Economic Life After The Corporation.

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Corporations are a major protagonist in the capitalist system. We think of them as the source of the goods and services we accumulate and combine to power our businesses, furnish our homes, enable our communication and mobility, aid our productivity, entertain us, clothe us, protect us, and generally provision us both as businesspeople and consumers. 

When we think of individual items that make up the categories of these goods and services, we often think in terms of innovation: the new iPhone that didn’t exist 20 years ago, or AI chatbots and electric cars, or new clothing styles and fabrics, online shopping with same day delivery, fiber optic cable and cloud computing, streaming video and CRM systems and Quickbooks and run-flat tires. Innovation is the output of corporations.

But corporations themselves have not always been a part of the economy, or central to economic functioning. They were, in fact, a capitalist innovation. Prior to their introduction, in the second half of the 19th century, the more usual form of economics organization was the partnership. This was generally an arrangement of two individuals, sometimes a few more, who came together to collaborate temporarily on a single-purpose business undertaking. The partners typically invested their own money, and did so at one time, since they would expect to finance any future expansion out of the positive cash flow from the business. Mostly, these were small, local businesses although some proved able to generate broader appeal. 

A great example is Josiah Wedgwood, who, along with his partner Thomas Bentley, established his company as a leader in pottery, producing innovations such as creamware and Jasperware (often in the distinctive shade of Wedgwood Blue). The company had an international clientele, including Catherine the Great of Russia and the Queen of England, as well as a large base of affluent households as customers. But the partnership was not a corporation and it was never a big business. 

With the introduction of the limited liability corporation, new vistas of scale and scope emerged. Indeed, the mass production, mass distribution, mass marketing businesses of the late nineteenth and early twentieth century required the new corporate structure to make them possible. The new corporations could recruit investors widely when investors knew that their liability was limited to the amount of their investment. Eventually, stock exchanges, funds and investment clubs would become institutional supports for the growth of large corporations. The emerging corporations could contract with each other for scale implementations never before dreamed of – Standard Oil contracting with railroads to bring affordable illumination in the form of kerosene to every household in America, and Carnegie Steel (and eventually US Steel) contracting for ever more technologically advanced steelmaking equipment to raise the quality and lower of the price of steel for the construction boom across the US. The corporation was an emerging benefit for customers and consumers throughout the world economy.

But all systems can decay. Science calls the process entropy – the leakage of productive work in the form of waste and the loss of clear direction and defined purpose. In the case of corporations, we can detect several forms of entropy. The first is found in their management systems. The corporations were founded by entrepreneurs, purpose-driven individuals aiming to serve the needs of customers and receive the market’s rewards for doing so. These entrepreneurs found that the new scale and scope of operations they had brought into being required a lot of co-ordination that they could not oversee entirely on their own, so they invented management (e.g. supervisors to oversee workers) and specialized departments (e.g. for construction, operations, marketing and sales, accounting, and so on – individuals focused on specialized tasks via division of labor).

After the entrepreneurs passed on and the managers took over the reins, they transformed management systems into command-and control systems. The goals became prediction (planning and projecting business outcomes in advance), precision (no surprises), and power (coercive and administrative sway over the behaviors of employees). These command-and-control systems were dominant in corporate management in the twentieth century.

These systems, in turn, bred three more distortions of the corporate form. The first is bureaucracy, the mechanism for corporate control. Bureaucracy is not externally focused on production for customer value, but internally on control via compliance and procedures, accounting, regulations, and process management. One of the outcomes is that bureaucracies spawn more and more of the jobs and methods of control, to the point where researcher David Graeber (a professor of anthropology at London School of Economics) coined the term “bullshit jobs” to describe them: jobs that have no point implemented by individuals who recognize them as pointless and totally lacking meaning and purpose.

The second distortion takes the form of entanglement with government. This phenomenon was greatly accelerated by the war economies of the First World War and the Second World War. In these periods, government took it upon itself to allocate resources in the economy to serve war purposes rather than customer needs. One of their methods was to appoint “czars” for munitions production and the production and distribution of supplies for the armed forces, and to import CEO’s and senior executives from the private sector to put them in the czar role with command power over the productive firms in the economy. After the wars, the executives returned to the private sector, but their relationship, and that of the corporations they managed, with government had been irreversibly changed. Corporations now found that they could benefit from government protection via regulations, tariffs and laws, and actively sought them in return for considerations such as political donations, subsidized research and construction contracts, and mutually designed policies. Companies like Amazon, Microsoft and Palantir are entangled with government via their contracts for developing government IT and security and AI systems. Banks accept government subsidies and bail-outs. GM was another that accepted government funds and conceded greater compliance. The separation between the private and public sectors is no longer clear.

