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A Radical New Vision Of Value Creation And The Value Roles Of Consumers And Entrepreneurs From Professors Bylund and Packard.

Hunter Hastings:

Mark and Per, welcome to this somewhat experimental edition of the Economics For Business podcast. Experimental in the sense that we’re going to have a three party discussion for the first time.

Mark Packard:

Hey Hunter. Hey Per.

Per Bylund:

Hey, thanks for having me, Hunter. Good to see you again, Mark.

Hunter Hastings:

With the occasion of having you both here at the same time is the recent publication of a coauthored paper, it’s called Subjective Value and Entrepreneurship. And it really advances and changes the thinking and logic regarding the implications of subjectivism for businesses, for entrepreneurs, it changes how we define value creation. It changes how business schools are going to have to teach value creation, it changes how firms are going to think about their business models, it changes how product engineers are going to think about product design. It really is a big breakthrough, I think.

Hunter Hastings:

So let’s start with I don’t know whether to say subjectivism or subjectivity, you’ll tell me Per, but it’s based on a area that we’ve covered before about value centricity. It’s subjectively experienced by the consumer, and therefore any entrepreneurial business action, whatever it might be, must be viewed through a lens of consumer subjectivity. So wouldn’t you start us off Per with the overview of what you and Mark mean, when you talk about subjectivity in entrepreneurship.

Per Bylund:

Sure, it’s not actually very strange for listeners to the Economics For Business podcast, because we’re saying pretty much what we’ve been saying here on the podcast for a while, namely, that subjective value is the direct experience, sort of good feel that you get, the emotions, everything that you directly experience as a consumer in your consumptive action.

Per Bylund:

Whereas what we’re doing in the paper is really reacting to how… There have been steps taken in the direction of subjective value, but they’re not exactly recognizing value as subjective, what they’re doing is rather seeing that… They’re assuming that value exists out there, in some form or another. And that we have different views of it, that we see it differently. And some of us can see some of them perhaps, but none other values.

Per Bylund:

Whereas what we’re doing in this paper is taking the full step and saying that no, value is your personal experience. It doesn’t exist in any other way. So it is, whatever it is for you personally.

Hunter Hastings:

So one way of just explaining the terminology, as we say, value exists in some way that would be objectifying it and you’re saying, we can’t do that. It’s entirely subjective.

Per Bylund:

Exactly. Yeah. It is your emotion, it is your feeling, it is your experience. And that’s end of story. That’s it.

Hunter Hastings:

Good. And so if we look through that lens to identify some of the applicability to businesses and firms, then let me start at the, what I call the point of the spear Mark, you say value is created by consumers, and not by businesses or entrepreneurs. And that’s the big non breaking statement at the outset. Business schools claim to teach value creation, but it bears no resemblance to that.

Mark Packard:

Yeah, it’s certainly not what’s normally taught in business schools. But to be clear, Per and I, and I think others of the Austrian School, we typically shy away from the language of value creation, we define value essentially, as benefit, an increase in individual well being.

Mark Packard:

So in this sense, value isn’t really created, it’s experienced by consumers, there’s no value if a consumer doesn’t experience it. If you have a product on your shelves, that is collecting dust, that product is not valuable, because no one has experienced value from it. And also, as Per was just saying, value is highly subjective. And it’s not just idiosyncratic, which means that it’s unique to every individual. It’s not even objective in any sense, it’s experiential. And that means that it’s different for everybody. And it’s dependent on your conscious view of and understanding of that value.

Mark Packard:

So everyone’s experience is different. We experience things differently. We have different physical and psychological and emotional makeup that puts every experience in an individually unique context. So value is never the same across individuals. It’s always unique.

Mark Packard:

So yeah value emerges or is experienced by consumers on the demand side and not on the supply side, it doesn’t emerge on the supply side, nothing is truly valuable ex ante. A resource doesn’t have value. A resource may be valuable to us or we might value a resource because we predict that it will contribute beneficially to one of these consumer experiences. But at that point, it’s only a prediction.

Hunter Hastings:

So pushing that a little bit further with value as an experience on the consumer side, you’ve talked about this before, but you repress it in the paper a little bit. It’s not even a one time experience, we can’t even narrow it down to that. It’s a process and more specifically a learning process. So take us through that, again, as you do in the paper, Mark, the implications of value as a process?

Mark Packard:

Yeah, I think this is a fascinating point, our lives and our whole human experience is this never ending value learning journey. Everything we do is toward a higher valued state, whether it’s production so that we can consume, or if it’s consumption, so that we can realize those benefits that we’re trying to get. But we don’t innately know precisely what we need, or even should want to make us as well off as possible.

Mark Packard:

From the moment that we’re born, we start searching for solutions to our pains, and our dissatisfactions. And we keep learning what to want and what not to want through our firsthand and secondhand experiences. And we keep changing and the world keeps changing. And there are new solutions to new problems. And until we reach what I call the Nirvana equilibrium, which we never will, where we’re perfectly and perpetually in a state of perfect euphoria, then we’re going to keep searching and keep learning and trying to resolve those remaining dissatisfactions.

Hunter Hastings:

And one of the ways you express in the paper Per that learning process, the consumer goes through is that they suffer from or they experience value uncertainty. So we often talk about uncertainty, and we tend to think about it on the entrepreneur side. And we’ll get to that in a second. But the consumers got uncertainty, too, they can’t know, at the point of purchase, or even at consumption, whether they’re going to experience value. So take us through the implications of that for the consumer.

Per Bylund:

And I think we all have the experience of buying a product and then being disappointed with how valuable it actually is, or how useful it is. And maybe we bought something and it sort of bought the idea of us being different people or it propelling us into a different career trajectory, or whatever or maybe it’s just a simple meal at a restaurant where we think that, “That sounds really great. And I’m going to try that.” And it’s not really all that satisfying.

Per Bylund:

So even when we have the product in front of us, and we can sort of extrapolate and guess what that good might do for us, we have an understanding or an idea of, and can imagine what it will get us and the experience we will get from it. But it doesn’t necessarily mean that, that is the experience we actually get from using the product. And that’s the uncertainty. So the more you have tried, the more experience you have, then probably you’re better at guessing how good that product is for you.

Per Bylund:

So what Mark mentioned in the learning process, that when you start out as a toddler, you don’t know a whole lot about anything. So you’re trying everything pretty much. But as a grown up, you know to stay clear of certain things that you don’t like very much, and so forth. But the problem is always a new product, a new good, a new thing to use that we don’t know exactly how this is going to satisfy us, even when we buy it.

Per Bylund:

And this of course translates to a huge problem for the entrepreneur because the entrepreneur needs to tell a story and sort of inform us of the possibilities and the value experience that we might get from the product, which is of course different for different people. But that’s why you have marketing and commercials telling a story and using pictures and colors and music and so forth to sort of convey to us as potential consumers that there is potential for value here.

Per Bylund:

Then the question of course is first do we believe it and then if we believe it, is it actually the case for us. So this, of course, goes back to the entrepreneur’s ability to sell us something more or sell us that service again. So when we go to a restaurant and we’re served a meal, and it was sort of poorly carried out, it wasn’t all that tasty that it looked like or whatever, we tend to not go back there.

Per Bylund:

So the entrepreneur’s problem is not only providing us with a good in the story, but also making sure that, in a sense, help us with a value uncertainty. And they can’t of course, because it’s our personal experience, but not lying is a good first step.

Hunter Hastings:

Yeah. And then just sticking with the consumer for a second. One of the props or tools that they use to do this evaluation work, you say is relativity, relativity of potential one satisfaction, I.E. they can at least go through the cognitive process of comparing the value proposition that’s in front of them with alternatives, and perhaps previous experience, you call it relativity marketing. That was your word. Can you explain that for us?

Mark Packard:

Yeah, that’s right. So everything that we value, we value relative to our opportunity costs, and actually more specifically to the alternative solutions that we typically use to satisfy that same need or needs as we understand them. So in other words to use Per’s example of the restaurant if I’m thinking about going out to eat for dinner, the value of a sushi place is not just relative to my valuation of other sushi joints.

Mark Packard:

It’s also relative to burger joints, and pizza joints, and steak houses and Indian food and seafood and everything else. It’s relative to all the other options that I have to satisfy that need. And you still have to go further than just these other restaurants, it’s also relative to the option of staying home and doing it myself, cooking my own meal. All of these options are available to me for the satisfaction of that hunger need.

Mark Packard:

And so I have to pick which is the best use of my time and money, for example, cooking at home saves me money, which I can use for other satisfactions, so to go out to eat, I have to give up those other satisfactions. But cooking at home also means I’ve got to clean up and do the dishes, which I also hate. So it adds an additional satisfaction component to that satisfaction experience, satisfying the hunger.

Mark Packard:

And so when you think about it, our minds do a remarkable amount of calculation when we choose and make these decisions. And most of it we do by instinct, which is pretty remarkable.

Hunter Hastings:

Yeah, I’ve got a picture of that going on inside my head every time I make one of those decisions, as you say, it’s pretty remarkable. Just as a sidebar, you did differentiate a little bit in the paper between consumers wants, and consumers needs. And I do personally get a little bit confused with that Per. So can you explain the distinction as you’re presenting it in the paper and how it might affect entrepreneurs thinking?

Per Bylund:

Sure. And Mark was sort of getting at that a little bit in his answer just a minute ago now. In the paper, we distinguished between a want, whatever is something you want, in a sense, it’s something you intend to use for satisfying whatever lack that you have, where I say need would be the core, sort of almost an objective component to it.

