist because capitalism gives no role to government. Government can divide the pie, but only after capitalism has created the recipe for the pie, assembled the pie ingredients, baked the pie, served the pie, accepted and incorporated the feedback of the consumers of the pie, and nurtured the broad and deep market for pies that generates the commercial revenues that governments can then tax and redistribute. Politicians and bureaucrats must condemn capitalism so that they can offer their so-called solutions to the problems they claim capitalism causes.

We have a deep and wide circle of groups willing to say bad things about capitalism: educators, intellectuals; the students and others whom they influence; the media who act as their cheerleaders; and politicians and bureaucrats whose professional incentives are to undermine the popularity of capitalism in order to justify their own anti-capitalist ends and means. Together, they represent a formidable array.

There isn’t a word for fans of capitalism. If we use the word “capitalist”, it’s perceived as derogatory. Whatever the name for fans of capitalism, we need them to be confident, vocal, well-armed with data, and positive and persuasive in its presentation. We need to strengthen the pro-capitalist mentality.

Why Study Economics?

Economics is the science of human thriving. It is the study of human choices and the motivations behind them. If we can understand those simple things, we can understand every transaction between humans as consumers and humans as producers, and roll that micro understanding up into the more macro understanding of firms and economies, and how they function, succeed and grow.

Thriving is what we all want. We can define it as continuously increasing our feelings of well-being. And that’s the first indicator of the value of economics. The output of any economy, of every firm and of every exchange and every transaction is more well-being – the feeling of being better off. Yes, a feeling. Economics is not measured in numbers like GDP or firms’ revenues or profits. It’s assessed by the satisfaction of individuals as to whether things are getting better or not. A growing economy is one with improving feelings of well-being. The nearest thing to a metric for this feeling of well-being is the University of Michigan Consumer Sentiment Index.

When the index is high, it’s associated with increasing stock market valuations, economic growth and prosperity. When it’s low, it’s associated with recessions. There’s no need to search for cause-and-effect, because it’s not there. The sentiment is emergent from the system.

A successful firm is one whose customers feel increasing well-being – more satisfaction, more confidence, more trust, more relatability. A strong balance sheet is one with assets that will facilitate such satisfactions and feelings of well-being many years into the future. A strong P&L is one that shows that customers are generating the cash flows that result from their willingness to pay for those satisfactions at the price the business chooses to set and results in profit.

How does economics teach us to increase well-being? Development economics as its called – the study and theory of how economic growth is generated – is a highly underdeveloped field. It has no answers because it’s looking for those cause-and-effect conclusions that just can’t be found. It’s better to look at system effects: what is the system most associated with increased well-being? It’s free market capitalism.

More entrepreneurship.

Entrepreneurship is the function that drives growth in the free market system of capitalism that brings prosperity. Entrepreneurship is misunderstood by most economists and all policymakers. Entrepreneurship is the economic function that creates new value, and value is what we all seek. Value is the feeling of being better off after experiencing a good or service that’s been prepared for us or sold to us. It’s the feeling of betterment – better off today, and better off tomorrow because of all the great offerings entrepreneurship brings to us. Entrepreneurship is what drives capitalism. It can take place in a startup or in a giant corporation, so long as the intent is to improve customers’ lives. It is highly restricted in an economy where government regulation strangles innovative opportunity, or where government directs investment funds to one industry rather than another – for the simple reason that entrepreneurship is experimentation to find out what customers prefer, and regulation often doesn’t permit experimentation. What drives growth? Those of us who are not entrepreneurs don’t know – we leave it to entrepreneurship to run the crazy experiments that will help the rest of us to find out.

Production before consumption.

The conventional wisdom of economic pundits and government planners is the opposite of the entrepreneurial view. They believe that consumption – what they sometimes call aggregate demand – is the driving force of the economy. If the economy, as they measure it, slows down or stalls, their answer is to put more spending power in the hands of consumers so that they buy more products and services. They believe that demand brings production into being. Without demand, there’d be no production. The opposite is the true case. Entrepreneurs reveal to consumers that there is more they can want – better goods and services, new technologically innovative products, faster deliveries and lower prices. By demonstrating the availability of more – by producing, that is – entrepreneurial businesses generate demand for their offerings. Demand does not bring businesses into existence; businesses bring demand into existence. Any and all restrictions on production should be lifted to bring productive growth to any economy anywhere in the world.