The third distortion can be encapsulated in the concept of financialization: the financial sector of the economy (what Americans often call “Wall Street”), which corporations initially utilized productively to fund R&D, internal investment and innovation, becomes an extractive, counter-productive and quite dominant influence, eclipsing the productive sector. Corporate priorities shift to financial quantification and away from the purpose of fulfilling the qualitative needs of customers. The financial sector demands predictable, consistent earnings on a quarterly horizon, compromising the investment firms must make in longer-term projects that may not have a pay-off for years rather than this quarter. Firms use stock buybacks to transfer their profits to hedge funds and institutional shareholders rather than fund current innovation projects. Financial markets prefer cost-cutting and budget control to meet quarterly earnings targets over creative innovation. 

These three distortions of the corporate form will lead to a much different economic landscape in the future. Today’s landscape is dominated by the major global corporate entities and their supply chains, and the financial structures that support them including not only stock markets but megabanks, giant pension funds, hedge funds and corporate finance behemoths like Goldman Sachs. Here are three vectors of change.

  1. The ascendancy of the dynamically flexible network.

Customers drive markets. They identify their own needs and then evaluate all the alternative ways of meeting them, ultimately selecting one or more as the best alternative(s) while continuously remaining open to the next new alternative that emerges from the churn of market dynamics. Increasingly today, customers have the option and ability to sort through all the possible business connections to find the suppliers and partners they prefer. They can close off one connection and switch to another and build a customized, dynamic network. Some of the connections may be to big business, but, increasingly, they will be able to connect to innovative new small and emerging firms with novel solutions. They’ll be able to shape these novel solutions to meet their own distinctive needs. The result will be a flatter network of small to medium-sized firms, highly specialized in serving customer needs, interspersed with a few big businesses providing relatively undifferentiated utility services.

  1. A new relationship with financial markets.

The conceptual size of the statistically dominant corporations today is inflated by their relationship with stock markets. It’s convenient for investors and money managers and CFO’s to bundle multiple businesses together in a single stock. Berkshire Hathaway is the poster child. According to Liberated Stock Trade Berkshire Hathaway owns 65 distinct companies divided into a complex web of over 260 subsidiaries. Why? So as to trade Berkshire Hathaway as a single stock. Amazon, Google, and Microsoft are, to a large degree, similarly structured: they operate multiple businesses under a single brand and stock umbrella. They are financial brands rather than operating brands.

Yet stock markets are no longer fundamental for the capital needs of the largest companies. Investors are trading the stock, but the companies are not raising new capital there. They’re actually pumping capital out of the corporation into the coffers of investors via dividends and stock buybacks. Stock markets are drains on the economy’s productive investment in innovation. They serve the interests of the financial sector not the productive sector. Over time, they’ll become less relevant as corporations fund R&D from free cash flow or from private sources other than stock market investors.

  1. A rise in entrepreneurship

Bureaucratization and financialization exert a significant brake on innovation in large corporations. The cost of innovation has gone up for corporations – the cost in time and administrative burden, as well as the sheer deadweight of size that compels the undertaking of larger and larger projects to move the behemoth’s needle. The opposite is true for entrepreneurial projects in smaller and more nimble companies. The cost of entrepreneurship is coming down in small and medium size businesses. Without the bureaucratic overhead, small and medium businesses can quickly experiment with new value propositions, test and explore with real customers, respond to feedback and expand and grow agile new businesses and brands quickly. The cost of operations is greatly reduced by the advent of AI and plug-in supply chains from the Internet. A new business can be tested, launched, expanded and made profitable before the large corporations have completed their budget meeting.

These three shifts will not herald the end of the presence of the corporation in the economy, but will relegate corporations to a subsidiary, residual role.

Customers don’t have problems to solve. They have imagined futures that are better than today.

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One view of how businesses succeed is that they solve the problems that people need solving. That’s the “jobs to be done” school of thought, popularized by Clayton Christensen and embraced by many others. This school of thought pictures people’s lives as being full of problems, and the role of entrepreneurship and innovation as fixing them.

