10 Better Business Perspectives From Austrian Economics

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1. Subjective value.

What is the purpose of business? It is to create value for customers, defined as the experience of a feeling of satisfaction, well-being, or even delight. Austrian economics cuts through the debates about maximizing shareholder value or stakeholder value, and about the cold and calculating pursuit of profit. Profit is an emergent result of creating subjective value, one that’s required to keep the value creation system in motion. A deep understanding of subjective value is a prerequisite for business success, and it results in a broader value perspective for businesses and firms than narrow concepts such as profit maximization or shareholder value maximization. The value-dominant logic of Austrian economics ensures that business is a benevolent force for society, as well as for all business participants on both the producer and customer sides.

Source: Ubiquitous. Subjective value in entrepreneurship, Per L. Bylund, Mark D. Packard 

2. Customer sovereignty. 

How does any economic system – a firm, a project, or a marketing campaign – work and succeed? The customer determines the outcome. By buying or not buying, by paying the manufacturer-recommended price or effectively demanding a lower one, by judging the quality of the experience and rating it and describing it to others, customers are the sole determinants of what succeeds and what fails for producers. By acknowledging this sovereignty, businesses channel themselves into the right business approach: humble, responsive, agile.

Source: Ludwig von Mises Human Action Scholars Edition Ch XV Section 4 The Sovereignty of the Consumers

3. Betterment.

The engine of economic growth is the individual consumer’s drive for betterment. Each individual is eternally dissatisfied with the status quo and seeks constructive ways to improve it through acquisition and use of products and services that they judge might help them in their quest. This dissatisfaction is the universal resource for entrepreneurs and innovators. Those who succeed in utilizing this resource effectively thrive.

Source: Ludwig von Mises: Human Action, Scholars Edition Part 1 Chapter 1 Section 2, The Prerequisites of Human Action

4. Entrepreneurship

Entrepreneurship is the economic function that senses the dissatisfaction of end-users, translates that sensing into innovative economic projects, and proposes new choices and alternatives to them. Entrepreneurs accept the uncertainty that they might not succeed in securing the acceptance of the customer (see 2 above), and they utilize methods of co-creation of value with customers to increase their probabilities for marketplace success.

Source: Murray N. Rothbard, Man Economy and State Ch 8 Production, Entrepreneurship and Change, Section 5 The Entrepreneur and Innovation

5. Empathy as a business skill.

The tool to match entrepreneurial sensing to the customer’s drive for betterment is empathy – the skill of identifying and understanding the customer’s mental model and seeing the world from that perspective. Being able to identify the feeling a customer would prefer to experience is empathic skill, and being able to get the identification right is empathic accuracy. Translating these inputs into potential new marketplace offerings is entrepreneurial imagination. All of these require a human connection that is the essence of the entrepreneurial society.

Source: Peter G. Klein Empathy For Entrepreneurs

6. Business as a flow.

Traditional business management approaches do not deal well with the dynamics of markets. There’s an effort to control – e.g. by making annual plans or compiling 5-year strategy documents that are somehow intended to frame resource allocation and employee activities – and to predict – e.g. by making sales forecasts and driving internal activities to “hit the numbers”. No control and no prediction are possible. Business is better viewed as a flow, a river of activity that is never the same twice and always different depending on the location of the observer. Ludwig von Mises called this situation “constant flux”. In this sense, value is a flow and capital is a flow – the capacity to think in terms of flow and manage in view of continuous flow is a desirable skill.

Sources: Peter Lewin and Nicolas Cachanosky: Austrian Capital Theory; Ch 2 Carl Menger and the Structure of Production

Ludwig M. Lachmann; The Market as an Economic Process

7. Orientation and Intent.

Strategy and planning are replaced by Orientation and Intent. In a business firm, orientation is a shared alertness among all employees and partners to new information coming from the marketplace and the business environment, and a shared way of filtering it and processing it quickly to inform new decisions. Intent is the framing of those decisions in the context of shared goals – no commands and orders but common guidelines for action. Orientation and intent are dynamic alternatives to command-and-control.