Per Bylund:

So Mark just mentioned the need to satisfy my hunger, which is not necessarily a want for any type of food. And it’s not necessarily a want for a restaurant either. So it’s broader. And this is sort of a little bit of a quibble, we have I think, about the relevance of distinguishing between wants and needs. Where I as an economist think that in a sense needs, it don’t matter, because we’re still acting on our wants, which is sort of an interpretation of how we can eventually get to those needs.

Per Bylund:

Whereas Mark would be more interested in the psychology aspect of it. And I guess we can discuss how relevant it is for entrepreneurs as consumers are still acting to satisfy their wants. But it could help to understand that there is a sort of a physical need behind a lot of products and a core that might be sort of objective that might be the same for a lot of people. I don’t know if Mark want to chip in here and give his sort of psycho analysis version?

Mark Packard:

Well, I will say that I’m right and Per’s wrong.

Per Bylund:

You got that wrong.

Mark Packard:

The way I see it and this goes back to kind of that learning model is that the need is, is critical, just because it is the satisfaction of the need per se that creates the objective experience from which the satisfaction and the experience arises. And so that… It is important to distinguish the wants from the needs, but the wants drive action, but the needs drive the kind of the response, the experience that we learn from and so influence future action. So that’s why I think it’s important.

Hunter Hastings:

So it has to do with consumer uncertainty in a sense. So you’re acting to satisfy a want, but whether that want actually satisfies a need? Well, that’s something you will find out for yourself in the experience. And the sort of discrepancy between the two is a big part of the uncertainty, right?

Per Bylund:

So I think that’s helpful. And I think of it in language, It’s much better if I’m a entrepreneur thinking about solving consumers wants or addressing consumers wants that’s the business I’m in and needs is some kind of higher state that the entrepreneur shouldn’t be thinking about. We use language about needs in a loose fashion that we should say once I think that’s how I interpret it anyway.

Hunter Hastings:

I want to take all of this, stay on the consumer side for a second. And I think what you’re telling is the consumer has work to do. They have this role of evaluating, and they’ve got some tools about relativity and the conditional nature of their decisions. But that’s a value processing task that they have. Is that a good way to think about the consumer’s role here?

Mark Packard:

Is this for me?

Hunter Hastings:

Either one, go ahead, Mark.

Mark Packard:

Yes. Our wants is perilous just explaining or actually predictive evaluations or evaluations, as I call them. That the predictions of value. And so we can imaginatively assess how much value we get from some new value proposition. And we formed once in comparing those imaginations but our value predictions are really fallible and uncertain, again, as Per was saying.

Mark Packard:

So when we consume, we also do what I call an assessment valuation. We reassess, or we assess that value experience itself, relative to our expectations of it. In fact, marketing theory argues that our experiences of satisfaction or dissatisfaction are actually comparisons to our expectations, they’re relative to those expectations. If we expected so much value, we’d be dissatisfied if we got less than that, even if it was actually pretty valuable to us.

Mark Packard:

So our expectations matter quite a bit in our value experiences and the assessment valuation is how we learn from those experiences and what we learn from those experiences? And from that learning, we decide what to want next.

Hunter Hastings:

So one of the ways I interpret that, tell me if you agree is that the consumer’s got a lot of effort here, got a lot of work to do. You say in the paper they have a job to do. It’s a discovery task and an innovation task. And you specifically say the role of value discovery and value innovation is the consumers, the entrepreneur can’t do it, because they can’t observe this evaluation.

Hunter Hastings:

So we’re giving work to the consumer, where I’m going with that is one of the implications for entrepreneurs in delivering convenience is think about that work. How hard does the consumer have to work to evaluate your offering and make it easier for them? Is that an okay way to translate what you’ve said here in the paper?

Per Bylund:

Yeah, I think so. That’s a good way of putting it. I mean, since we are arguing that value is completely on the consumer side and that value is the experience. And therefore that there is some certainty in the value for the consumer too. So this consumer seeks to get the value out of things, but doesn’t necessarily can be wrong. It does mean that for the entrepreneur, what they need to do is in a sense offer something that is potentially of greater value for consumers than other entrepreneurs are offering.

Per Bylund:

What that means is also that entrepreneurs can only get to the point where they facilitate value for the consumer, but whether the consumer actually chooses it, whether the consumer actually gets value out of it, that is really beyond what they can do. So whenever they sell the product, which can facilitate value for the consumer, the entrepreneur is sort of done.

Per Bylund:

I mean, the entrepreneur can, of course, offer service and whatever support might be part of the product as well. But as soon as the consumer has and uses an experiences the product, the entrepreneur can’t really do anything about it. So what that means is, is that yeah, the discovery of what the actual value is on the consumer side, it also means that the consumer might discover and innovate and figure out new ways of using the product, or service and also sort of find completely different uses for what the entrepreneur has delivered. And I think we’ve seen that throughout history and in the economy all the time that it happens when entrepreneurs offer a new type of product or device that whoops, people did not use this as intended, or as the entrepreneur expected.

Per Bylund:

Instead, they used it in a very different way, which turns out that, that’s in a sense, it’s a different product. So the entrepreneur can learn from this value innovation that the consumer is really providing to the marketplace, in a sense.

Hunter Hastings:

So let me try and sum up the revolution on the consumer side. I think it’s really critical, this idea of the consumers got work to do they got a valuation work to do, they’ve got uncertainty they’ve got to overcome. And in my head, I contrast that with the famous Clayton Christensen claim, which is about objectified value, I think that the consumer has jobs to be done and the entrepreneur’s offering can do it.

Hunter Hastings:

And we’re saying the opposite here that the consumers doing the job. And the entrepreneur can really facilitate that. That’s I think, that’s my way of saying what the revolution is, you’re giving much more weight to the consumers role in value generation, than has been the case in the past.

Per Bylund:

Yeah, we’re sort of shifting the boundary between the entrepreneur and the consumer. Whereas traditionally, it’s been the case that the entrepreneur delivers the product, which has the value, and then the consumer just has to use it. And then of course, it’s some weird psychological thing going on whether the person is satisfied or not. And there’s plenty of, I guess, space for the entrepreneur to trick the consumer. And the disappointment is sort of the entrepreneurs fault, whereas the implication of our new boundary between where the distinction between where value happens and where it’s facilitated means that there can be plenty of disappointment in a good or service on the consumer side completely.

Per Bylund:

So the consumer has made a mistake in expecting to get certain value out of a product, but didn’t, there was nothing wrong with the product, the product was exactly as described, but the consumer made an error. So the entrepreneur is not at fault. But of course, it might mean that the consumer is no longer trusting the entrepreneur, and will not buy anything more from the entrepreneur and what have you.

Per Bylund:

And I think what it also does is, it recognizes the larger role of the consumer. What it also means is that the entrepreneur becomes more of a servant of the consumer than was the case before. That, instead of being the guys in traditional sort of entrepreneurship, where you figure out a product, you produce a product, and then you just take it to market and then consumers get to buy it.

Per Bylund:

Instead, it’s your problem as an entrepreneur to figure out what could cause a valuable experience for the consumer, of course in competition with what other entrepreneurs are offering. And then make sure to continue and follow up and help the consumer through through the use of the product and make sure that the consumer gets a valuable experience out of it, which is much harder than it sounds.

Per Bylund:

But what it does is points out that the entrepreneur is sort of in the hands of the consumer, whether the entrepreneur’s successful. It depends on how much he or she helps the consumer to get a valuable experience.

Hunter Hastings:

Yeah, so let’s focus on the entrepreneur side now, we flip to that. One of the phrases I picked up from the paper that really brought it home for me is that what the entrepreneur is doing is producing the means for consumers to use for their desired satisfaction.

Hunter Hastings:

So that’s a very creative way to think about the role of business, I think. You’re producing the means but you have no control over how the consumer uses those means. So all you’ve got is watching, observing and monitoring what the consumer is doing, is that a good way to say it Mark?

Mark Packard:

Yeah, it’s a bit of a paradigm shift in the way we think about business. Again, we’ve shied away from this language of value creation, because value emerges in the experience of consumers. And this means that value isn’t created by businesses, right? The experience might be created by a business, but the value emerges out of the experience. And honestly, even that’s not entirely accurate, because really, it’s consumers who consume, right? It’s consumers who are actually creating the experience.

Mark Packard:

So what businesses do is really just facilitate the opportunity for that experience for consumers. So what we say is and I think this is much more accurate, is that businesses facilitate value experiences that are expected to benefit consumers. And that’s a very different way of thinking about what business’s role is, we’re providing the means, the resources, the tools.

Mark Packard:

And some businesses are experienced businesses, they actually create the experiential environment for the consumer to experience that thing. But it’s the experience that really, ultimately matters.

Per Bylund:

So if I may add to that, I mean, we see some of the errors that come from seeing what the entrepreneur does as value creation. We see those in policy, which are, in a sense, disastrous policy propositions, where a producer of a thing is going to be held accountable for what the consumer does with the thing. That doesn’t make any sense at all when you recognize that no consumers can innovate, they can figure out whatever they feel like and have whatever experience they feel like for that good, whatever it is.

Per Bylund:

So the producer has no influence really over what the consumer does with a product, which is pretty obvious for anyone running a business that when you have made the sale well, if they resort to throwing the tomatoes they bought on people, instead of eating them well you can’t really do anything about that at all.

