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The Epic Calling Of The Entrepreneur.

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Many of us feel the pull of contributing to something “bigger than ourselves”. It could be a cause, a charity, a movement, a great project. It could be mentorship in a collaborative organization. Some people even claim that working for the government qualifies: representing (or regulating) the people.

But doing something “bigger than ourselves” does not have to be interpreted purely as a collectivist principle (sacrificing the rights of the individual for the common good), nor as altruism (living for others and not for oneself).

Almost 250 years ago, Adam Smith pointed out that it is not out of benevolence that the butcher, the brewer and the baker provide customers with dinner. Rather, it is out of self-interest. Which is an 18th century way of describing the entrepreneurial ethic of service.

Ethic of service

In an entrepreneurially driven market, customers – by buying or not buying, repeat purchasing or not, subscribing or not – determine what is produced. To be successful, businesses serve customers. They spend an enormous amount of time and money to understand customers and their preferences and needs, and expend all of their resources in an effort to meet those needs in the way that gains approval. Customers are rational seekers of betterment – they buy what will make their lives better, from their own perspective. They seek happiness. That’s what entrepreneurs deliver: better and happier lives.

The reward for utilizing today’s resources in ways that generate the greatest future improvement to society is profit. It is society’s way of pointing to where entrepreneurs should direct their best efforts. The ethic of service is sustained by reinvesting profit into more investments that benefit customers.

The epic calling of entrepreneurs is to join and accelerate this cycle of service, betterment, profit and reinvestment. 

Ethic of Innovation

The market in which customers have all the power is highly dynamic. The genius of customers is to be never satisfied. Betterment is their goal, and betterment never stops. There is always something better in the future, and always a new entrepreneurial market entrant or new R&D team to design it and offer it. 

The result of this dynamic is a continuous stream of innovation – new and better products, services, techniques, delivery systems, restaurants, food, payment systems, movies, TV’s, computers, smartphones, and V/R headsets. It’s better service at every store from the high street to the mall, and every dry cleaners and every nail salon and every gas station and repair shop, because innovation includes treating people better while serving them better. The dynamics of the market means that a customer who receives good service from any provider makes that the standard in judging all others. The momentum in the dynamic entrepreneurial economy is always forwards and upwards, towards betterment. 

Ethic of digitization

Digitization brings rapid betterment at an ever-increasing pace. It’s exponential. Entrepreneurs both initiate this phenomenon and harness it. Entrepreneurs brought us the internet and websites and search engines and e-mail and online shopping. They made almost infinite amounts of information available to us – certainly much more than anyone can consume or use. The digital economy brings abundance, the opposite of scarcity, which is what economists have told us is the norm in markets. Under digital abundance, all choices are going to become richer and richer, the cost we pay for things we value is going to become lower and lower (irrespective of what governments do to their fiat money – amazon.com is going to offer more and more choices and deliver better and better quality at faster speeds whatever the state of the dollar; we may pay with a different currency).

Entrepreneurs employing digital means to serve customers better will operate in this new world, pursuing and exploring the digital challenge: what are the boundary conditions of higher quality at lower cost? How can they bring digital betterment to everyone in the world? 

The emerging standard of digital betterment is that new services need to be 10X better than whatever is already in the marketplace in order to get customers to turn their heads, pay attention, and change from their current services, which are already excellent. The resultant compounding of improvement will rapidly elevate our life experiences.

And, in fact, digitization puts customers even more in charge – interactive technology brings more empowerment and control to customers than ever. We can compare prices more easily, benefit from the experiences of others who supply ratings and reviews, perform more tasks more quickly and easily, and orchestrate our own system of services and experiences in exactly the combinations we prefer. Customers will decide which digital providers they choose to allow into their lives. Only the best will qualify, and entrepreneurs will strive to be in that group.

Ethic of private property

It has been pointed out, most notably by Ludwig von Mises, that the entrepreneurial system requires acknowledgment and protection of private property to operate. Investors are free to invest in projects they judge to have the potential for high returns, founders are free to allocate their own time and resources to their innovative ideas, and customers are free to spend their own money on offerings that please them. This private property-based entrepreneurial system has brought the world increasing standards of living and quality of life for roughly 250 years, lifting billions out of poverty and squalor. Today’s entrepreneurs preserve that progress, despite the efforts of socialists to reverse it and replace private property with state ownership and bureaucratic control. No calling is higher.

Better world, better society

There is no shortage of pessimists who see the world through the lens of decline. Most of this is partisan politics, which is, indeed, descending to new lows. Some of it is politics combined with scientism (as in climate change fear). A good antidote to this pessimism is Hans Rosling’s book, Factfulness, which compiles hard data from impeccable world sources demonstrating the incredible, consistent and ongoing global progress in fields like life expectancy, child mortality, reduced incidence of poverty, growth in living standards, levels of education, elimination of disease and even reduced pollution. 

Entrepreneurship makes all of these possible via positive thinking, ideation, innovation, organization, and analytics. But, beyond these functions, entrepreneurship is the dominant force for good in the world. Entrepreneurs are optimistic (because they see the opportunities for progress), polite (because they value relationships), collaborative (to make relationships productive), law-abiding (the wrong side of the law is unprofitable), non-violent (violence is also unprofitable), and civil (because community building contributes greatly to success).

Epic calling

In Yu-Kai Choi’s book Actionable Gamification, which is an insightful analysis of human values, Epic Meaning & Calling is the core drive that is in play when a person believes they are doing something greater than themselves. Entrepreneurs experience that calling. Whatever their individual firm, invention, project or initiative, they feel the higher calling of betterment, and they derive part of their psychic profit from responding to that calling. They feel different and special because of their role and their contribution. 

And their contribution is, indeed, special. They are the drivers of the free market economy that raises everyone’s potential and attainment. They are the pillars of a collaborative culture of achievement and accomplishment. They are the creative catalysts of change. Society is better the greater the role and influence of entrepreneurs.

More of us should respond to the epic calling.

84. Bob Luddy: Five Active Processes of Austrian Economics That Helped Me Build One of America’s Most Successful Entrepreneurial Businesses

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Bob Luddy is founder and CEO of CaptiveAire (CaptiveAire.com), the US market leader in commercial kitchen ventilation systems. It’s a $500MM+ business with 1,000+ employees and a 40+-year success record. Bob explains to Economics tor Entrepreneurs how these principles of Austrian economics, applied as active processes, played a part.

Key Takeaways & Actionable Insights

Say’s Law

Say’s Law is a fundamental proposition in support of a production-driven market system as opposed to a consumption-driven view. It’s quite difficult to interpret and pithy summaries like “production creates its own demand” and “production precedes demand” don’t help entrepreneurs very much.

