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128. Matt McCaffrey: Austrian Business Strategy (Part 2): Principles

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Austrian economics helps entrepreneurs to develop and implement more effective business strategies, and to open up streams of continuous innovation. As Joe Matarese, CEO of Medicus Healthcare Solutions, said about Austrian economics in relation to business: It just works.

In episode #127, Matt McCaffrey outlined the Austrian strategy process of Explore and Expand, and its logic development. This week, he helps us dig deeper to identify the principles of Austrian economics that underpin our distinctive approach to business strategy.

Key Takeaways & Actionable Insights

Realism: real people, real markets, real entrepreneurs in real firms.

Mainstream economics has never been able to help business, because of its focus on math, models, and prediction. Real people and their decisions and interactions and motivations and emotions can not be captured in equations and mathematical functions.

Austrian economics has carved out a particular area of focus in the behavior of real people in its study of entrepreneurs and entrepreneurship. Austrians examine real entrepreneurial decision-making day-to-day; they highlight real people experiencing value and entrepreneurs’ role in generating that value. From this base, Austrian economics investigates how individual actions and choices and interactions lead to the formation of markets.

Dynamism: The market is a process.

Austrian realism sees the market as a dynamic process, continuously unfolding in interaction and innovation and change. Mainstream economics, with its preference for the greater mathematical tractability that comes with abstraction, has no capability of dealing with this real-world dynamism. The embrace and study of dynamic processes gives Austrian economics much of its applicability in business. The business world is never static. It can’t be understood in abstractions. It’s real and messy and changeable and unpredictable.

Uncertainty and complexity: embrace emergence.

Uncertainty is a keyword for Austrian economists. It’s a term that describes the real world in which entrepreneurial businesses operate. They can never know for sure what comes next; they can’t anticipate all of the interactions between competitors, changing customer preferences, technological advances and social and economic trends. There is no sure-footed way to plan for the future. Austrians recognize uncertainty and help businesses think about how to cope with it, how to narrow it, how to accumulate knowledge to lighten it, how to weigh decisions in the environment of uncertainty.

The new scientific term for uncertainty is complexity: in any system, the interactions are so many and their results are so unpredictable that modeling and forecasting are impossible, and outcomes are defined as emergent (i.e., outputs happen in a way that is not predicted by merely combining inputs). Austrian economics helps businesses deal with emergence.

Subjectivism: People are people, both as consumers and as providers.

One of the realistic principles of Austrian economics is to deal with people as people: we are all subjective in our valuations and judgments and emotions. We are not homo economicus: perfectly rational (in the mainstream economists’ definition of rational) in objectively weighing benefits and their opportunity costs. If all we are doing in producing goods and services for consumption is trashing the planet, then we can’t be rational, in their eyes.

In order to understand business and understand entrepreneurship, it is absolutely necessary to begin with subjectivism. Consumers’ subjective values ultimately determine what is produced; if consumers don’t value something, producers won’t make it. On the producer side, entrepreneurs’ subjective valuations of the resources they have available to them to assemble in a production process affect the value of their business.

It is entrepreneurs’ subjective evaluation that results in the identification of new uses for a resource, and the introduction of new innovations. Subjective values lie underneath every new business relationship with customers, from streaming movies to google searches to online travel booking. Subjectivism is everywhere in the economy and in business.

Time: How to plan in the present to satisfy customers in the future.

Austrians are unique in their understanding of the economic role of time in business. Entrepreneurs deal in future time. They imagine better futures in which customers enjoy greater satisfaction, and then they imagine how to bring it about and act on their imagination. Production — getting from imagination to consumption — takes time. Entrepreneurs are dealing with buying decisions in the present (such as hiring and buying inputs) for selling decisions in the future. They can’t know future prices or future customer preferences, so it’s a bet.

The consumption decisions customers make today reflect entrepreneurial decisions that were made weeks, months, years or decades in the past. Austrian economics helps entrepreneurs manage the contingencies of time.