Per Bylund:

I mean, if you sell hammers, they’re intended to be used in construction work or what have you. Well, someone takes the hammer and bashes someone’s head in, that’s not the intention. But it’s sort of an innovation on the consumer side, not very productive one, but still. So holding producers responsible for what someone might do with a thing. It completely misunderstands what is going on here.

Per Bylund:

And it completely… In a sense it handicaps and undermines the position of any entrepreneur that whatever someone produces, can be used for something terrible, potentially, and something beautiful as well. But whatever the consumer chooses to do with it, it’s out of your control. So you can only try to make it valuable for a consumer, but you can’t really change the consumer’s behavior with the thing, how they use it, and so forth.

Per Bylund:

So I think producers make this error too, not only policymakers, but trying to steer users to use products in a certain way. An example of this would be Apple, for instance, where very often in Apple products, you can use it in one way, but you can’t really change it a whole lot. So unless you use the computer or the tablet, or what have you, the way that Steve Jobs intended and thought was a good way of using it, it’s kind of be a mess trying to use it.

Per Bylund:

And that sort of steering, it has the benefit of simplifying the product, and maybe simplifying the message. But it can also reduce the value that the consumer gets out of it and you can even make the value pretty much zero.

Mark Packard:

I was talking to my parents just the other day about WD-40 and all the things that WD-40 can do. And you know the story of WD-40 is that it was designed for aeronautical equipment, it was to prevent rust on aeronautical machines. But it is a huge product and a huge success because some of those employees took it home and started using it in different ways that it wasn’t originally intended for.

Mark Packard:

And yeah, let your consumers explore and try things with your product and see what they come up with because they can come up potentially with much more valuable uses for what you think it should do than what you think it should do. So, that’s a good point Per.

Hunter Hastings:

It’s the essence of what Professor [Kihani 00:30:44] called a couple of weeks ago, generativity, if you are unfiltered in what you let the consumer do, you’ll be unconstrained in the innovation that comes out the other side. So there’s a exponential potential there.

Hunter Hastings:

So let’s go back to what the entrepreneur can do, they can initiate a value proposition, “Hey, here’s something that I think will serve as the means to you, Mr. and Mrs. Consumer to fulfill your want.” And the wants today and wants tomorrow because of production taking time. And then they can monitor the consumers value experience and get some feedback from that, is that how we define what the entrepreneur can do?

Per Bylund:

Sure, why not? I mean, in a sense, they have to forecast or predict or imagine what could be of value to consumers and provide them with the means. And then seek whatever means of feedback there are in order to learn and just like we talked about, with WD-40, is a great example, that sometimes consumers use it in a much, much more valuable way than you had anticipated. Well, then it makes sense for you to follow up and try to figure out how they’re using it. And you can learn about your product’s actual value, by having a close relationship with the consumer.

Per Bylund:

So it’s not about selling something and then just turning your back and moving on. So any product in a sense, you can learn about the consumer experience. And you can have a relationship with consumers. And thereby realize how you can make the experience more valuable for consumers, maybe you can make a small tweak here and there. And that would facilitate more value for your existing customers or maybe you can make it valuable to a whole new range of customers.

Per Bylund:

I think it’s a little strange to assume that the entrepreneur can figure all this out to begin with. So when we talked about before that you should set place the value first and then the values determines the price that you might be able to charge for the product. And then your role as the entrepreneur is to choose the cost structure that can offer your profit given that your estimation of the price is correct.

Per Bylund:

Well, this goes beyond placing the sale that you can learn and you can continue to develop the product using the consumer’s experience and learning from the consumer how your product is actually valuable. And thereby you can improve your chances.

Per Bylund:

So I think a lot of modern companies recently anyway have had sort of adopted this model without, I guess, knowing exactly why. I mean they probably don’t have a value theory that they’re following. But having like panels of customers, providing feedback and looking at online reviews and things like that, in order to learn more. What did we do, right? What did we do wrong? Where’s the value add in a sense to this experience of our product?

Per Bylund:

And how can we help the consumer realize more value in using and experiencing what we have to offer? And there’s of course a lot you can learn. So you have to be open for that. And especially if you have a new product, it’s not easy to figure out exactly how people might use the product.

Hunter Hastings:

As we try to compose what we’re calling the Austrian business model, I think of it as three V’s and we’ve just covered I think the third one. So I call them value understanding, that’s what you two have been talking about all day, understanding what value is, value facilitation we’ve discussed that in depth. And the third term which might not be the right word, but is the right ideas, value agility, I.E. the agility to monitor the experience, take the feedback, make sure adjustments, take it back, see what happens next, continuous change and improvement. So I’m going to call that value agility.

Mark Packard:

Well, that’s also the on the entrepreneur side. The agility is on the entrepreneur side. But what you’re looking at is really an enhancement of the value experience for the consumer. So you have to be agile to respond to those things, but also to sort of suck in that information that might or might not be available.

Hunter Hastings:

Yep. The three V’s is a business model for the entrepreneurs, hopefully, as we perfect it. So another phrase you used in the paper, I think, Mark we’ll ask you this is that in all of this, the entrepreneur can never know. Never know what the value outcome will be. So just take us there, how does the entrepreneur act in that situation?

Mark Packard:

Yeah, Per was kind of talking about this. But when you think about it in this way that we’ve been discussing, the uncertainties and the difficulties of business become a lot more apparent, and you start to see how business isn’t just production and sales, it’s really about providing consumers with the best means to achieve the best experiences.

Mark Packard:

But again, everyone is different, and their value experiences must be unique. Because we’re also different, and we experience things differently. And this means that consumers will, over their lives, end up with very different value learning processes and conclusions and that means different preferences.

Mark Packard:

And so even if you could know for sure that your product would be subjectively beneficial to someone, it doesn’t really matter what you think, it matters what they think. And so you can’t ever know, what the value outcome will be. But you’re you’re doing the best you can with this uncertain future, with what you have, and you’re making your product as beneficial as it can be. And I’m doing some work on kind of these narratives, we’re painting a picture, we’re telling a story that helps consumers understand how what we’re doing, what I’m doing as an entrepreneur, would help you. And that’s about the best we can do.

Hunter Hastings:

So in the paper, you find another fascinating and important route for pursuing this idea of subjective value and entrepreneurship, and that is the entrepreneurs choice itself to be an entrepreneur, to act entrepreneurially. And you say that they’re not looking for dollars and cents in profit exclusively, there are non monetary rewards and satisfactions from facilitating the satisfactions of others. So I think Per maybe that’s developing a little bit more what Mark said, but take us there, the entrepreneurial choice and it’s subjectivity.

Per Bylund:

Sure. It’s really the same value theory that we’re saying that well, value is the experience you get from something, which obviously is not the dollars and cents that you get as profits, because your experience of that is something else, either, it could be the prestige of becoming rich, or it could be the prestige of being an entrepreneur, but it can also be the getting the means to consume something for yourself. Or it could be just simply being your own boss, or it could be all of these at the same time.

Per Bylund:

So the question for the entrepreneurs is really, why am I doing this, which is not necessarily even related to profit. Obviously, you would need to cover your costs and breakeven in order to continue running the business unless you’re Bill Gates or something. But other than that, I mean, why are you doing it. Most entrepreneurs are probably not in business for just reaping in cash and getting rich. I mean, the data shows pretty clearly that starting a business, it’s not a super way to get rich because entrepreneurs they typically make a little less as entrepreneurs than they make as employees, if you can compare the situations.

Per Bylund:

So it’s the same situation as for the consumer, but the value that you get of something is the experience and how you treasure and how the experience satisfies whatever wants you might have. So it’s wrong to as we often do study entrepreneurship in terms of the profits they make and thinking in terms of just the dollars and cents that you get in and that you sort of put in your own pocket.

Per Bylund:

Because that’s probably not what drives the entrepreneur just like it’s not what drives the consumer, whereas we think it’s pretty obvious for the consumer because the consumer pays cash in order to get the experience. But I mean, the entrepreneur does the same thing. It really is a subjective value world. And the analysis of it should then be subjective value analysis as well.

Hunter Hastings:

So in the paper, I’ve got some language here that I need you to unpack for us, you describe that entrepreneurship as a choice. It’s a contingent voluntary action of goal driven actors. I think I can translate that. And then Mark, you say the entrepreneurs uncertainty is not epistemic, which I take to mean knowledge constraints, which we’ve talked about a lot on this podcast. It’s aleatory if I pronounced that right, it’s randomness. So can you explain those two terms about uncertainty for our listeners in business language? How do I deal with aleatory uncertainty?

Mark Packard:

Yeah, I pronounce it aleatory, but I’m not quite sure what the right… It’s a Latin term. But the difference between what we call epistemic uncertainty versus aleatory uncertainty is epistemic uncertainties are ignorance based, they are things that you can know if you collect enough information. If I toss a die, there’s a one in six chance it’s going to come up a six.

Mark Packard:

But if I knew exactly how that die was cast and all the factors and stuff, it is possible for me to predict exactly what face that, that die is going to land face up. But there are other types of uncertainties that there is just indeterminate, it’s not random, it’s not even happened yet. Right? It hasn’t been determined, like other people’s choices.

Mark Packard:

A lot of things happen based on what other people choose to do. And they haven’t made those choices yet. So we can’t predict those future outcomes, we are waiting for people, including ourselves to make those choices. And so the outcome in that sense is just inherently unpredictable. Doesn’t matter how much data we collect. And so I get a little frustrated when B-schools and just industry experts talk about the promise of say big data, and artificial intelligence in predicting consumers and all this stuff.

