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Why Study Economics?

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

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

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

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

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

More entrepreneurship.

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

Production before consumption.

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

Less quantitative, more qualitative.

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

Less economic policy.

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

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

The Value Creators Podcast: Episode #12. Mark McGrath On Adaptive Entrepreneurial Management

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Mark McGrath of AGLX has developed a management approach he calls The Adaptive Entrepreneurial Method. He combines the insights of John Boyd and the entrepreneurial principles of Austrian economics. 

Boyd was a prolific writer on strategy, particularly famous for his development of the OODA Loop model of decision-making under uncertainty, feedback, and responsive re-orientation, as well as the author of a vast body of work on strategy. 

Austrian economics overlaps in the area of entrepreneurial judgment, which is purposeful action under uncertainty, and dynamic responsiveness to the resultant marketplace signals (ie. feedback loops) that action generates.

He joined The Value Creators podcast to explore the intersection of John Boyd and Austrian economics.

Resources: 

AGLX

Mark’s podcast: No Way Out

Mark’s Substack: The Whirl Of Reorientation

Knowledge Capsule:

1. Austrian entrepreneurship is a Human-Centered Approach:

  • Boyd’s theories emphasize prioritizing people in decision-making.
  • Human-centered approach over technology-centric focus.
  • Recognizing the role of consumers, employees, and stakeholders.

John Boyd’s insights underscore the significance of placing human understanding and interaction at the heart of decision-making processes. Rather than fixating on technological advancements, his theories advocate for acknowledging the central role of people within any system. This approach emphasizes the vital connections between consumers, employees, stakeholders, and their collective impact on the overall success of an endeavor. The equivalent space in Austrian economics is subjective value.

Action: Always place human values at the center of all business strategizing and decision-making.

2. Continuous Learning and Adaptation:

  • Adaptation and flexibility in ever-changing environments.
  • Shaping strategies based on evolving circumstances.
  • Emphasis on continuous learning to respond to changes.

A core tenet of John Boyd’s philosophy is the value of perpetual learning and adaptability within dynamic environments. His approach encourages a constant re-evaluation and adjustment of strategies in response to evolving circumstances. Instead of adhering to rigid plans, Boyd’s philosophy advocates for organizations to actively engage in continuous learning, enabling them to proactively address shifts and remain relevant. This is perfectly consistent with Austrian principles of continuous change and dynamic efficiency (as opposed to the static equilibrium approach of conventional economics).

Action: Your firm’s knowledge accumulation plan – i.e. learning – is its first priority.

3. Interaction and Isolation Dynamics:

  • Balance between interaction with allies and isolating competitors.
  • Drawing allies through effective engagement.
  • Isolating competitors to disrupt cohesion and effectiveness.

One of John Boyd’s pivotal concepts revolves around the interplay of interaction and isolation. The strategy for success involves effectively engaging allies while simultaneously isolating competitors to weaken their cohesion. This dynamic equilibrium plays a critical role in influencing outcomes and securing advantages within competitive environments.

Action: Choose the right partners as allies and isolate your competitors from these relationships.

4. Strategy as a Mental Tapestry:

  • Strategy as a dynamic mental tapestry of changing intentions.
  • Emphasis on self-awareness and situational awareness.
  • Continuous evolution of strategies based on circumstances.

John Boyd’s approach to strategy departs from conventional thinking by framing it as a dynamic mental tapestry of evolving intentions. He underscores the importance of self-awareness and situational awareness, advocating for strategies that continuously evolve in response to changing contexts. Unlike static planning, Boyd’s philosophy aligns with the adaptive nature of complex systems.

Action: Don’t plan – adapt.

5. Embracing Complexity and Distributed Leadership:

  • Embracing complexity over linear solutions.
  • Acknowledging distributed leadership in multifaceted challenges.
  • Orchestrating interactions to adapt to evolving contexts.

Boyd’s theories encourage a departure from linear problem-solving towards embracing the intricacies of complexity. By recognizing the multifaceted nature of challenges, Boyd’s philosophy promotes distributed leadership. This approach involves orchestrating interactions and collaboration among diverse elements, enabling organizations to respond nimbly to evolving contexts and foster innovation. Austrian economics, in the same way, is complexity-aware and orchestrates through value creation.

Action: Use value as the attractor in a complex business world.

The Value Creators Podcast: Episode #11. James Burstall On The Flexible Method

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There’s a considerable debate among consultants and academics regarding the definition of management: what is it? Is it a science, is it a process, is it a set of tools that business schools teach us how to use? 