Less quantitative, more qualitative.

Economics is usually presented as a quantitative science. Economic “quants” focus us on numbers like GDP or economic growth rates or trade imbalances or debt levels. They want us to think of economics as a science on par with physics and mathematics. But it’s not. Economics is about well-being, and how humans increase well-being for themselves, their families, their firms and their communities. Well-being is subjective, a feeling on the part of individuals. It can’t be measured, enumerated, ranked or stacked or trended. Economics aims for a world in which we can consciously and deliberately raise and expand and extend well-being, without always trying to capture the improvement in numbers. Feeling better off is a qualitative phenomenon.

Less economic policy.

The word policy should never be conjoined with the word economics. Policy equates to politics, i.e. a biased, group-interest driven perspective on economic decision-making. Economics teaches us that markets can freely determine all allocation decisions, and all selections between what individuals and groups prefer, favoring new and better and jettisoning what’s out-of-date and inferior. Politicians may not always like market choices, and may therefore introduce policy that contradicts the markets, but this always leads to less total well-being. And since there is no possibility of isolating cause and effect in a complex economic system subject to an incalculable number of influences, interactions, constraints, and unanticipated feedback loops, policy never “works” – it can not lead to the outcomes it promises.

Students of economics will understand and appreciate these catalysts for well-being – that’s why economics is worth studying.

Complex Adaptive Systems: The Daoism Of Western Science.

Western science, like all of our institutions, thrives on novelty. New theories and new sciences abound: quantum physics, computer science, network science, string theory. The lines of inquiry are always extending beyond yesterday’s boundaries.

One recently developed science is complexity and complex systems. In a reversal of the traditional reductionism in science – which looks for explanations at ever smaller micro-scales, from molecules, to atoms, and now to hadrons and quarks – complex adaptive systems theory looks at the world holistically as systems, including systems embedded in systems embedded in systems, and asks how they perform at the system level. The economy is a system, society is a system, a firm is a system, a city is a system, a brain is a system, and so on. A system can be contrasted with a collection of objects that are disconnected, like a bag of marbles or nails.

There’s a particular focus on Complex Adaptive Systems (CAS): a class of systems found in many fields such as economics, biology, and social sciences, characterized by a collection of individual agents acting independently and constantly reacting to what the other independent agents are doing. These agents interact locally with each other at the micro level in unpredictable ways, and through these interactions, system-level structures and patterns emerge without central control. 

The concept of emergence is key: unpredictable outcomes occur, without any traceable cause-and-effect links. The scientists’ favorite word in this context is non-linear. Their treasured linear equations are of no use in predicting future outcomes in a complex adaptive system. That means, for example, that the policies politicians and bureaucrats prescribe to fix what they perceive as economic and social problems are useless when viewed through the lens of efficacy, and damaging when viewed through the lens of the independent agents – people – interacting within the system. Their freedom of interaction, the essence of the system, becomes impeded by policy.

Complex Adaptive Systems open up another cause-and-effect problem in business. How can we celebrate the great achievement of hero CEO’s if outcomes emerge, rather than tracing back causally to the decisions and actions of the great business leader?

How do we deal philosophically with the idea that outcomes emerge, without any traceable cause? That’s anathema to Western science. Perhaps Eastern philosophy offers a better approach. In Daoism, the Dao is The Way. The focus is not so much on the outcome, more on the way or the path. There is no outcome, only constant change. The images of Daoism include water and river imagery: the river flows over boulders and pebbles, between mountains and banks, bends left and right, and becomes bigger and bigger, and never stops. Heraclitus famously said that a person never steps in the same river twice, because each time, the person has changed and the river has changed. Change is the essence of existence. The way is universal, we follow it – go with the flow.

Complex adaptive systems that constantly adapt to the changing environment and to the interactions of independent agents are said to be self-organizing. They follow The Way, as the way emerges. They exhibit dynamic change, never stepping into the same river twice. The appropriate observation point is holism rather than reductionism – interconnected Eastern thinking rather than analytic Western thinking.