Mark Packard:

Because consumers are people, they’re not going to be… They’re not automatons, they’re not computers, they’re not predictable in that sense. We don’t know what people will value in the future. We have to predict it as entrepreneurs, as business people, we have to predict it. But we can’t predict just by collecting more market data. Market research is important. We need to understand our customers and consumers.

Mark Packard:

But we can’t kind of jump in assuming this conclusion is right, we understand our consumers. And so this is going to work, we have to accept the fact that people are unpredictable, that they can change their minds, that they can surprise us. And going in with that mindset allows us to be more adaptive, more agile, as you were saying, and adapt to what they find and what they discover over time. And we can learn from them as we learn ourselves, and that makes this learning process both two-sided. The consumers are learning and we are learning with them.

Hunter Hastings:

In fact, that’s a beautiful phrase that you two had in the paper, you say entrepreneurship is the two-sided navigation of radical value uncertainty. So both sides have radical value uncertainty. In the never ending quest towards higher value states. So that gave me a good feel for the dynamics of it. And it’s a new definition of what entrepreneurs do.

Hunter Hastings:

And if I can pick up on another phrase and Per maybe you can take as long as… It’s a mental journey or process. A series of imaginings, judgments and learning over time. So tell us about that. It’s a journey.

Per Bylund:

Well, it truly is a journey, and in a sense it’s a learning process where you’re trying to figure out and you’re responding to whatever feedback and whatever information that you might come across along the way. The problem of course, is that everything requires your interpretation and your imagination of what it might mean. It’s definitely not as easy as simply looking at statistics and then picking whatever is the most significant variable or something like that.

Per Bylund:

Entrepreneurship is nothing like that. And it’s funny that Mark mentioned that such statistical and big data analysis. I wrote an article before, I think it was on mises.org. Commenting on the Bing search engine, where they had an attempt to using big data to predict who would win in sports games, football and basketball, and ice hockey and what have you.

Per Bylund:

And I looked at some of those results. And it turns out that pretty much consistently they were two thirds right. And then they were talking about a sport where you know a lot of statistics about the players, you know exactly the rules, you know how much time they have, you know exactly their positions, you know the rules, they are pretty obvious, they’re explicit to all the rules. So, it doesn’t actually give you a lot of space for unknowns, because everything is already structured, and it’s clear, still big data could only predict two thirds of the actual outcomes.

Per Bylund:

Even given the historic data on say if the team is having a good streak, or whatever, even with this information, they still couldn’t get it right. And then, of course, trying to use big data to predict what will people value in the future, I mean that’s impossible, what you can do is potentially exclude things that are probably not relevant or exclude ways or routes that are not going to be very helpful.

Per Bylund:

But you still have to base it in your own imagination of what will be the case of your imagination of how consumers will use your product and how they will cherish the experience that they get, sort of empathize with them, placing yourself in their shoes. And of course, learn along the way and learning along the way that journey as we said before, it doesn’t end with placing the sale, it continues, because that’s where you can start to learn about your product, and how consumers actually experience the product when they’re using it.

Hunter Hastings:

So let me wrap up there with a question that’s pertinent for our economics or business project. And you’ve given everything that you’ve just explained and elucidated so much. We’re trying to facilitate more successful entrepreneurship, meaning you can better help consumers to get satisfaction, to experience value, we think of it as a GPS to use your journey metaphor, which is given where we want to go more satisfied consumers.

Hunter Hastings:

Here’s where I am right now. And here are some things you can do to make that journey more accurate and more successful. So is that doable? And the way you’ve just described it? Can we facilitate more successful entrepreneurship? Better two-sided navigation of the process?

Per Bylund:

Yeah, of course. I mean, what we’re talking about here is really facilitating the facilitators of value. And I think, getting your mind in the right place, thinking about these things in the right way. That’s the place to start. And unfortunately, not only do many entrepreneurs, not realize these things, and of course, they don’t have to read scholarly papers or anything like that, but they need to have a proper thinking about how the world works and what they’re actually offering that they’re not selling a valuable product, they’re offering a product that can facilitate value for consumers, which is different.

Per Bylund:

And unfortunately, many business schools are teaching this in the wrong way and using objectivist language and we had a podcast before when we talked about how they’re using analogies from military conquest and things like that. And that’s terrible, that’s not only misunderstanding value, that’s completely flipping everything upside down and putting it on their head because it’s not the case that you’re conquering a market and you’re subduing the consumer, you’re doing exactly the other way around.

Per Bylund:

You’re trying to figure out how to serve them the best way possible. That doesn’t make you a king or a conqueror. It makes you a servant in a sense, and you benefit and serve yourself by serving others. The consumer really is sovereign in the marketplace.

Hunter Hastings:

Mark I’m going to leave you with the last word on facilitating entrepreneurship.

Mark Packard:

I totally agree with Per. I mean, I think one of the tasks or goals of the Economics For Business program and project is to get business people and entrepreneurs to understand economics in a fundamental way. And as Per was saying, the current paradigm in social science, including management and entrepreneurship researches is objectivist view, where you just kind of look at these various factors A, B, and C and see what kind of effects, statistical effect it has on D.

Mark Packard:

And based on that analysis, they say, “You should do A or C, and that’s just not very helpful if you’re an entrepreneur, because you don’t really understand the mechanisms of why. But Austrian economics, this deep understanding of how economics actually works, gives us that why and that helps you to navigate the uncertainties, the dynamics of economic change and process. And that’ll help you a whole lot moving forward.

Hunter Hastings:

Well, I want to thank you both for the incredible work that you do throughout your research and your theorizing, this paper is a particular breakthrough I think. And it’s certainly facilitated a good experience for me, and I’ll do what I can working with you too and everybody else at the Mises Institute to get more and more people to appreciate the implications of it, because I think they’re colossal.

Hunter Hastings:

So thank you both for today. And thank you for the ongoing work and we’ll continue to try to make this as useful as possible for everybody out there who’s listening. Thank you.

Mark Packard:

Thanks Hunter.

Per Bylund:

Thank you.

Mohammad Keyhani: Implications Of Generativity For Entrepreneurship And Strategy

Implications of Generativity for Entrepreneurship and Strategy

Guest:

Mohammad Keyhani

Haskayne School of Business, University of Calgary

[email protected]

 

This article is based on episode 104 of the “Economics for Business” podcast by the Mises Institute (www.mises.org/E4BPod) featuring Mohammad Keyhani in conversation with host Hunter Hastings. This text is a slightly edited version of the interview transcript. The original audio can be found here: https://mises.org/library/professor-mohammad-keyhani-generativity-new-digital-pathway-business-growth

Hunter Hastings

Entrepreneurial businesses employ creativity and ingenuity to serve customers in new and better ways in order to grow. They first choose a set of customers and invest in understanding those customers and their dissatisfactions. They then set in motion a development process to design, assemble, and deliver products and services to overcome those dissatisfactions. That’s the essence of the continuing process of generating value. Increasingly in the digital age, this process is being enhanced or even superseded. On the input side of the business, firms are foregoing the limitations of choosing and targeting customers, replacing that step with unlimited and unfiltered participation. Everyone is welcome. On the output side of the business, firms are aiming to unleash users to generate innovations and new ideas, and to share them, build on them, and improve them further. That’s open innovation. The Austrian underpinnings of this emerging business model lie in the knowledge process theory of entrepreneurship. Entrepreneurs require knowledge of customer dissatisfactions. They need to know what questions to ask, to ascertain these hidden or unarticulated needs. Entrepreneurs need to know the processes of product and service development, including digitization, app design, or hiring the right people, assembling the right resources, and getting the right financing. And when they’ve developed a product or service, they deploy it in the market they’ve previously identified, which by definition is knowledge constrained.

In summary, entrepreneurs don’t know all the questions to ask and problems to solve, only some of them. And they can’t assemble, examine, and test all ideas and solutions, only some of them. The new business model breakthroughs are aimed at escaping from knowledge constraints. What if the inputs from users were unconstrained and unfiltered? And what if the potential outputs of innovation could come from unlimited sources? And what if entrepreneurs could accurately match those unfiltered inputs and unconstrained outputs?

Answering that what-if question today is Professor Mohammad Keyhani, a professor in entrepreneurship and strategy at the Haskayne School of Business at the University of Calgary. Dr. Keyhani is also a great supporter of practicing entrepreneurs by his Entrepreneur Tools website (https://entrepreneur-tools.zeef.com/) which we’ll talk about today, and his Crowdfunding Tools page (https://crowdfunding-tools.zeef.com/) . Professor Keyhani, welcome to the Economics for Business podcast …. I’ll ask you to introduce yourself to our listeners. They can find you on your website (https://www.mohammadkeyhani.com/). You have a deep research interest in entrepreneurship, you teach “Entrepreneurship: The State of the Art” and you teach another course called “Technology for Entrepreneurs.” So please tell us how you developed your expertise in entrepreneurship and some of your focus areas.

