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.

Removing Barriers Is The Pathway To Value Creation.

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The purpose of every business is to create new value for customers. The people and institutions who purport to teach us how to do it try to make it very complicated. You’ll need a creative idea, a new business model, technological innovation, new distribution methods. There’s a nine-box business model canvas template to fill out. Consultants are needed to get the process right, and a marketing agency to craft a promise to potential customers and spend advertising dollars to put the persuasive word out. They say that customers can’t imagine how the new value will benefit them, and so innovative new products and services and creative communications are a business imperative.

The great challenge, the great creative difficulty is presented to businesses as the need to establish something completely new, never known or done before. That’s intimidating. Given all the smart people, successful entrepreneurs, highly-resourced corporations, and well-funded R&D projects that have gone before, how can a business feel confident about coming up with something entirely new?

Happily for the future of value creation, that is not exactly the challenge. The true need is not for creation but removal. And the act of removal takes us in the direction of simplification.

How do customers think about pursuing new value? To begin with, they probably don’t use that word or that terminology. They think about goals – what they want to have happen in their life, the experiences they want to enjoy, the hopes they have for themselves and their kids and their companies and their projects. They think about the values that are most important to them, like family relationships, economic security, achievement, wealth, health, and social standing (there are many more, of course). Then they think about the barriers to the realization of their goals and values. What is getting in the way? What’s preventing them from accomplishing what they want to accomplish and from experiencing what they want to experience?

Here lies the key to the challenge of value creation for customers. It’s the barriers. If businesses can identify the barriers that people feel are in their way, and can help remove them or navigate around them or render them inoperative, then new value is created. No brilliant new invention is needed, no creative ideation that has never before been conceived, no light bulb going off.

The trend towards convenience provides an example. Amazon is increasing its revenues and serving more customers on more occasions by giving the gift of convenience – order online with a minimum number of clicks and delivery to your door could be same day or certainly much faster than in the past. There’s no great creative insight here. People would rather receive things they’ve ordered sooner than later. They’d rather have the shopping experience be faster rather than slower. They’d rather have a wide selection than limited choice and they’d rather not be frustrated by out-of-stock conditions. What’s getting in the way of these preferences? What are the barriers that customers encounter? Amazon has built a business that approaches $500 billion in revenues by removing these barriers. They call it “Working Backwards” – identify what gets in the way of desired customer experiences and work backwards from there to fix them. (Former Amazon executives Colin Bryar and Bill Carr wrote a book by that title to help you learn all about the approach.)

The process of removing barriers is inherently simple. Just talk to customers. What do they feel is getting in their way? What’s frustrating them? What’s driving them crazy? They can’t invent new solutions but they most certainly can tell you about barriers that they face – and they’ll probably do it passionately and with vehemence (which is a good gauge of how important the issue is to them, and how grateful they’ll be if you remove the obstacle).

B2B value creation is just as much about barrier removal as B2C value creation. What are the goals and aspirations of your business client? What’s impeding achievement? If they are facing difficulty in identifying barriers in the first place, offer them help with research or analysis or consulting. In this case, their barrier is unclear understanding and you can help get over it. If they’ve shone their own light on the causes for under-performance, go to the next step of analysis for them and help them identify removable obstacles. Often, the term “solution” – as in solution to a problem – is the wrong framing. Your client might more readily accept your value proposition of removing obstacles so that they can make forward progress on their own terms than they would adopt your solution to a problem that implies that they’re not smart enough to figure it out for themselves.

Rather than formulate value creation in terms of inventing never-before-conceived benefits for customers – which can tempt businesses into making excessive claims for their value propositions – it’s often a better pathway to effective innovation to focus on removing barriers, lowering obstacles and eliminating constraints. You are not then putting customers in the position of having to learn new things to want, things that they weren’t previously aware were on offer. Your business will be in the much more advantaged position of helping customers attain what they already want and have been denied or have deemed unattainable or unreachable. Removing barriers is a much more credible value proposition – customers already have a clear picture of the barriers that are in place for them, and therefore can easily envision a world without that barrier. It’s freeing, empowering, enabling. On the other hand, any proposal you make about your innovative introduction of new benefits requires a much greater cognitive effort on the customer’s part. You’re asking them to evaluate a world they can’t imagine, as opposed to one they can.

