A podcast based on the winning principle that entrepreneurs need only know the laws of economics plus the minds of customers. After that, apply your imagination.

92. Clay Miller: 5 Austrian Principles Applicable to Your Business Today

Principles of Austrian economics have immediate applications in business. Clay Miller, a deeply experienced and highly successful global tech entrepreneur, makes the case via five principles drawn from five easily-accessible sources of Austrian economic theory, with many accompanying examples.

Key Takeaways & Actionable Insights

Principle 1: The distribution of knowledge requires disaggregated thinking.

Source: “The Use Of Knowledge In Society,” F.A. Hayek – Get It Here

Hayek wrote this paper as part of a research program into the problem that economics tries to solve. He defined it as a knowledge problem. Knowledge “never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess”.

The implication he drew was for central planning by governments and their departments and committees that would attempt to plan production or set prices. Such central planning is impossible because dispersed knowledge can not be aggregated and so the planners never have enough knowledge on which to base a plan.


“The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place…..”


In our Economics For Business project, we have the opportunity to help entrepreneurs apply the same principle to business knowledge, or data. Too much aggregation can obscure information that is really important and most useful for improving business performance.

Here’s an example. A frequently used KPI (Key Performance Indicator) is average revenue per customer. It’s calculated by aggregating all customer revenue into one number and dividing by the number of customers. For this to be actionable intelligence, it is necessary to assume that spending by each customer is very uniform. But consider the case where average revenue per customer is $190 for a customer base of 10 users, composed of 9 who spend $100 each and one who spends $1,000. The KPI does not suggest that each new customer you acquire will spend $190. In fact, it’s more likely they’ll spend $100. And, in fact, what you would really like to know is the profile of the $1000 customer and whether that profile, applied in recruiting new customers, would enable you to recruit more $1,000 spenders. You really want to choose metrics that can provide insight into individual customer behavior — like the nature and motivation of the one $1,000 spender.

Similar Austrian thinking would apply, for example, to Google analytics, which can profile the type of customer interacting with your website or app, and observable behavior such as conversion rate by page visited, or abandonment rate for specific pages. These are disaggregated statistics that can help you serve customers better.

Austrian thinking is rigorous in seeking to identify cause and effect, and to ensure that correlation is not mistaken for causation. A simple example is restaurant data that exhibits a 30% increase in customer traffic on Tuesdays. There’s a correlation between day-of-week and traffic increases — but it’s not causation. Tuesday does not cause the traffic increase. What does? It requires digging to find out, perhaps, that a local firm offers a perk to office workers to pay for them eating out on Tuesdays. As Hayek would say, this is specific knowledge of time and place, more likely to be qualitative than statistical, embracing the subjectivity that’s central to Austrian economics.

Principle 2: Consumer Sovereignty requires that entrepreneurs are directed by their customers.

SourceBureaucracy, Ludwig von Mises: Get It Here

This book focuses on the inefficiencies and ineffectiveness of bureaucratic organizational structures and processes. In a chapter titled Profit Management, Mises defines the Austrian concept of consumer sovereignty. Understanding and applying this concept is central to entrepreneurs’ capability to create effective value propositions for their offering, brand or business.


“Thus the capitalist system of production is an economic democracy, in which every penny gives the right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs, and the farmers are the people’s mandatories. If they do not obey, if they fail to produce, at the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight rein on all business activities.”


Consumers are the ones driving production. It’s up to business managers to make sure that every decision is towards bettering the value proposition offered to customers.

For example, the décor in a restaurant should be chosen not because the owner favors it or because an interior designer decrees it, but for the purpose of enhancing the value experience of those consumers the owner wants to attract and to serve. This requires empathy. Consumer sovereignty and entrepreneurial empathy go together.

Because consumers are the ones valuing what is produced, they are the ones ascribing value to the product or service the entrepreneur produces. The entrepreneur needs to anticipate what they value, and to do so requires ever-greater closeness to the customer. Clay described the value provided by simple but tasty barbecue restaurants in his home state of north Carolina, in a décor of plastic and paper and small booths. But that wouldn’t attract the customers who prefer fine dining in a five star restaurant. The customer decides what experience they value.

Startups can usefully anticipate consumer preferences by creating an imaginary perfect customer, and thinking through the value they want and the value the business can facilitate for them. Once in production, get as much feedback as possible on the actual value experience and the customer’s feeling about it. Every decision made inside the business needs to be for the purpose of and directed towards improving the customer value proposition and value experience.

Principle 3: Human value scales are complex and ever-changing and entrepreneurial empathy is required in order to reach an understanding of customers’ value dynamics.

SourceHuman Action, Ludwig von Mises: Get It Here

Human Action is the magnum opus of Austrian economic theory. Every chapter will yield great insights for business. Clay selected value scales as a topic.