The pursuit of the Dao – the Way – entails harmonizing with this process rather than controlling it. Embracing harmony is key for adjusting our philosophy. Thus, in CAS parlance, the trade-offs between different levels and agents within a system would need to be inclusive rather than controlling, for the classical concept of harmony is one in which diverse interests prevail in a dynamic balance. Harmony is understood as the ‘unity of any nonidentical objects’, which in their diversity allow for ‘the possibility of new things arising’. Translated into CAS, harmony is inclusive of discord but not overtaken by it. If discord does overtake the system, dynamic harmony loses its integrative quality and breaks up into chaos; alternatively, when it is stifled by uniformity, harmony ceases to exist.

Seen through the lens of business, CAS and The Dao require changes in standard business thinking. Control and prediction have been the twin pursuits of business management. But harmony results from balance, not control. Pursuing innovation in a linear fashion through R&D investment in projects can exclude “the possibility of new things arising” in an emergent way, because it uses reason and analytics to favor some investments and excludes others. Emergence is not even contemplated.

Western science and business management tend to prefer the identification of causal change – or that which we can attempt to control and seek to predict. The new science of complexity is less mechanistic than the standard model, and closer to Daoist intuitive thought. Complex Adaptive Systems, in its nonlinear treatment of change, provides a bridge between East and West, an integrative perspective.

Business Is Not A Set Of Practices Or Strategic Methods Or Planning Techniques. It’s A Mindset

In the current business era, there’s a lot that seems mandatory: using quantitative methods of strategy and planning, following documented IT-enabled processes, organizing fixed structures that can be captured in org charts, and complying with government-mandated rules and regulations. Even the acts of creativity that contribute to innovation are specified, documented, and captured in software. There’s a bias towards fixed cause-and-effect thinking: if a business takes action X, it will result in outcome Y. We are told that case studies will reveal this cause-and-effect linkage in hindsight, to be re-applied in future planning.

There appears to be no room for individualism, spontaneity, unpredictable interactions, or rebellion. Those concepts are insufficiently objective for today’s business executives, consultants, professors and executives. The goal in business is primarily stability: to make a plan and achieve it, to set targets and hit them, to predict quarterly earnings with accuracy, to define processes in the knowledge that they will be followed unfailingly. The goal is to turn business into a science, with hard numbers, laws, and data-driven methods.

But in excess, this objective approach does not support the primary goal of business, which is value. 

The purpose of all firms is to generate value for customers and value is not objective or measurable or amenable to design or planning. Value is a feeling – a feeling of well-being or satisfaction experienced by customers. Different customers experience more value or less value than each other even when using the same product. Value occurs when the customer has used the product or service and compare the consumption experience with their going-in expectations. Value is subjective from beginning to end – from the search for potentially satisfying experiences to the realization in use to the evaluation after use. 

In fact, it is not the firm’s job to create value. It’s the customer’s role to find the most effective solution to their wants and needs. They can express some doubt or uncertainty that there’s anything available to them that exactly meets their need, although they might buy something that the best available option, even though their satisfaction is incomplete. They’re always looking for the discovery of something better. This is the role of the customer – the genius role of insisting on something better, thereby stimulating innovative action among producers to respond with new value propositions. Together, the producer and the customer imagine a new future value via a new or improved service or product; the producer can help the process along with product enhancements and advertising and PR and perhaps prototypes to help the customer’s imagination along.

If the customer’s imagination is piqued, the firm must commit resources to assemble the product capacity that will put an actual, purchasable offering into the marketplace for consumption. There’s no guarantee that this will be profitable or successful. The customer has the final decision. There’s no planning, predictive modeling, sales goal targeting or quantification of any kind that can eliminate or overcome this uncertainty. The customer will choose between all the alternatives available, including to buy nothing at all. It’s all contingent, and there are infinite possibilities. Firms choose their path towards facilitating the customer’s value experience, but there are no objective certainties.

So if business is not objective, quantifiable, or plannable, how would we describe it?

The philosophical word is subjectivism. Businesses would be better equipped for marketplace success if they followed subjective methods. They’re dealing with people and their emotions and their interactions with others in a complex social system. There’s no hard science, no spreadsheets, no data set that can predict the outcomes. 