Let the customer experience a world without barriers. They’ll love you for it.

We Crave Value. They Give Us GDP.

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All human action is purposeful. Those are the words of an economist – Ludwig von Mises – not a preacher. Every one of us has goals we are working towards, many goals at many levels, from achieving lifetime status to getting our kids into a good school, to looking forward to a nice dessert after dinner. 

Economics is the science of achieving our purpose. It’s the science of choosing the right goals and choosing the right ways to achieve those goals. Economists call these ends and means. When we feel like we have chosen appropriate ends and found the right means to get there, we experience value.

Value is what we want. Value is what we crave. Value is a feeling, an experience of satisfaction, especially if the learning process to define good ends and effective means is a long one, a path of challenges and errors. Think of the value of completing a certification in some skill or profession, for example. There’s a lot of work and a lot of time that goes into it. It’s necessary to choose which certification to go for, necessary to sacrifice some things you’d rather be doing than studying or putting in workshop time or practice, it’s necessary to pass an exam or a test of some kind with all the stress and preparation that precedes it. Then you get the certification. That feeling of accomplishment, of pride, of a new pathway opening up in front of you, that’s what the economist calls value.

The purpose of every firm engaged in commerce is to generate value for customers. In reality, it’s the customer that creates the value because only the customer can experience that feeling. No customer, no value. The firm is a helper, a facilitator of value. The firm can produce the means for the customer to choose in order to pursue desired ends.

Value becomes a process – a process of interaction between producer and end-user. The end-user is learning what to want by prioritizing the importance of their own ends, comparing alternatives, weighing up opportunity costs (what would they choose if they didn’t choose this and switched to something else?), and assessing actual value in use compared to what was promised by the producer. The value learning process never stops.

Value seekers are rigorous in their evaluations. They’re willing to take time to get to the point of value. That’s why producers are constantly trying to persuade them to “buy now”, or yelling “offer ends this week” or otherwise trying to generate urgency. Value seekers are willing to save now for the future, when they believe value might be higher (they can buy something more valuable with their savings) even though our hedonistic society seems to assign more importance to immediate gratification. Value seekers are willing to make trade-offs, foregoing even attractive propositions when they are confident in their relative assessments of what’s better for them. There is self-discipline in value-seeking.

The private sector of entrepreneurial firms strives to help customers to realize value. Entrepreneurship can be defined as the creative pursuit of new customer value.

The greatest enemy of value is government. At the base of their anti-value stance is the measurement and pursuit not of value, but of a metric the government publishes under the name of GDP. GDP is the antithesis of value, quantitative not qualitative, numbers not feelings, about prices rather than value and spending rather than value experiences. Because GDP reflects spending, and because governments have justified their intervention into the economic activities of their citizens by expressing the goal to “grow GDP”, they urge us to spend, spend, spend. When we don’t, they “stimulate”, with more government, spending (using money conjured out of thin air) aiming to encourage more personal spending. 

Worsening an already bad arrangement, government aims for inflation: the increase in prices across the board, lowering the purchasing power of every citizen. The result is less value. We buy cheaper food rather than the most healthy or nutritious food. And government encourages the Big Food producers who make the cheap, unhealthy, non-nutritious food, with subsidies (like the never-ending sugar subsidy) and programs like the Food Pyramid, and many more. Because of inflation, people invest less in their human capital of fitness and health; it’s more expensive under conditions of inflation to maintain that gym membership or buy that bike. Same with education, which is getting worse and worse, especially at k-12 level and especially in poorer neighborhoods. The scarce resource of education is assigned by zip code, not by value. In general, the government wants price inflation because it’s more value for them (they value the power they get from the money they print) and less value for us.

We get less value in foods, replaced by more cheapness 

We get less value in gasoline, they get more self-righteousness through “green” energy claims.

We get less value in transportation, via an increasingly bad experience, whether driving or taking public transportation. They get more usage by forcing it on us.

We get less value in medical care, they get more control (which they value highly) through regulation and legislation and cronyism with Big Pharma and Big Insurance.

We get less value in the landscape, and we get water rationing. They get to expand the powers of the Bureau Of Land Management.