“It is customary to say that acting man has a scale of wants or values in his mind when he arranges his actions. On the basis of such a scale he satisfies what is of higher value, i.e., his more urgent wants, and leaves unsatisfied what is of lower value, i.e., what is a less urgent want. There is no objection to such a presentation of the state of affairs. However, one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man’s actions.”


When a person makes a decision to purchase your product or service, they conduct a quite complex evaluation to integrate your offering into their scale of values. And the values and the scale is constantly changing. Consumers are not static robots. Their circumstances change, their preferences for saving or spending change, their time of life or even time of day demand rearranging of value scales.

A consumer may have a high preference for Krispy-Kreme donuts. But then they go on a diet. Their value scale changes. Losing weight and increasing fitness are now higher values than enjoying a donut. If you are the Krispy-Kreme donut franchisee, it’s important to be aware of the value scale change, and to empathize with the customer. Maybe you could develop a promotion called “Cheat Day” that rewards them with a donut treat after a week of exercise and donut restraint. As Wayne Gretzky used to say, skate to where the puck is going to be, not where it is now.

How can you understand value scales? One interview with a customer — what a researcher would call deep, rich qualitative information — can be worth much, much more than survey data. Mises said that we can only know an individual’s value scales by observing an individual’s actions. Having them answer a survey question such as “How highly do you value this item?” or “What price would you pay for this item?” does not indicate how they would fit the item into their value scale. They may say they would pay $250,000 for a Ferrari, but, when they weighted the experience of owning the Ferrari versus the opportunity cost of foregoing other experiences, would they actually make the purchase? The survey answers won’t tell you.

Entrepreneurs are rewarded for estimating correctly what the customer values and creating the appropriate value proposition.

Principle 4: The market is a discovery process, with uncertainty on both sides of market exchanges. All entrepreneurial actions are tests, with no certain outcomes.

SourceCompetition And Entrepreneurship, Israel Kirzner: Get It Here

This is a seminal work on entrepreneurship. One of the major themes is that markets are a process of discovery. That insight directs entrepreneurs to think in dynamic, process terms. The entrepreneur experiences uncertainty in what he or she is producing, because they are not sure of what customers will value in the future. The customer is uncertain, too, because they’re unsure of how they’ll value what the entrepreneur produces. Whenever we, as consumers, feel trepidation about “pulling the trigger” on a purchase, we are experiencing this uncertainty. Meanwhile, the producer is anxiously discovering the receptiveness to his or her value proposition.


“The market process, then, is set in motion by the results of the initial market ignorance of the participants. The process itself consists of the systematic plan changes generated by the flow of market information released by market participation — that is, by the testing of the plans in the market.”


Kirzner points out that every plan an entrepreneur has, every value proposition, every offering made to prospective customers can only be a test, a trial. Nothing in the market can be certain. Entrepreneurs are trying to anticipate what customers are going to value, and they can never be sure in advance.

That’s why entrepreneurs use empathy, to imagine, if they were the customer, what type of experience the customer would be looking for. Entrepreneurs must imagine what customers might enjoy in the future. They must seek the customer’s agreement that, “Yes, your product or service delivered what you promised and made me feel better.”

One implication of Kirzner’s principle of “market ignorance” is for branding. If a brand has accrued a certain level of market reputation, consumers will feel less ignorant. They will feel they “know” a brand that’s been producing for 100 years, that is symbolized by the 3-point star that can be seen everywhere, and that is trusted and approved by many other consumers. A brand represents the stored experience and the stored reputation of many customers.

Principle 5: All entrepreneurship is for social good, and more social good is achieved by subjecting business to the marketplace test of profit and loss.

SourceAustrian Perspectives on Entrepreneurship, Strategy and Organization, Peter G Klein, Nicolai Foss, and Matthew McCaffrey, “Austrian Perspectives On Entrepreneurship, Strategy and Organization”: Get It Here

In Chapter 4 of this book, the authors discuss the concept of social entrepreneurship. This is an idea that seems to be gaining traction, especially among millennial business owners and millennial entrepreneurs. The idea is that business should be focused on something more than profit and loss. It should provide some “social value”, making the world better. Klein, Foss, and McCaffrey provide some robust Austrian thinking with regard to social entrepreneurship.


“However, these metaphors (“social value”, etc) often imply a false conflict with traditional entrepreneurship. For example, the contrast between conventional market entrepreneurship and social entrepreneurship implies that the former is somehow not social, or even anti-social. This is misleading, however; for example, Austrians would respond that Mises’s calculation argument demonstrates that the entrepreneurial market economy is profoundly social. Entrepreneurs, by bearing uncertainty in an effort to satisfy consumers, work ceaselessly to improve the welfare of all members of society, and their work in turn strengthens bonds of cooperation between individuals and communities, while at the same time disincentivizing conflict and exploitation. This is social behavior in its most fundamental form.”