Mohammad Keyhani

Very well, thank you. So just some background on me: I’m an Iranian Canadian, I came to Canada to do a PhD in strategic management focusing on entrepreneurship in 2008. And the focus of my research during my PhD, was to try and build on my previous math background because I had an undergraduate degree in math, and I was somewhat familiar with modeling and simulation work. So I sort of leveraged that to look at the economic foundations of entrepreneurship. Interestingly, when I looked at what it is that the literature calls the economics of entrepreneurship, or economic foundations of entrepreneurship, I was pointed in the direction of Austrian economics as a school of thought. But surprisingly, there was very little modeling in that literature. And I later learned that it was sort of a conscious methodological decision by most Austrian economists to avoid mathematical modeling to the extent possible. Not that they don’t do any of it, but it’s just done very little in that field. So I attempted somewhat of a heretic move in that I said, OK, I’m going to engage Austrian economics, but I am going to model it mathematically with simulations, and that became my PhD dissertation.

I build on that work when I teach the PhD seminar at our school (Haskayne School of Business, University of Calgary). We have a PhD program in entrepreneurship, and I teach that course “Entrepreneurship: The State of the Art,” as sort of a review of the entrepreneurship literature to our PhD students. I have divided the course mainly based on various disciplinary perspectives, including economics of entrepreneurship, psychology of entrepreneurship, sociology of entrepreneurship. But of course, my own PhD research was very much the economics of entrepreneurship.

The other course that you mentioned, I’m teaching “Technology for Entrepreneurs.” It’s an undergrad course, but it’s more representative of the more recent research that I’m doing. I can’t really describe it as the economics of entrepreneurship, but the work that I did on the economics of entrepreneurship is very much informing the work that I’m doing on the various technologies that entrepreneurs are using right now. It’s been an insightful effort to link my previous work to this new line of work that has been interesting me. I’m generally very much a technology enthusiast and follow the all the latest developments in software technology, and that’s sort of what’s got me into this new line of work.

Hunter Hastings

Thanks for that background. Just as an aside on Austrian Economics, I’m not an academic so I’m no expert but I certainly get the impression that the school is coming around to modeling through complexity theory. That the kind of computational modeling—simulation as you referred to it—that you can do when you come through the lens of complexity theory opens up some modeling pathways for Austrians that maybe they didn’t have before. I know that Todd Chiles said that Austrian Economics is a strand of complexity theory, and people are developing that theme I think. Does that sound right?

Mohammad Keyhani

That’s certainly what I have argued and others as well. There’s a famous paper called “Was Hayek an ACE?” with ACE meaning Agent-based Computational Economist. And I have a paper more recently in the Strategic Entrepreneurship Journal (https://doi.org/10.1002/sej.1311) arguing for why simulation methods are compatible with Austrian economics, and how they incorporate the various aspects of dynamism, subjectivism, uncertainty that the Austrian School prefers, and that were mainly the reasons for why the Austrian School rejected closed-form mathematical models. I argue that simulation methods open that up, as others have argued, but I base my arguments mostly on what I was able to do with my own simulations. But yes, I think that is an opportunity. I’m not seeing that many Austrian papers being published with simulation methods yet, but I do sense a bit of a shift of thinking in the sense that there’s more of an openness to it. And I think if that openness wasn’t there, I wouldn’t have been able to publish my simulation papers. I think the openness is increasingly there to explore how simulation methods can advance Austrian theory.

Hunter Hastings

Well that’s a subject for a future conversation professor, but today we were going to talk about another area of business modeling that you have opened up and are a leading thinker on, and that’s generativity. The generative product or generative service. That’s going to be our theme today. It’s got a lot of promising implications for entrepreneurs. Can you start by telling us what generativity is? Defining generative with regards to businesses and business models?

Mohammad Keyhani

I think one of the most common definitions of generativity comes from Jonathan Zittrain, who’s the main person who has expanded and put forth this theory of technology generativity. His perspective of course was from a legal scholarship perspective because that’s his field. But he defines a generative system or the generativity of a system as “a system’s capacity to produce unanticipated change through unfiltered contributions from broad and varied audiences.” This is a variation of his definition from a couple of years earlier which is “a technology’s overall capacity to produce unprompted change driven by large varied and uncoordinated audiences.” So that’s typically taken as the definition. But there’s other ways to approach the understanding of generativity and one is through the particular characteristics of generative technologies as Zittrain outlines. In his book “The Future of the Internet and How to Stop It,” he outlines five different characteristics which were:

  1. Leverage: how extensively the technology is able to put its various functions to different uses.
  2. Adaptability: how much it can be adapted to different tasks.
  3. Ease of mastery: how easily people can understand it and use it.
  4. Accessibility: how easy it is for people to access it.
  5. Transferability: how any changes to the technology can be transferred to someone else so that other people can build on what previous people have done with the technology.

Zittrain talks about these as characteristics of a technology. But I think from a business perspective, we very much can view these as characteristics of products. There can be products that are more or less generative compared to competitors or compared to other products. Zittrain doesn’t have a very product-oriented view to this, but I think it’s just a very natural step to think of products as being less or more generative.

Hunter Hastings

Maybe we can go to that product level and talk about the features and benefits. This is the language with which we think about products and services, and maybe you have some examples that could illustrate that.

Mohammad Keyhani

Zittrain mentions this in his book, that the main things that identify generativity are the increase of participation as an input, and the increase of innovation as an output. So participation as input, innovation as output. There’s existing literature on how firms and companies can benefit from increased participation, because everyone recognizes that not all valuable knowledge is within the company. And so there’s this whole literature on open innovation, methods like crowdsourcing, and that sort of thing. It’s, it’s long been recognized that there’s benefits to increasing participation into the business of a company or the design of a product. And there’s also recognition that this sort of increased participation can lead to a higher number of innovations, and more interesting innovative ideas. But I think what’s new in the generativity theory and from the generativity lens, is that the product itself can have features or mechanisms that increases the participation into its own development, evolution, design, use, and also helps increase the innovations that participation can engender. Importantly, while open innovation is an organizational technique, generativity is a product characteristic. The main contribution of generativity is to ask, how do you build a product that almost automatically does that main function of generativity to increase participation and increase innovation? A a non-generative way to increase participation would be to organize a crowdsourcing competition, for example. You could do that, but that’s an organizational tool. It’s not a feature of the product. When the product itself has features that increase the participation of various users and various contributors to its evolution, that’s what we call product generativity.

Hunter Hastings

So my mind leaps to the obvious, something like Amazon where people enter searches, and so the more people you get asking more questions like “where can I find this?” or “can you solve this problem for me?” you’re getting participation in generating problems and more suppliers come on the other side with more solutions. Is that a form of generativity?

Mohammad Keyhani

I would say that is a form of generativity, because I think generativity applies both to products and to marketplaces, or markets as mechanisms. So I think markets are very much generative systems, and they can be designed to be more generative or less generative depending on the type of market that you need. For example, I think Uber or even Airbnb are very much narrow scope markets, and not very generative. Airbnb is a bit more generative than Uber, but compared to Amazon, both of them are not very generative markets. Amazon is a hugely generative marketplace, and it’s mostly benefited from the generativity of its marketplace as a business advantage. So that that’s why I’m thinking that it’s not necessarily that Amazon had a generative product, although I think, to some extent, they have tried to make their product more generative, but I think the main reason that Amazon has succeeded was the generativity of its marketplace. And I think markets are generative for different reasons than products are generative. But yeah, so if I wanted to give good examples of generative marketplaces, I would tell you about some of the tools that I found, while I’ve been curating a page for technological tools for entrepreneurs.

Hunter Hastings

Let me go back a bit and sorry I leaped ahead to markets and maybe I interrupted your flow on products. So what are some examples of generative products?

Mohammad Keyhani

Generative products are generally a bit hard to categorize. It’s a it’s a bit hard to describe exactly what they do, because they can do so many different things. They’re more like toolkits rather than products. They’re more like general-purpose products rather than narrow scope, specific-use products. So as I was curating my Entrepreneur Tools page (https://entrepreneur-tools.zeef.com/) one of my major value adds in curating that page has been to categorize the various tools that I find. And I’ve increasingly noticed that there are tools in there that are just very hard to categorize, because they’re general purpose tools. So examples that I could give are Zapier.com and other competitors to it like Integromat.com. These are tools that basically connect various other tools to each other through APIs (Application Programming Interfaces). They’re kind of like the plumbing of the internet now, they’re connecting various APIs to each other. And there’s so many different things you can do with them. Just because there’s so many different possible connections between the tools that link to Zapier or Integromat. Another type of tool that I would call generative is something like Google Sheets or its relational database counterpart, AirTable.com. They have allowed users to do so many things with them. In general spreadsheets and databases are very generative products, and they can do a lot but a regular database like MySQL or MongoDB, or things like that are not very accessible to the regular person. And spreadsheets make databases more accessible and easy to master, easy to understand to regular people. AirTable has basically taken the additional step of opening up relational databases to the regular user. Not just a spreadsheet, but a kind of spreadsheet where its rows can be objects that have their own spreadsheets. And you could even say that because it’s cloud based, it even increases generativity, because there’s so many things you can do with software as a service or cloud software that you can’t do with client based or desktop software. So AirTable is another example of generative software.

Another category that I would call generative these days are these dynamic document creation and note taking tools, for example, Coda.io and its main competitor, Notion.so. These two tools are very hard to describe exactly what they do, because they do so many things. But they are becoming increasingly popular, people are doing a lot with them. They’re some people are creating blogs with them. Some people are creating websites with them. Some people are creating project management tools, or team collaboration tools with them, group note taking, knowledge base building, there’s so many things that you can do with these tools that they’re very clearly generative products.