Bob Luddy doesn’t interpret, he applies. His application formula is this: new supply that is brought to market can solve problems that have not so far been solved. In that case, demand will result.

He gave this example: in the 1980s, many of the harmful effluents from cooking in a restaurant were escaping into the kitchen and sometimes even into the dining room. Those effluents could contain carcinogens, and at the very least, they’re very unpleasant. That was a problem – but it was the status quo.

So Bob thought, in Say’s Law mode: if CaptiveAire could solve that problem, and bring the solution to market at an acceptable price, demand (i.e., lots of customers) would follow. That turned out to be exactly right.

Implied in this formula, of course, is attention to market signals regarding unsolved problems, a problem-solution design process, and a communications and customer interaction capability to inform the market of the new solution. Say’s Law applies, but not in isolation from other entrepreneurial actions. Those actions, Bob tells us, include accuracy and completeness in solving the problem, since many competitors may be trying to address it at the same time. Small details can make a big difference in applying Say’s Law.

Subjective Value

Many podcast listeners have asked whether the concept of subjective value — which holds that it is the subjective and emotional evaluation by customers of an entrepreneurial offering that determines its market acceptance – applies equally in B2B markets as in B2C markets. Isn’t subjective value more relevant to consumers’ choices of fashion and food than it is to business customers’ choice of service es from vendors and suppliers?

Bob’s response: The subjectivity of value is very, very clear, and it’s reinforced in the market every single day.

He used the example of bringing an integrated ventilation system to a restaurant. CaptiveAire might be successful in explaining all of the problems it’s going to solve, its sustainability, and all relevant features and functions. Completion of a sale still comes down to the user subjectively assessing the exchange value, by asking “Am I willing to pay X amount of money to solve these problems?” The customer very well could say, “No, I’d rather live with some of the problems and depart with that much money.”

Bob emphasized the importance of communications in addressing the challenges raised in calibrating subjective value appraisal. A strategy of “solving all the problems” requires clear communications to the customer of how CaptiveAire solves the problems, so that the user can make a fully-informed decision. “If we don’t communicate well, the value of the product in the user’s mind may be lower. So part of the issue of getting a higher subjectivity of value is to have a full understanding of what the product does.” Clear communication is a component of value.

Comparative Advantage

There’s a big difference between competitive advantage and comparative advantage. Bob explains it this way: competitive advantage lies in striving to provide the same service and same solution in a better way than a competitor. Such an advantage may be achievable from time to time, but it is temporary and quite easily taken away by a hard working competitor. The market signals are clear and unobscured, telling the competitor where they must improve and the incentives to do so are compelling. No competitive advantage is sustainable over the long term.

Comparative advantage is different. It’s an unmatched capability, often built over time by accumulating unique knowledge and experience and applying them in a unique capital structure. Such an advantage is longer term, maybe not absolutely invincible, but very hard to overcome.

Bob cited an example outside of his field: winemaking in Napa Valley, California. “If you decided you wanted to make wine and compete with Napa Valley, it’s going to be a hard way to go.”

In the case of CapitveAire, “over time, we’ve been able to develop those design technologies, techniques, automated equipment and software, and when you marry all those things together and you integrate them, we gain a major comparative advantage. It’s very hard to overcome because it’s not one thing. It’s many things, and they’re all well thought out and have been developed over a number of years.”

Bob refers to on important element of CaptiveAire’s comparative advantage as “technique”. An example is “bending metal in real time and dynamically stacking it right up on the assembly line”, resulting in elimination of inventory, and very rapid turnaround time. It’s CaptiveAire’s unique methodology, developed over many years. Competitors can attempt to emulate but they fail. It’s a comparative advantage.

Opportunity Cost

The cost of any choice or decision includes its opportunity cost: what option must be declined or given up in order to make the choice you prefer.

Bob explains: Understanding opportunity costs means turning down opportunities that would divert resources, and, instead, focus on getting the best utilization out of your human resources possible, and making the most sustainable solutions, which are going to save time and money over a period of time. We make 10 major categories of products. No more. To keep those products at the right price, at a high level of performance and sustainability requires all of our time. So if we divert any of that time, opportunity costs might result in us failing at our most primary mission.

He gave the example of a line of business that required extensive customization. The benefit of customization is that each customer feels that they enjoy unique value. The opportunity cost is that it’s impossible to be all things to all people — it absorbs too much time and too many resources. CaptiveAire addressed the opportunity cost problem by replacing customization with software-enabled adjustability of certain key inputs like voltage and phase. They found that this solution could effectively address 95% of customer-requested flexibility. While competitors asked, “Just tell us what you want, we’ll figure it out” and spent resources on responding, CaptiveAire was able to stay focused on its core mission and core products and services.

Every opportunity that comes a firm’s way must be examined through the lens of opportunity cost. Austrians see opportunity cost as an active process — the same way they see value and resource allocation and pricing and many other elements of business.

Pricing

Pricing is a discovery process. At the same time, it’s an element of business strategy. Bob made a strategic decision at the outset to price “lower than the market,” while aiming for highest quality. The market informs CaptiveAire of what the pricing norm is, and therefore what “lower than the market” is. The discovery part is: how low to go to maximize unit sales and revenues. The second part of Austrian pricing theory is that producers choose their own costs. Bob chose to seek ways to keep costs low enough to sustain his pricing and quality strategy, which led him to the efficiencies, automation, speed, inventory-reduction, high technology, and opportunity-cost sensitivity that characterize CaptiveAire.

Price, cost, and profit are integrated in a strategic formula that’s tested every day by the customer’s willingness to pay the price of high quality.

Free Downloads & Extras From The Episode

Five Active And Integrated Processes Of Austrian Economics (PDF): Download PDF

Bob Luddy’s Effectuation Process (PDF): View Image

Entrepreneurial Life: The Path From Startup to Market Leader by Bob Luddy: View on Amazon

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

Start Your Own Entrepreneurial Journey

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

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83. Clay Miller: An Entrepreneurial Journey to New Lands, New Organizational Designs and New Value

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Key Takeaways & Actionable Insights

The entrepreneurial instinct can be sparked in K-12 and around the family dinner table.

An entrepreneurial culture is highly beneficial to society at the global, national, and local level. We should examine how well we nurture the entrepreneurial instinct in K-12 schooling and in the discussions we have with our kids at home.

