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. 

Productivity:

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.

Knowledge-building:

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”.

Corporate Layoffs Occur At Firms That Don’t Prioritize Customer Value Creation.

Recently (Dec 5, 2022), Pepsico announced that it would lay off hundreds of workers “in headquarters roles”. The lay-offs memo was signed by the CEO of PepsiCo Foods North America and the chief human resources officer of Frito-Lay North America. These executives stated their purpose was to “take steps again to simplify the organization so we can operate more efficiently”. Why, one wonders, were they not operating more efficiently prior to this announcement? Presumably, more efficiency is a good thing, and should be sought at all times.

Pepsico is not alone. A December 4, 2022 entry on intellizence.com has a long list of layoffs at companies including H&M (1,500 layoffs), United Furniture (2,700 layoffs), Alphabet (10,000), Hewlett Packard (6,000), Cisco (4,000), Amazon (10,000), Meta (11,000), and Credit Suisse (9,000). The list goes on.

The purpose of a firm is to create value for customers. Bartley J. Madden, in his book Value Creation Principles, expands the idea of purpose to “communicate a vision that can inspire and motivate employees to work for a firm committed to behaving ethically and making the world a better place”. This concept of purpose includes knowledge-building to learn how to serve customers better, and sustaining win-win relationships with all the firm’s stakeholders – including employees, of course. If employees are to be inspired, they should expect to be treated fairly and with respect. They should be treated as individual value creators, empowered, trained, informed, and given the autonomy to make decisions that further value creation for customers.  Fundamental to the Bartley J. Madden vision is long-term sustainability. Value creating firms ignore the demands of Wall Street for quarterly returns and the maximization of shareholder gains, and focus on building the real assets in the firm – through capital investment and innovation projects – that can continue to deliver customer satisfaction for decades and longer. Financial returns are an outcome of this commitment, but do not represent the purpose of the firm. Maximizing shareholder returns does not qualify as a vision in this worldview.

A value creating firm that aims at genuine sustainability adds to its assets when those assets are demonstrated to be value drivers. Madden points to the knowledge-building proficiency of the firm as the critical element in long-term success or failure. Knowledge-building is a learning process: learning what drives value for customers. Customer value is subjective – an experience, a feeling, something that can’t be measured via the standard quantitative metrics. But there is an indicator of customer value that can be relied upon, and that is cash flow. Cash flow is value created in the customer domain flowing back to the corporation as revenues. Customers advance through a value learning cycle that begins with evaluating whether or not any proposition has potential value for them, then comparing it with alternatives, and then arriving at the point of exchange which we can call  “willingness to pay”. If willingness to pay is positive, the firm receives revenue, indicating that the customer has committed themselves to the experience of value in the expectation of satisfaction. If the customer repeats the cycle and buys again, it’s an indicator that the value experienced met their expectations. There’s a second flow of cash to the firm.

There’s a direct connection between cash flow and value creation. Therefore, through experimentation and analytics, a firm can identify its value drivers, those assets most positively and most directly generate customer value. These value drivers can include assets like brands, specialized expertise, technologies that generate desired customer experience (like speed and convenience and ease of use), and highly refined knowledge that defines the firm as the go-to reliable expert. Value drivers can also include human capital – the people who work at the firm, immerse themselves in the knowledge-building process, contribute to its further development, and become value creators in their own right.

So why would a firm lay off hundreds of such people “in headquarters roles”? Presumably, they wouldn’t fire value creators, for that would be depriving customers of value, which is the opposite of the firm’s purpose.

Or is it? In fact, what these layoffs reveal is that customer value was never these firms’ purpose in the first place. In this age of financialization, the purpose of the firm is maximizing its returns to shareholders (who include the CEO and the Board and the rest of the C-Suite, as well as Wall Street and institutional investors, but seldom customers). Those returns are assessed at minimum quarterly and often more frequently. If those returns, or pre-indicators of those returns such as revenues or margins, turn downwards, the stock price can easily decline, slamming the brakes on shareholder returns. An easy fix is to reduce costs, to restore margins and profits, and the easiest cost to reduce in the short term is labor – people. 