And finally, another category that I would say are very generative products on the rise these days are no-code software development tools. Something like Adalo.com for building mobile apps VoiceFlow.com for building voice-based apps, Bubble.io for building web apps. These no-code software development tools are very much generative, because they’re opening up the ability to create software to so many regular users or regular people, people who don’t have computer science degrees or haven’t built the expertise as like a back-end or front-end or full-stack developer. They’re not really developers, but just playing around a few minutes with bubble, they can become developers. And it’s just amazing how it’s opening up participation into software development, and therefore increasing innovation, because now you have so many people who would otherwise not be building software, able to build software, and able to innovate using software. So that’s why I would definitely put these no-code development tools as a category of generative software.

Hunter Hastings

That’s really exciting. That’s cutting edge kinds of opportunities for entrepreneurs. One of the elements of explanation or the theory behind these things that you put forward which is also exciting is that generativity overcomes knowledge constraints that all entrepreneurs face. You can’t possibly know all the problems to solve and all the questions to ask. You can’t possibly know how to fix every need that a customer has. We see entrepreneurs as orchestrators and orchestration is a really hard thing to do when you’ve got knowledge constraints. Expand on that a little bit. Filling knowledge constraints or softening knowledge constraints for entrepreneurs.

Mohammad Keyhani

The knowledge-based foundations of the theory of generative products and markets is something I’ve already begun to explore in a paper we published in Strategy Science (https://pubsonline.informs.org/doi/10.1287/stsc.2019.0092) on what we called “firm-designed markets.” The idea is that the firm—and this is the main idea behind open innovation theory as well—the firm itself and its employees, no matter how big the firm is, even if you’re Google and you have 100,000 of the smartest minds in the world working for you, you still don’t have the majority of good ideas because you just don’t have the majority of the people of the world in your company. So if you can find ways to open up the participation that goes into your products beyond the boundaries of your company, you are able to address your own knowledge constraints, including and especially your blind spots. Sometimes you have knowledge constraints where you know that you don’t know something. Those are known unknowns. But sometimes you’re dealing with unknown unknowns. They are very much your blind spots, you don’t even know where to look, you don’t even know that you should be looking for an answer or that if you look for an answer, there might be opportunities there.

So I think one of the main features of generativity, whether it’s the generativity of products or the generativity of markets, a main feature, is that it sort of automates knowledge search. It is like detaching the search process from the searcher. The search process for knowledge is always constrained by the searcher, and that means that it’s constrained by the blind spots of the searcher, because the searcher only knows to search in certain places. So if you can find a mechanism that detaches the search process from the searcher, it unchains the search process in a way that potentially allows the search process to get into what otherwise would be blind spots for the searcher. So that’s I think the key feature of generativity, whether it is the generativity of products or markets. With products, you have features in the product itself, that result in that knowledge search that gets different users to come and play with the product and learn to do things with the product that the product designer couldn’t have even imagined. I don’t think the creators of spreadsheets or PCs or even Zapier, AirTable, Bubble, all these tools that I mentioned, I don’t think they could have fully imagined all the things that their users are building with their products. These products have features that allow them to un-constrain or unlink the search process from the knowledge constraints of the searcher. They don’t need to be directed in a lot of ways, because they have the features built-in that allow them to elicit participation and create innovations out of that participation without a guided search process.

Same with generative markets. Generative marketplaces allow the incentives of the market to take control of the search process and in a way so that no one person has to define what is the problem area we should be searching for. You just let the demand side of the market define problem areas and the supply side define solution areas. Sometimes it is a bit switched up, where the demand side might not even realize that it has a problem or that it needs a product or wants a product until a supply side solution is provided. But the point is that the marketplace creator as the owner of the generative product—here being the generative marketplace—doesn’t even have to know or define all the problems and solutions. They can just benefit from all the problem-solution matches that are created in the market. And that’s a huge, huge source of profit potentially, and a huge source of competitive advantage. When you’re able to automatically profit from problems-solution matches where neither the definition of problems nor the definition of solutions are constrained by your own internal knowledge as a company, it’s like opening a door to a whole new level of potential opportunities and profits that was previously closed because you were constrained by your own knowledge of where to search for problems and solutions.

Hunter Hastings

I was very taken in one of the early Zittrain papers that you sent me about—at a very high level—the idea that if you attach a personal computer to a network like the internet, there’s no telling what solutions that will generate. You couldn’t possibly imagine where we are today when somebody first did that and connected a PC to the internet. That was a very stimulating idea. Obviously it’s very high level but it kind of illustrates what you just said I think.

Mohammad Keyhani

For Zittrain, that’s when he’s describing the two main examples of generative technologies that he talks about in his book. One is the PC and one is the internet. So when you talk about connecting the PC to the internet, it’s like a doubling of generativity. I shouldn’t call it doubling because it’s not a linear addition process. It’s a combinatorial, nonlinear or exponential process. It’s a nonlinear, exponential synergy of generativity that happens when you connect multiple sources of generativity to each other. The theory that I’m working to build is, the next logical step for me now that I’ve sort of thought about how products can be generative, and how marketplaces can be generative, it to think about the combination of generative markets and generative products. Zittrain and the Information Systems literature have talked about how products can be generative. And then there’s theory that I’m building around how markets can be generative. I’m talking about firm-designed markets, but I’m basically borrowing theory from all the people in the economics literature that have argued that economies are knowledge-generating systems. All the literature on endogenous growth theory, and the works of Edmund Phelps on dynamic economies (see for example his book “Mass Flourishing”). I’m building on them to theorize how firm-designed marketplaces can be generative. So the next step logically would be similar to what Zittrain has described as this combination of two generative technologies. I would say that those companies that have been able to benefit from generativity in their products in exponentially synergistic combination with generativity in a firm-designed marketplace that they operate and they profit from, those companies have the potential for huge success. And I think if you look at say the top 10 most valuable companies in the world today, you will be able to identify some mechanism like this. Some mechanism involving the combination of a generative marketplace with a generative product. And I think that’s kind of a generativity-based theory of competitive advantage that mostly explains the outliers of success in today’s economy. It’s not meant to generally explain performance heterogeneity or competitive advantage in general for all firms, but it is a tool that can explain why some of the outliers of performance today are outliers.

Hunter Hastings

Could it be more generally applied in the future do you think? You talked about “Mass Flourishing” and dynamism at the economy level, at the national level, but perhaps it’s the future of growth on a broader basis. Not just for outliers which is true today but more entrepreneurs might be able to harness generativity in the future do you think?

Mohammad Keyhani

It’s very difficult to achieve the combination of generative products and generative marketplaces. In general, everybody out in the entrepreneurship world, in the Silicon Valley tech world, everyone knows that these marketplace businesses are very attractive, because the problems and the solutions are basically taken care of by the demand side and supply side and you basically just benefit as the orchestrator of the market or the governor of the market. So these business models are known to be very valuable, very lucrative. Although I would say maybe it’s not as recognized that generative markets are have the potential to be much more lucrative than non-generative markets. So for example, the profits that Apple and Google make from the Apple Store or the Android Play Store as marketplaces, or the profits that Amazon makes from its generative marketplace. I don’t think that a firm with non-generative marketplace, say like the Ubers of the world, I don’t think they can easily reach that level of profitability.

Because in the end, the Ubers of the world are very much allocative marketplaces, their main goal is to increase the efficiency of resource allocation in the world. And they will profit for as long as there is inefficient allocation in the particular market that they’re operating in. But generative markets are not just about resource allocation, so they’re not limited by the extent of allocation inefficiency that’s out there. They have unbounded potential for growth, because every time somebody comes up with an idea or innovation, they benefit from it. One of my favorite examples is that that game that came became popular on mobile devices a few years ago, it was called Flappy Bird. I think one student in Vietnam just sat down and wrote a fun mobile app game to play and the game went viral and got so many users to play and purchase that and it was making a lot of money. I think it was on the Android Market. Google was benefiting or if it was on iOS as well, then Apple was benefiting as well. Both benefiting without having to even think about or having to even be in the game business. They were benefiting from this idea for an innovative game that someone across the world had developed in their spare time.

Hunter Hastings

Would TikTok be an example of generativity? You’ve got an immense number of users creating all kinds of different ways to generate videos and animations and things on TikTok. Is that an example?

 

Mohammad Keyhani

To some extent. I wouldn’t call TikTok a very generative tool. But on a spectrum of generativity, it is relatively generative. So the benchmark to test how much a product is generative or not, is to see how much it’s able to be put to different uses that maybe it was not even intended to be in the first place. So for example, when Facebook creates a platform just for people to connect to their friends, and then it realizes that users are now using it to organize events or buy and sell used goods. It shows that the platform had generativity such that the users were able to adapt it to different uses. And then Facebook has often sort of caught up with these new uses by building specific functionality to address the ways that people are now using it. A benchmark to see to what extent a product is generative is to see if it’s allowing users to do things with it that nobody had expected or the initial product wasn’t really made to do that. So I guess TikTok is an example of a company or a product that is to some extent generative.

Hunter Hastings

User-generated innovation?

Mohammad Keyhani

One level of generativity is the extent to which it allows users to innovate. But sometimes those innovations are cumulative, they change the product, or they do something with the product that allows others to improve their own innovation as well. So I think that cumulative nature is what Zittrain was trying to get at with his “transferability” characteristic. If for example, someone does something cool with a spreadsheet tool, that they then put the template out there for other people to use as well, that’s an example of how these user innovations can be cumulative. If a market can incentivize those sorts of transferability, then that’s again, another level of generativity. So, for example, AirTable or Bubble.io, they allow users to create templates with their product, and then sell those templates or components in a generative marketplace that arises around a product that is itself generative. That’s a very powerful mechanism.