Steve Jobs improved society greatly by inventing the iPhone. The impact on society was considerable — better communication and information sharing, and higher productivity for billions of people.

Every venture — including social ventures — must grapple with basic economic problems. Taking on a social mission does not relieve the firm of the pressures of the marketplace. Social enterprises are business organizations, and if they earn revenues through the sale of goods and services, they must apply judgement to allocate scarce resources in the face of uncertainty. Genuine participation in the marketplace requires them to be subject to the profit and loss test.

Klein, Foss and McCaffrey make the point that “social value” is incalculable. What’s good for one individual is not the same as for another. Individuals value things subjectively. When a business pleases one group, it may be adversely affecting another.

Profit is not evil. It’s impossible to make a profit without serving your fellow man. You are doing good for society by being an entrepreneur, by producing things that people want and value. You forego your own consumption by investing in your business, and so you are making a sacrifice to serve others. And if social entrepreneurs are not subjecting themselves to the profit and loss test — if they are supported by charity or grants — then they are not receiving the signals form consumers that they are allocating scarce resources in the way that consumers — i.e., society — prefers.

The ethic of entrepreneurship is to serve, and to make others’ lives better, and to receive the approval and reward of customers via the profit and loss mechanism of the market.

Free Downloads & Extras From The Episode

“The Use Of Knowledge In Society,” F.A. Hayek (American Economic Review, Vol. XXXV, No. 4, September 1945; pp. 519–30): Get It Here

Bureaucracy, Ludwig von Mises (Yale University Press, 1944): Get It Here

Human Action, Ludwig von Mises (Mises Institute, 1999): Get It Here

Competition and Entrepreneurship, Israel Kirzner (Liberty Fund, 1978): Get It Here

Austrian Perspectives on Entrepreneurship, Strategy and Organization, Peter G Klein, Nicolai Foss, and Matthew McCaffrey (Cambridge University Press, 2019): Get It Here

“The Austrian Business Model” (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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91. Curt Carlson on Innovation Champions

Austrian economics sees an economy in motion, perpetually renewing itself. Economic agents (firms, customers, investors) constantly change their actions and strategies in response to outcomes they mutually create. This further changes the outcome, which requires them to adjust afresh.

Entrepreneurs live in a world where their beliefs and strategies are constantly being “tested” for survival within an outcome these beliefs and strategies create. It’s complex.

Key Takeaways and Actionable Insights

One of the strategies required in this dynamic system is innovation: the enabling of new value propositions to customers, sustained by new resource combinations, new technologies, new go-to-market capabilities, new channels and new delivery mechanisms.

Innovation has often been characterized as presenting the entrepreneur with an unmanageable level of uncertainty. Curt Carlson challenges this idea and believes innovation can be predictable via the utilization of sound process, captured in his N-A-B-C method, which we explained fully in E4EPod episode #37.

In addition, Curt tells us in episode #91 that the right individuals can strengthen the process by acting as innovation champions. Here are their characteristics.

1. Originate a value proposition.

The route to value starts with a value proposition — accurately identifying a need and developing the appropriately differentiated approach with the right cost structure. Champions are those who can originate innovation projects with an energizing and inspiring proposition. They are customer advocates with creative capabilities. Champions can use Curt’s process map for guidance, or our own “Economics For Business Template” ().

2. Collaborate with a complementary partner.

Innovation is a team game, and it often starts with a partnership of two. Venture capital funds often look for a team of co-founders rather than on brilliant individual. A combination of an engineer and a marketer is a good one, but there are many more. The key is that the partner is complementary: different skills, different experience, same commitment and passion.

3. Build a team over time.

The benefit of complementary skills is not limited to co-founders or co-champions. As an innovation project evolves, the need for more skills and different experiences expands. A champion is able to add complementary skills via new team embers over time, while maintaining team cohesion and integrity.

4. Learn necessary value-facilitation skills.

Recruitment is not the only route to new skills for the team. The champion should be able to recognize skill gaps and fill them via their own learning. For example, mastering the interpretation of qualitative data from customer learning sessions is imperative but not intuitive. Champions work hard at gathering the data (listening and empathy skills) and processing the data (interpretation skills) to project possible future solutions (imagination skills). These new skills are learned over time.

5. Iterate with the team and in larger forums.

It is impossible to predict how an innovation process will proceed, and what twists and turns will be necessary. A champion is able to iterate the understanding of the need, the approach to solving it, the use of technology, and the management of costs. Change is constant not only in the world, but in the innovation project. Iteration can be conducted in the small team, but the champion should also seek larger — perhaps company-wide — forums for sharing and commentary. Everyone’s input counts. Champions don’t become too possessive of their ideas.