We get less value in energy grids that don’t work, and rolling blackouts. They get monopolies they can control and to preach sermons about climate change amelioration.

Governments extract value from their citizens, and from the producers of value who serve citizens. They divert attention from their value extraction by pointing to GDP growth. There’s no need to be fooled. Pay no attention to GDP statistics. Ask yourself, is my life experience improving? Is that of my family? My community? Take your own actions to improve value for yourself. Your own subjective value creation, and value co-creation with the producers who align with your purpose, will guide you. Don’t tolerate value extraction.

Six Traits Of America’s Entrepreneurial Culture

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The quality of life we enjoy in America today can be traced back directly to our entrepreneurial culture. The innovations of automobiles for everyone, safe, well-constructed homes, the electricity grid and all the devices attached to it, the internet and all its pages and interconnections, sanitation, medical care, airplanes that whisk us around the world and around America – whatever combination of things makes you think “quality of life” can find its origins in entrepreneurship.

We can differentiate between entrepreneurship and entrepreneurs. Entrepreneurship is an economic function, which can be considered in the abstract, separate from the individuals who practice it. Entrepreneurship is the process of introducing customer-approved innovation – including all those items on the list above, and all the many more that have customer approval, from Disneyland to cosmetic dentistry. The function of entrepreneurship comprises the desire of customers for betterment, the alertness of entrepreneurs to identify this desire as an opportunity for profit, and the implementation of that opportunity as a successful commercial business that delivers the betterment that the customer seeks. Entrepreneurship as a function begins with the customer via an unmet need, and finishes with the customer via their approval. There’s a multi-stage learning cycle: the customer learns what to want, what’s available to meet their need, and how to make accurate choices from everything that’s offered.

There’s an individual who instantiates the function of entrepreneurship – the individual (or firm) we call the entrepreneur. The entrepreneur is not an abstraction but a real flesh-and-blood person who performs the actions of entrepreneurship. These actions include the diagnosis of what the customer needs – which is often not well-articulated, because the customer is better at identifying what’s wrong or what’s missing or what falls short in their current arrangements, but not very good at inventing the future innovation that will fix the problem. Through the use of human understanding, the entrepreneur imagines the new future that the customer can’t yet articulate, and embarks on the process of trying to bring it into existence. Entrepreneurs are dedicated to better futures.

Connecting the abstract function of entrepreneurship and the personal commitments of entrepreneurs is an entrepreneurial culture – the behavioral norms and practices and institutions that provide the social context for entrepreneurship, both in the cultural permission for customers to always demand improvement, and in the cultural approval of the risk-taking entrepreneur pursuing the uncertain market reward of an imagined future. If the consumer culture was one of accepting the status quo, there would be no entrepreneurship, and if the producer culture was one of intolerance of risk and uncertainty, the same would be the case. The consumer culture is as important as the producer culture.

An entrepreneurial culture includes:

  • Optimism for the future – for a consumer to believe in the potential for betterment in the future requires an optimistic outlook; the same goes for the entrepreneurs who believe they can deliver that betterment. Optimism is an American trait. It’s not felt so much in European cultures, for example, where existential dread and a sense of civilizatinal and cultural decline are more the norm.
  • Creativity – entrepreneurial innovation does not result from bureaucracy or linear systems of management or mathematical models or computational projections or even from scientific inquiry experimentation. It stems from creativity. Someone imagines a better future and imagines how to bring it about. A design process brings the future into the presence via sketches, prototypes, blueprints, molds, and trial and error. Americans are creative. They created a nation and a constitution, they populated empty land west of the Rockies, they created railroads and corporations and a legal system where there had previously been nothing. Creativity is a national trait.
  • An open, mobile society – the ranks of the entrepreneurs are not limited to those born wealthy and privileged and educated at the best schools. They’re not even limited to those born in America. Our society is open to mobility in multiple directions and entrepreneurship benefits from this social mobility.
  • Risk – an entrepreneurial culture does not embrace pampering or sheltering or avoidng risk. It seeks risk. It seeks the uncertainty that means it is possible to imagine and seize an pportunity withiut any guarantee.
  • Skin in the game – the reward for risk is profit, acclaim, recognition and influence. Entrepreneurs strive for these outcomes; the entrepreneurial culture grants them this level of privilege if they are successful in improving others’ lives. Skin in the game means taking the risk and thereby qualifying for the reward.
  • The right to succeed – a few entrepreneurs achieve untold riches; many achieve great financial success. The entrepreneurial culture celebtrates their success and sets them up as examples for others and for future generations. Let’s all be entrepreneurs!