Do consumers buy a subscription to Netflix because they have the problem of being bored or repulsed by alternative content? Do startup companies buy cloud services from AWS because they have a computing problem to solve? Does Mom buy frozen dinners to solve the problem of what to feed the kids?

No. It’s the wrong mental model – the wrong way to think about the demand side of economics and the role of businesses in our lives. The energy of economic growth derives not from the negativity of thinking about problems but the positivity of thinking about opportunities for betterment. The capitalist business system is powered by customers’ imaginations. They see the possibility of a better future, a set of circumstances that is different from and preferred to the current state. They imagine this desired state, not so much as a set of features, but as to how they will feel in it. Today’s circumstances may be fine, but there’s always that inner voice that thinks, “Things could be better.” When it’s really important, “Things that matter to me could be better.”

It’s purely an act of creativity. It’s what social scientists call “counterfactual”. People are imagining a future that doesn’t yet exist, yet they can conjure up the future feeling in their mind. There might not even be the possibility of it existing today, because it requires an innovation to bring it about. How brilliant is that? It’s the same level of imagination that Einstein employed to think about relativity and  Niels Bohr used to think through quantum physics, when relativity and quantum theory didn’t yet exist.

It is cognitive acts of counterfactual imagination that drive civilizational advance, the unrelenting seeking of human progress. And the same counterfactual imagination drives commercial innovation, from the iPhone to new flavors of breakfast cereal. Things could be better. Our phones could cease to be tethered so that we can talk on them while walking. They could cease to be clunky so that we can enjoy the elegance of design. They could help us do multiple tasks so that we can carry one device instead of many. Users didn’t invent these functions. Users made them possible by imagining the world as a better place – more convenient, more amenable to our preferences for convenience and speed and aesthetics. By being open to new value propositions, users bring new value into being. 

The other face of the customer’s imagination of future value that’s better than today’s is entrepreneurship. Entrepreneurship is the business function that turns the customer’s imagined future into commercial new reality. Entrepreneurship is the second stage of innovative genius, the stage that responds to the customer’s initiation. Entrepreneurship is the imagination of not just the future feeling of satisfaction that the customer feels, but also of the product or service or proposition that delivers the satisfaction. Entrepreneurial imagination becomes more and more substantive over time. It starts with an idea – “what if we were able to….” – that’s framed in an incentive: there could be a significant economic reward from the customer if we are successful in realizing the idea as a deliverable product or service. The process moves from idea to concept to some kind of early-stage artifact (the sketch on the back of a napkin) to prototype and MVP and test market. At every stage there’s a check-in with the customer who is imagining a better future: is this idea / concept / artifact / prototype / MVP aligned with your imagination? Is this what you were thinking? (Because, of course, they don’t “know” what they were thinking. What they had in mind was an abstract desired state. But when prompted with an artifact, they can respond – yes, that sorta/kinda points in the right direction. Such encouragement is sufficient to fuel the entrepreneurial development process.)

There’s an ultimate test of the alignment of the new value proposition with the imagined future state. It’s willingness to pay. If the customer is willing to make an exchange of something valuable to them – usually money or some derivative of money like a credit card payment, but also their time and effort – in return for the new product or service, it must, by definition, feel to them like it will bring about their imagined future state, or at least part of it, or, at the very least, provide a useful test of the viability of reaching that desired state through commerce.

People buy Tesla EV’s. Businesses buy AWS cloud computing services and harness Microsoft’s AI tools to help them succeed. These are all innovations that stimulate the customer’s imagination of a better world – an emissions-free transportation system that counters the trend towards climate change; a world of easy access for all businesses to the most advanced and robust computing power; a world of new learning and experimentation. These are all imagined first by customers – “these things that matter to me could be better” – and then by entrepreneurs in response. It’s not a linear progression, of course. Perhaps the first act of imagination that ultimately led to EV’s was the thought that air pollution from tailpipe emissions is unpleasant. That meme becomes a vector in a complex system where EV’s emerge from an unfathomable number of interactions and consequences and further interactions and new experiments and news cycles and conferences and scientific advances. We can’t untangle it. Reductionism no longer applies. There’s no cause and effect. But EV’s wouldn’t happen without customers imagining a better world in the future.