6. Champions exhibit enviable human values.

Project teams are often under stress. Deadlines loom, experiments fail, ideas clash. A champion demonstrates human value of trust and respect and integrity that bind teams and projects together. People want to work with champions.

7. Champions take organizational responsibility.

All innovation projects are fraught with risk and uncertainty. Some will fail. Others will take unexpected turns. When the unwanted or unexpected happens, a champion takes responsibility and does not try to deflect blame to exogenous factors. All decisions are subjective, and champions take ownership of their decisions.

8. Champions persevere.

Innovation project timelines can be long. Curt described some that took 10 years or more (like the development of Siri, which eventually became associated with the iPhone4). Despite barriers that might seem insurmountable, and setbacks that might feel humbling, champion s keep going no matter what. They are inspired, and inspirational to others.

9. Champions succeed.

Success is not a behavior or a characteristic, it is an outcome. Nevertheless, with the right process and a good team, champions succeed repeatedly.

In our hyper-competitive world, without a champion success is not possible. The only viable path is to aspire to be the best at what we do. That starts and ends with someone committed to success — a champion.

Additional Resources

Check out Curt Carlson’s HBR article, “Innovation for Impact” (PDF): Click to Download

Curt’s website is PracticeOfInnovation.com. Click on “Innovative Indices” to see how to assess the innovative potential of your firm and projects.

“N-A-B-C Innovation Process” (PDF): Click to Download

“Curt Carlson: There is a Systematic, Repeatable Process to Generate Customer Value”: E4EPod episode #37

90. Per Bylund On A New Austrian Business Paradigm: Facilitation Of Value

In our project to make a useful link between Austrian economic theory and business practice, we earlier introduced the Austrian Business Model. This is a recipe to make a profit – a template adaptable to any individual firm.

Download The Episode Resource The Austrian Business Paradigm – Download

Key Takeaways and Actionable Insights

What exactly do we mean by paradigm?

A paradigm is precedent to a business model. It’s the underlying way of thinking – a set of values, beliefs, concepts and practices that combine to constitute a distinctive entrepreneurial approach to business.

Per Bylund’s exposition of the principle of Facilitation Of Value leads to a new – Austrian – paradigm for business. Here is the framework:

The Purpose Of Business is to facilitate value for customers.

In today’s interconnected, fast-changing world, businesses are formed and managed with the intention of ensuring value experiences for customers. This challenge is fraught with uncertainty, because value is an emergent – and therefore unpredictable – property of the interaction of people, artifacts and behaviors in complex systems.

Customers, whether consumers or businesses, operate in their own system. They must fit everything they consume into their existing system – their life or their business processes and organization.

Customers experience value in their own systemic context. If they own a car, for example, they experience ownership value within a system of taking kids to school, commuting to work, and shopping, as well as in an intersecting system of service, maintenance, fueling, accessorizing and replacing worn parts.

Businesses interface with the customer’s systems from their own system of design, procurement, resource management, partnering, warehousing, distribution, payments, technological enablement, regulatory compliance, communications and many more elements. A business system facilitates value to realize the customer’s experience within their own system.

The value of any offering is positively perceived by customers when the fit into their system is felt to be a good one and the offering contributes to system improvement or enhancement in some dimension. Uncertainty is always present because the system improvement can not be predicted with certainty in advance.

Austrian economics provides the principles for entrepreneurs, managers and strategists to establish a unique, sustainable, profitable and scalable process to facilitate value for customers.

The end-user / consumer takes the primary role.

A business can not be an assembly of resources or an expression of core competencies or the implementation of innovation in isolation. It can’t be the result of a strategy to penetrate a market or disrupt a competitive set without first understanding the hopes and dreams and aspirations of customers. It can’t be a simplistic choice from a set of business models on the business school shelf.

A business must stem from giving the customer the primary role. The very purpose of a business is to please customers by serving their needs, and so their perception and preferences must define the business design. Since the needs of customers are subjective, idiosyncratic, changeable and context-dependent, methodological individualism – making the individual the unit of analysis, rather than groups or segments or markets or industries – is the indicated approach.

This approach is a lot different than ideas of shareholder value or stakeholder value. It is sometimes acknowledged in terms such as consumer-centricity or consumer-first. But those commitments tend to be tactical and implementational. Relentlessly and unfailingly taking the point of view of the customer is fundamental to the new business paradigm. It’s what make business purposeful and ethical, sustainable and responsible.

Value is determined by the end-user or consumer.

What consumers seek from business is value. Value is hard to define and challenging to quantify because it is a subjective experience of the consumer, within that consumer’s own individual context. What’s perceived as valuable by one individual consumer will not be the same as another individual, and any individual can change their perceptions or their ranking of what’s more valuable at any time.