The opposite traits will undermine the entrepreneurial culture. If we become pessimistic and subscribe to the idea of American decline; if we permit ourselves to be governed or managed by bureaucrats following restrictive standardized rules; if we close ourselves off to immigration or mobility of any kind; if we fear risk and give up on the rewards that come with it; if we criticize and decry entrepreneurial success because we resent the level of reward our successful entrepreneurs are accorded; these are the feelings and actions and tendencies that will bring an end to American entrepreneurship. We’ll catch the European disease of restraining entrepreneurship by over-regulating and over-bureaucratizing. We might fall into the Asian error of state-mediated entrepreneurship. We might inherit the South American fear of entrepreneurship.

The entrepreneurial culture is not something that can be governed by the apparatus of the state. It’s not something that can be taught at university. It’s much more likely to be communicated at the family dinner table, and spread by sharing optimistic attitudes and open-minded delight in possibilities. It is strengthened by open-minded acceptance of every experiment, and by welcoming innovation on principle. It’s collaboration and participation and inclusion and expansiveness. It’s the embrace of change, even when it is uncomfortable. It’s open-minded active learning.

Let’s hope we can maintain it. Let’s try hard.

99% Of Businesses Practice Free-Market Capitalism. Our Largest Corporations Practice Something Else.

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Markets are incredible. They are the poetry of economics. We use them every day to solve complex social issues.

These phrases are taken from Anthony J. Evans’s book Economics: A Complete Guide For Business. Professor Evans is right: we don’t appreciate the wonder of markets as much as we should. They enable people who don’t know each other to collaborate and exchange worldwide and to find their specialties and contribute individually in the most productive way they can to the economic growth, progress, and prosperity that eliminates poverty and elevates prosperity and makes lives everywhere more comfortable, safe and purposeful.

Within markets, there are producers and consumers – firms and their customers. 99.9% of the firms are what are often called small businesses. They’re the backbone of the economy, acting as the producer in collaboration with customers in the co-creation of the majority of economic value. Their mode is entrepreneurship, the customer-centric approach to business that elevates the identification and understanding of customer needs to the level of primacy above all other activities. The understanding of customer needs is the necessary and irreplaceable asset in which these businesses know they must invest. Once they have assembled the asset, they creatively apply it to the design and delivery of the best solution among all those the customer could choose from. These businesses understand what Austrian economists refer to as customer sovereignty: the customer is the boss and decides which firms are successful or not successful – i.e. receive the market’s reward or the market’s penalty – through their buying or not buying what’s on offer.

In these cases, we can think of business firms as mini-markets. They operate via the matching of supply with demand. The fundamental market signals of customer choice (whether the customer is willing to buy or not) and pricing (what the customer is willing to pay) flow through the firm as indicators of how the firm should allocate its resources – how much to invest in particular lines of production or service, how assets should be allocated and focused, who should work on what, what improvements are needed, what innovations should be targeted to the future, what to spend R&D dollars on. In the metaphor employed by Austrian economist Ludwig von Mises, the customer is the captain of the ship, and the business takes the captain’s orders and points the ship in the direction the customer wants to go.

In aggregate, that’s why markets are incredible. They are tools for us all to co-create the value we seek, and collaborate in making life better for all of us.

Outside of the 99.9%, however, value co-creation is not quite so pure or unadulterated. In the big corporations that dominate the business news and many people’s thinking about the production side of the economy, there are three significant distractions from customer value creation.

The focus on shareholder value detracts from customer value creation.

The maximization of shareholder value has been an almost exclusive focus of the largest S&P 500 companies over their recent history. Maximizing shareholder value means that the customer is not in first position for these corporations. Not their first priority, not the most important focus of their time, effort, resources, and investment. They have more important things to do.