Clay Miller got a Commodore 64 (you can look it up!) when he was 11 years old, and his interest in computing, software and writing code started there. He was a programmer at 11 years old (something that is more common today than it was when Clay was young) and developed a taste for programming and an aptitude and some skills. He learned how to jump over hurdles of software-writing complexity at a young age.

A mentor can reinforce a young person’s disposition towards entrepreneurship, and accelerate their progress.

A local tech entrepreneur took Clay under his wing and hired him for programming projects. Clay built accounting software and other products in this arrangement as a high school student. Observing and participating in this entrepreneurial environment at an early stage in life gave Clay the idea of entrepreneurship as a future pursuit. He started to take on consulting assignments while at college, although he wouldn’t yet identify tech entrepreneurship as a “career”. He was able to begin to make the transition from pure programmer to customer service entrepreneur. Starting early can influence a lifelong entrepreneurial journey.

There are many ways to accumulate knowledge, and entrepreneurship is a fast track to applicable knowledge.

Clay chose serving customers as a pathway as opposed to continued learning in school and a conventional corporate career path. Both paths are ways to acquire knowledge. Identifying the process you prefer for knowledge acquisition – school or entrepreneurship – is a valid choice. Entrepreneurship may be the quicker and more direct route. And entrepreneurial knowledge is often more applicable, and more rapidly applicable, for your own individual economic ends.

An entrepreneurial leap forward resulted from identifying and supporting a new emergent industry.

Clay took a job as a CTO in an emerging industry; organ and tissue transplants. This enabled him to experience economic growth at a higher level through the application of technology in a high-demand environment. He learned about fundraising and financing and shaping resource allocation based on the funding available. He learned about mass customization for a diverse customer base. He learned the role of the technical advisor vis-à-vis the CEO, enabling the executive suite to achieve its vision. Finding a growth industry can accelerate your individual development.

Transition from tech expert to global customer service entrepreneur.

Clay was initially a user of offshore outsourced technological services. He mastered the economics and logistics of this organizational arrangement. Quickly, he founded his own Asia-based outsourcing corporation, and added a significant innovation: the embedded outsourced CTO. Often, firms use outsourced technology services for the flexibility of dialing up and dialing down service intensity on demand. There is a downside to this flexibility, which is loss of continuity and accumulated knowledge, as contractors move on to other jobs. Clay performs the role of CTO for his clients, ensuring them continuity of strategy, and keeps his outsourced tech talent available in his own ecosystem, so that accumulated client knowledge is not lost and can be reapplied later in the cycle.

Perception-Decision-Action

Clay’s journey can be seen as an illustration of what psychologists call the PDA cycle – Perception, Decision, Action. Entrepreneurs perceive the world around them in a subjective manner, conditioned by their individual circumstances. In Clay’s case, those circumstances included exposure to technology, and some experimentation with it, at an early time in his life. Later, he made some decisions on best choices – e.g. between school and entrepreneurship – based on his perceptions. He acted, became a tech entrepreneur and then a customer service innovator. Every action changes the world, and so changes the entrepreneur’s (and the client’s) perceptions, leading to new decisions and new actions. Entrepreneurial success emerges from the process.

See our PDA graphic to further stimulate your thinking.

You might also enjoy reading this paper from our colleagues Nicolai Foss and Peter Klein on the language of opportunity. They say that opportunities do not exist in any objective fashion. They are not “out there” to be “seized”. Entrepreneurs create their own outcomes. Foss and Klein call their process B-A-R: Belief, Action, Results. See if you think B-A-R is different from P-D-A.

Free Downloads & Extras From The Episode

The Entrepreneur’s PDA Cycle: Download PDF

Foss & Klein’s Entrepreneurial Opportunities, Who Needs Them?: Download The Paper

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

Start Your Own Entrepreneurial Journey

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

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

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82. David K. Hurst: Business School Fallacies and Acting Your Way to Better Thinking

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At E4E, we believe that Austrian economics can guide business execs and entrepreneurs to better thinking about how to manage businesses that thrive. Business educator David K. Hurst blames neo-classical, Chicago School economics for the bad thinking that pervades business today.

Key Takeaways & Actionable Insights

Here’s how he phrased it in our @e4epod Episode #82:

I emerged from Chicago believing, or at least accepting, the basic assumptions which lay behind business education at that time, which was heavily influenced by what I came to understand was neoclassical economics. That is, it believed in greed as the primary motivation. It was all about individual self-interest and utility maximization, I think, was the word. It was heavily rationalistic in that it believes that we ought to behave like little mini scientists with everything based on evidence and data and then lastly, the focus was very much on equilibrium, that markets were self-equilibrating and that the natural condition in organizations was stable. Stability was the norm and change was something that you had to manage and that if things went awry, it was mainly because you weren’t following standard procedures. Management was essentially about allocating resources… It was nothing about innovation… and making sure things ran in a steady, linear, rational fashion.

When I got into the real world, I found that these principles were, well, wrong.

The right principles are those that Jesus Huerta de Soto includes in his Austrian theory of dynamic efficiency. David Hurst sums them up this way:

Of course the linear, stable, rational model is the way academics think businesses ought to run, if only they would listen to them, and the fact you can’t run them that way because the world is nonlinear. It’s dynamic.

Organizational Dynamism

To illustrate dynamism at work, David described a frantic time of disarray in a newly acquired company when a major project management problem arose, and sclerosis caused by hierarchy and central planning, multiple process manuals, traditional career paths and rigid job descriptions impeded a response.

Spontaneously, individuals on the front line formed small teams (they’d be called Agile today) to hunt down innovative and collaborative solutions to this and other challenges that arose. They were non-hierarchical, with no process manual, no reporting structure and no fixed operating plan.

Similar small, collaborative, horizontal teams multiplied to solve problems of business recapitalization, debt and cash flow management, innovation, pricing and many more. The business, after divesting unproductive divisions and products, became profitable, grew and thrived. There was improvement and it was, as David put it, non-linear.

New Organizational Theory: Boxes and Bubbles

David reflected on this experience and developed a theory to explain it. He observed that, in the dynamic crisis time, traditional hierarchy and procedure had faded into the background, and the spontaneous order of agile teams had taken the foreground. Both continued to exist.

I called them boxes and bubbles, boxes being the formal box structure which productive, large-scale organizations end up using, and bubbles were these soft, informal teams that we formed at a moment’s notice. They formed easy coalitions with each other and when they did the job, they burst. They disappeared and went back into the mixture out of which new bubbles could come.