Value, therefore, can not be created by a firm or a brand, despite the traditional use of that language. Value is formed in the consumer domain, as an emergent property of the consumer’s choices, behaviors and context. Take a laptop PC for example. The value experience changes depending on whether the user is a gamer, an executive in the financial system, or a video editor. It varies based on the software the user installs, the usage advice he or she receives from peers and experts, the quality of the user’s network, their preferences for in-use performance, and many more variables. You can examine the same value experience thought experiment for any good or service of your choice, e.g. the value of an Audi A8 to a family of 6 living in rural South Dakota compared to a family of two in Manhattan with a one-bedroom apartment and a single parking space. Value emerges in lived experiences within these varied contexts.

For a business to business enterprise, it is sometimes expedient to limit the value analysis to the final purchaser / end user. There are sometimes some special value considerations in these contexts. For example, business customers tend to evaluate every economic choice in money terms – does it lower costs or contribute to higher revenues? But it is also the case that a business customer is often, in fact, multiple users (whether a procurement committee or a department all using the same item), and so a group rather than individual assessment of value is appropriate. Nevertheless, value remains a subjective, idiosyncratic, changeable phenomenon.

Empathy for customer dissatisfaction is the starting point for business development.

Dissatisfaction with the status quo – Austrian economists sometimes call it unease – is the raw material for business development. The genius of consumers is to always sense that their experience could be better than it is.

Empathy is the diagnostic skill of observing and analyzing behavioral data and deducing emotional drivers for change and innovation. A customer searching online for more efficient home heating solutions may be dissatisfied with the ambient conditions in the home, or with the level of his or her gas bills. An individual interview can determine which of these – or other alternatives – applies and point the way to a desired solution. The entrepreneurial practice is to focus empathetic attention on the inner drivers which are manifested in observable behavior.

There is no shortage of customer dissatisfactions to be addressed by businesses. The skill of empathy is to advance beyond taking the point of view of the consumer and to feel the experience that the consumer feels, and to identify the feelings that really matter. This is counter-factual – it’s not actually possible to feel what another human being feels – and is therefore an act of imagination. Imagination provides the energy for consumers’ dissatisfaction (they imagine a better future) and for entrepreneurs’ creativity (they imagine what dissatisfaction feels like for the consumer, and they imagine solutions to that dissatisfaction).

Empathic design

To advance from imagination to a business plan is an act of design. Design can be captured as a process in which an innovating business creates a blueprint for a good or service or technology or other artifact that presents a practical solution to a customer. There are many design process alternatives. The shared design principle is to start with an identifiable customer with a problem to be solved, and progress towards a solution with which the customer can interact and can evaluate.

Early prototype solutions should be adequate to share a resonant imagination between entrepreneur and customer, and to stimulate realistic responses from customers regarding features and attributes they do or do not find valuable, and flexible enough to accommodate frequent iterative adjustments based on those responses.

Uncertainty exists as a barrier to be overcome in the delivery of new solutions to customer dissatisfaction. Adaptiveness is the entrepreneurial response to uncertainty.

Uncertainty is integral to the business paradigm. Uncertainty can be experienced as the impossibility of predicting the future because of the extreme complexity of the interactions of customers, entrepreneurial offerings and potential solutions, opportunity costs, transaction costs, environmental factors and other system elements. The response to uncertainty is adaptation: making a change in a business offering and monitoring the resulting change in customer acceptance, customer behavior, customer interactions or other consequential results. Favorable changes are preserved, unfavorable ones discarded.

Continuous dynamic change then becomes the norm for businesses in an adaptive system. There is no equilibrium, no stasis, no predictive planning, no stable combination of assets or resources. There are no system-imposed or structural boundaries to a firm’s activities, just the subjective entrepreneurial judgment about interaction with customers to facilitate customer value. In complexity theory terminology, customer value is the constraint to the system that can shape change and emergent outcomes (think of Steve Jobs constraining his designers to “no buttons” on Apple devices).

Businesses accumulate capital as a result of the flows of income from customers.

The measure of business effectiveness is the flow of income from customers. Insofar as entrepreneurial actions set in motion a flow which is projectable into the future, a business is in a position to make capital investments both to expand its capacity to generate income flows and to create new innovations to stimulate new flows.

Current flows are subject to change at any time when customer preferences change, or their environment changes or there are shocks to the customer’s system. Entrepreneurs must develop accurate appraisals of which of their assets – in what specific combination – are most responsible for generating income flows, and establish them in such a way as to be flexible in rearranging them and recombining them in response to (or in anticipation of) market change.

Future flows from investments in innovation are uncertain and unpredictable. Entrepreneurial skill in identifying productive investments (foresight) differentiates more successful from less successful firms.