Source: Orientation: Bridging The Gap In The Austrian Theory Of Entrepreneurship; Mark J. McGrath and Hunter Hastings; AERC 2022

8. The end of structure.

In a world of flow, traditional organizational structures and the transmission of hierarchical authority can prove to be constraining, impeding vital information flow, and resulting in waste and inefficiency. The most constraining organizational form is bureaucracy. Leadership becomes an emergent situational tool, not a consequence of authority. It is fluid not structural, operating vertically and horizontally from bottom to top and top to bottom, in small teams and grand challenge projects as needed, based on knowledge specialties as they pertain to the situation at hand. 

Sources: Ludwig von Mises: Bureaucracy

Desmond Ng: Entrepreneurial Empowerment And The Austrian Approach To Value-Generating Organizational Design

The Boundless Promise Of Decentralization For Business; Hunter Hastings

9. Shared mental models.

We all see the world indirectly, through mental models. As a consequence of subjective understanding, each individual in a firm constructs their own mental model. Management and leadership in this context come down to aligning all these mental models so that they become one, cohesive, shared model. The shared model becomes the binding force that takes a business forward with growth momentum.

Source: Economics For Business: Building An Entrepreneurial Business Culture With Systems Thinking

10. Simple rules.

Austrian economics understands that markets and firms and industries are “spontaneous orders” – what today we call complex adaptive systems (CAS). Such systems are guided not by plans and policy manuals but by simple shared rules that apply to all and are followed by all. Such rules as the creation of subjective value, practicing empathy, and acting entrepreneurially are among the rules that bind firms together. 

Sources: Economics For Business: Systems Thinking For Business

F.A. Hayek; Law, Legislation and Liberty, volume 2, Chapter 7

What Level Of Return Are You Providing To Your Customers On Their Emotional Investment?

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Happy customers are a goal for businesses. Customer satisfaction, customer trust, customer loyalty – these are all assets that corporations and brands work hard to build. They’re emotional assets. When a customer is satisfied with their purchase and with the experience that results from it, that’s a feeling, not a number. When a customer comes to trust a vendor or supplier or brand, that’s a perception or intuition rather than a cold, reason-based assessment. When that trust translates to loyalty, it may be expressed in behavior (such as repeat purchasing) but it’s nevertheless based on sentiment as much as analysis.

Seen from the perspective of business, happy customers represent purpose. The purpose of a business is to create and maintain happy customers. The business methods and tools for achieving this purpose are not found in the numbers of finance and accounting, and they’re not in the bureaucratic processes of business administration. They’re not in the footnotes of the Annual Reports and 10K’s that the SEC demands that companies spend fortunes on to produce and file.

The business tools that produce happy customers are emotion-based. The most important is empathy: the ability to understand the customer’s mental model – see things from their perspective and with their perception and emotion – and to operate within that mental model when designing products and services for them. One definition of value creation and innovation is the solving of problems that have meaning for others. To even get started on this track requires an understanding of what’s meaningful for customers, an understanding that can only be gained from their perspective.

Think of any successful service, product or business. Why are its customers happy? How do they feel and why? What feelings motivate them? What are their values and how does the business or brand complement those feelings? To take just one example, why are Tesla owners willing to pay as much as they do for their EV? Do they find personal meaning in contributing in some way to the climate crisis (which, itself, is highly bounded by feelings)? Or do they take pride in the green credentials they can display to their neighbors, peers and friends? Does the simplicity and austerity of the car’s design complement and embody these feelings? Elon Musk and his team are able to do this analysis. They have a highly developed feel for their customers.

This is not to imply that business is all “touchy-feely”. In fact, this feeling that the customers have for brands, products and services becomes capital on the business’s balance sheet, as well as becoming revenue and profit on the P&L. The customer’s feelings that a brand will make them happy and result in a feeling of satisfaction becomes revenue through the mechanism of willingness-to-pay. After assessing the potential value and utility of any brand offering or any value proposition, the customer decides (based on emotional, subjective valuation) whether or not to buy. Are they willing to pay to find out whether their experience of the brand will be as good or better than they expect? If they are a repeat buyer, they’ll be more confident. If they’re a new buyer, they’ve developed some tentative trust. If they’re feeling affluent and they’ve already met their more basis needs they may feel a little more relaxed and uninhibited about their willingness to pay. In any of these cases, they’ll assess again after their experience to weigh whether it met their expectations or not, and on this basis, develop their future evaluation for the next opportunity to buy.