Time makes the customer the boss.

Austrians utilize the concept of consumer sovereignty as an analytical tool. It means that consumers are the ultimate decision-makers in all economic systems, because what they buy or don’t buy determines what is produced. Their power is a result of the time it takes to produce. The value of resources that entrepreneurs assemble today depends on what consumers think and feel in the future.

Forecasting is tricky and best avoided, but patterns can be recognized.

A consequence of time and consumer sovereignty is the fragility and inaccuracy of forecasts. How is it possible to forecast consumer tastes in the future? There are some exceptional entrepreneurs who get it right. What’s their secret? Austrians’ understanding of dynamics and complexity can help point to the processes most likely to be associated with success, without attempting to forecast it.

One alternative to forecasting is pattern recognition. Jeff Bezos said that consumers are unlikely in the future to ask for higher prices, lower quality or slower delivery. That’s pattern recognition. It’s generalized and broad based and lacking in precision and specificity. But there is a consistency to some patterns that entrepreneurs can recognize and act upon, adding their own idiosyncratic insights and guesses to shape the actual value propositions they will make to consumers.

Out of all this emerges the Austrian entrepreneurial method.

We’ve all been educated in the scientific method. It’s utopian: experiments conducted with strict controls will yield the truth.

The entrepreneurial method is different, but with equal status, and greater applicability in open — i.e., human — systems where control is not an option.

It’s a bit messy and hard to characterize with precision, but it’s nonetheless real. It starts with imagination — imagining a future in which customer dissatisfactions are addressed and resolved. Their world is made better. This is proactive creativity on the entrepreneur’s part, triggered by existing highly dispersed knowledge, including tacit knowledge, held by the entrepreneur and others.

The entrepreneur designs a business model that might be able to resolve the identified customer dissatisfactions in the future and assembles resources that he or she believes, in the right combination, could accomplish the task. There’s no correct way; the entrepreneur draws on the realism of Austrian economics to best understand the challenges and how to address them.

The entrepreneur then advances with her or his own form of experiment. It’s not controlled in a closed environment. It’s a hard commitment of resources in a definite format to make a value proposition to customers. The experiment consists in ascertaining the customer’s response: like or dislike, buy or not buy, use and enjoy or use and reject? The experiment does not end there. It is continuous — receive the result, decide on how or whether to change the proposition, and try again.

Gut feeling or intuition or personal subjective heuristics all have roles to play in entrepreneurial decision making. Austrian economics captures these phenomena in the concept of judgment under conditions of uncertainty.

Organizing for the exercise of judgment.

Since judgment is the ultimate generative energy in producing value for customers, and since it’s personal and individual, how do firms grow? If judgement rests with a single entrepreneur, such as a founder, growth can’t scale, and will quickly reach its limits. Austrians have the organizational design solution: delegated judgment. Austrian leaders are able to design and implement non-hierarchical organizations in which every employee is empowered to exercise entrepreneurial judgment.

They do so by substituting value codes for authority. Value codes are the unwritten codes (although they might be found in the employee handbook) and conventions of “how we do things around here”, how we generate value for customers, the mission and purpose and internal methods of the firm.

Additional Resources

“Austrian Entrepreneurial Principles” (PDF): Download PDF

Austrian Perspectives on Entrepreneurship, Strategy, and Organization by Nicolai J. Foss, Peter G. Klein, and Matthew McCaffrey: But It On Amazon

126. Joe Matarese Defines a Whole New Level of Customer Value to Build a High Growth Service Firm

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Firms that can unlock the deep secrets of subjective value can unleash powerful, long-lasting value streams. When these flow in a confluence with well-identified market drivers, revenue and profit growth can be greatly accelerated.

Joe Matarese tells Economics For Business how he conjoined these two forces for his medical staffing service firm, creating a dynamic market leader from a three-person startup.

Key Takeaways and Actionable Insights

Market Drivers are strong, lasting forces capable of projection.