That raises the question, what are the skills for business, if they’re not numeracy and hard science and mathematical economic. The answer is empathy. The skills of empathy – the ability to see inside customers’ minds and simulate a view of the world as they see it, to imagine what they are imagining, to reconstruct their mental model as opposed to imposing your own – are the most important in every business, and for every individual in every position and every function in business. Everyone must display customer empathy. What is the experience they are having? What’s imperfect about it from their point of view? What might result in a better experience for them, a potentially greater satisfaction for which they might be willing to pay. This empathy is best exercised at the level of the individual customer. If a business can get the empathic diagnosis right for one business, then they can investigate how it scales. Every customer is different, but there might be some patterns of response and interaction that spread out among a population of customers. 

Empathic diagnosis can reveal customers’ intent. What ends are they aiming for? What’s the highest value they seek? How can the firm’s proposition stimulate them to believe that it might contribute to that highest value? Uncovering the customer’s intent can indicate what experiments to run to find out whether any of the propositions a firm is able to get customers to imagine a future where new value is a possibility for them. Experiment is a key word: there’s no certainty in advance. Possibility is another key word: there is a wide range of possible outcomes. But by running the experiments and responding to feedback, the number of possibilities, the range of uncertainty, can be narrowed.

Once the results of experiments are in, then the firm can start unleashing its quants to do the economic calculation. How much will the customer pay based on these experimental results? How many customers might there be? How frequently will they buy. How much advertising budget should I spend to make the value proposition more widely known. Quantification is appropriate for these questions, once the empathic diagnosis is authenticated. 

Of course, the quantification can’t be accurate, and circumstances will change. It’s subjective calculation – the right method for an uncertain and subjective world.

Raushan Gross: Socialism Cannot Work, Not Even in an AI-Driven Economy

Many of us seek products and services from sellers with goods of the best quality and relatively lower prices. Sellers seek the highest prices for selling the least amount of goods. Sellers compete for customers but would much rather be the only seller in the marketplace or market space. Furthermore, consumers want more for themselves and less for other consumers.

This depiction of market behavior is normal and may seem chaotic to some who view the marketplace through a socialist lens. With all the recent talk about reining in artificial intelligence (AI), taming AI, and limiting its uses, it sounds like the hubris of socializing artificial intelligence products and services.

However, an AI-driven economy cannot be socialized by a single entity, despite all the noise about AI restrictions, limitations, and tighter rules and regulations sent down from the top elites. We all use artificial intelligence in daily activities, ranging from work and leisure to side hustles, if you have one. With the glitz and glamour of technology, particularly artificial intelligence, the point that is missed is this: AI products and services enable firms to meet demands, assist entrepreneurs to create value, and enhance the exchange processes we all take part in daily.

Zack Dugow, who wrote “How to Defend Yourself against All-Powerful Monopolies That Control Your Business” for Forbes, made an important observation but did not take it to its logical conclusion. Dugow said, “If you have a heavy reliance on one of these monopolies [artificially driven software or social media/web page tools], you need to be able to pivot your business quickly and have your backup plan readily available to you. What service providers can you switch to?”

Should AI technology and AI startups eliminate monopolistic behavior between firms and consumers and rid the market space of the unrealistic notion of any socialization of AI technology? Everything has a price and a cost, which is why socialism was debunked some time ago.

However, what about artificial intelligence? Can it be socialized in the market space? You can socialize some things, but artificial intelligence cannot generally be owned and operated by a single entity or widely restricted from public usage. Someone must own the productive resources, sell services, and upgrade and maintain the hardware and software.

Opening market spaces for AI seems reasonable; however, will the elites plan to socialize AI services and products, close up the industry, and eliminate AI buyer options? When prices, inputs, and outputs are calculated, it becomes an unfeasible proposition that AI services, products, and industries be socialized. Fortunately, more and more AI service startups are available for buyers. Again, people use AI-enabled services and products to a large degree for many day-to-day activities. AI startups are on the rise, and they are listening to the market space, despite the socialist view that permeates throughout the media pushing toward more regulations and clamping down on open competition. Nevertheless, even in an AI-driven economy, socialism still cannot work.