I’ve seen various companies that, for example, have generative products, but really don’t try or fail to create generative markets around them. Examples could include some 3D printers, which are very generative products, they can do many different things, and people build things with them that are very innovative that is not necessarily imagined by the creator of 3D printers. But the extent to which you have marketplaces that incentivize people to buy and sell innovations by other users of 3D printers differs I think, across the industry. I think there’s some websites that allow you to buy and sell and some are completely open source. There’s variations.

And then there’s also the issue of appropriation. As a company, how much are you appropriating or benefiting from the innovations that come out of the generativity of your products or your markets? An example of a generative product that also has a generative market around it, but is maybe not appropriated fully by any one company is the WordPress content management system. It’s a huge product. According to Wikipedia, 60% of all the websites on the internet that use a content management system are built on WordPress. That’s a huge amount. But WordPress is completely open source, not really owned by any one particular for-profit company, and there has been a generative marketplace around WordPress. So there’s so many other companies now building themes and selling themes for WordPress components, widgets, add-ons for WordPress, and service companies helping you customize and install WordPress. There’s so much of a market around it. But it’s not the kind of market that’s owned or appropriated by any one particular company. So that generativity is benefiting society in a way but there’s no one company like the way that Google benefits from the Android Market, or Apple benefits from the iOS App Store, there’s no equivalent of that for WordPress.

Hunter Hastings

You’ve given us an awful lot to think about, so thank you for that. You mentioned a paper that you’re working on that will tell us a little bit more about managing generative products. When do you expect to publish?

Mohammad Keyhani

I’m hoping to publish that one as maybe a book chapter and I have another one that I’m working on theorizing the generativity of markets and calling it a theory of market generativity. And then I want to take the next logical step of hopefully publishing a paper that outlines the generativity theory of competitive advantage. So that generativity theory of competitive advantage would describe how certain companies that have been able to benefit from generative markets and generative products have become outliers, and the extent to which they’ve benefited.

Some of the ideas in that paper around generative products and what they mean for entrepreneurship and product management include first of all, some of the advantages and disadvantages of generative products. Not all products should be generative or need to be generative. For example, when you’re trying to match the market of drivers and people who want to go from place A to place B, you don’t necessarily want generativity, you don’t want a lot of innovations to happen in this market. Because the product is very much well defined and narrow scope, and people need it. So you want to address the need for that product. You want to minimize the noise. So you actually don’t want it to be too generative, because generative markets are noisy, they are full of innovations. And they’re messy. And so sometimes you don’t want the market to be messy. Another example of a market you don’t want to be messy is the market for organ donations, for example, the matching of organ donors to organ recipients, which is a market design problem that Alvin Roth’s has worked on. His work on that and similar types of matching markets has won him the Nobel Prize. Those are often types of markets that you don’t want to be messy and noisy, you want them to be very efficient resource allocation mechanisms.

But sometimes you do want your product or your market to be generative, and there’s ways to design them to be more generative. But if you are going that route, and you want a generative product, there’s tricks to it, because you need, for example, to be more patient. And if you have venture capital backing, you need to have the type of investors that are more patient with their capital. Because generative products often are not narrowly defined or well-defined, and they sort of get their definitions and become co-created and co-defined by all the participants and all the users that use them and decide what they’re good for, and come up with ideas for what they’re good for. There’s this example of this company called SparkFun that creates products around very generative platforms like the Raspberry Pi, or the Adruino board. These are very generative hardware products that basically allow people to build their own homemade computers. SparkFun is a company that makes products around these platforms, and I read in a paper that at some point, when they realized how people are using their products for things that they didn’t think that they would be used for, they decided intentionally as a company to no longer label their products as having certain uses. Because what they would label as the uses would be limited by their own knowledge. Whereas when these products go out and get exposed to the innovations of a variety of users outside their company, they realize that it has uses that they never even thought of.

That becomes tricky for entrepreneurship, because a lot of the methodologies like the “lean startup” or the Value Proposition Canvas are the Business Model Canvas, the various tools that we use in the entrepreneurship world, a lot of them don’t assume generativity by default. They assume that the company can define exactly what problem it is trying to solve with the product, from the get-go. They assume that the company knows what the uses are for the product from the get-go. And when you don’t know those things, and you’re creating them with your users, things are different. For example, with this whole emphasis on customer feedback in the Lean Startup approach, in the case of generative products, you would need to go from customer feedback to customer play. You need to allow customers to play around with the product and discover new uses. Rather than just show them a demo and get their feedback because that’s the commonplace way to do it right now is to show someone a demo and get their feedback but it doesn’t properly address the generativity mechanism. Generativity really needs the user and many users to play with a product to learn what it can do, rather than just show someone a demo. So just imagine Coda.io or Notion.so, the way that they’ve been growing, it takes a long time for all the different users that have played with these products to realize what they can do with it. But they have to have the patience to let the users play, let them learn and then capture the learning and convey it to other users. It takes a long time. It’s a different process. But you just have to realize that if you’re working on a product that is generative, some things about how you manage the entrepreneurship process might be different.

Hunter Hastings

It sounds a lot like emergence. In complex systems you can’t predict what outcomes are going to emerge. You’ve just got to sit back and watch the emergence. As you say, that may take time.

Mohammad Keyhani

Exactly. That’s a very good term for it: emergence.

 

References

Keyhani, M. (2019). Computational modeling of entrepreneurship grounded in Austrian economics: Insights for strategic entrepreneurship and the opportunity debate. Strategic Entrepreneurship Journal, 13(2), 221-240.

Phelps, E. S. (2013). Mass flourishing: How grassroots innovation created jobs, challenge, and change. Princeton University Press.

Tajedin, H., Madhok, A., & Keyhani, M. (2019). A theory of digital firm-designed markets: Defying knowledge constraints with crowds and marketplaces. Strategy Science, 4(4), 323-342.

Vriend, N. J. (2002). Was Hayek an ACE?. Southern Economic Journal, 811-840.

Zittrain, J. (2008). The future of the internet–and how to stop it. Yale University Press.

100. Jeff Deist: Animating Economics to Serve Real People and Real Businesses

Economics is treated by many as an arid field of mathematical modeling. Human beings are treated as data in the model, almost the way physics regards atoms and molecules. This approach to economics doesn’t help people much; it doesn’t help us understand the world, and isn’t helping us build a better future.

Economics is an animating science. Austrian economics is humanistic; it treats humans as people, pursuing their hopes and dreams, frequently changing, seldom predictable, and never acting like data in a model.

That’s why we see our brand of economics as animating: helping people to understand better how to identify the best means for their chosen ends. For businesspeople, that translates into knowledge, processes and tools to help businesses grow and thrive.

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Key Takeaways & Actionable Insights

The role of the entrepreneur

Entrepreneurship is the animation of business. It’s action; the exciting process of turning business knowledge and market signals into commercial solutions with the application of imagination, insight, creativity, resource assembly, and agile adjustment.

A big part of what makes Austrian economics different and better for business application is the understanding of the role of the entrepreneur and the entrepreneurial function in the economy. Jeff Deist articulated this role as a nexus between capital and markets, and the entrepreneur as the individual taking risk, employing their own property and having skin in the game. It’s an exciting role.

Entrepreneurship and value

Entrepreneurial business is the intentional pursuit of new economic value. The pursuit requires a deep understanding of the concept of value, an understanding that Austrian economics provides. Ever since Carl Menger established the concept of subjective value, Austrian economists have been deepening their understanding still further. Today, we recognize more than ever the role of the customer in value creation; since value is their experience, they are active collaborators. Entrepreneurs harness this collaboration. Think of an iPhone. Apple designs and assembles it, and then a large part of the value experience comes from the user adding apps, composing and sending and receiving messages and e-mails, choosing videos to watch and podcasts to listen to, eagerly contributing to the value experience that they themselves enjoy.

Value is what users make it.

Individualism and diversity

Entrepreneurial economics recognizes the role of the individual. It respects and honors the individual choice. Each individual, in the role of both consumer and producer, exhibits different preferences, personality, and psychology; we live in different places and in different contexts; we each have different needs and wants.

There are many favorable outcomes from individualism. One is the vast global diversity of the marketplace, whether exhibited on amazon or Alibaba or Grainger.com for industrial supplies. Another is economics as an engine of humanity and peace, which is the context for entrepreneurs providing goods and services globally to customers.

Specialization, achievement and satisfaction

Economics For Business aims to help all businesses and all entrepreneurs to find their specialization in this global ecosystem. We apply the economic principles of the specialized division of knowledge and division of labor. We all have knowledge that is unique to us, and we can all find an application of that knowledge in business.

Bob Luddy, who has been a guest on our podcast, founded CaptiveAire, a company that specializes in restaurant ventilation systems, providing benefits of safety, comfort, clean air and regulatory compliance to a broad range of foodservice customers. Bob stresses the value of specialization to become the leader in a category – a share leader and a knowledge leader and an innovation leader. And he’ll tell you that the non-material rewards of economic specialization are delightful, including satisfaction, achievement, earned respect.

CaptiveAire is a great example of considered specialization – it’s not in a high tech category (although there is a lot of tech incorporated in CaptiveAire’s product and service bundle), or an internet business or a software business. Find your customers, find a need that is not being filled, and build from there.