The Theory Of Complex Systems

Applying complexity theory, David developed what he calls an organic approach to business management, modeled after natural ecosystems, such as a forest. Forests start off as weeds — small and fast — and end up as big and slow trees. Yet forests are dynamic: they renew themselves through fire, burning the obsolete, decadent growth to create the space into which new growth can come. At that stage, the forest starts to build a new community of fresh growth. It continues in an infinite loop, existing for indefinite periods of time.

David Hurst's Business Ecocycle Model

Austrian theory, of course, embraces the idea of complex systems. We know that any economic endeavor, any market, and any firm operates within a complex system of millions and billions of provider-customer exchanges, governed by the idiosyncratic subjective value scales of consumers and the entrepreneurs who strive to empathize with them and serve them. We know that these complex systems can’t be managed in any traditional, hierarchical, procedures-manual sense, and they can’t be predicted. We understand business cycles and adaptive behavior.

How Did Business Schools Come to Teach The Wrong Model?

How did the business schools get to teach their totally inadequate model?

They adopted this model in the late 1950s. Their goal was to come up with systems to produce economies of scale, how to produce more of the same. Like the steel business – very inefficient, highly polluting but facing tremendous demand for steel for rebuilding the world in the 1950s and there was no reason to change.

The theory that emerged was how to perpetuate this success. But nothing lasts unless it is incessantly renewed. Firms must innovate to maintain dynamic competitiveness. The organizational structure required to run something with economies of scale, a very mechanical, machine-like, productive hierarchy, is very poor at innovation because those are exactly the dynamics that you’ve got rid of in the pursuit of efficiency, in the pursuit of low prices.

The theory that businesspeople used to support them in this productive model was of course neoclassical economics. It appealed to them to explain why it was all about rationality and it was all about stability, keeping things the same.

The Uses of Knowledge

David tells us that Hayek became his guide.

It seemed to me that The Fatal Conceit applied to the corporate world, the mini socialist structures. I mean, when I graduated from business school, the Fortune 500 were the sort of last refuges of Stalinist bureaucracy. They were central planners, so Hayek’s critique applied to them. That’s the way they work. People at the top were dictators, that’s the word for it.

Businesses fall into what David refers to as a “power trap”, bureaucratic and rigid.

The boss would come and say, “Well, I want to do this deal so find me some assumptions that make it work.” Instead of getting evidence-driven strategy, you got strategy-driven evidence. It was totally inverted. The process was actually a process of power, and the structures are structures of power. It ends up with elites”.

The Organic Approach to Management

David described working with an entrepreneur in South Africa.

He was Austrian, but not an economist. He was a tool and die maker in Austria and he had come out to South Africa and he had set up a tool and die business to make fuel tanks for the automotive industry in South Africa. This guy was a wizard on the technology of stamping. It was just know-how, practical knowledge.

He wasn’t dealing in abstractions at all. It was all about practice and things emerged on the shop floor, “Oops. Okay, so that’s interesting.” He was continually experimenting, tinkering, and he was hugely successful because he had this extremely efficient, effective process. And he was not intellectual in the remotest. If you tried to ask him, “What principles are you operating by?” he wouldn’t be able to tell you and that was okay. It’s the power of practice and that the actions come first, and the words come later.

There is a space in my diagram, on the left-hand side, it’s all about acting your way into better ways of thinking and on the right-hand side, it’s about thinking your ways into better way of acting. The two are melded together. It’s a dance, if you will, between the two sides.

The way you come out of business school is thinking about the job of management like an engineer. You had this machine which required to be maintained, lubricated, fixed, parts replaced sometimes, but it was essentially a machine, a smooth running machine, and you think like an engineer.

I see the manager as a gardener. A gardener has engineering aspects, but they also have wilder aspects to them. The gardener creates the conditions in which, in the case of enterprises, people can grow. They grow people. That’s what it’s all about. I see this gardener as the one being able to conduct this dance. You need to dig up soil and replace it. You may need to tear down existing plants and put them on a bonfire and burn them, break out the chainsaw and saw. At other times, you need to supply structure, a lattice on which they can be trained and pruned and all that kind of stuff. The gardener seemed, to me, to capture this duality to the manager’s task.

Measuring Unmeasurables

Peter Drucker said that there a lot of unmeasurable things which are absolutely valid and are absolutely critical. Like Mises, he understood that measurement is always about the past. It’s always about what happened. He says,

The things that really matter are the unmeasurables that refer to the future.” The example he gives is the ability of the enterprise to attract young, high motivated people. He said, “If you can’t attract these people, eventually it’ll show up in the numbers, but it’s not something you’ll see in the numbers right now because it hasn’t happened yet. It’s straws in the wind.

How do you measure unmeasurables? Through Hayekian knowledge theory: getting everybody in the organization talking to each other about what’s happening, about what they’re seeing every day, because that’s where it’s happening, on the ground. This is all a part of acting our way into better ways of thinking, getting ideas, seeing the opportunities emerge out of what we’re doing, out of the action.

Free Downloads & Extras From The Episode

Austrian School vs. Neoclassical School: Download PDF

David Hurst’s ecosystem model (JPG): View Image

David’s book, The New Ecology Of Leadership: View on Amazon

David’s original HBR article on “Boxes and Bubbles”: Download The Paper

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

Start Your Own Entrepreneurial Journey

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

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

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How Free-Market Entrepreneurship Is Transforming The Economics Of Healthcare In America.

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Podcast Transcript: Conversation With Dr. Keith Smith of the Free Market Medical Association (fmma.org); September 1, 2020

Listen to the full episode here.

Hunter:

Dr. Smith, welcome back to Economics for Entrepreneurs.

Dr. Keith Smith:

Thank you. Thanks for having me again.

Hunter:

Since you were last here, you’ve become famous. You’ve appeared on several podcasts, including Econ Talk with Russ Roberts, where you were voted the number one most popular of 2019, which tells us that people are highly interested and highly motivated by what you have to say. We’ll try and add to that today. Last time you were here, we talked about Austrian economics and how it influenced you in setting up the Surgery Center of Oklahoma, but today let’s focus on thinking about a free market in healthcare and the role of entrepreneurship. That takes us to FMMA.org, which is the website of the Free Market Medical Association, the home of free-market medical services; tell us a little bit about that. You say you’re dedicated to bringing together buyers and sellers, which sounds to me like an economics-based view of the healthcare industry, so please tell us about FMMA and who are the buyers, and who are the sellers, and how are you going to bring them together better?