No company has yet been granted exclusive ownership privileges of AI products and services. Not yet! Currently, there are over thirteen thousand (and rising) private startups of AI services and products in the United States alone, according to eWeek. Will artificial products and services remain decentralized? AI is a tool and enabler of exchanges between customers and firms. The advent of AI technologies can ward off monopolist behavior in a free market because, with an innovative approach to a consumer product or service, any company may be able to prove themselves worthy in the face of Goliath. Contrary to popular opinion, firms that use AI to enhance customer satisfaction and increase productivity open more doors for regular folks to start up their own business, which gives buyers more options in the marketplace. It also allows customers to enjoy the many features and benefits of products and services that add value to their daily lives. Some need to see this point. In other words, those who want to centralize AI services and products to one seller and raise the barriers to industry entry are saying out loud that they want more for themselves and less for you (and me).

That means no firm should have the exclusive privilege of being the only provider of AI services. Right? So many industries started as decentralized firms and are now privileged providers. Question: Who sets the prices of AI services, packages, and models? While your local utility provider, in many cases, is granted the privilege of being the only supplier of utilities, Amazon, on the other hand, has not received the same privilege. Amazon has a strong position in the market, but we know of competitors out there we can visit if we would like to. The difference between privileged providers and Amazon is that Amazon is subject to market competition. Therefore, they must listen to customers and pay attention to price increases, warehouse logistics, and customer service improvements.

If AI products and services remain decentralized, it will allow the market spaces to regulate the prices and costs for using AI services as opposed to if AI services are centralized under one firm or an elite few, similar to airline companies. When consumers and entrepreneurs see the rising costs of AI-enabled platforms, it reduces the incentives to use that technology, but it also allows new entrants to come into the market space and attempt to deliver a better product at a marginally better price. To disregard this market movement is the intent of socialism in general.

Furthermore, a handful of AI service providers eventually reduces the quality of this handful of providers (there are many instances of this decline in quality and rising price when a provider is granted a monopoly privilege). However, a natural monopoly might be reasonably valued. Technology of any kind, operating in a free market, should be the mechanism by which people who desire to enter an industry can do so with their skills and investment and make their attempts at competing—even if they are unprofitable, they were able to enter the fray.

What is often misunderstood about monopoly and prices is explained by Murray Rothbard:

There is no direct control over price because price is a mutual phenomenon. On the other hand, each person has absolute control over his own action and therefore over the price which he will attempt to charge for any particular good. Any man can set any price that he wants for any quantity of a good that he sells; the question is whether he can find any buyers at that price.

In a free market, no one is granted monopoly privilege—a privileged market position is earned by providing the best quality and price that consumers are willing to buy. On the other hand, forced or restricted choice is a form of socialism, or at least interventionism. At this time, it seems the capital markets are deciding where to invest, which is apparent in the rising number of firms producing more products and services so that businesses can meet public demand. If, however, all capital for AI investment funnels to one entity, it would be a disaster insofar as an economic calculation.

The idea of socialism does not hold up to its tenets considering AI’s technological advances made in recent years from the rising number of firms, especially advances in AI for entrepreneurs and consumers alike. A socialist vision of the world is very compelling, but reality tells us something different. The basic premise is that someone has to produce, someone has to consume, and there is a price calculation for both to exist. In the reality of socialistic visions, when subjected to market space examination, this premise tends to break down.

In many cases, the producer and consumer are the same people at different times. Production must take time, and with knowledge of prices, producers know the quantity of goods to produce at any given time. Even if one can socialize the production of luxury items, homes, and vehicles, how does one produce the capital required to make those items? Even with all needed inputs, AI cannot engage in the economic calculation needed to make a socialist economy work.

Author: 

Raushan Gross

Raushan Gross is an Associate Professor of Business Management at Pfeiffer University. His works include Basic Entrepreneurship, Management and Strategy, The Inspiring Life and Beneficial Impact of Entrepreneurs, In Pursuit of an Entrepreneurial Culture, and Emerging Institutions of Entrepreneurship. His research interests include topics ranging from entrepreneurship, free markets, economies, markets and competition, and the role of technology in market coordination.