These customers are making an emotional investment in the business’s offering. They’re expending their own emotional energy in thinking through their internal problem to solve. They’re trying to anticipate their own future emotions that will arise after the purchase. They are taking a value risk – it might not work out. This is a considerable emotional investment. There are only so many times they’ll be willing to repeat the investment, whether for this product or for the category from which they choose it. A disappointing Tesla can be traded in at some point. A disappointing fashion choice can be discarded and never repeated.

The customer seeks a return on their emotional investment – ideally a high one. When they choose between two different ways to spend their money – to exercise their willingness to pay – they’re weighing two potential returns and they’ll select the higher one.

The customer’s emotional investment becomes the company’s capital. When they buy, revenue flows back to the company. What we know as capital value on a company’s balance sheet is the flow of revenue back to the company, minus the cost of generating that flow, expressed as a single dollar value. If customers are happier, or more customers are happy, more revenue flows, quite possibly at a higher profit since the willingness to pay might be higher, and the company’s capital value increases. This is what becomes stock market value – a stock price can be expressed as a Price / Earnings ratio. The earnings in this equation are those flows coming back from customers. It’s really a Price / Happy Customers ratio. Similarly, in financial analysis, Economic Value Added (EVA) is a similar calculation: the flow of revenues from customers minus the costs of generating them.

Economic calculation for a business requires both numbers and feelings, quantitative analysis and qualitative analysis. It’s necessary to empathize with and assess the emotions of customers, and to translate these into projected revenue flows. It’s equally necessary to identify their willingness to pay as a number (i.e. pricing) and then to choose costs of production that are both consistent with their emotional needs and consonant with the accounting analysis of profitability.

In a book called After Steve: How Apple Became A Trillion Dollar Company And Lost Its Soul, Tripp Mickle contrasts the mindset and approaches of Apple’s Chief Design Officer Jony Ive and CEO Tim Cook. Ive was the design aficionado who sought flawless perfection in Apple’s products as the way to earn the love and loyalty of customers, always surprising them with what was possible and with the degree of elegance and beauty that was achievable. Tim Cook was more of the numbers-based efficiency aficionado, seeking cost discipline to achieve profits at price points the customers indicated they were willing to pay.

Both are necessary, of course. But even costs must be emotionally and subjectively judged as supportive of customer happiness. What, for example, is the cost of Apple’s beautiful packaging which evokes such pride of ownership and delight at the unpacking experience? It would be easy to choose lower priced packaging. But what would be the cost in diminished customer delight? What would be the capital cost of reduced revenue flows from a diminishing army of Apple fans?

All-in-all, it’ a feel for business that’s more important than excellence in business administration, and it’s this feel for business that reveals more of the secrets of the success of great entrepreneurs, great brands, and great corporations. Business schools won’t tell you that, and won’t help you develop that feel. Trust emotions, practice empathy and exercise judgment.

Climbing The Value Ladder.

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Value is the energy that powers the economy and its growth. People relentlessly pursue better experiences in the future than are available to them in the present and their attainment of that future experience is what is meant by the term value. People assess – or e-value-ate – their experiences after the event and decide whether they were valuable to them. They anticipate better experiences in the future, and look for goods and services they believe will be able to bring them that better experience.

It’s because people demand that the future should be better than the past or present that there is any economic activity at all. It’s the reason for innovation. It’s the reason for interest rates. It’s the reason for economic growth. It’s the reason for supply chains and retail stores.

The experience of value is a good feeling. It’s satisfaction. It’s the replacement of one state of well-being for a better one. It’s calmness in place of anxiety and contentment in place of desire. It’s also a never-ending question, because value can always be improved upon and satisfaction can always be higher.

In pursuing success in markets, businesses can improve their prospects if they bear in mind the primacy of experience. Engineers are often wrapped up in products and services features and performance. Sales and marketing often focus on these same elements when making their pitch to customers. But customers don’t want features and performance or even product attributes. They want that experiential feeling of value.

Value propositions and sales pitches will be better when the experiential value is incorporated. Instead of selling today’s features, sell tomorrow’s feeling. “When you select us as your supplier you’ll feel confident in the level of service we provide. All your information requests will be immediately fulfilled, and your customer service rep will always be available. You’ll always feel that we are here, standing by to respond or help, and proactive in bringing you new ideas, and innovations.”