Clearly, the people who have been laid off must not be in value creating jobs. They’re not driving trucks and stocking shelves. So why were they hired in the first place? The reason is that there’s a purpose of management other than creating value for customers. They want to increase their department size, and the number of people they supervise, because the incentive compensation system rewards them for that. It’s an increase in power for managers. They’re short-term thinkers, and they don’t anticipate the layoffs to come; they’ll take the power and compensation increase now, and worry about the layoffs when they come.

That’s why not only the purpose of the firm must be examined to make sure it’s truly oriented to customer value, but also management itself must be reimagined because it is too often not value creating, it’s value destroying. Middle management, especially, is value-destroying. Bart Madden points to the efficient value generation of firms like Nucor in the steel industry, with only 4 layers of management from CEO to the factory floor, and compares it with traditional steel industry competitors who might have as many as 12 layers of management.

When a firm is truly focused on customer value generation, they wouldn’t hire these bureaucratic “headquarters roles” in the first place, and then they wouldn’t resort to layoffs to solve the problem they created for themselves.

Austrian Economics Is On The Right Side.

Iain McGilchrist is a neuroscientist, psychiatrist and philosopher who devoted his research work to illuminating the proposition of hemisphere differences in brain function. We all have a left brain hemisphere and a right brain hemisphere, and they function (or “see the world”) differently. McGilchrist makes long lists of the differences in worldview attributable to the hemispheres.  We can selectively highlight a few here:

The left hemisphere (LH) deals with detail, the local, what’s in the foreground, and easily grasped. The right hemisphere (RH) deals with the whole picture, including the periphery and the background. this local versus global distinction is one of the major differences in the processing of the two hemispheres.

  • The RH is on the lookout for and better st detecting and dealing with what is new. The LH deals with what is familiar.
  • The LH aims to narrow things down to a certainty, while the RH opens them up into possibility. The RH is comfortable with ambiguity and holding pieces of information that appear to have contrary implications, whereas the LH makes an either/or decision in favor of one of them.
  • The LH’s world tends towards fixity and stasis, that of the RH towards change and flow.
  • The RH recognizes uniqueness and individuality. The LH tends towards more generalization.
  • The RH is essential for empathy, and emotional receptivity and expressivity are greater in the RH.

McGilchrist’s thesis is that the left hemisphere and its mode of thinking has become dominant in today’s world, and that dominance is a disaster for civilization. Why? What he calls the left hemisphere world 

  • has lost the broader picture
  • favors data over knowledge
  • has lost the concepts of skill and judgment
  • favors bureaucracy (procedures that are known and predictable)
  • elevates quantity as the only criterion versus quality
  • dismisses common sense
  • discards tacit knowledge
  • has a need for total control
  • has more anger and aggression
  • loses social cohesion
  • is characterized by passive victimhood

In the field of economics, we can clearly see McGilchrist’s left hemisphere versus right hemisphere dominance in action. Mainstream economics, the style that is practiced by government and the Federal Reserve, taught in academia and written about in the New York Times, exhibits a left-hemisphere dominated pattern. Austrian economics is more right-hemisphere, in stark contrast.

mainstream economicsAustrian economics
Principally concerned with mathematicization, modeling, aggregates and related variables (x causes y).Principally concerned with the economic system and its emergence as a result of the purposeful actions of individuals reasoning subjectively.
Empirical, working with data series and tables and numerical outcomes.Verbal and logical, working with language and reason, observing behavior to deduce motivation and purpose.
Captures data in re-usable mathematical symbols and algebraic formulae. Seeks to construct reusable/repeatable models.Deals with uncertainty, dynamics, constant flux, and flow.
Equations are solved, models are completed and self-sufficient. Point predictions.Descriptive and not predictive. Assumes constant change, uncertainty and non-linearity.
Positivist, adopting the methods of physical sciences.Humanist, adhering to the approach of social sciences.
The economy as a machine to be tuned.The economy as a complex adaptive system. Interaction of many components. Emergence.