Dr. Keith Smith:

When I just think about the question, bringing buyers and sellers together, that is an indication of a truly dysfunctional set-up in the market – that that question should even be posed. Buyers and sellers together are typically what forms a market, and that mission of the FMMA, which is very tough work, bringing buyers and sellers together, really has to overcome much that has been thrown in between buyers and sellers. I think whenever we look at the Free Market Medical Association, we have to acknowledge that bringing buyers and sellers together is something that is meant to overcome all of the obstacles that have been placed between them. And Jay Kempton and I, the co-founders of Free Market Medical Association, we both know really good things happen when buyers and sellers talk directly and are haven’t succumbed to the Kool-Aid that all of the intermediaries that profit from buyers and sellers not talking directly have served them.

The buyers are basically anyone who is a patient or anyone who is likely to be a patient, which means everyone. In all likelihood, everyone in the world, certainly in this country is a buyer. Some patients are direct buyers. They pay with cash or their own personal funds. And then some people are indirect buyers who have an ombudsman or an intermediary or a proxy purchase for them. There are advantages and disadvantages when a proxy is involved, but Surgery Center of Oklahoma and all the other members of the Free Market Medical Association, we deal with proxy buyers as well as individual buyers spending their own personal funds and treat them all the same, afford the same price to them all. But a buyer is basically someone who has sticker shock.

Jim Epstein from Reason Magazine picked up on that early, that a buyer is someone who we would all characterize as an individual who actually cares what it costs, and there are a lot of people in the United States who receive medical services who could care less what it costs because they’re not paying the bill. They don’t have the sticker shock. So our focus in developing a free market must begin with those who actually care. Whether people know that they should care what it costs is kind of beside the point, because everyone should; to the extent that the government remains involved in the purchase of medical services to the degree that those services are unaffordable, everyone’s tax burden is much larger because there are so many patients and buyers out there who really don’t care what it costs, a shocking number in fact.

So a buyer in my mind, someone with sticker shock and a seller is someone who has medical services to offer on the marketplace, and a true seller is one who will attach a price to it and then allow the market to judge whether it’s a value or not.

Hunter:

So the idea of a free market seems obviously very attractive, but very, very difficult in today’s healthcare environment. You could call it the un-freest market that we experience. It’s the most regulated, the one most opaque as a result of special interest machinations. I think of the procurement committees and the formulary architects and so on. Take us a little bit further and tell us what we can achieve for the customer first, those buyers who have sticker shock, which is always the first concern of a market. What can we achieve for them?

Dr. Keith Smith:

The second part of this FMMA initiative is the actual soaring of the quality that is actually delivered. And that’s why this is such a great message – why I get up every day just anxious to tell anyone that’ll listen, this is a good news message. And we’re not really used to good news messages in the medical industry. All you hear is the spiraling cost and the sporadic quality. But what a market does, a true market, when someone says and declares in a marketplace of sticker shocked buyers, “Here is what I do and here is the price I believe should be attached to it,” they’re declaring their own value. And if they’re not any good, then they will not be chosen. People will not vote for them with private funds or the proxies will avoid them because their reputation is on the line as an advising buyer.

So whenever people are not good, whenever people are frauds in a marketplace, they are naturally culled. So the good news is when people who are awful at what they do enter a marketplace and succumb to the judgment that the marketplace ultimately delivers, then their absence in the marketplace means that the better, more high valued players are those who remain. And obviously there are all kinds of shenanigans where different individuals and institutions and corporations buy exemptions to the judgment of the market. But if the market is truly allowed to work, those who are awful get culled and those who provide value remain, and the result of that for the customer or the patient is not only a better price, but quality soars as a result. You see cheaper and better, and that’s a pretty easy argument to make, and I think it’s a very difficult argument to make on the other side. I mean, who doesn’t like cheaper and better?

Hunter:

Right. Jeff Bezos always says, “I don’t think anybody will ever ask me to not be as cheap and to deliver more slowly.”

Dr. Keith Smith:

It’s funny.

Hunter:

That’s right. Well, it’s looking forward. I love your analogy there that markets are good news. They’re good news for buyers, the patients, and they’re good news for the sellers because it lets them excel and then you go to one more step on your website and you talk about entrepreneurship as a route to the free market. And there are a couple of interesting quotes there, Dr. Smith. You say, “In medicine and healthcare, entrepreneurship involves the restoration of the physician-patient relationship.” You’ve hinted at it, but tell us more about what’s eroded today in that relationship and how entrepreneurship will restore it.

Dr. Keith Smith:

Entrepreneurship, depending on whose definition of it you’re looking at, is decision making in the facing of uncertainty, and whenever there are intermediaries in the room, there is less uncertainty. And I fault many physicians for inviting intermediaries into the room to lessen their uncertainty. Physicians will have a waiting room that is full only because they are in-network for some PPO or insurance plan. In Surgery Center of Oklahoma, our waiting room has patients in there who have chosen to be there. We’re not in anyone’s network. So whenever you have an acknowledgment of what entrepreneurship is, where you really embrace and acknowledge the extent to which you are willing to take risk and put yourself out there so that people can either embrace or reject you, by necessity, you have shoved all of the third parties aside who are more than happy to be in the waiting room and the examination room determining not only what fee is assigned to a service, but also what care can be rendered to a patient.

So all of that erodes and interferes with the relationship that a patient and a physician should have. Patients should feel confident when they go see their doctor that they have an unapologetic advocate. I think that many physicians are medical advocates. I think most physicians are. But in order to be a complete advocate and to be a financial advocate, I think that physicians have to more and more assume the role that other entrepreneurs assume and bear some risk, and sort of put their chest and shield out there in front of patients. I hear physicians sometimes say, “I just want to practice medicine. I don’t want anything to do with the business or the money side,” and all they’re doing with that cop out statement is abandoning their patients to the financial wolves, many of whom are happy to step in and make a living off of that physician abandoning that patient.

I don’t think there’s any willful neglect. I just think that we’ve grown up with a system that has exploded so that it’s very difficult to navigate. It’s very creepy. But it’s actually very simple to reject all of the third parties, assume the proper role of the businessman and the entrepreneur, which actually allows the physician to assume the role of financial advocate as well as medical advocate for the patient.

Hunter:

You would think that, on the surface at least, physicians and other producers in the medical system are ideally placed for entrepreneurship. They’ve got the potential and actuality of being one on one with customers. They’re empowered to make on the spot judgments and decisions. They’re a locus of trust as you said. They can allocate their own resources. Why do you think that physicians don’t think of themselves as entrepreneurs? What is the resistance? Did the system create it or is this something else?