Austrians are skeptical about prediction, but it is reasonable to project some forces into the future. Demographics is one — the progression of age cohorts through the demography of a country can be mapped quite accurately. Increasing longevity is another, based on ongoing increased investment in health care and advances in the associated technologies. When Joe Matarese identified a shortage of doctors, he was able to confidently assume the shortage would continue.

When customer problems result from these forces, a market segment opens for solutions.

One customer problem fed by these forces is staffing for critical roles in hospitals — doctors, anesthesiologists, nurses, etc. Staffing complements need to be assembled, absences caused by holidays, maternity leave, etc. need to be covered, and the natural churn of individuals taking new jobs, retiring, or moving requires flexible response. Not only staffing but scheduling is required — the right medical team for the specific operation at the appointed time.

The problem-to-solve is functional. The deep value is subjective and intense.

Joe’s core insight was about the intense emotional need, not just the functional need. He observed his client — an operations executive in a busy hospital system — stressing out about the problem. Operating room staffing is life-and-death. Unfilled team roles would often arise at the last minute, threatening the healthcare mission of the hospital.

Temporary staffing service providers would sometimes fail to deliver the scheduled stand-in. Stress for the executive intensified.

The solution for a deep-seated and intensely felt emotional need is to transfer the burden to the service provider.

Think of the intense burden the administrative executive bears when she’s not confident that her staffing plans are secure, and her routines and methods are not foolproof. What if there is a failure at the time of a scheduled operation and it can’t go forward? Or patients can’t get nursing care because of under-staffing? How much value is there in a service that can relieve the stress?

Joe Matarese conceived of the emotional solution: take the responsibility off the shoulders of the executive and take it on as a service of his firm. How is that achieved? Bulletproof processes and routines. Comprehensive databases of people and their skills and attributes, and of client facilities and their needs. The latest technology for profile matching and precision scheduling. Impeccable implementation. And, most importantly, intense listening to continuously monitor customer feelings, combined with the responsiveness to act on those feelings.

Growth follows when these market drivers, functional drivers and emotional drivers are aligned.

Medicus Healthcare Solutions quickly gained market share in its initial geography. Growth comes from adding new customers, expanding territory and the underlying forces of an aging population consuming more healthcare.

But growth is a management challenge. One area of great challenge is managing people. Those who signed on for the early stages of growth and development may not have the skills — or the interest — for the later stage tasks of management like strengthening processes and systems. Making sure the team is perfectly tuned to the demands of the current stage is difficult but critical.

Further acceleration of growth is driven by innovation.

Medicus Healthcare Solutions has always grown faster than the market. How? Through an intense search for new knowledge and its application in the form of unrelenting innovation — never resting in the search for better ways to provide client service. For example, in addition to continuous improvement in precision tailored scheduling, Medicus added a consulting service. Scheduling solves the client’s immediate short term problem, and does so again and again. Consulting can examine the client’s systems and solve the problem in the long term by designing and installing internal systems as good as Medicus’.

Joe has a long experience with innovation and how to manage it, and promised to come back to the Economics For Business podcast in the future to share his knowledge.

Additional Resources

“Driving Growth With Core Customer Value Insights” (PDF): Download PDF

“Medical Staffing and the Revolutionary Innovations We Need,” presented by Joe Matarese at the Mises Institute’s Medical Freedom Summit: Watch the Video

Medicus Healthcare Solutions: Visit the Website

The Future Of Work? Individuals Mimicking Firms, With Appropriate Access To Capital, Technology And Favored Contractual Relationships.

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There’s been a lot of discussion about “The Future Of Work” that worries about technology replacing workers and leaving them beached – unable to earn a wage or a salary because their job has been automated or replaced.

That’s very old-fashioned and out-of-date thinking. It’s so old, it’s what economists call neo-classical. It portrays the firm as a production function that assembles capital goods (technology) and labor and combines them to produce an output. In this equation, labor (jobs) can be substituted by technology.