There’s no place for management any more. What will replace it?

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The Drucker Forum has put out a call to management scholars, executives and consultants to “reframe management”.  The existing management model that dominates today’s business practice and education – Drucker Forum calls it the “inflexible machine-management model” – is at odds with today’s complex and unpredictable world. Therefore, they propose, let’s replace this model with another, “The Next Management”.

A more appropriate step would be to recognize that management as a concept is no longer needed and no longer valid. There should be no “management”, whether the old model or a new one. When business sensed the need for management as a rational approach to bring order to the new scales of mass production, mass distribution and mass marketing that the Industrial Revolution made possible, the science of complex systems had not been formalized. This science, specifically the science of complex adaptive systems or complex evolving systems is genuinely new. The business world didn’t have its insights and findings when management was invented. They had Newtonian physics; economics aspired to be like physics; and management looked to economics for initial guidance. 

We now have the opportunity to learn from the latest advances in systems science.

Business firms, industries and economies can themselves be viewed as a member of a class of complex evolving systems. Evolving systems display these three attributes.

1. They are composed of numerous diverse and interacting components that have the potential to combine in vast numbers of different configurations – a multiplicity of emergent structures. It is impossible to predict the configurations that will emerge, which will be successful, which will survive and which will die.

2. The multiplicity of new configurations is autocatalytically generated, simply from the interaction, combination and recombination of the components. More firms are born than survive, more projects and business models are created and tested than actually persist and become established.

  • The term autocatalysis introduces one of a number of related principles from systems science that are fundamental for emergence: self-organization, autopoiesis, self-creation. They all relate to the idea of evolution: that there is constant endogenous change that has its own energy and can’t be stopped or even influenced by exogenous forces.

3. In the multiplicity of new emergent configurations, as in evolution, there are winners and losers, those that survive and thrive and those that don’t. Winners are established through a process of selection. Configurations are preferentially selected based on function (sometimes referred to as fitness, as in fitness for a purpose).

Among business firms, the function that is selected is the creation of value for customers. The market is the selection mechanism, through customers’ willingness or unwillingness to pay for value.

The functional capacity for value creation is determined by functional knowledge – knowledge of what actions are advantaged in value creation. There is actually a scientific law in play: the law of increasing functional information, that the system will evolve (its functional information will increase) if many configurations of the system undergo selection for function. Firms are knowledge building systems utilizing experimentation to generate new knowledge.

Therefore, the function of “management” – which can be thought of as an arrangement to attempt to bring developmental order to a firm, making the results it achieves more predictable and controllable – is replaced by experimentation, a number of concurrent trials, tests and bets with no attempt to predict or control outcomes since no predictability is conceivable. 

There’s an equivalent in economics, which is entrepreneurship: action under absolute uncertainty. Entrepreneurship is a mindset of imagining multiple possible futures and setting in motion a selected set of experiments from which one of those futures will autocatalytically emerge through the mechanism of creating value for customers, a value that is unpredictable from the entrepreneurial perspective because there is too much swirling change in the evolving ecosystem for any prediction or estimation.

Management as a rational approach to bring order has no role to play. Decision problems are no longer well defined, and therefore not amenable to rationality. The challenge is to translate knowledge and expertise into new experiments, without predicting how they will work or what the payoffs might be. This challenge can’t be conceived as management in any form. Entrepreneurship is the method to establish new starting conditions for new value creation, and market selection will take care of future allocation of resources between winners and losers.

Value Geeks

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What is The Geek Way? Andy McAfee has just released a book with that title, in which he writes about the organizational culture of modern business firms who have achieved extraordinary results in a short period of time. He’s taking about Netflix and amazon and Microsoft and Apple and their Silicon Valley neighbors. These are all tech firms, but McAfee is not focused on the technology behind their products and services, but on the culture and mental models of their organizational setup and their managerial practices.

He calls their approach to organization and business “The Geek Way” as a device to separate their thinking from that of the typical business school where it is believed that study and analysis by wise observers can deliver some general propositions about how to run a successful business. Geeks believe the opposite: that there are no generalizable propositions and that learning does not come from others but from within oneself and within the firm. It’s cultural.