Dr. Keith Smith:

I think it’s a couple of things. I think the system itself has become such a complex mess, and sometimes I’ve even wondered if that was intentional and deliberate, meant to drive physicians away from their rightful place, which frankly in the past they more than willingly assumed. I think also there may be a psychological component where the proper risk adversity that a physician brings to medical management of patients translates into the same risk adversity when it comes to assuming risk as a businessman. So the risk that a physician should tolerate running their practice from a financial side should be much higher than any risk that they would tolerate in the medical management of patients.

 

But I think that there is some sort of unspoken psychological attempt to make sure that risk is equal. There also is a lot of fear amongst physicians now, that they never know when they’re going to get that next letter from an insurance company that says they’ve been de-platformed and they’re no longer in a network and they’re not going to be seeing patients from XYZ PPO anymore. And at that point, they’ve become completely addicted to that flow of patients. Or the government entity that cuts them off, or worse the government entity that just says, “Oh, by the way, we’ve decided starting next month this is what you’re worth.” So there’s a lot of fear amongst physicians and it has become difficult for them to bare their chest and say, “I am going to take control of this and assume some risk in order to get control of my life and practice again.”

The fear that is out there, the arbitrariness and the unpredictability of the timing of decisions of regulatory agencies, insurance companies, the government, there are a lot of things that are out there that make it very difficult for the physician that decides to work in that system.

Hunter:

I wonder how you’re going to change that mindset, Dr. Smith. There are a few ways you can do it. You can demonstrate the alternative model, which is what you do at the Surgical Center of Oklahoma. You can educate, here’s what entrepreneurship is all about and we’re trying to do a little bit of that here on our new Economics for Business platform. Or you can actually train business management skills, entrepreneurial management skills. What do you think is the path to changing that mindset that’s based on risk and fear that you just described?

Dr. Keith Smith:

Well, we’ve demonstrated, I think, by example at Surgery Center of Oklahoma that you can practice in a way that does not involve third parties. You can practice in a way where you are not leveraged by government money and thrive. Not just survive, but really thrive. The other part is educating everyone. I think that as physicians begin to realize that they need to acknowledge the system that they’re in, and also I think as physicians see that other physicians are unplugging and really seceding from this sick system, and how happy they are, and how successful they are, that tends to get rid of many of the fears that are paralyzing for people who are right on the edge who are ready to make this move.

At Free Market Medical Association, what we’re trying to do is educate everyone that it’s doable, it’s possible, it’s being done, it’s being done increasingly by more and more of the folks who initially said it could not be done. And then trying to unlock the mother lode of sticker-shocked buyers and trying to get the self-funded proxy buyers to send that signal into the marketplace, which would overwhelm the ability of us free marketeers to supply what they’d demand. And that signal is, I believe, more powerful than anything that we can do by example in our facility or inside of FMMA. The signal, when the buyers demand that the marketplace and the sellers provide high value price transparent services, we will have a market. It will be off to the races, and I think that is what we’ll unlock the system, that’s what will bring the current system to its knees.

And it’s so powerful. Think about Murray Rothbard describing the market as both beautiful and powerful. And it will not take a huge number of like-minded free marketeers to bring what’s already a just disgusting, criminal, broken system to its knees.

Hunter:

Well, at FMMA.org, Dr. Smith, talking about pricing, you have an online search tool. You say it’s like the grocery store for healthcare pricing. Your members can post their free-market bundled cash prices as you call them, and shoppers can search by keyword, they can search by product code, they can search by drug name, search by physician names. So it sounds like you’ve got one side of the platform going. Tell us about the kinds of suppliers who are providing this pricing and then we’ll find out what you’ve learned about the demand side of, as you say, your buyers demanding that pricing. But tell us about the platform on the seller side to begin with.

Dr. Keith Smith:

Shop Health is the tab at FMMA.org that you’re talking about. This was Jay Kempton’s idea from the very beginning: that we would basically have what amounted to a shopping mall with multiple stores inside and every store was responsible for what they sold and the prices they placed on any of their goods or services, and all that was required to be part of this shopping mall was membership in the Free Market Medical Association. As a buyer, this website where you can look at all of these goods and services and prices is free. There’s no charge. There’s no amount you have to pay. There’s no membership fee that allows you to see pricing. That goes along with one of our tenets at the Free Market Medical Association that pricing is not a product. You should not have to pay to see the hidden pricing inside of the box. That is not a marketplace. That is something very different, and that is a very powerful tool that fuels the cartel-like arrangement which exists now.

I encourage people to see Shop Health as a huge shopping mall inside of which are different businesses, one of which is the Surgery Center of Oklahoma, and our prices are available for people to see there. It’s a radical concept because it’s free to the buyer and it’s very powerful. There are more and more patients that seek pricing like that available and visible at Shop Health and use that to leverage a better deal at their local, otherwise price gouging, hospital. That is a market at work. It’s beginning to work anyway when a price gouger who wants no part of what we are all about at FMMA has to succumb to a sticker shocked buyer who says, “Hey, match this, or I’m flying to Charlottesville, Virginia to see Dr. Bill Grant,” or “I’m flying to Austin, Texas to see Dr. Kelly,” or “I’m going to Surgery Center of Oklahoma.” There is a marketplace that is developing as in self-defense. The price gougers have to respond to Shop Health and the other price tools that are out in the marketplace.

Hunter:

It sounds like it’s beginning to happen on the buyer’s side. You want to unleash those buyers who will demand pricing transparency, but a lot of them, as you say, are cartelized and they’re special interests within the system. It’s not in their interest to have pricing transparency because there’s so much special interest take from the high prices. Can those individual patients be the trigger for unleashing the bigger buyers or is there another step that we’ve got to figure out?

Dr. Keith Smith:

I think there is a tipping point and I believe that individual buyers are not great enough in number to get this tipping point where it needs to be: to become so unstable that the whole system that’s just so sick comes crashing down. I think it is going to take the proxy buyers, it’s going to take the self-funded companies who ignore the advice of their self-dealing broker and consultant, who begin to question, “They told me I was very lucky. I just have a 15% increase in my health spend this year instead of the 30% increase everybody else had.” Increasingly, that sales technique that brokers and consultants use is falling on deaf ears. Very ironically, what the government has decided to do to the economy with the virus lock downs has caused some self-funded companies to sharpen their pencils and to look for different solutions because margins are tighter.

Companies whose margins are tighter who have not been self-funded are beginning to self-fund. Keeping in mind that self-funding is where companies buy medical services for their employees out of operating revenue and bear the risk rather than pay an insurance company to bear that risk and make a ton of money for doing so. So, when the proxy buyers, when the self-funded companies step away and quit succumbing to the Kool-Aid sold to them by the brokers and all the other intermediaries, the PPOs, all of those people that are just getting rich off of this current system, when the self-funded buyers walk away from them and look around, they will see this free-market solution is just shining right in front of them. The ticket to save gigantic amounts of money while simultaneously rendering better benefits to employees, while also ensuring that they receive even higher quality care.