But today, the neo-classical production function does not exist in many industries, where there are hybrids of digital and physical assets or fully digital industries that exist purely via the exchange and manipulation of data and information flows (think AirBnB and Uber).

Old fashioned economic thinking extends to what the neo-classicists call “the theory of the firm” – what is a firm and why does it exist. This thinking sees the firm as an actor in a market where it operates to maximize profits.

In reality, the firm itself is a market, a tangle of contracts with owners of labor, who might be employees or contractors or suppliers or even customers. The firm can also contract for technology – owning it, renting it, or consuming it in the form of services (utilizing the cloud technology of AWS, for example, or the services of a trucking company for delivery).

Why assume that the AI and bots and productive technologies of the future are a resource only for firms? Inside the firm or outside the firm, technology resources could be owned or controlled by individuals. In fact, it is often the case today that workers in firms own their own technologies in the form of smartphones and tablets. Why couldn’t they own a bot and bring it to work?

There is a tendency – left over from neo-classical times and neo-classical thinking – to privilege the firm as the owner of capital. But there is no need to maintain that privilege today. The boundary between firms as capital owners and workers as capital users is dissolving.

Professor Irene Ng points to the new pathway as workers mimicking firms. They might be set up as an owner-operated contractor, or an independent consulting firm or a start-up, often using digital platforms and benefitting from the lower co-ordination costs they bring.

Mimicking a firm gives a worker new privileges:

the ability to solicit capital, acquire technology and contract further labor or assistance – all resources that are set within a legal framework and an institutional structure that accord a multitude of benefits, but also encompass risks.

Mimicking Firms: Future Of Work And Theory Of The Firm In A Digital Age; Irene Ng; Journal Of Creating Value.

Workers can be entrepreneurs and contractors, with business contracts as well as contracts in wages, and should be able to choose the contract that best suits their preferences. They should be able to acquire capital, debt and technology as they improve and enhance their human capital and social capital. This “hybrid actor”, as Professor Ng terms it, can be both firm-like and labor-like, especially in acquiring the resources generated by technology. Corporations can contract with both the individuals and their technology.

Call it the gig economy, or call it new entrepreneurialism; in any case it is the opening for individuals to acquire the resources necessary to position themselves to benefit from technology, rather than be displaced by it in the pessimistic fear mongering of the neo-classical interpreters of the future of work.

The future focus is more on the ownership structure of the firm and the nested relationships of internal and external markets for labor and technology. The innovative thinking will emanate from individuals – the workers who transform themselves into technology owners and capitalists-for-hire – and not from economists.

Can Capitalism Survive Beyond 2021? Yes! A New Generation Of Entrepreneurs Will Keep It Refreshed.

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Economist Joseph Schumpeter famously asked, “Can capitalism survive?” 

His next sentence: “No, I do not think it can.”

This was back in 1942, and socialism was in the ascendancy. It feels somewhat similar in 2021, given the economic policies of the Biden administration, and the money-printing activities of the Federal Reserve, the ECB and Central Banks worldwide. 

Yet the problem Schumpeter identified was not one of economics, but one of people. He thought that capitalism depends on broad popular support, but saw that it would breed its own enemies, and that its beneficiaries would fail miserably in defending the system that brought them wealth and comfort.

The most visible enemies of capitalism, in Schumpeter’s analysis, are intellectuals. Although he was an intellectual himself – employed as a university professor – he took an extremely dim view of the intellectual class. Intellectuals are a nuisance for capitalism. In Schumpeter’s phraseology, they lack the “firsthand knowledge” that only “actual experience” can bring, and so they are envious onlookers, purveyors of uninformed criticism.