Free Downloads & Extras From The Episode

The Austrian Business Paradigm (PDF): here.

“The Austrian Business Model” (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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89. Jeff Booth: How Entrepreneurs Can Harness The Power Of Technological Deflation

What is technological deflation, and how can entrepreneurs take advantage of it? By combining already available and easily accessible technologies to facilitate the accelerated information flows that constitute value in the 21st Century: higher quality, faster speeds, lower costs. Jeff Booth explains.

Download The Episode Resource Value Then vs. Value Now PDF – Download

Key Takeaways and Actionable Insights

Technology reduces the labor factor, lowers costs, and frees up time.

These are the components of deflation: less labor and effort for any unit of output, faster speed, lower material costs, and re-allocation of time to from lower to higher productivity activities.

The speed at which this technological change is happening is “staggering” in Jeff Booth’s words, and will accelerate. More and more time will be freed up to allocate to higher uses.

The result is deflation: higher quality for lower cost at faster speeds.

The only reason price deflation is not pervasive throughout the economy is the status quo governmental system.

Federal Reserve money printing, more and more debt, lower interest rates – these are actions designed to drive price inflation. This scheme defies the natural order of technological deflation. It is the great fight of our time, says Booth, to end the inflationary scheme.

But for entrepreneurs, the right action is to embrace and harness tech deflation.

There is tremendous leverage for entrepreneurs in the current economy of technological change.

Jeff uses his “folding analogy”. If you could fold a piece of paper 50 times, it would reach the sun. Technological change is at the early folding stage today, but each new fold doubles the growth rate and the impact.

The way for entrepreneurs to put this folding analogy to work for them is by combining technologies. Several folds at once.

One of Jeff’s examples is Elon Musk. In Jeff Booth’s words, Musk forecast three exponentials: the exponential improvement in battery technology, the exponential increase in the role of software in automotive engineering, bringing information flow into the vehicle, and the exponential improvement in A.I. to bring self-driving features to automobiles. Taken together, these three widely available technologies made Tesla a revolutionary venture, surpassing GM in market capitalization.

The same “crazy opportunities” are available to all entrepreneurs.

We don’t all have to be Elon Musk. The possibility to increase customer value and reduce costs at the same time are available to all entrepreneurs. One of the keys to success is to direct technology towards increasing data capture: more and more data signals to drive deep learning via algorithms, leading to better and better and faster and faster decision-making. Data collection platforms managed with A.I. algorithms can generate the exponential growth that Jeff refers to.  Google and Amazon are the examples everyone talks about; but here on E4E, in episode #84, Bob Luddy talked about sensor-based data collection in his CaptiveAire restaurant ventilation systems, feeding performance data back to the central platform for increased learning and improvement. The opportunity is available to all types of business.

Value looks different today than in the past, and it will look different again in the future.

“What will value look like in the future?” is one of the questions Jeff Booth urges all entrepreneurs to ask for themselves and their business.

He cited one example from history: the Blockbuster video rental business. To Blockbuster’s owners and managers, value looked like the convenience for consumers of movie entertainment of 9000 stores across the country, each with a huge selection of videotapes to choose from. Their idea of adding value was to provide popcorn and candy in the checkout aisles. But when Netflix came along, value starts to look different. It’s the convenience of streaming movies directly to your digital TV or tablet in your home or on the go, with constant additions to the offering, both of original content and content from other channels. The 9000 Blockbuster stores no longer look so convenient. Information flow and digitization make value look different.

Another example Jeff cited is the university education business. Traditionally, its value is based on real estate – an exclusive set of physical buildings in one specific place to which students must travel (or rent a dorm room) in order to access an exclusive faculty of high-reputation teachers. Now, with technology and information flow, the core knowledge is accessible anywhere / anytime, and is tending towards free. Offline educational ventures can hire the teachers to make video classes available to the world, and virtual reality will make the experience even more vivid and more enjoyable. The knowledge is the same. Students’ questions are probably the same. The cost structure is totally different.

Three principles for entrepreneurs to facilitate new value in the future.

Given these examples, and given the trends of accelerating digitization, data flow, multiplicative combinations, and algorithmic analysis and intelligence, what are the principles for business to follow to be able to facilitate new value for customers?

1) Aim for 10X improvement in the customer experience.

The rate of acceleration is so fast, and the exponential potential of new combinations of technology is so great, that innovators must aim for a 10X improvement in customer-perceived benefit to command attention, turn heads and dislodge customers from their current choices. (Curt Carlson made the same point in episode #37.)

2) Make your thinking boundaryless.

