A new worldview for economics and business.

It’s exciting to live through a time of changing worldviews – when what we used to believe is shown to be wrong, and is replaced by new beliefs that are often still emerging and therefore somewhat open-ended. New doors open, new possibilities present themselves, there’s new energy.

The science of physics experienced this change of worldview in the later parts of the twentieth century and is still exploring new worlds in the twenty-first. The old worldview was Newton’s: that the universe was a machine, its motion and planetary interactions governed by unbreakable mathematical laws. This mechanistic view extended to all of natural and human life – whatever we examine, we look at it as a machine and try to figure out how it “works”, how the parts into which we can reduce the machine function together, and how it can be tuned for better performance. This mechanistic view extended to people and organizations, where we called it “management”.

Fritjof Capra, in The Tao Of Physics, writes about “the fundamental change of worldview that is now occurring in science and society…..the unfolding of a new vision of reality”. The change stems from the discoveries of quantum physics, where the traditional idea of a material substance is replaced, and concepts of space, time and cause-and-effect are radically transformed. The machine-like image of how the world works is replaced by an image of dynamic flow; the world is forever in motion, time and change are essential features, and all phenomena are interrelated rather than separate, so that a change in one component affects all others, and hence affects the whole, which in turn re-affects the components through never-ending recursion of feedback loops. Quantum theory and relativity theory forced the world to change its worldview. There are no “basic building blocks” of matter that we can isolate, just a complicated web of waves and patterns of energy. The new world is not precise or predictable or measurable. it’s a world where opposites we don’t understand and can’t conceive of co-existing nevertheless apply. It’s a world of probabilities where there are multiple possible futures at any point, and therefore the possibility of many presents. It’s a bit spooky, as Einstein put it.

The world of economics and business is on the threshold of such a change in worldview. The same Newtonian mechanistic and mathematical approach that was applied in physics has been adopted in economics. The economy was viewed as a machine, churning out a numerical output identified as GDP. The efficiency of this machine could be calculated using algebra and equations. A certain amount of capital combined with a certain amount of labor and a factor that represents technological progress became the “model” for how the economy works. Within this larger machine were smaller component machines called firms, which combined capital and labor and technology in smaller and distinctive ways to contribute to total output. These machines were “managed” for high performance – organized as hierarchical command-and-control structures where the managers at the top who had all the equations and plans and visions instructed and directed the lower orders on how they should act. The worldview was quantitative and positivist, a word which we can translate as “there’s an equation that explains everything”.

The quantum equivalent in economics and business is the growing recognition that numbers and equations and top-down command and control management have no place in a system composed of human factors not machine parts. The economy is just such a system and firms are such systems. The appropriate worldview is the opposite of quantitative and positivist: it’s qualitative and subjectivist. Physicist Richard Feynman captured the difference in a well-turned phrase: “Imagine how much harder physics would be if electrons had feelings.” There could be no laws of physics, no continuity of data streams, no capturing of behavior in equations and algebraic symbols. 

Economics and business concern humans. They are artifacts of human action and cultures of human feelings and emotions. The basic unit of analysis is the individual, both as worker and producer and as end-user, consumer and evaluator. Individuals are guided by their feelings, which change over time, and as context changes, and as they interact with others whose feelings are in play. The purpose of the economy is not to produce GDP, but to produce well-being, that feeling among individuals that they are better off compared to previous time periods and compared to alternatives. The economy gives individuals choices rather than giving them output. Firms are collections of individuals doing the same for customers – presenting them with choices and the proposition that making the choice will enhance their well-being – and for each other. The firm is a collaboration of people with aligned mindsets and shared assumptions and values engaged in offering well-being to others. There are no equations to help, and no hard-number metrics. There is subjective calculation – that well-being can be assessed, and can be monitored for its direction (getting better or worse) and its intensity (deeply felt as satisfaction or softly felt as contentment). There’s also the opposite assessment of unease or disquiet, which is the signal to the entrepreneurial firm that there’s the opportunity to generate new well-being that’s currently missing. There’s a market reward for getting this right, when satisfaction turns into willingness to pay and cash flows to the firm that makes well-being more possible and accessible for its customers.

These market rewards are flows, not to be measured by looking back over time at the end of the quarter or the year, but by looking forward to the future satisfactions that will keep the cash flowing, or sensing some fade in satisfaction which calls for innovation and an improved value proposition. Management is caring – caring about the customer experiencing value and feeling satisfaction and being confident in their choices. This is the new worldview. The old one brought with it the perception of capitalism as extractive and exploitative because there was no caring there, just numbers and equations. We are happy to move on.