In this episode, James Burstall comes on to explain his perspective on management as a mindset (the interacting mindsets of many different people in many different circumstances in fact)  as proposed in his new book titled The Flexible Method: Prepare To Prosper In the Next Global Crisis.

Resources:

James Burstall’s Production Group – Argonon

James Burstall’s Book: The Flexible Method: Prepare To Prosper In The Next Global Crisis

Knowledge Capsule:

  1. Introduction to the Flexible Method:
  • “Flexible Method” is an approach tailored to managing uncertainties in business.
  • Central components include adaptability and radical determination, combined to form a powerful decision-making framework.
  • This method encourages an open-minded approach to research, teamwork, and resolute action for decision-making.

Action: Elevate responsiveness to change over planning.

  1. Radical Determination and Decision-Making:
  • Making and committing to decisions is crucial in the Flexible Method.
  • Teams need to reach a consensus and show unwavering determination.
  • Tough decisions are embraced and executed with full resolve.

Action: Don’t just make decisions, commit to them, and get team commitment.

  1. Adaptiveness and Scanning for Opportunities:
  • Radical determination is about executing decisions; adaptiveness involves identifying opportunities.
  • Scanning the horizon for changing circumstances is vital.
  • A case from the credit crunch illustrates the need to be open to new avenues.

Action: Where possible, anticipate change in the form of an opportunity space.

  1. Cash Flow as a Critical Metric:
  • Cash flow is the most critical business health metric, needing respect and management.
  • Managing finances during crises involves making tough decisions.
  • Strategies to retain relationships and sustain the business are discussed.

Action: Measure your business’s health with cash flow and cash availability.

  1. Entrepreneurial Mindset and Restlessness:
  • Organizations in crisis operate like startups.
  • Restlessness is essential for fostering an entrepreneurial mindset.
  • Embracing change, creativity, and innovation is emphasized.

Action: All business is entrepreneurial, not managerial.

  1.  Leadership, Care for People, and Reflection:
  • Leadership involves emotional intelligence, authenticity, and prioritizing people.
  • Values like diversity, inclusion, and environmental responsibility are retained.
  • Gratitude, rewards, and reflection play a role in the Flexible Method.

Action: Caring brings resilience to business.

The Value Creators Podcast Episode #10. John Tamny Entrepreneurs Don’t Meet Needs, They Lead Them

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Entrepreneurs aren’t just about meeting needs; they’re all about setting trends and leading the way. Think of the big names like Elon Musk, Steve Jobs, Jeff Bezos, and Sam Altman. They don’t just follow the usual business rules; they rewrite them. So, how do they actually pull it off?

In his talk, John Tamny will take us on a journey to see how entrepreneurs, the minds that redefine industries, shake things up by tackling needs that haven’t been addressed yet. He’s all about those game-changers who see opportunities where others don’t.  

Show Notes:

0:00 | Introduction

1:22 | Entrepreneurs

2:00 | Entrepreneurial Thinking

3:36 | Entrepreneurs Leading the Future

5:06 | Mindset of an Entrepreneur

6:26 | Characteristics of Entrepreneurs

8:23 | Changes Lead Businesses

11:18 | Entrepreneurs Think Differently

14:06 | Hidden Entrepreneurs

15:55 | Big Companies are Not Entrepreneurial

18:42 | Institutional Entrepreneurship

22:54 | Creating New Knowledge for People

24:12 | The Idea of Capitalism

26:15 | Understanding Causation

32:31 | The Idea of Next-Generation Entrepreneurs

34:30 | Crypto Revolution

36:40 | Outro

Knowledge Capsule

  1. Entrepreneurship and Progress:
    • Entrepreneurship is that fundamental element of human nature that drives progress and innovation.
    • The United States has a history of entrepreneurial spirit, with individuals taking risks and pursuing their ideas.
    • Entrepreneurs challenge the status quo, create new value, and drive economic growth. In this sense, they’re oddballs.

Action item: Indulge your oddball entrepreneurial instincts.

  1. Education and Learning:
    • Education is a consequence of prosperity, not the other way around. People who want to learn will seek out knowledge regardless of formal education.
    • The next generation’s access to information and technology will lead to even more innovation and progress.
    • Learning is a choice, and the desire to acquire knowledge and skills is a key driver of success.

Action item:  Use A.I. and other tools as much as possible to accumulate knowledge.