  • A large financial services customer would send e-mail requests to a service provider late at night, and would keep score of how many same-evening responses they received. The providers with the best response scores were graded higher. If you are in the customer service business, it pays to check your e-mail before going to bed!

How can you add more experiential value to your value proposition?

  • Would your potential client enjoy the drawing on the special knowledge level and career experience level of your team? How would they feel in the future to be in a monthly call with your top analysts or top site foremen so as to be able to learn about the latest market conditions, especially in the midst of market turmoil?
  • Is your client frustrated with the service levels or lack of responsiveness of any of their current providers? How can you make them feel like it will be better with your company’s greater commitment to service?
  • Are there any higher values that the client is pursuing above and beyond current functionality and performance? Every client – and every individual at every client – has a ladder of values they are climbing. Have you asked them about it? Do you know their higher value preferences?
www.econ4business.com

Value is always ascendant from lower to higher. Customers seek out the functional value that reassures them that a product or service that is offered “works” for them. Then they can move up to less functional attributes – like style and aesthetics, for example. At a higher level still, they think about the longer-term future: not only how will the product perform now, but how will it fit in with their future plans. Once they believe that there’s a future fit, they’ll think about high values like relationships and ethics. Ultimately, they are seeking a better world, or a more meaningful career; if you and your company and its products can help, you’re contributing to the highest level of value. The best value creators climb the ladder and find the strongest route to the top.

Customer Value Is All That Matters In Business.

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Value creation is – or should be – the number one concern of every business and everyone in business. The term means value for customers. If a firm does not generate value for customers, it is not in business and can’t possibly serve other constituencies like employees, shareholders, stakeholders, and local communities.

Businesspeople must think deeply about value and understand it fully, and it’s not always the case that they do. Let’s start at a higher level than the business firm, at the level of the economy. What is an economy? It’s how well-off a group of people make themselves with the resources they have available to them to work with. It’s the shared well-being of that group of people. It’s their quality of life, their enjoyment, and their satisfaction. In other words, the economy is not just the goods and services we produce or the dollars we exchange with each other to buy and sell goods and services. The economy is value that is generated for people – feelings of satisfaction, of joy and reassurance, and security, of meeting not just functional but also emotional and spiritual needs. The pursuit of economic value takes on purpose and meaning when it’s viewed through the eyes of people – and people are customers for business.

If we now return our focus to the level of the individual firm and its customers, we realize that value generation at this level in the economy must embrace and address the same feelings of satisfaction, joy, emotion, and spirituality. These feelings must be present in the value propositions that businesses make to customers. Each individual customer’s current state is a dynamic function of multiple values that they are trying to balance. You can refer to various analytical models for people’s value bundles. Here’s one called the Schwartz Theory of Individual Values. A quick look tells you that people are integrating values as diverse as pleasure, conformity, and security (and many more) into their everyday decisions and choices. The balance changes in every situation and from moment to moment.

Any business engaged with any customer at all must be conscious of the range of individual and cultural values that are in people’s minds and consciousness. If your customer is part of a firm in a B2B relationship with you, then you need to take account of the shared values of the firm you are dealing with, which will color and shape the decision-making of the individual you are engaged with.

From this perspective, value creation can be seen as pretty complex. Quite forbidding, even. How do businesses manage? There are a couple of simplifying approaches.

Get the direction right.

Value is a process. Your customer is continuously learning about value – what they themselves value in any specific situation and at any specific time. Their evaluation is changing. But they are seeking one direction, which we can call betterment: improving their feelings of satisfaction. Value is a change in status from one of less well-being to one of greater well-being. It is an increase in well-being. That means that you may not need to understand every nuance of the balance of the customer’s multi-functional values system. You just need to measure and monitor whether their feeling of well-being and satisfaction is moving in the right direction, towards betterment.

Get aligned.

While it is probably too demanding to try to identify every position of every customer on every vector of the Schwartz Value System or one like it, there is a less demanding way of value mirroring, and that’s alignment. If your position on your own value system is reasonably well aligned with your customer’s (you’re not in conflict, at least), and perhaps even better aligned than your competitor’s, then there’s a good chance of forming a value partnership: you make a value proposition that they can feel good about accepting. Alignment comes from an analysis of what matters. What matters most to your customer? You can ask them; it’s often very hard for them to articulate their values, but they might be able to answer a question about what’s important to them, at least at this time, in this situation, and regarding this deal. (Bill Sanders told us how just asking the question can “expand the value pie” in any contract negotiation with any customer.)