That proxy buyer of self-funded companies, when unleashed, will be the reason we experience that tipping point and then everyone will benefit. The individual patients will benefit, because as the market develops and prices fall, prices will fall for everyone. Quality will go up for everyone. This rising tide is going to flood everyone’s fortunes higher and it’s very exciting to think about. I think that there have been times in the last 12 years since we put our prices online, I’ve wondered if I would see it. I am now more optimistic than ever that I’ll see it not just in my lifetime, I’ll see it in my career where the people in this country reject the government’s handling of this industry, selling and auctioning all of these factors to the cronies who have ponied up in Washington and we will see a true market emerge and a real rebirth of the great tradition of medicine that the United States has been known for for quite some time.

Hunter:

That’s a wonderful vision. As you say, it’s very exciting. It’s certainly wanted and greatly wished for. Can you have that influence in pharmaceuticals, Dr. Smith? For a layman like me, it seems like the pharmaceutical industry, or cartel, or nexus, is the most impenetrable barrier to thoughtful and discriminating buyers. It seems like there’s no buyer power. Can your self- funding buyers have an effect there?

Dr. Keith Smith:

I think that we’re beginning to see the breakdown of the grip that Big Pharma has on the industry. But we have to keep in mind that the FDA is largely funded by Big Pharma. So once people realize that the FDA is meant to regulate are those who fund the FDA, it’s not rocket science to take it from there and realize the FDA is not about to harshly regulate those who pay them the most in Big Pharma. So you work very hard to expose the middle men, like the pharmacy benefit managers. You work very hard to make people aware that large PPOs and insurance companies actually own their own pharmacy benefit manager intermediaries. I mean, you can extrapolate what that means.

But ultimately you run into the culprit, the ultimate culprit everyone has to keep in mind is the federal government. It’s Uncle Sam. I tell everyone we can bash the pharmacy companies, we can bash the PPOs, and they all deserve a good bashing. But Uncle Sam is driving the getaway car. None of these shenanigans are possible without Uncle Sam riding shotgun for all of this thievery. And the FDA, as Dr. Robert Higgs has pointed out, is truly a criminal organization, and unless there is a severe curtailing if not privatization of the FDA, I don’t think we’ll get a long way with Big Pharma. I think there will be some gains, because as the prices of actual medical services plummet, people will wonder, why do pharmaceutical products continue to accelerate in price, and that will put pressure on them. But the FDA is the real boogeyman and they are going to protect their clients with all they’ve got as long as they have that power.

Hunter:

What’s the role of the big insurance companies in your future vision of the free market, Dr. Smith? They seem to be on the side of the cartel as opposed to the side of the individuals. How do you think about them in the future?

Dr. Keith Smith:

Well, the insurance companies now, to quote Jay Kempton, are not insurance companies. We need insurance and we need insurance companies. We just need them to get back into the insurance business. All they are now are money handlers and money changers. So they make people pay to see the pricing in the box. They extend these false discounts and skim off the difference. So there is not really any assumption of risk by PPOs. One hospital administrator referred to a PPO not that long ago as an ATM for his hospital. In some markets, the PPOs are in control of the hospitals. In some markets, the hospitals actually own their own PPO. So all of these types of arrangements are a disaster and they have nothing to do with insurance or the assumption of risk. So as long as insurance companies will get back in the business of insurance, I’m all for them.

Of course, Obamacare made sure there really were only about four insurance companies left. There’s this 30% loss ratio which only the big boys could tolerate. So there was a vaporization of the smaller insurance companies. They all went out of business or there was this huge consolidation because they could not comply with that requirement in regulation that only the largest four or five could tolerate. People say, “That’s great. We need to force these insurance companies to make sure that 70% of all the premiums that they collect are paid out of medical expenses.”

Well, the huge insurance companies love that, and all the little ones went out of business. So regulations like that, they need to go away and then you see a whole bunch of insurance companies and then you have competition in the insurance sphere. And then you have real insurance, not what we have now.

Hunter:

So a lot of what we’re talking about on the negative side, Dr. Smith, is centralization. Centralization of regulation at the FDA and these big insurance companies that you just described and other forms of cartelization as you’ve talked about it. Taking a look at the Free Market Medical Association, it looks like you’re thinking in decentralized terms. You’ve got a very contemporary organization with local chapters that have significant autonomy. Your Shop Health infrastructure is a platform, so suppliers can upload their own products and buyers can do their own searches. Is this decentralized organization part of the future of the free market as you’re thinking of it?

Dr. Keith Smith:

Yes. And I think it’s consistent with F. A. Hayek’s concept of the knowledge problem. What’s going on in the market in Arizona is very different, in all likelihood, than what’s going on in the market here in Oklahoma. The response to challenges there, the response to consumer preferences there should be different. All that Jay Kempton and I have insisted on is that members adhere to the pillars, and that is basically that they adhere to the golden rule, that they adhere to mutually beneficial exchange and that they offer a service at a price to anyone who wants to buy at that price and not have multiple prices, and that people do not have to pay to see the price. So there are some very basic tenets at the Free Market Medical Association that we insist on, and that frankly, we’ve enforced in the past. But after that, the local chapters are free to respond to consumer preferences in their area as they see fit. One result of that has been for people like me and other members to benefit from the experience gleaned from encountering market challenges and difficulties in other states that we had not yet encountered.

And I know that if a certain issue comes my way that has faced Bill Grant in Virginia or the folks in San Antonio, an issue that I’ve yet to face, I’m already armed with the ideas of how I might respond or what the consequences for not responding might be. It’s a confederation if you will. It’s a very, very open-sourced organization, and everybody benefits from that.

Hunter:

It’s very Hayekian, as you say. General rules that apply to everybody. And it’s also what Jesus Huerta De Soto calls entrepreneurship, which is the creation of new information and then sharing it among everybody once you’ve created it. So your members are creating new information in their local areas and, as you say, everybody gets to benefit.

You’ve got an FMMA annual conference coming up, Dr. Smith. And I saw from that website that the theme is Mission Possible: Healthcare Entrepreneurship as the Antidote to the Broken Healthcare System. You talked a lot about that today and it’s more than Mission Possible, it’s Mission Exciting according to you and I’m excited by it. Who can attend? How do you attend? What should people expect from this annual conference? Tell us about the conference.