One of those things is the buying back of their own stock from shareholders, a pure act of financial engineering designed to boost total stockholder returns. Reducing the number of outstanding shares on the market artificially inflates a key measure of a company’s value: its earnings-per-share, or EPS. Buybacks are often followed by an immediate surge in stock price, at least in the short term. According to Knowledge At Wharton:

The buyback boom began in the 1980s, and has only accelerated since. In the last decade, the author writes, “American firms have spent a stunning $7 trillion buying back their own stock — the equivalent of half their profits.” In the last two years, buybacks and dividends have actually exceeded the net earnings of publicly traded American companies. Adding insult to injury, companies like Apple often fund these buybacks, not by dipping into their substantial cash reserves, but by borrowing. In 2013, despite having $145 billion in the bank, Apple borrowed $17 billion. 

https://knowledge.wharton.upenn.edu/article/pitfalls-financialization-american-business/

The Institute For New Economic Thinking reports

The most egregious buybacks offender is Apple, which from October 2012 through December 2021 threw away $484 billion—92 percent of its enormous net income—on open-market repurchases, the sole purpose of which was to boost the company’s stock price. In addition, Apple funneled $118 billion in dividends to shareholders, sucking up another 23 percent of net income. For March 1, 2022, Apple’s safe-harbor daily “limit” for buybacks under Rule 10b-18 was $3.5 billion.

https://www.ineteconomics.org/perspectives/blog/where-did-you-go-vice-president-joe

Knowledge At Wharton summarizes the financialization of American business this way:

Today, finance, while making up only 7% of the economy and creating a mere 4% of all jobs, generates more than a fourth of corporate profits. Large corporations increasingly came to mimic the banks that were supposed to serve them and to seek profits in ‘financial engineering.’

https://knowledge.wharton.upenn.edu/article/pitfalls-financialization-american-business/

Bureaucracy Has No P&L Motive And Therefore No Customer Focus.

In his book titled Bureaucracy, published in 1945, economist Ludwig von Mises outlined the threat that an expanding bureaucracy poses to economic prosperity and a free society. His concern was with government bureaucracy. He did not believe that private companies would develop throttling bureaucratic structures, because bureaucracy develops where there is no profit and loss motivation. Companies can’t afford bureaucracy that is not responsive to customer signals, because the approval of customers determines whether the company is profitable or not, and whether it survives.

He was wrong. Our largest corporations have now been overrun with their own internal bureaucracy. It started as compliance: bureaucracy as a defense against government legislation and regulation. When government creates OSHA (Occupational Safety And Health Administration) for example, firms must create an OSHA compliance bureaucracy, people, and resources that are dedicated not to creating customers and fulfilling their needs but to compliance with OSHA directives and standards. There are many such government departments and repositories of regulations that require corporate compliance bureaucrats.

But recently, the role of bureaucracy in corporations has changed. It is no longer confined to the defensive role of avoiding the fines and jail sentences the government hands out to those who fail to comply with regulations. The corporate bureaucracy has now gone on the offensive. It proactively asserts, in the names of its acronymic policies of ESG, DEI and CSR, the right to compel corporate behavior that has nothing to do with serving customers and everything to do with curtailing the capitalist focus on profitably serving customers. Bureaucracies impose internal costs on the firms that employ them, and make sales and revenues more difficult to attain, not easier. The anti-capitalists have infiltrated capitalism.

Ludwig von Mises was right: bureaucracy lacks the profit-and-loss motivation that drives businesses to thrive. Now it’s no longer the external enemy but rather the virus inside the system.

Crony Capitalism Is Not Capitalism.

The third stage of corporate decline following financialization and bureaucratization is statification: they become the state, they merge with government so that it becomes hard to know whether the state owns the means of production or the means of production own the state. In the US, we refer to the outcome of this merger as crony capitalism, but it’s worse than that mild term for fascism implies. The corporations begin to be policy designers and implementers, such as Shell Oil on climate change policy and Ford Motor on energy policy. In the opposite direction, Amazon becomes a recipient of government subsidies.

As George Orwell put it:

The creatures outside looked from pig to man, and from man to pig, and from pig to man again; but already it was impossible to say which was which.

George Orwell, Animal Farm

For customer-first capitalism, we must look to the 99.9% who are not at the trough like the pigs and the farmers – the corporations and the government – and who uphold the promise of free markets and their customer-granted rewards.