The focus of Austrian economics on real people, individuals interacting in the pursuit of subjectively-assessed value, creating a dynamic flow of activity of benefit for all contrasts starkly with the mainstream economics focus on mathematical models and solving equations, aggregate quantities like GDP, and unremitting regulation and government intervention aimed at control.

Until we rebuild our institutions from a more balanced perspective, releasing the hold of the left hemisphere on our thinking and behavior, we are condemned to follow the downward spiral into a command-and-control economy.

This Is Value Entrepreneurship – The Business Method Fueled By Entrepreneurial Economics.

Entrepreneurship is the business driver – of revenue and growth, of the customer base and customer loyalty, of innovation, of cost reduction, of everything about business that constitutes success. It’s true of businesses of every scale – every firm must be entrepreneurial to succeed.

Value is the purpose of entrepreneurship. On the Mises Institute Economics For Business (E4B) website you’ll learn deep insights about value – that it’s not a thing but a feeling, that it’s the outcome of a learning process, that you can’t put a price on it, but people will pay for an expectation of value. There’s a lot to learn about value.

Combining the two in Value Entrepreneurship provides you with an understanding and a toolset to pursue new value for customers at every scale, in every firm, via every project, process and job. Value Entrepreneurship is the business system fueled by entrepreneurial economics.

Let’s first examine and prepare for entrepreneurship. Entrepreneurship is action. While MBA programs may focus on strategy and planning and finance, E4B’s alternative approach emphasizes action. Entrepreneurial action can be broken down into two components – the decision to act and the action itself.

The decision is a hypothesis. There is more uncertainty in business than can ever be resolved. You are never certain. The most you can expect is to narrow down your choices of possible actions to a small number. You develop a hypothesis of what could work based on two inputs. First, an analysis of whatever information or data is available to you that tells you something about prevailing market conditions and constraints. And second, the synthesis of your data-based conclusions with your instinct and intuition, your assessment of dynamics and what might change in the future, as well as your creativity and ideas. From analysis and synthesis, you generate hypotheses of all the things you could do that are aligned with your intent, and choose as many of those as you’re capable of implementing – that’s your capacity, which might be governed by available funding, staffing or capital goods such as your AWS service agreement.

With the decision made, you act. Decisions are hypotheses and actions are experiments. The purpose of an experiment is to generate learning. Find out what works and what doesn’t, so that you can do more of what works and abandon what doesn’t. If you run as many experiments as possible, the fittest business strategy will emerge. Complex systems theory refers to this process as explore and expand. That’s what entrepreneurship consists of: exploration followed by expansion.

We learn because action generates interaction – with customers, retailers, markets, competition, media, and the entire business ecosystem. Interaction, in turn, generates a feedback loop. Customers buy or don’t buy. They enjoy their experience, or they don’t. Or, most likely, they partially enjoy it but there are some drawbacks that the entrepreneurial business can respond to and rectify if they can properly gather the right knowledge.

That brings us to the second part of Value Entrepreneurship – the value part. We just referred to the customer’s experience. That’s what value is – an experience, subjectively felt and evaluated by customers. Value is formed and experienced entirely in the customer’s domain. As you’ll appreciate as you enter more deeply into this way of thinking, the customer is the driver of your business. Customers are the sole determinants of business success or failure. They determine what gets produced by buying or not buying – by not buying, they ensure that production stops and business resources are redeployed to new uses. 