Dr. Keith Smith:

The conference is packed with just rock stars if you will, yourself and Peter Klein included. And it’s attendable virtually — free of charge. We also have a limited amount of in person availability based on the constraints we’re facing in this day and age. It’s very exciting. I wish of course that we could do it in person like we’ve done in all the past years, but I believe we’ve come to that place where those of us who say that you can place a price on the medical service you offer are not seen wearing a tin foil hat. If anything, the conversation has flipped. Those who are unable or unwilling to place a price on the service that they offer, and I mean a bundled service, so I mean if there are multiple individuals involved in rendering a care episode, they are expected to get together and provide a bundled price. And the light is shining brighter.

I think the accountability light is shining brightest on those who are unwilling or unable to do it. And I would argue no one’s unable. Anybody that’s not providing prices is unwilling. So the conversation has really changed. I don’t think I’m seen as a tin foil hat or crazy like people thought I was and characterized me 12 years ago when I put prices online. Now, if anything, it’s switched around. There are state and federal laws that are being considered to force people to post prices. And I’m not in favor of that, because I think that just provides the legislator, particularly the unscrupulous ones, an opportunity to sell exemptions. And I don’t believe anybody ought to be forced to do anything except by the market. I think the market forces people to do what is aligned with consumer preferences. You don’t need laws.

But if you think about the idea that we’ve come all the way from “it’s impossible to post prices for medical services” to “you’re going to be punished and you’re going to be fined if you don’t provide prices attached to medical services”, this argument, the whole narrative has changed. So this is not just Mission Possible, this is Mission Imperative. People are going to start to feel the heat from one source or another for not providing prices. My preference is they feel the heat from losing business. And in Oklahoma City, I’ll tell you that’s the case. But all over the country, I hope that everyone including the price gougers respond to the market pressure, not the pen of the legislator. But I think this is Mission Possible and it’s very exciting and I think more people acknowledge that. But it’s Mission Imperative. And there’s going to be a lot of pressure brought to bear on those who refuse to exit their price gouging roles.

Hunter:

Hopefully, it’ll become Mission Irresistible and Mission Inevitable.

Dr. Keith Smith:

Yes.

Hunter:

It sounds like you’re getting there, reaching that tipping point, or at least that the tipping point might be quite close. Well, congratulations on everything you’ve achieved so far, Dr. Smith. In anticipation of the future, just one more thing about the conference, what’s the date of that?

Dr. Keith Smith:

The date of the conference, the virtual day is the 11th of September and then the next day, the 12th of September is the live part that we’ll have here in Oklahoma City, which also will be viewable by the virtual attendees.

Hunter:

Excellent. Well, we’ll provide the appropriate links on our podcast page and we’ll use whatever social media reach that we have to get the word out. And as you said, everyone’s welcome. Anybody can attend. If you do attend, you’ll get to be part of a wave that is taking us to a better future in health care. So Dr. Smith, thank you very much for today. Thanks for all that you do and well look forward to the conference on the 11th and 12th of September. Thank you.

Dr. Keith Smith:

Thank you, Hunter. Thanks for having me on the show again and for your tireless efforts promoting all that’s going on. We are so appreciative.

Hunter:

It’s a good cause. Thank you very much.

 

81. Dr. Keith Smith: The Free Market Medical Association Brings Entrepreneurship to Medical Services

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Dr. Keith Smith, co-founder of The Free Medical Association (FMMA.org), is an entrepreneur and free market warrior who is undaunted by the seeming scale of his innovation task: to bring to healthcare the kind of customer experience only entrepreneurial free markets can deliver (see “Pillars of the Free Market Medical Association” PDF).

He is laser-focused on the problem to solve.

(Full episode transcript available here.)

Key Takeaways and Actionable Insights

The aim is to bring buyers and sellers together.

As Dr. Smith explains, simply stating that there is a need to bring buyers and sellers together is an indication of dysfunction in the market for healthcare. Buyers and sellers talking directly with each other is what makes a market: willing buyer, willing seller, mutually agreed price.

Buyers are patients who care what healthcare costs. Today, they have sticker shock.

Buyers who care about price can be direct-buying individuals, and their proxy buyers, who can include self-funded employer health benefits systems, more and more of which are emerging. Innovations like Health Savings Accounts and high-deductible insurance policies are bringing more direct buying into the market.

Willing sellers should be complete and comprehensive advocates for the patient, across the whole range of their needs, including financial aspects.

The targeted customer experience is for patients to feel confident when they visit a doctor that they have an unapologetic advocate. Today, physicians are medical advocates, but to be a more complete advocate, physicians must think and act like entrepreneurs, bearing some risk in serving their patients. Many say, “I don’t want anything to do with the business side or the money side of medicine.” By doing so, they are abandoning their patients to the financial wolves, many of whom are willing to step in and make a living off the patient. It’s not so much willful neglect of the patient’s interests, as simply caving in to a system that has become extremely difficult to navigate.

A problem in healthcare is the dominant presence of intermediaries between the buyer and the seller.

Dr. Smith described the wide range of intermediaries, cartels and proxies that get in the way of a direct, transparent and mutually beneficial relationship between buyer and seller. Insurance companies are “money handlers and money changers”, keeping healthcare prices high, so they can offer false discounts and skim off the difference. There are brokers and consultants to employers, whom Dr. Smith calls “self-dealing”, who add a layer of costs. There is Big Pharma, the pharmaceutical industry that largely funds the FDA, making it inevitable that the regulator will protect the pharmaceutical companies and their business model and their pricing.

In the end, the “ultimate culprit” is the Federal Government. None of the financial abuse of the patient would be possible “without Uncle Sam riding shotgun for all of this thievery”.

A solution lies in decentralization, disintermediation and the application of Hayekian knowledge theory.

Dr. Smith alluded to F.A. Hayek’s concept of dispersed tacit knowledge in describing the FMMA’s decentralized approach. The Free Market Medical Association establishes local chapters, who follow a small number of “pillars” regarding price and value and mutually beneficial exchange, including equal pricing to all cash buyers of the same service. The chapters are completely free to respond to customer preferences in their own local market. These chapters create new knowledge based on their transactions and experiences in their local market, and can share it with all other chapters.

Austrian principles of decentralization, free exchange without intermediaries, and the recognition of the value-creating dispersed knowledge of patients and entrepreneur-practitioners are Dr. Smith’s starting point.

Free Downloads & Extras From The Episode

Pillars of the Free Market Medical Association: Download PDF

The Free Market Medical Association’s annual conference, “Mission Possible: Healthcare Entrepreneurship as the Antidote to the Broken Healthcare System”: FMMA Annual Conference

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

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