If what you think matters is close to what the client thinks matters, then there is the opportunity to become value partners, to make a deal or make a sale or make an exchange.

Empathy And Knowing Your Customer.

The business skill that underpins the generation of customer value is empathy. This is not a casual “get inside the customer’s head” routine. Value empathy is a product of the rapidly advancing knowledge of neuroscience that is spreading into business methods, combined with an understanding of complex adaptive systems thinking. Empathy starts from the concept of a mental model – a way of seeing the world and processing the information gleaned from sensory inputs – hearing, seeing, touching – into an individually cogent perspective. Every individual operates a unique and different mental model. The process of empathy is first to construct someone else’s mental model – the customer’s – and then run new information through it – the new value proposition that the business wants them to consider. If the business has constructed the customer’s mental model accurately, it should be possible to make a reasonable prediction as to how they will react to the value proposition. It’s not infallible, but it’s also not guessing, not projecting, and not wishful thinking. It’s not even marketing – that comes later if the business wants to attempt to change or modify the customer’s mental model. There’s a learning process, and humility is called for in thinking about customers’ complex mental processes.

Empathy is knowledge-based, unlike sympathy, which is emotional. Therefore, the more a business knows its customers and the more they know about their customers, the greater the potential for an accurate empathic diagnosis of the customer’s mental model. The first step in value creation is selecting the right customers for your business – customers you can know well and will enjoy knowing.

A Value-Dominant Business Culture.

Many of the criticisms aimed at big corporations today are the result of businesses’ failure to understand value. The claim to maximize shareholder value, but this is a financial calculation, not the generation of valued experiences for customers which is the true purpose of business. They claim to pursue stakeholder value, where the term stakeholder is amorphous, but generally taken to include employees, the population of the communities in which offices and factories are located, sometimes the environment, and sometimes even the government. None of these business activities fall under the true heading of value creation – only customer value fits. All else follows: profits (signals from the customer that they fully approve of the value they receive), stock price appreciation (reflecting the discounted future cash flows from satisfied customers), and stakeholder benefits (profitable companies with a loyal customer base are more likely to support all of their other constituencies).

Customer value takes care of all the other values. That’s why it’s all that matters.

An Entrepreneurial Society Woud Be A Great Improvement Over The Political One We Live In.

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Entrepreneurship is love. Entrepreneurs love their customers. It’s a genuine love; the complex combination of human values in the hearts and minds of customers mesh with the similarly complex combination of human values in the hearts and minds of entrepreneurs, and that’s what makes markets.

This is the scope of Austrian economics, and why it is different from economics in all its other forms. Austrian economics is a science of personal and interpersonal meaning, of how people think and feel, of subjective phenomena. Entrepreneurship is cultural. To thrive, entrepreneurs must be particularly well-embedded in and connected with the culture, to identify which customers seek their love and the forms in which they would most prefer to receive it. That’s one of the reasons why economist Ludwig von Mises declared that

Economics must not be relegated to classrooms and statistical offices and must not be left to esoteric circles. It is the philosophy of human life and action and concerns everybody and everything. It is the pith of civilization and of man’s human existence.

Ludwig von Mises, Human Action Scholars Edition, Kindle location 17005

Central to Mises’ concept of civilization was the function of entrepreneurship and the entrepreneurial individual. They are the ones, he wrote, who

will make the life of coming generations more agreeable …they are the spokesmen of progress.

Ludwig von Mises, Human Action Scholars Edition, Kindle location 2216

Economist Jesus Huerta De Soto builds on these concepts and defines entrepreneurship as the

“set of co-ordinating abilities which spontaneously permit the emergence, preservation and development of civilization”.

Jesus Huerta De Soto, Socialism, Economic Calculation and Entrepreneurship, Ch 2 p215, Edward Elgar 2010

De Soto sees the influence of this entrepreneurial coordination function in the emergence of all social institutions, including law, money, and democracy. These are “an evolutionary product of the exercise of entrepreneurship itself” (Ibid). They arise from a vast number of people individually contributing throughout history their own small bit of practical information and entrepreneurial creativity. De Soto’s entrepreneurial society has identifiable characteristics.