The man who has gone through a college or university easily becomes psychically unemployable in manual occupations without necessarily acquiring employability in, say, professional work.… All those who are unemployed or unsatisfactorily employed or unsatisfactorily unemployable drift into the vocations in which standards are least definite or in which aptitudes and acquirements of a different order count. They swell the host of intellectuals … whose numbers increase disproportionately. They enter it in a thoroughly discontented frame of mind. Discontent breeds resentment. And it often rationalizes itself into … social criticism … [and] moral disapproval of the capitalist order. 

Capitalism, Socialism and Democracy, Joseph A Schumpeter

Capitalism creates sufficient wealth for the economy to support positions for intellectuals who do not produce, merely comment, and, as a result, the system comes under attack from those whose very occupations are made possible by the efforts of the entrepreneurs and capitalists who drive the economy in a ceaseless process of innovation, improvement and wealth creation.

But Schumpeter’s analysis goes beyond the commonplace observation that intellectuals are anti-capitalist. His argument is more complex: that capitalism’s success undermines the social institutions that protect it, creating “conditions in which it will not be able to live”.

Capitalism operates not primarily for the wealthy, but in the interests of the average person. Capitalism shortens their workweek, delivers leisure, excellent affordable and fashionable clothing, appliances of every kind, entertainment and education. This progress, in Schumpeter’s analysis, is the work of a minority: creative entrepreneurs who convert scientific discovery into items of pleasurable experience and valued benefits for customers. Capitalism enlists these entrepreneurial individuals of unusual talent and energy.

But these bold spirits become submerged. As capitalist corporations become bigger due to their success, they add layers of salaried employees – the “organization men” of capitalism – and the spirit of capitalism withers because these employees do not have the entrepreneurial spirit of founders and owners. These are the individuals who benefit from the system but fail to defend it from the intellectuals’ attack. These are the middle managers and bureaucrats within firms, accountants, engineers, systems wizards, marketing analysts, media manipulators, laboratory, technicians and associated technical experts who are paid and rewarded directly with the fruits of capitalism, yet don’t think sufficiently deeply about the system to develop an appreciation for the benefits it provides them.

Built-in Self-Destruction?

The self-destruction is built-in to capitalism in Schumpeter’s view. The system depends on general popular approval, which you’d think it would receive, given that capitalism improves the life of everyone who participates. However, there is a transitional element to the progress that capitalism brings, and it’s one with a detrimental effect. As the large corporations grow, they hire more and more administrators, drawing from a pool of individuals who, in the past, would have been entrepreneurial proprietors of smaller capitalist enterprises, what today we disparagingly call small business. Capitalism is, in this way, making progress that is self-destructive. Capitalism declines into administrative routine.

The perfectly bureaucratized giant industrial unit not only ousts the small or medium-sized firm and “expropriates” its owners, but in the end, it also ousts the entrepreneur and “expropriates” the bourgeoisie as a class which in the process stands to lose not only its income, but also what is infinitely more important, its function.

Ibid

And what about the leaders of the large corporations who perpetrate this “expropriation”? They come to believe that, in the era of big government, the best way to protect their interests is cronyism, a sort of business-controlled socialism in which the profits of the big companies are preserved, while the risks are socialized via legislative and regulatory “protections” enacted by the state.

A New Entrepreneurial Resurgence.

Schumpeter’s pessimism can be quite persuasive as one observes the decline of capitalism today into bureaucratic corporations integrated with an even more bureaucratic welfare state that promotes dependency over initiative, creativity and hard work. 

But his analysis is too one-directional and does not accommodate feedback loops. The corporate administrators and technocrats will become unfulfilled, bored and alienated. They will not accept that all they can expect is the wage that is paid to them for their labor hours. They will observe that the entrepreneur can obtain market rewards from many other sources, including capital from investors or loans from banks, and eventually returns on equity and on creativity. Entrepreneurship also opens up new streams of psychic and life rewards, from a sense of achievement to purpose and meaning, and the comradeship of working in highly motivated entrepreneurial teams. Life is better for entrepreneurs.