Quantum Economics, Potential, And The 4V’s Business Model.

To get your head around quantum mechanics, it’s necessary to be able to think about a space that’s between reality (called spacetime in the language of the science) and imagination, something that doesn’t exist. This half-way house, this in-between, is not unreal. But it can’t be observed or verified. Some of its inhabitants will become real and verifiable and some won’t, never to be observed at all. A way to think about this in-between is as potential. Potential is sometimes realized, and sometimes it isn’t.

In her book Understanding Our Unseen Reality, Ruth E. Kastner explains how potential can be realized in quantumland. It takes the form of a transactional process, in which a quantum object that she calls an emitter sends out an offer wave. Under certain conditions, another quantum object, which she calls an absorber, can receive the offer wave and send a confirmation wave in return. If the confirmation is a mirror image of the offer, the two objects have formed an incipient transaction. If there is only one offer and only one matching confirmation that is an exact mirror image, the incipient transaction becomes actualized and real. It becomes, in Kastner’s words, “A brick’, an observable, verifiable event in spacetime. (pp 48-53)

I am quite sure I have oversimplified quantum theory. However, it’s in the good cause of making an analogy that is useful for real-world practicing entrepreneurs and businesses.

Austrian economics is quantum economics. Quantum mechanics is the study of behavior and properties and interactions of the smallest units of energy in the universe.  One of its revelations is that “the rules are different” at this scale. The rules of classical physics do not apply. Austrian economics is the study of the smallest unit of energy in the economic system, the individual. The term that is used in economic science is methodological individualism: the study of the behaviors and properties and interactions of individual people and how they propagate into processes like value creation, and economic growth, and into structures like firms. (Here’s a white paper that explains in detail.)

An example of an emergent process is the Austrian Business Model, a framework for profit-making operations for businesses. The essence of the Austrian Business Model, the engine if you will, is the core value generation process we call 4V’s. The 4V’s represent a rolling, recursive, repeating value process for firms to successfully bring new innovation to the market. The 4V’s are Value Potential, Value Facilitation, Value Capture, and Value Agility.

In quadrant V1, Value Potential, is in quantumland. It’s not yet real, but it can be. Think of it as the space where the consumer is sending out offer waves, just like a quantum object. These offer waves are a little hard to process. The consumer expresses dissatisfaction, or unease with the current state of their consumption experience. Things could be better. The wine could be more to their taste, or it could be less expensive. They like the room afforded by their SUV but they’re a bit unsure whether they can put up with the mpg levels. They like going to restaurants but it might be nicer if the restaurant came to them. Maybe they feel they’re not getting all the possible benefits that they could from the internet. Or Netflix. Why is zoom so hard to use? Why does my bank treat me with such disdain? Why can’t I eat as much chocolate as I would like? Why is healthcare so expensive? I’d like to earn a degree, but I’m not sure if it’s worth the 4-year commitment or the money. Why is the CFA exam so hard? Why is dentistry so painful? Is my dog enjoying its food? I hate having acne. I have a headache. Sometimes, I feel a bit lonely.

Consumer sentiments such as these are offer waves. They’re the signal that precedes an incipient transaction. If they are important enough to the individual, and if they’re important to enough individuals, they represent value potential. For example, unease about the time commitment and cost of acquiring a traditional 4 year degree could be an offer wave that, when absorbed and confirmed, becomes educational innovation, the formation of online for-profit degree courses, and ultimately Coursera and Masterclass. Concern about the palatability of dogfood could become The Farmer’s Dog, or A Pup Above or one of many more entrepreneurial initiatives. Feeling lonely sparks the $3 billion online dating industry, or Meetup.

None of these businesses are real in their pre-existence as consumer unease. They are potential. Every firm, every business unit, every industry, every innovation begins as a quantum object we call consumer dissatisfaction. Every firm needs to begin with a stash of value potential. Every firm needs to be able to exercise empathy to detect the signals, understand the feelings of the emitters, the dissatisfied consumers, and translate them into commercial possibilities. These firms need the creative imagination and the resourcefulness to devise and run multiple probes into these possibilities, a portfolio of experiments in activating potential. Some will work in generating a confirmation signal that the consumer determines is the mirror image to their unease. Many experiments won’t work. The process is probabilistic. It might be possible to improve the probabilities in your firm’s favor by running more experiments or becoming better at absorbing offer waves. Or it might not.

Whatever the case, identifying and accumulating value potential is a necessary capability of every successful firm. Without it, there is no success. It requires deep, intimate understanding of the consumers, and a commitment to interpreting their offer waves. It requires the humility to know that it’s hard to perfect the process, and that there will be a lot of misinterpretations and errors.