Big data versus big empathy and big insights

We live in an era where more and more data is being collected, compiled, processed and analyzed by producers (as well as non-economic actors such as governments, of course). As the sources of data, many of us have concerns about this trend. The economic principle that is more important for businesses, however, is that, no matter how “big” the data sets are, they do not have value (they are not causal data) until they provide or reveal some qualitative understanding of customer feelings, motivations or attitudes. These are the data that are genuinely useful to businesses. The Economics For Business method to develop this understanding is empathy, and we have a full toolset to help entrepreneurs apply it.

MBA-ization versus products, people and active learning

Jeff quoted Elon Musk on the subject of MBA-ization of business: too much focus on financial modeling and spreadsheets, and not enough on deploying engineers on the factory floor to develop, introduce and continuously improve great products that provide the customer with a delightful experience. Jeff concurred that MBA programs and business schools have become bogged down with a lot of dead weight, and have obscured some of their market-facing functions. They don’t provide the value they ought to provide for the tuition charged.

Economics For Business can provide the 20% of business school knowledge that’s actually valuable, and add new content – informed with Austrian insight – that’s even more relevant, plus the methodology and tools to apply the knowledge in business practice.

This approach is based on the educational science of active learning. In this view, learning is not achieved via books and lectures (which are necessarily backward-looking) but via the receipt of tools and methods and techniques, applying them oneself in real-life situations, and learning from the feedback received from people and markets and business results.

Building experience and sharing experience.

Active learning is the accumulation of experience. It is the unique experience of entrepreneurs and their teams gained from the operation of their businesses that constitutes the division of knowledge flywheel that continuously reinforces their advantaged position in the marketplace.

There is a time value to experience; it takes time to accumulate. On the Economics For Business platform, we’ll aim to identify ways to share experience to speed up the experience-gathering timeline. Q&A and discussion within our entrepreneurial community is one way. Another is mentoring, whereby experienced business people can share what they’ve learned over time.

Economics as a route to work and life satisfaction.

In his book Dynamism, Economic Nobel prizewinner Edmund Phelps tells us that, according to individually reported life satisfaction scores (e.g. Pew Research Center surveys and other similar surveys), the greater part of life satisfaction results from production activities rather than consumer activities. The purpose and meaning of taking on challenges, achieving results, making discoveries, self-reliance, and success in meeting goals are found in participation in the production side of the economic system. We hope to play our part in the stimulus of those satisfactions via the Mises Institute’s Economics For Business project.

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Why All CEO’s Can Benefit From A Familiarity With The Austrian Business Model.

For our Economics For Business initiative, we have adopted the motto: Think Better, Think Austrian.

Everyone in business can benefit from studying and understanding the fundamentals of economics. By this, we do not mean the economics of GDP and employment levels and the money supply, and not the economics of the Federal Reserve and the Treasury Department. We mean the economics of human action – how and why individuals behave the way they do in markets, in buying and selling, and in everyday life. Businesses are successful when they fit into and contribute to the everyday lives of customers, and economics provides understanding of how to do so.

The brand of economics that helps you to think better is called Austrian economics, because it originated at the University of Vienna. You may have heard of the Chicago School of Economics, made famous by Milton Friedman and others. Many so called “schools of thought” are named for their geographical origins.

Austrian economics is a tool for business because its thinkers have developed a particularly rigorous body of economic theory, and its practitioners have translated the theory into a complete toolset for application in business. Mainstream economics is not particularly useful for business, for many reasons. Insofar as it deals in fictitious aggregates such as GDP or “the automobile industry”, it can’t help firms who are making decisions about real resources to serve their customers and enable their employees. Insofar as it mathematicizes economic processes for analytical ease, it can’t help firms who deal in trust, loyalty, service, and human values, rather than equations. Mainstream economics can’t be used to strengthen your business model.

Austrian economics, on the other hand, can provide exactly that level of practical utility. In fact, Austrian economists have developed an Austrian Business Model to demonstrate the applicability of this brand of economics in business. The ABM is a framework from which any company can develop or refine its own unique business model suitable for our fast-accelerating digital age. If you are a CEO contemplating the sustainability of your firm’s business model, the ABM will provide you with some new ways of thinking.

A new way to think about value.

Value is one of those terms that is used loosely in business, which leads to flawed understanding. Business schools and business writers refer to “value creation”. Often, they mean market value, the dollar difference between the stock market value of the number of shares outstanding at one point in time and some earlier point in time. Sometimes they equate revenue or profit generated with value. In these cases, value is objective and can be calculated and allocated a dollar denomination.

Austrian economics defines value as subjective. It is a feeling in the customer’s mind, a complex outcome of cognitive, emotional and biological processes, both conscious and unconscious. Value emerges for customers as they live their life and try to assemble an ecosystem of services to help them make it better. This value is context-dependent, idiosyncratic and changeable. This value is created entirely in the customer’s own domain. Firms can’t create value.

This is a very different premise than we are traditionally taught at business school or even in the everyday language of business discussion. For example, a popular book on business models makes this statement: there is something about some firms that makes them more profitable than their rivals. In the framework of the ABM, we would say: there is something about some customers’ desired experiences that makes facilitating them more profitable than other customers’ desired experiences.

This value perspective can stimulate some new behaviors in firms.

  • Obsessive and total focus on the customer — identifying them, understanding them, letting them lead the process of value creation.
  • Selection of a precisely defined group or cohort of customers as your audience, with continuous development of ever deeper and more detailed understanding of their subjective preferences.
  • Development of a value proposition — a hypothesis about how you will help the customer to an experience that they will value. It’s simply that — a hypothesis that you will test as much as possible for verification, but which is never proven until the cycle of market exchange, experience and evaluation is completed.

This business model starts with developing deep understanding.

A new business relationship with value.

Value is what customers seek. Their life is a search for value and an assessment of whether value was realized in their everyday experiences. If your business can not create value, what can it do? The answer is : facilitate value – make it more possible for customers to enjoy their experience.

A design approach can be used – experience design. Experience design consists of imagining every element of the customer’s experience, based on their value learning cycle. What is it about your value proposition that will make them anticipate a valuable experience? What will make them feel that this experience is preferable to any alternative they have, direct or indirect? What will cause them to exchange value — give their dollars for your offering — and what is the price they will be willing to pay? What ensures that they will assess the experience positively after the event?

The key to design is (1) to imagine every possible element of the subjective experience, empathically embracing the customer’s individual context; (2) to understand that every little detail counts and that small differences in delivery can make a huge difference to the perceived experience. In fact, since customer service is so highly developed in modern economies, it is the small details that generate differentiation and uniqueness for your brand.

Since the business is never in control of value, it is important to make measurement part of experience design. Once in the marketplace, your value proposition goes “wild”. You no longer control it. The customer is creating the value and you are not. The best you can do is to be available if they want to invite you into their process, and to be observant of their behavior. Measurement is observation. Don’t presuppose, but do collect data, preferably qualitative data at the individual customer level. This is your raw input for continuous improvement.

Phase 2 is a customer-led design and assembly phase for the entrepreneur.

An experimental approach to value exchange.

Austrian economics sheds bright light on exchange – the transaction between seller and buyer. Exchange is governed by uncertainty – a business can’t know or predict with accuracy what the customer is going to do in the future, or how they will view the terms of exchange. Will the customer perceive sufficient value to even enter into exchange? It’s the ultimate market test. The customer is weighing the benefits they subjectively perceive against the costs, which include money but also any other difficulties or barriers they perceive to making the exchange. Is participating in your offering totally convenient (which is the general standard today) or is there anything in the experience that makes it less convenient and less compelling?

The best way to solve this challenge is to experiment with as many offer bundles as you can in order to observe market results. Does your service sell better online or direct-to-customer? Do customers prefer to subscribe or to buy by the unit? If they try, do they convert? Test as many bundles as you can.

Once you have established the right bundle and willingness to pay, calculate your cash flow and choose your costs in order to generate the margins and profits you require. This is the opposite of the margin math taught in business school, where firms calculate their costs and then add a margin. Austrians discover the price the customer is willing to pay, and then choose the costs compatible with that willingness to pay. The customer determines the price of the exchange, not the business.

Phase 3 is an experimenting and testing phase for the entrepreneur.

Value Agility

You’ve achieved some marketplace results. You’ve established that the customer perceives value in your offering and they’re willing to pay a price that generates positive cash flow and profit.

That same marketplace is incessantly changing. Your approach to the 4th stage of the Austrian business model is dynamic. You make sure that you have all the feedback loops required to receive marketplace data about the acceptance of your offering, and any changes in customer preferences and competitive behaviors. You manage 360 degree monitoring of the customer experience and you anticipate and expect that your experience design, however excellent, will erode over time. The customer will demand something even better, and competitors will aim to match or improve on your delivery. It’s important to keep your model of customer value preferences fresh, and to be planning and preparing new and improved value facilitations. You find ways to maintain flexibility in your capital structure to facilitate the required agility.

Agile businesses continually test and evaluate innovations, and introduce them to the marketplace. Value improvement and value innovation are your goals. The process never stops. The journey never comes to an end.

Your business model must yield sufficient cash flow for substantial amounts of new capital investment each year. Your organizational design must facilitate the addition of new capabilities and the discontinuation or de-emphasis of existing capabilities that no longer are perceived as unique or compelling by the changing customer. Agile businesses monitor their dynamic capability — how much is being added, how much is being changed or updated. Are you keeping up with the customer, the ecosystem in which you engage, and your competitors?

Phase 4 is a phase of continuous dynamic change for the entrepreneur.

You can learn more about the Austrian Business Model here.