Capitalism has recently made new advances that reverse the trends that Schumpeter observed – what he called “automatizing progress”, i.e. taking the vibrantly creative entrepreneur out of the process of economic progress and substituting routinized work methods. Now, new forms of productive capital enable more individuals to choose the entrepreneurial route, by harnessing the tools of the internet, including open source and low cost software, networking systems to organize decentralized innovation, and newly capable ecosystems such as IoT. Entrepreneurs can become designers of new consumer experiences and of new markets. They can innovate by connecting things rather than building or inventing them. They can connect devices and sensors and software and data streams to personalize experiences for customers. It does not require the resources of a giant corporation, and it often does not even require a lot of financial capital (and, when it does, there are a myriad of new sources).

Today, it is far easier to seize the emotionally fulfilling high ground of entrepreneurship, and to reject the stultifying bureaucracy of corporate process and routine and hierarchy. People can substitute the joy of creativity and initiative for the alienation and insecurity of the cubicle and the spirit-draining scheduled meeting on Microsoft Teams. 

A new generation of entrepreneurs and their firms is arising and will defy the decay of the capitalist spirit that Schumpeter anticipated. 

Loss Of Jobs? No, It’s The Splendid Rise Of Entrepreneurship.

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There is a bit of a wall of worry that advancing technology will eliminate a lot of jobs in the future economy. As usual with conventional wisdom, it’s the wrong way to think. What if jobs are just a bad idea, or at least one whose time has passed? What if we are on the cusp of figuring out a better way for everyone who works to be appropriately rewarded?

Let’s start with corporations, since they represent the source of most jobs. They hire workers, they offer jobs. Jobs are designed for corporate purposes. That has been a good system for a couple of hundred years, because it was the only way workers could access the capital they require to be their most productive. Specialized skills plus specialized capital combinations equals high productivity. Workers are paid in relation to their marginal variable product, and so some of them could be well remunerated if they found the right job.

But the arrangement has a little bit of a whiff of dependency. Some call it wage slavery, although that seems like a step too far. But workers are clearly dependent for access to capital. The corporation has provided that access.

Have you noticed, however, that the respect that society grants to big corporations is eroding? We can see it in the repudiation of Big Energy, Big Tech, Big Pharma, and even Big Food. The withdrawal of respect is critical, as a Big Energy CEO Bernard Looney of BP observed:

Looney said there’s no question that oil — his company’s main commodity — is becoming increasingly “socially challenged.” Even people working within BP started to have doubts about their line of work, Looney said. The company was in danger of losing staff, he said, and job candidates were reluctant to join. “There’s a view that this is a bad industry, and I understand that,” he told the Times.

Looney makes a far-reaching point. People are not going to work in a job where they get no respect, whether from their employer or form their peers or from society (represented, these days, by Twitter and Facebook). Respect is a fundamental. It’s why we work.

Lack of respect is one reason people will migrate away from Big Corporations. But economics provides another. More are realizing that the cost-benefit analysis of the career ladder / work-life value proposition is worsening. According to Bernhard Schroeder at forbes.com, young people can do the math in a very sophisticated manner.

A significant portion of the Gen Z demographic is having second thoughts about whether college, and its debt/cost, is necessary to accomplish their goals.

Gen Z is becoming more open to doing college differently or not going at all, according to a new study by TD Ameritrade. The study surveyed over 3,000 U.S. teens and adults, including approximately 1,000 Gen Z (ages 15 to 21), 1,000 young Millennials (ages 22 to 28), and 1,000 parents (ages 30 to 60). About one in five Gen Z and young Millennials say they may choose not to go to college. Many others see a less conventional path through education as a good idea.

As Jared Lindzon writes at Fast Company,

the traditional pathway to career success—namely higher education and climbing the corporate ladder—has never felt more out of reach or less certain. 