Geeks focus on a narrowly defined subject matter, and then dig into it deeply with insatiable curiosity and love of experimentation. They’re not pre-committed to any outcome of their experiments and they certainly don’t concern themselves with conventional wisdom or majority opinion. They go wherever their inquiries take them

McAfee’s book is about management geeks. Discarding conventional business school teaching about how to manage firms, the geeks the author studies think from first principles about how to manage the new firms that have emerged in the digital era and which don’t seem to conform to industrial age thinking about command-and-control management structures, hierarchical organization and business planning. The new age companies flow. They’re not managed.

McAfee proposes that there are 4 guiding principles for management geeks: speed, ownership, science and openness. Speed refers to speed of iteration – the capacity to run lots of experiments that can be quickly mounted, analyzed, interpreted and used as design feedback for the next version, next step, or next move. Ownership refers to the removal of bureaucratic barriers to rapid decision making – distributing both authority and accountability so that the right individual can make – and own – a decision without running it up too many flagpoles or organizational hierarchies. Science refers to the determination of good and bad ideas through the scientific method of falsification. A good example is an A-B test: rather than making a decision about red versus blue as a color choice, run an A-B test with customers and let the response data point to the better choice. It’s better than HiPPO – the highest paid person’s opinion. Openness refers to bringing all opinions and arguments for and against any proposition to the table without any deference to hierarchy or supposed expertise. Argumentation rather than consensus is the method to get to agreement on how to proceed. Once the argument is resolved everyone moves on in unison.

The problem with the Geek Way that McAfee describes is its introversion. Geeks tend to be introverted, unconcerned with the opinions and preferences of others and entirely concerned with their own projects, their own firms, and their own technology platforms. But that won’t do for business success. 

The purpose of business is to create value for customers. Those who work at building and growing a healthy business need to be Value Geeks not management geeks. To do so requires an extroverted approach – always looking outwards to the customer and the market, listening to customers’ hopes and concerns, translating the signals that the market sends, and turning them into ideas and projects for new and better ways to provide value in response.

The algorithm for Value Geeks is different than the one for management geeks. The four guiding principles are:

Empathy – the number one mindset and most important skillset for value geeks is empathy, the ability to identify the customer’s mental model of a desired state compared to their current state, and to be able to think like they think when ideas and propositions are run through that mental model. Value geeks can’t feel what customer’s feel – that’s a false claim for empathy – but they can simulate how they think and the implied consequences for choices they will make in the future.

Creativity – via empathy, value geeks understand customer dissatisfactions, what customers are uneasy about in their current circumstances, what they think could be better in the future or under different circumstances. But customers can’t invent new solutions; they’re not the innovators. How do innovative businesses create new value and new solutions? It requires creativity, that magic, unpredictable leap of imagination to a place that no one’s gone before. Value geeks prize creativity above all, because it holds the promise of novelty and surprise, the keys to new value. Will every creative idea be a winner? Of course not, so value geeks test and probe and experiment to add more substance and certainty until one of them is ready for market. But it’s creativity that is the essential ingredient to get the value process started.

Value Propositions –  the form of the experiment to test for market acceptance is the value proposition, a promise to the customer that a product or service or experience proposed in a business offering will deliver a benefit that the customer will value. A value proposition incorporates the idea that the business listened to and understood the customer’s needs, creatively translated the customer’s signal into an innovation, and is humbly offering it for customer evaluation. A value proposition is an exquisite act of design and a persuasive act of communication, a promise that entices and a promise that is kept. Value propositions are creative art and delivery science, offered with the humility of hoping to get it right while ever-willing to improve.

Learning – value is a process, a learning process. For the customer, it’s the process of identifying, selecting, purchasing, using, experiencing and evaluating. The customer can’t know exactly what the experience will be in advance. They learn, and they evaluate by comparing actual with expected value. Similarly, the business making the value proposition is learning, too. They learned enough about needs to make a responsive design, and they subsequently learn from the customer’s evaluation of their experience how accurate the design turned out to be, and how to improve it if it’s off-target in any way. Learning is accomplished through open recursive feedback loops from the customer to the business. Value geeks welcome feedback and seek it out at every point in the process because they love to learn. Learning is fuel for value.

Empathy, creativity, value propositions, learning. These are the 4 guiding principles for that make up the value geek way. 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Why Study Economics?

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

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

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

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

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

More entrepreneurship.

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

Production before consumption.

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

Less quantitative, more qualitative.

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

Less economic policy.

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

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