  1. Causation and Expertise:
    • Causation is often misunderstood, with people misinterpreting relationships between events and outcomes.
    • Expertise can sometimes lead to tunnel vision, where experts become entrenched in their own data and assumptions.
    • The market and individual choices provide a more accurate gauge of trends and outcomes than expert opinions.

Action item:  Accept emergence, avoid false assumptions about causation.

  1. Innovation and Global Warming:
    • Innovation arises from individuals (oddballs!) challenging conventional wisdom and exploring unconventional ideas.
    • The assertion that experts are always right is challenged by examples like climate change and sea-level rise. The behavior of the market and individual choices contradict expert predictions.

Action item:  Rely on markets, not experts.

  1. The Next Generation and Private Money:
    • The younger generation is poised to be the richest in history, benefiting from technological advancements and abundance.
    • The rise of private money (perhaps, but not necessarily, in the form of cryptocurrencies could revolutionize the financial landscape by offering more trusted and efficient alternatives to government-issued currency.
    • The ability to circulate money that holds its value and the profit potential in private money creation are driving forces behind this potential shift.

Action item:  Pursue innovation in private money.

  1. Optimism and Capitalism:
    • Capitalism, rooted in individual initiative and free markets, has fueled prosperity and innovation throughout history.
    • While challenges arise, capitalism’s ability to adapt and outpace government intervention is a testament to its enduring strength.
    • Optimism about the future stems from the ongoing creative destruction that entrepreneurs bring to the market, constantly reshaping and improving it.

Action item:  Be an optimistic capitalist.

Business Is Not A Set Of Practices Or Strategic Methods Or Planning Techniques. It’s A Mindset

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In the current business era, there’s a lot that seems mandatory: using quantitative methods of strategy and planning, following documented IT-enabled processes, organizing fixed structures that can be captured in org charts, and complying with government-mandated rules and regulations. Even the acts of creativity that contribute to innovation are specified, documented, and captured in software. There’s a bias towards fixed cause-and-effect thinking: if a business takes action X, it will result in outcome Y. We are told that case studies will reveal this cause-and-effect linkage in hindsight, to be re-applied in future planning.

There appears to be no room for individualism, spontaneity, unpredictable interactions, or rebellion. Those concepts are insufficiently objective for today’s business executives, consultants, professors and executives. The goal in business is primarily stability: to make a plan and achieve it, to set targets and hit them, to predict quarterly earnings with accuracy, to define processes in the knowledge that they will be followed unfailingly. The goal is to turn business into a science, with hard numbers, laws, and data-driven methods.

But in excess, this objective approach does not support the primary goal of business, which is value. 

The purpose of all firms is to generate value for customers and value is not objective or measurable or amenable to design or planning. Value is a feeling – a feeling of well-being or satisfaction experienced by customers. Different customers experience more value or less value than each other even when using the same product. Value occurs when the customer has used the product or service and compare the consumption experience with their going-in expectations. Value is subjective from beginning to end – from the search for potentially satisfying experiences to the realization in use to the evaluation after use. 

In fact, it is not the firm’s job to create value. It’s the customer’s role to find the most effective solution to their wants and needs. They can express some doubt or uncertainty that there’s anything available to them that exactly meets their need, although they might buy something that the best available option, even though their satisfaction is incomplete. They’re always looking for the discovery of something better. This is the role of the customer – the genius role of insisting on something better, thereby stimulating innovative action among producers to respond with new value propositions. Together, the producer and the customer imagine a new future value via a new or improved service or product; the producer can help the process along with product enhancements and advertising and PR and perhaps prototypes to help the customer’s imagination along.

If the customer’s imagination is piqued, the firm must commit resources to assemble the product capacity that will put an actual, purchasable offering into the marketplace for consumption. There’s no guarantee that this will be profitable or successful. The customer has the final decision. There’s no planning, predictive modeling, sales goal targeting or quantification of any kind that can eliminate or overcome this uncertainty. The customer will choose between all the alternatives available, including to buy nothing at all. It’s all contingent, and there are infinite possibilities. Firms choose their path towards facilitating the customer’s value experience, but there are no objective certainties.

So if business is not objective, quantifiable, or plannable, how would we describe it?

The philosophical word is subjectivism. Businesses would be better equipped for marketplace success if they followed subjective methods. They’re dealing with people and their emotions and their interactions with others in a complex social system. There’s no hard science, no spreadsheets, no data set that can predict the outcomes. 