What’s the alternative? Don’t take a job, make a job. Become an entrepreneur. While the PR machine for Big Corporations continues to tar entrepreneurial business with the brush of high risk and fear of failure, and as an entitlement desert without corporate benefits or the warm embrace of the corporate PR department, young people are migrating to entrepreneurship and smaller, more nimble entrepreneurial companies where they can enjoy more creative empowerment. They are calculating the cost-benefit equation in a different way.

The calculus is not just financial. There are many psychic benefits from entrepreneurship, and they’re superior to the corporate ladder option.

Earlier start

In the corporate world, it’s required that you start at the bottom of the pyramid. With sacrifice (usually of work-life balance), it’s possible to climb upwards, but the pyramid narrows quickly after you and your fellow climbers, get beyond the base, and it’s easy to get jettisoned. On the job site, you start as apprentice or assistant and do the menial tasks until you are trusted with the tools. In the restaurant, you start as waiter or dishwasher and hope there is a pathway upwards.

Entrepreneurs are starting out at a younger and younger age. Even teenage. There’s no need to climb someone else’s pyramid if you can start out as the boss.

Easy access to capital

For today’s entrepreneurs, capital is something you download from the internet. Amazon.com will provide all the infrastructure needed to operate a digital retail business. Alibaba will hook you up to a supply chain. Mohammed Keyhani will connect you to dozens of generative tools for business design and business building, many of them free. There’s a whole fintech world of distributed capital on offer for those who want financial backing. The cost of entry for entrepreneurship has never been lower.

Self-sufficiency

Young people want to respect themselves. They’d rather be creative and resourceful and trust in their own self-confidence than to work in a corporation where they are told what to do, perhaps by people for whom they have no respect or in pursuit of hopeless strategies. The old “loyalty for security” trade (do as you are told and keep your job) is no longer as attractive as it once was. The market rather than the corporate HR department is Gen Z’s preferred mechanism for evaluating human worth and allocating human resources.

Control

The market is uncertain. Entrepreneurship is risky. Competition is unforgiving, red in tooth and claw.

Gen Z is not buying this corporate and government propaganda either. The uncertainty in the market is human: how do people choose, what do they prefer, what do they believe constitutes good service, what makes them loyal? These questions are fascinating and engaging. Gen Z loves to swim in these waters. Empathy is a business tool they can cultivate. They know how to run the A/B tests on offers and content through which they can implement the explore-and-expand methodologies that harness the complexity of adaptive systems. Entrepreneurs embrace and welcome market uncertainty, and get an emotional reward from mastering it.

Meaning And Purpose

Active participation in the capitalist system as entrepreneurs competing to best serve customers in the economic marketplace is a source of meaning. Clay Routledge, a social psychologist at the Challey Institute contextualizes it this way:

Meaning is defined as people’s perception of the coherence, significance and purpose of their lives. We are all trying to find a place in the world where we function, and we have a desire to be significant, to play a role in society, and to have a purposeful existence.

And people understand this about themselves. They have a good subjective sense of what it means to have a meaningful and purposeful life.

Clay’s research reveals the importance of existential agency – the extent to which people believe they have the ability to pursue and maintain meaning in their lives. And people’s beliefs about meaning and existential agency influence a range of economic beliefs and views towards capitalism and entrepreneurship. People who have more existential agency were more likely to have positive views towards capitalism, about entrepreneurship, and more likely to be motivated to start or run their own business.

Clay also emphasized how much meaning in life and existential agency are associated with pro-social beliefs, attitudes, and behaviors. For these people, motivation is not focused solely on their own wellbeing and their own life outcomes. Part of the motivation is to serve a community and serve society. Entrepreneurs are motivated to solve problems for others: entrepreneurship is pro-social. It can solve the major challenges of society, including macro problems like climate change or poverty.

A better choice

For Gen Z and Young Millennials, the realization is dawning that entrepreneurship is a better choice – for them as individuals, for the customers they will serve, for society and for the economy – than entry into the corporate hierarchy or wage labor in a system controlled by employers.