Customers are always evaluating, and thereby producing value. They do this from the context of their own system. Let’s take an example of a consumer household and its systems (although we must emphasize that the value entrepreneurship model applies equally to the world of B2B, not just B2C). Let’s take one sub-system: food and nutrition for the family. There’s a system of deciding what to eat and drink, there’s a system of shopping, whether online or offline or both, there’s a system of storage, perhaps involving freezing, refrigeration, and room temperature. There’s a system of preparation and cooking, involving a lot of home appliances. There’s a system of cutlery and place settings, and another for washing these. Taken altogether, it’s a complex system. And it may be continuously changing. What if the family Is becoming more conscious about healthy eating? What if they start substituting lower-calorie foods for higher-calorie versions? What if they start reading ingredient labels? What if they buy more fresh food and less manufactured food? What if they discover new preparations like blenders? 

We can see the physical manifestations of these changing experiences in the market. The periphery of the supermarket where the fresh foods are sold becomes bigger and the center contracts. Healthy cookbooks appear on amazon and social media. Fresh fruit appears in more convenient packaging and new varieties flourish. New brands of healthier crackers and desserts abound.

The point about value is that it is formed in the customer’s system, that system is complex, and it’s always changing. The role of the value entrepreneur is to observe the system, understand the system, fit into this system and make a contribution. It’s possible to identify gaps, maybe gaps the customer is not even aware of. Most importantly, there’s the potential to identify the system the customer will prefer and move to in the future, ideally before they get there themselves. This is value innovation – imagining and inventing the future. Whether in the present or the future, the entrepreneur’s contribution is to help the customer to feel satisfied that they’re making the best choices within their own system. Their system is life, and entrepreneurs help make the system work for them.

Entrepreneurs and entrepreneurial businesses facilitate this feeling of value – make it possible, make it robust, make it repeatable. They are rewarded by customer purchases, and value flows back to the firm as cash flow, to be reinvested in more production and more innovation. The value entrepreneurship loop is continuous. 

Co-ordination And Orchestration: The New Role For Management In The Digital Age.

Is there a role for managers in the fast response, rapid change, constant flux VUCA world of business in the digital era? Yes, and they’re more important than ever.

Entrepreneurs invented management for the same reason they pursue innovation of all kinds: to address a need. In the nineteenth century, entrepreneurs created a brand-new form of customer capitalism. They introduced railroad systems, telegraphic communications, mass production and mass distribution, and created huge factories and global supply chains for the first time. The orchestration of these systems to assemble the right combination of inputs and bring them together at the right time, organize the new high speed manufacturing capacity, and to get the output distributed to warehouses, shops, and homes across the newly expanding geography of America represented new levels of complexity that no-one had ever before encountered.

It was a problem to be solved. And so, the entrepreneurs – Rockefeller, Vanderbilt, Carnegie, Roebuck, and many, many more – invented management structures and management processes to solve it. Their management systems were world-changing innovations just as much as their new products and services were. Alfred Chandler, the foremost business historian of the era, called it a management revolution.

The companies Chandler chronicled were market-driven and customer centric. Rockefeller’s Standard Oil brough cheap illumination to America’s new homes, extending days and improving both productivity and the quality of family life. Roebuck’s Sears, Roebuck & Co catalog brought a vast, unprecedented selection of items to those same homes much the same as amazon does today (except that Sears, Roebuck extended credit – “Send no money until delivery!”)

These management models extended into the twentieth century, without much structural change, but the transition from entrepreneurial business owners to salaried professional executives brought a lot of deterioration in the ways in which the models were operated. The new breed of executives turned inwards, examining the efficiency of internal processes more than the effectiveness in the delivery of customer experiences. Cost reduction through process management became the holy grail.

In a self-defeating manner, the executives built bureaucracies to police the internal processes, in layers of management, new compliance functions in legal, finance and HR departments, and a generalized move towards the sclerosis of command-and-control and away from the free-flowing delivery of customer value.