That raises the question, what are the skills for business, if they’re not numeracy and hard science and mathematical economic. The answer is empathy. The skills of empathy – the ability to see inside customers’ minds and simulate a view of the world as they see it, to imagine what they are imagining, to reconstruct their mental model as opposed to imposing your own – are the most important in every business, and for every individual in every position and every function in business. Everyone must display customer empathy. What is the experience they are having? What’s imperfect about it from their point of view? What might result in a better experience for them, a potentially greater satisfaction for which they might be willing to pay. This empathy is best exercised at the level of the individual customer. If a business can get the empathic diagnosis right for one business, then they can investigate how it scales. Every customer is different, but there might be some patterns of response and interaction that spread out among a population of customers. 

Empathic diagnosis can reveal customers’ intent. What ends are they aiming for? What’s the highest value they seek? How can the firm’s proposition stimulate them to believe that it might contribute to that highest value? Uncovering the customer’s intent can indicate what experiments to run to find out whether any of the propositions a firm is able to get customers to imagine a future where new value is a possibility for them. Experiment is a key word: there’s no certainty in advance. Possibility is another key word: there is a wide range of possible outcomes. But by running the experiments and responding to feedback, the number of possibilities, the range of uncertainty, can be narrowed.

Once the results of experiments are in, then the firm can start unleashing its quants to do the economic calculation. How much will the customer pay based on these experimental results? How many customers might there be? How frequently will they buy. How much advertising budget should I spend to make the value proposition more widely known. Quantification is appropriate for these questions, once the empathic diagnosis is authenticated. 

Of course, the quantification can’t be accurate, and circumstances will change. It’s subjective calculation – the right method for an uncertain and subjective world.

The Value Creators Podcast Episode #9. Mark Packard on Subjectivism

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At the Value Creators, we favor a much different business model than the one that’s traditionally taught in business school. Our model focuses on value, understanding that value is experienced by customers, and that it’s entirely subjective. You can’t put numbers on it, you can’t capture it in a plan, it’s not something that can be distributed to shareholders. It’s not a thing of any kind.

We build the Value Creators system on the firm foundation of economics. In this episode, we’re going to explore the basis of sound economic theory and a sound understanding of value. A key word is subjectivism, which may sound very wonky, but it’s the gateway to understanding value.

To talk about value and subjectivism, our guest today is Professor Mark Packard. He’s the Research Director at the Madden Center for Value Creation, part of the College Of Business Management at Florida Atlantic University. He’s the author  He’s the author of Entrepreneurial Valuation, An Entrepreneur’s Guide To Getting Into The Minds Of Customers.

Knowledge Capsule:

  1. Subjectivism and Value: The conversation starts with a focus on subjectivism in business, particularly in understanding value. From a subjectivist perspective, value is not intrinsic; it is determined by the consumers’ subjective evaluation of products or services. Businesses must focus on providing things of value that consumers appreciate and are willing to pay for. This understanding shifts the perspective of businesses from being value creators to value facilitators, aiming to deliver a better and more valued experience to their customers.
  1. Empathy and Understanding Customer Needs: To succeed in business, entrepreneurs must have empathy and gain a deep understanding of their customers’ needs and value experiences. This involves spending quality time with customers, observing their lives, and interacting with them to truly grasp their desires and preferences. The goal is to identify what customers would value the most and offer products or services that align with those preferences.
  1. Innovation and Technical Knowledge: Successful businesses combine customer needs knowledge and technical knowledge to innovate and create superior value propositions. Entrepreneurial success comes from finding solutions that customers value more than existing options. It requires constantly learning and refining the understanding of customer needs and leveraging technical knowledge to develop products or services that cater to those needs in novel and effective ways.
  1. Crossing the Chasm: Achieving scale in business involves crossing the chasm between early adopters and the early majority. This requires having a clearly superior value proposition that resonates with a broader audience. To succeed, businesses must focus on customer experience, as early adopters’ satisfaction and positive word-of-mouth play a pivotal role in convincing the broader market to adopt the product or service.
  1. Balancing Uncertainty and Adaptability: Business success is not solely reliant on luck, but rather on a combination of understanding customer needs, technical knowledge, and continuous adaptation. Uncertainty is inherent in entrepreneurial ventures, but businesses can mitigate this by fast-adaptive learning and a willingness to revise and refine their value propositions based on feedback and changing market conditions.
  1. The Role of Knowledge Building: To become better entrepreneurs and business leaders, individuals must focus on knowledge building. This involves running experiments, interacting with customers, and processing feedback rapidly to continually improve the understanding of customer needs and create innovative solutions that provide superior value.