  • It’s a process, defined by its dynamism, ever-changing.
  • It’s spontaneous, not designed by anyone, and not subject to legislation or top-down imposed rules.
  • Highly complex: billions of people with an infinite range of goals, tastes, values, and knowledge.
  • Composed of interaction – exchanges based on rules and standards (no violence, no fraud, etc)
  • All interactions are driven by the energy of entrepreneurship – creating, discovering, and transmitting information.
  • Consequently, the plans of individuals are adjusted and coordinated through competition – the most successful entrepreneurial plans become the most popular.
  • Individuals are thereby enabled to live in an increasingly rich and complex environment. Everything keeps getting better.

Any restriction on the free action of entrepreneurial creativity is unethical, in this view. Ethics emerge from the pursuit of creative entrepreneurship – by billions of people over hundreds of years – as moral guides that make human coordination and cooperation possible. Ethics are not to be imposed.

The political society we live in today drives us in the opposite direction. It seeks to divide: haves and have nots, winners and losers, red party versus blue party. It replaces the entrepreneurial ethic with redistribution, freezing “what exists today” and dividing it up irrespective of who created it. It wants to judge the social process irrespective of the individual behavior of those who participated in it. This is termed social justice. But in fact, it is an immoral violation of justice. It tramples on the property rights of those individuals who are producers, it prevents the free practice of entrepreneurship that makes the dynamic development of civilization possible, and it violates the entrepreneur’s right to the results of their own entrepreneurship.

In an entrepreneurial society, individuals will strive creatively and energetically to improve others’ lives. They’ll seek, discover and alleviate any situations of urgent need into which other human beings may have fallen, because entrepreneurship is love. The entrepreneurial society will be just, mutually empathetic, and beneficial for all. The best society promotes and rewards the entrepreneurial creativity of everyone in it.

The 3-Body Problem: Big Business Can’t Serve Both Customers And The Financial Sector.

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In Newtonian physics, if there are two bodies that interact gravitationally, and an observer knows their positions and velocities at a given point in time, it is possible to predict all their future positions. However, the introduction of a third body surprisingly leads to an analytically unsolvable problem. This suggests that if there is a system of two bodies that are unsettled with respect to one another, there may be a hidden third body lurking around that, if identified and understood, could help us make better sense of the system as a whole. This metaphor of the three-body problem (which I borrowed from Henrik Berglund) can help illuminate a nagging problem in the economics of business.

Business exists to generate value for customers. This buyer-seller, user-maker, demand-supply 2-body relationship has been established in economics and business from the earliest days of both disciplines. Today, sophisticated analysis of economic systems and markets and the emerging new structures and arrangements of the digital world serve to emphasize more than ever what Steve Denning refers to as Customer Capitalism and Customer Primacy. As the digital age of business has evolved, there is an ever-greater shift of balance in the two-body system of business and customers to the latter. The power of search and knowledge and universal connectivity and ranking systems and all the other digital developments we have come to utilize for identifying and comparing choices have cumulatively empowered the customer and created winning businesses out of those who are most cognizant of and responsive to the changing balance of power. The most recent business organization innovation to emerge from China, Rendanheyi, calls for zero-distance to the customer – bringing the customer inside the firm for co-creation of value, shared engagement in service models and the development of new value scenarios.

Over time, the customer is becoming more and more influential in how business is done.

Except, that is, in the largest of corporations, the ones that are quoted on the most significant stock markets and are included in indexes like the S&P 500. These corporations practice something other than customer capitalism, with a different rule-book than customer primacy. There are several overlapping models.

Shareholder Value Maximization

The concept of maximizing shareholder value via total shareholder returns (stock price appreciation plus stock dividend payments) is often attributed to Milton Friedman of the Chicago Schol Of Economics and his 1970 essay in The New York Times titled The Social Responsiblity of Business is To Increase its Profits. Friedman’s position was a little more nuanced than his detractors allow, since he stressed legal and ethical norms and the expectations of society. Nevertheless, the Wall Street crowd who profess to pass judgment on the performance of corporate Boards and CEO’s habitually use total shareholder returns as their benchmark metric. Whatever else this is, it’s not customer primacy. If, for example, corporate resources are used for stock buybacks in order to better assure stockholders of their short term valuation gains, then these investment resources are not being used for building and combination of capital assets that will assure future perofrmance, nor are they being invested in innovations to further improve customer value. Shareholder value maximization puts shareholders and investors first, not customers.