At the beginning of the 21st century, businesses are discovering that the command-and-control approach of bureaucratic management can’t function in the fast-moving innovation environment of the digital age. The new approach is the Adaptive Entrepreneurial Value ModelValue is the singular focus: that’s value for customers, not to be confused with or intertwined with value for stakeholders or shareholders. The value customers experience is an outcome of the corporation’s singular focus on customers. Entrepreneurial means business conducted with an entrepreneurial orientation, always aiming at improving customers lives, always sensitive to the condition that they’re looking for increased value tomorrow even though they might feel satisfied today, and always exploring and experimenting in the pursuit of innovation. 

And adaptive means willing and eager to change in response to new data and new information, about customer preferences, competition, business conditions, regulation, new business partner opportunities, or any and all elements of change that signal an opening for profitable adjustment.

The era of adaptiveness foretells the end of the era of bureaucratic management hierarchies – but not of management per se. The command-and-control format for management doesn’t fit the high-response world of adaptation to new market data, nor do tools like 5-year strategic plans and annual operating plans and budgets. But that does not mean that all firms should radically decentralize and eliminate management in favor of self-organizing agile teams and A.I algorithms. Experimental trials of such approaches, such as holocracy at Zappos and the “bossless” organization at Valve, have ended badly.

In fact, managers are more important than ever – just not in the old command and control way. Rather they are now coordinators and orchestrators, enabling adaptiveness rather than impeding it. This kind of management is a tricky expertise to get right – but it’s vital, and it offers great opportunities to those who can excel in the role.

Peter Klein, who is Professor of Entrepreneurship, and Chair of the Department of Entrepreneurship and Corporate Innovation at Baylor University, is the co-author of Why Managers Matter, a management manifesto that bucks some of the current trendy thinking about lean, flat, leaderless organizations. 

A well-functioning management process can change internal production processes, teams and resource allocations as needed in response to external changes in customer demand and marketplace conditions. Professor Klein’s advice is to distinguish between circumstances that call for Mark 1 management (exercising managerial authority and giving instructions) or Mark 2 management (indirect guidance through organizational design).

When there is a high degree of interdependence between people, teams, and tasks, such that it is critical that tasks are highly coordinated, completed at the same time and combined in a highly specific fashion, then management intervention is required, and it will include Mark 1 elements. When production is more modular, when tasks and projects can be completed interdependently, then Mark 2 management can be exercised through a decentralized, flat, and culturally aligned organization. (Professor Klein cited the example of the type of higher education institution where he works; all the professors can design and teach their classes, do their research, and publish their papers and books with a high degree of autonomy.)

He points out, through relevant case studies, that a flexible corporate management structure can be better at adaptation than, for example, a network of independent contractors and suppliers that would be challenged to orchestrate responsive changes to an external change, since each would have a different experience and process it through a different cultural orientation. They wouldn’t co-ordinate as well or as quickly as internally managed teams.

So, management isn’t dead in the digital age. In fact, it’s returning to the co-ordination and orchestration role that Rockefeller and Carnegie and their compatriots originally intended for it – but working with a different set of production machinery.

The Long Night Of Mathematicized Economics Is Over.

Sometime in the 19th century, economists got the idea that mathematics was an appropriate language for economics. This was a strange turn, since economics is the science of how human beings, pursuing their own desires and preferences, find ways to exchange with other human beings to produce prosperity. Finding ways to exchange involves creativity, ideation, innovation, forming companies, providing services, importing and exporting – activities and processes that don’t lend themselves to algebraic symbols and mathematical equations. 

Mathematics is inappropriate for economics, yet it has become dominant. Why? Precisely because it removed the human component, the creativity, the subjectivism. The new practitioners didn’t want that mode. They wanted cold, hard calculation. They wanted to be seen as “real scientists”, like physicists and engineers, dealing in scientific precision and not the uncertainty and softness that, in their view, characterized the analytics of social science and social interaction. Human-ness is so messy. Math is clean and sterile.

But the hold of mathematics on economics is breaking. Its inappropriateness as a tool of economic understanding is widely recognized, and new alternatives are becoming well established.