One of the great restrictions on entrepreneurial creativity is the institutionally and historically imposed tradition of thinking in silos, and thinking that industries have boundaries. Universities have their faculty departments and corporations have their divisions, and they tend to put silos around thinking. But the Elon Musk example of batteries + software + A.I. crosses industry boundaries, technology boundaries, performance boundaries, and financial boundaries. Boundaryless thinking can open up endless new possibilities. Entrepreneurial economics teaches the re-combination of assets, not necessarily the creation of new ones. Busting silos can lead to new combinations.

3) Forecast the exponential.

Where in your frame will exponential change occur? Use your imagination to try to forecast it. The future can’t be predicted but it can be imagined. The challenge is to imagine the next fold of the paper and the next one and the next one; and the next combination of two or three or four or more new technologies. The idea of the exponential can be applied everywhere.

Free Downloads & Extras From The Episode

Value Then vs. Value Now PDF: here.

Get Jeff’s Book The Price of Tomorrow here.

“The Austrian Business Model” (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

Enjoying The Podcast? Review, Subscribe & Listen On Your Favorite Platform:

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88. David K. Hurst: Managing People-As-Ends and not People-As-Means.

Key Takeaways and Actionable Insights

In many situations, the complexities in managing a diverse and layered team of people is to view individuals as ends and not means.

Management and organizational frameworks often treat people as means. The business ends are external: so-called shareholder value, or stakeholder value, which is fashionable today, or simply revenue and unit sales goals or metrics and KPI’s.

Managers are taught to look at people through an economic lens as resources – human resources – in the same way as material resources and financial resources, to be utilized as efficiently as possible.

But people are not means. They are subjects, and they have subjective ends of their own. They’re searching for identity, meaning, and trying to meet their own potential. If managers recognize this, their approach to people as team members and employees will be much different.

Individuals need to be able to tell their own story in their own space.

We work for money but we live for story. The most important story is the one we tell about ourselves and our values. People need opportunities to tell their story. Everyone at every level in an organization and in every type of role or job needs this opportunity.

To do so, they need their own space in which to create and embellish their story, a space that is unique to them and gives them a fine-grained perspective of which they are masters, and for which others will prize them.

David Hurst gave the example of Costco, where the in-store personnel have space to use their own discretion to serve customers. If a customer (a guest, in Costco parlance) requires assistance in locating an item, a Costco associate will stop whatever they are doing and escort the guest all the way to the shelf location. They have their own space and their own discretion to design and deliver a unique level of service, and a story they can tell about their customer commitment. This becomes a culture that pervades the entire company.

FedEx has similar spaces, and similar stories about individual employees going to extraordinary lengths to make sure packages are delivered on time.

One way to create these spaces is to give everyone intelligence gathering roles.

David Hurst tells the story of delivery truck drivers in the steel fabrication business. He treated them with deference for their ability to gather real-time intelligence: which competitors had trucks in the customer’s yard; what concerns were customer employees talking about; which customers were friendly and which ones adversarial? These front line employees are able to gather and feed back market intelligence that was faster, deeper more local and more detailed than traditional reports. It’s small data, often much more valuable than big data. And the employees can tell their stories about their intelligence gathering and their important role in company processes, from their unique space.

The word in management usage now is fine-grained. The front line has a fine-grained perspective and fine-grained intelligence. This fine grain is highly valuable, especially when shared in collaborative teams and structures where everyone knows their role, which is not tied to hierarchy.

Hierarchy and structure create a cascade of negative effects for the people in them.

As companies grow and become larger, they require internal specializations and experts in narrow, technical fields. Specialization brings hierarchy, where general managers can supervise those in specialized roles. Hierarchy leads to careerism and status, when employees are not collaborating with each other but competing. The result is what David calls a power trap. The firm becomes trapped on the right had side of his Management In A Field Of Tensions model.

Recently, it has become fashionable to coin terms such as human capital, or brand capital, or relationship capital, or even spiritual capital or street capital. All of these terms are sloppy definitions of capital from an Austrian point of view.

Management In A Field of Tensions Diagram

Click on the graphic to download it.

The tension for management lies in a continuous pull of the “hard, scientific” side of the model, away from the humanistic side.

Austrians lean towards the left hand side of David’s model: humanistic, treating people as ends, respecting narrative more than data. For example, the exercise of judgement under uncertainty, so central to the Austrian paradigm of the entrepreneurially-driven economic system, lies on the left hand side of the model. It’s practical, grounded wisdom, when entrepreneurs make decisions when they don’t have all the data. (And the Hayekian insight is that no-one ever has all the data.) They glean what they can from the individual observations of people involved in the situation at hand (small data), and then decide, knowing that the consequences are uncertain, and that they will need to be adaptive to change in the future.

The right hand side of the model represents the pull of so-called science: hard data, mathematical calculation, plans and administrative bureaucracy.

Smaller, private, more entrepreneurial companies can often avoid the right hand side of the model.