Entrepreneurs Do Not Fail, They Effectuate Funds Of Knowledge For Human Flourishing

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Failure is a misnomer if we are referring to the human action involved in an entrepreneurial pursuit. A commonly held, although misleading notion, is that entrepreneurs often fail within the first few years in the marketplace. Often, I wonder why and how it happens that entrepreneurs fail only after a few years in the market if they envisioned a profitable opportunity where none had existed beforehand and was visually unapparent to others. In a non-metaphorical sense, let us think about this: Entrepreneurs discover and invest in producing and distributing goods for those who demand them the most, thereby creating downward pressures on consumer prices via their purposive action. With that said, why is it that at one point, the entrepreneur discovers effectual ways to satisfy consumer demands, and only within a few years is the entrepreneurial reported to have failed? I do not buy this one bit, and I believe this belief is all wrong. Here is why: Firms measure “success” or “failure” via profit and loss. How do we measure the entrepreneur’s contributions? One way we might measure the entrepreneurial function is by their compounding effect on future developments for human flourishing.

Instead of, as some might think, that entrepreneurs quit too soon, the reality is that entrepreneurs are often negatively affected by distortions and interventions in the marketplace. Not to mention, entrepreneurs are subject to the ongoing competition between existing and emerging institutions. Institutional competition is a result of what has been and what will be. Nevertheless, Institutional conditions serve to attract the unknown persons with specific knowledge who are incentivized and motived to contribute to the knowledge fund of the marketplace.

Some have said that entrepreneurs do not pick the right people for their team, their purposes are directed toward the wrong endeavor, and somehow, they lack commitment, persistence, and all the rest. I do not buy it. We must look at the effects of various institutional changes, distortions, and interventions, that play such a significant role in the assumed failure of nascent or incumbent entrepreneurs. 

It boggles the mind how failure is attributed in many cases only to entrepreneurs’ characteristics instead of the distortions and interventions placed in their way that obstruct the signals that are widely used to make decisions. Institutions like money and price act as entrepreneurial signals that reflect the known knowledge needed to produce and distribute consumer goods and services, particularly those economic goods valued most by market participants who consume and are satisfied by them.

Even the thought of an entrepreneur’s failure is somehow self-inflicted is udder nonsense. Who would discover a profitable opportunity only to fail at it knowingly? Moreover, the same people who attribute failure to the entrepreneur have the antidote for fixing their failures. Ha! We got entrepreneurial failure all wrong. It is no doubt true that sometimes entrepreneurial projects do not cut the mustard. However, according to Murray Rothbard, no one else knows their market and the workings of their market better than the entrepreneur. Therefore, there must be some external factors creating situations conducive to failure. As you see, commentary about entrepreneurial failures seems to face inward – failure is the entrepreneurs’ fault – of course. I beg to differ. Firms may fail, but entrepreneurs do not. Entrepreneurs shape our future only by adding to the entrepreneurial stock of knowledge. The steamboat, airplane, vehicles, ice manufacturing, light bulbs, umbrellas, pens, food and food processing, digital apps, just technology, in general, are all outcomes of an accumulation of knowledge from previous entrepreneurs that took place over decades and in some cases even centuries. 

Here is a thought experiment: If entrepreneurs functioned under a designated entrepreneurial sector, I presume they would “fail” less often. We know that institutions shape individual’s decision-making and, in the entrepreneurial sector, risk tolerance. An entrepreneurial sector as a “fund of knowledge” creates conditions for entry and learning from previous entrepreneurs’ accumulated experiences. 

Institutions of Entrepreneurship invites the effectual conditions for human flourishing – the spontaneously grown institutions where wealth can be created ex nihilo. You see, the marketplace is not anthropomorphic; it is a means by which individuals can pursue their end. 

You see, “failure,” as implied by those who do not realize it is one of those misleading words concerning the function of entrepreneurship in a market economy. We cannot look at failure as such. Intervention and distortions and institutional shifts have a more significant effect on entrepreneur success than the personal characteristics attributed to their “failure.”