Stakeholder Return

A slightly modified version of shareholder value maximization is the concept of stakeholder return, whereby the corporation is advised that they will be judged by their contributions not to customer value and customer well-being, but to a much wider range of claimants. These may include employees and unions, the members of the community in which the corporation’s offices or plants are located, the government, the environment, the planet, the global poor, religious groups, or any selection from a wide range of constituent parties that stakeholder activists assert have a claim on corporate resources.

Many corporations claim to adopt this so-called stakeholder capitalism, but in reality, it’s just a PR stunt, a public front of social sensitivity and purported altruism. There is no substance behind it, although there is a herd of consultant companies who emerge from the swamp to join the feeding frenzy of advising corporate clients on how to maximize stakeholder returns (and escape the censorship and lawsuits of activists and governments).

Business has suffered a PR crisis, caused in large part by shareholder value maximization, which was perceived as favoring a few plutocrats over the broader mission of business to improve lives of customers and thereby improve society. The purpose of a firm is to satisfy the needs and wants of customers. If they do so successfully, then society, as well as the lives of individuals, are improved.

ESG, DEI and Other TLA’s.

Overlapping the stakeholder capitalism movement, and perhaps embedded in it, are the assertions of additional claimants on corporate resources. ESG asserts the primacy of claims concerning so-called sustainability, expressed in Environmental, Social and Governance concerns. DEI (Diversity, Equity, And Inclusion) asserts the claims of almost everyone on corporate resources: according to dei.extensio.org at Tuskegee University, individuals of diverse race, gender, religion, sexual orientation, ethnicity, nationality, socioeconomic status, language, (dis)ability, age, religious commitment or political perspective must not be under-represented. And that’s just the D in DEI.

There are more TLA’s (three-letter acronyms) to choose from, including CSR (corporate social responsibility), NZC (net zero carbon), and even IMP (integrity in management practices). There is an explosion of claims on corporate spending, corporate staffing and corporate resources in general from all over the parts of society that seek to benefit from the production of others, rather than produce for themselves.

The Third Body: The Financial Sector.

Why does financial sector growth crowd out real economic growth? That’s the title of a paper published by the Bank For International Settlements (the central bankers’ central bank) in 2015. It noted that growth in the financial sector of an economy reduces total growth – a fast-growing financial sector is a drag on total growth. The financial sector grows at the expense of the real economy, and financial growth disproportionately harms R&D intensive industries, i.e. those investing in future innovations. One of the reasons given in the paper is that skilled labor (all those graduates who take jobs at Goldman Sachs and JPMorgan) is attracted to the financial sector at the expense of other sectors like computing and transportation and health care.

But another reason surely is that financially-dependent industries (a term from the paper signifying those industries that depend on help from the financial sector with borrowing, debt issuance, M&A and other financial transactions) must accept the constraints the financial sector applies alongside their expert assistance. A perfect example of this phenomenon is found in the shenanigans of Larry Fink. He is the CEO of BlackRock, a financial asset manager with 10 trillion US dollars under management and 20 billion dollars in annual revenues. BlackRock is usually one of the top 3 institutional investors for every large company in the US, and therefore has the ear of the CEOs. He regularly writes threatening letters to those CEOs to press them into Fink-approved ESG and CSR activities and investments (and divestments). It’s an unveiled threat that BlackRock can take actions that will be detrimental to the stock values of those CEOs’ companies.

Fink is a large mountain on the big planet that is the third body in our Newtonian metaphor – the one that unsettles the behavior of the original two bodies towards each other. Left to their own devices, corporations would compete to succeed in serving customers’ needs better with valued services and value-enhancing innovations. The intervention of the third body diverts them.

As the financial sector gets bigger and bigger, it will distort the customer-oriented behavior of the largest corporations more and more. That’s why the future of business lies with the SME sector and the new evolution of networked decentralized production.