Smaller and privately held companies have many advantages. They tend to be more frugal in good times and bad, and act carefully with cash, thus retaining flexibility in difficult markets. They have a high bar for capital expenditures and make fewer malinvestment decisions. They often try to avoid carrying too much debt, so that bankers don’t have power over them. And, importantly, they are often better at retaining talent and keeping experience inside the firm. They can avoid the careerism of competing for status in the hierarchy, and just let people become better and better at their jobs. On the left hand side of the model, as David describes, it’s all about people.

Free Downloads & Extras From The Episode

Read about David’s management philosophy of Leading Like A Gardener here.

Get David’s book The New Ecology Of Leadership here.

“The Austrian Business Model” (video): https://e4epod.com/model

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87. Professor Matthew McCaffrey: The Austrian Definition of Capital and its Application for the Health of Your Business

Key Takeaways and Actionable Insights

An understanding of the Austrian definition of capital is tremendously useful to all business owners and managers.

What is capital? Austrian economics has a precise and distinctive definition — unlike business schools and most business publications, books, and columnists. Among those entities, the term capital tends to be used very imprecisely. You might see sentences like, “Entrepreneurs must ensure they have sufficient capital to get their new product to market”, or “to get to break-even”. Such usages imply that capital is a cash reserve to be “burned off” in the process of launching and scaling a business.

Recently, it has become fashionable to coin terms such as human capital, or brand capital, or relationship capital, or even spiritual capital or street capital. All of these terms are sloppy definitions of capital from an Austrian point of view.

And it’s important to note that capital is not the same as capital goods, which are “produced means of production”. Capital is not a means of production, it is a consequence of production.

What, then, is the precise Austrian definition of capital?

On the E4E podcast #87, Professor Matthew McCaffrey gives us this definition:

Capital is the monetary value of a business’s claims to income. This includes all of its marketable assets, whether they are tangible or intangible. It’s a sum of individual values. These values are ultimately determined by consumers, because the value of a firm’s assets and the value of its income streams ultimately depend on how consumers value the final product. Crucially, capital is distinct from what are called capital goods or production goods, which are the physical goods used in production. Those are also vital for understanding how entrepreneurship works in practice, but they are not capital in the sense in which we mean it.

In summary:

  • Capital is a flow (rather than a stock)
  • Coming into your business
  • From consumers
  • Reflecting the value consumers perceive in your company’s services.

B2B businesses can substitute the term “final purchasers” for consumers if producing goods and services purely for business customers. But it is important to remember that the value of capital always eventually reflects the valuations of goods and services by consumers. The software or professional services your B2B business provides to a business customer will command less of a claim to income if that business customer faces a change in preferences and a decline in market demand from their consumer population. When forecasting future income flows, every business must bear in mind the climate among ultimate consumers.

What are the implications for entrepreneurs and business managers?

  • Flows can be generated via tangible or intangible assets.
  • Consumers’ valuation of services is the key variable.
  • Entrepreneurs must be able to appraise which assets — in which combinations — are generating the flow.
  • The flow can change — even disappear — when consumer preferences change: entrepreneurs must be able to adjust.
  • Large flows can result from a low asset base — and vice versa.
  • Appraisal — predicting future prices and flows — is the vital skill to determine what to invest in, how to organize, and what to produce.
  • Cash flow is the measurement variable.
  • Use cash flow to calculate asset productivity.
  • Update appraisals continuously based on cash flow.

What about capital goods?

  • Capital is NOT the same as capital goods.
    • But capital goods can be generators of capital flows.
  • IF consumers value their output.
  • Austrians stress HETEROGENEOUS capital goods, both tangible and intangible.
    • A jigsaw puzzle to assemble, disassemble, and reassemble in the right combination, based on consumers’ valuations.

What actions should entrepreneurs take as a consequence of the Austrian view of capital?

  • Always focus on the value you are facilitating from consumers.
    • They, in turn, will generate your capital flow.
  • Measure the flow in dollars — especially the trend.
  • Be a master appraiser: know your asset productivity.
  • Set up your assets for flexibility — be fully able to disassemble and reassemble capital combinations.
  • Experiment frequently with different combinations.
  • Become comfortable with continuous change in asset combinations.

Free Downloads & Extras From The Episode

Professor McCaffrey made reference to Frank Fetter’s role in defining capital in his online discussion, “Frank Fetter and the Austrian Tradition in the United States”: View Online Discussion

Professor Peter Klein explains why metaphors like Human Capital are unhelpful to entrepreneurs in his article, “A Note on Human Capital“: View Article

“The Austrian Business Model” (video): https://e4epod.com/model

Start Your Own Entrepreneurial Journey

Ready to put Austrian Economics knowledge from the podcast to work for your business? Start your own entrepreneurial journey.

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