The Illusion Of Knowledge

In an essay entitled The Illusion Of Knowledge, Howard Marks, co-founder of Oaktree Capital Management, points out that the mathematical models of economics can’t predict and can’t guide expectations. There are too many variables and the most important variables are human and therefore unpredictable in their reaction to changing circumstances. He asks

Can a model replicate reality? Can it describe the millions of participants and their interactions? Are the processes it pretends to model dependable? Can the processes be reduced to mathematics? Can mathematics capture the qualitative nuances of people and their behavior? Can a model anticipate changes in consumer preferences, changes in the behavior of business, and participants’ reaction to innovation? In other words, can we trust his output?

Howard Marks, The Illusion Of Knowledge

His answer is no. 

Economics Of Verbs Not Nouns

W. Brian Arthur is another prestigious economist who rejects mathematical modeling for his science. In a paper entitled Economics In Nouns And Verbs, he observes:

The economy is very much a creation of humans and a very complicated one, so given the liberty of human choices and the vagaries of people’s actions, it is not obvious why algebraic logic and calculus should apply.

W. Brian Arthur Economics In Nouns And Verbs.

The core problem, as he articulates it, is that the algebraic symbols of econometric models exclusively represent nouns:

Economics deals with prices, quantities produced, consumption, rates of interest, rates of exchange, rates of inflation, unemployment levels, trade surpluses, GDP, financial assets, Gini coefficients. These are all nouns. In fact, they are all quantifiable nouns— amounts of things, levels of things, rates of things. Economics as it is formally expressed is about amounts and levels and rates, and little else.

Ibid.

The language of mathematics does not allow actions. It can’t answer questions about how an economy or a firm or a development project emerges in the first place, how innovation works, how economic development takes place, or how structural change happens. Anything in the economy that deals with adjustment— whether it is adaptation, innovation, structural change, or history itself—falls through the algebraic mathematics sieve.

Arthur calls for a language of expression in economics that can describe these actions, changes, and innovations, and thereby develop some resemblance to and understanding of the real world.

Language and Austrian economics

Ahmed Elsamadisi, CEO of the analytical software company narrator.ai says that there is one data model that can cope with all these variables: it’s called language. Data has a role to play, but it’s subsidiary to language. Elsamadisi talks about “having a conversation with data” – it’s human beings using language to ask the right questions who are able to find the most value in historical information.

The economics that Brian Arthur is looking for already exists, but most economists ignore it. The unfortunately-named Austrian economics – its first scholars were in Vienna but the research now is global – uses language and deductive logic from first principles to develop its theories. It has no models. 

As economist Per Bylund writes in How To Think About the Economy, economics Is about people and specifically about what they do to meet their own goals. People’s wants are unlimited but their means are not, so they economize, choosing from scarce means to achieve as much as they can. Economics is life: spontaneously and adaptively doing what we can with the resources available to us. As a consequence, the economy Is unplanned order, always in flux. It can’t be modeled.

Subjective Quantification

Professors Peter Lewin and Nicolas Cachanosky propose a novel combination of thought processes to integrate words and numbers in economic calculation. Their term is subjective quantification. Human beings have the unique ability to turn subjective ideas into numbers that express the idea. We find a particular product or service that we feel has potential value to us, and we turn that feeling into a number via our willingness to pay a monetary price to acquire it. That’s turning the subjective – our idea of value – into the objective – the number of dollars we’re willing to pay. Generally, this is the process of economic calculation. Firms estimate revenues they may receive in the future from customers who perform this value calculus. The firm uses its own estimate – a subjective one, by definition – to make plans for investment and business expenditures.

Models promise prediction and guidance on economic variables. It’s an illusion, as Howard Marks puts it.

With the new resurgence of Austrian economics, and its modern expression in what Brian Arthur calls complexity economics (an economics of verbs not nouns), the dominance of mathematics in economics is coming to an end.