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.

Twice The Well-Being, Twice the Production, Twice The Love.

The purpose of an economy is to facilitate the feeling of well-being for its participants. That’s different than the official version, of course, which is to grow GDP, a combination of government spending and consumer spending on produced goods and services. 

GDP is reported as an agglomeration of all kinds of constructed numbers. We’ll-being is not measurable but its qualitative dimensions can be drawn by gauging the sentiment of citizens. The sentiment gauges are currently registering some weakness.

Well-being is produced by the private sector of the economy. There’s a well-established, time-tested proven system for doing so. It starts with the evidence of negative well-being. People exhibit an unease, a vague feeling that things could be better than they are. This vague feeling is the genius of the consumer. The human drive for betterment, to trade current circumstances for a new set that might feel more pleasant or more satisfying, is the energy of innovation, technological progress, economic growth, and civilizational advance. It’s an amazing feat of imagination, being able to see, in the mind, a future that doesn’t already exist. A counterfactual, as the scientists sometimes put it. The consumer’s imagined counterfactuals create new possibilities. 

On the production side of the private sector, there exists the function of entrepreneurship. Entrepreneurship is an act of individuals, either solely or in groups and teams, often in the form of firms and business corporations. Firms sniff out consumer unease. It’s what they do. It’s their purpose. Informed by this discovery of unease, entrepreneurs get to work to relieve it. They do so via innovation, designing a new proposition they can share with the consumer: will this work for you? will this make you feel better? have you considered this? If they get any feedback (“Yes, I’ll buy it.” “No, that’s not good enough.”) it informs a continuous change and improvement process until the offering is right for the consumer. 

In economics, the experience the consumer feels is called value. We can call it well-being. The feeling that things are getting better, that there are new options and new choices, that someone is listening and responding. This feeling is produced by the entrepreneurship of the private sector.

The other part of the economy is government and what government subsidizes. Government does not produce anything. That’s not its purpose. It extracts from the production of the private economy, via taxation, via debt creation, via regulation (limiting choices for both entrepreneurial producers and their consumers), via the diversion of resources (employing people as bureaucrats who could be much more usefully productive in the private sector), and using technology and capital that could also be deployed usefully for private purposes. Government spending as a percentage of GDP is a proxy for the ratio of government extraction to total production, and that number in 2020 was 44%

Making things worse, the government monetizes its debt via the Federal Reserve, thereby increasing the money supply in the economy. This money is depreciating at a constant and rapid rate. Saifedean Ammous in The Fiat Standard smooths out his estimate of monetary inflation at 7% per annum, which is enough to halve the value of anyone’s dollar holdings in 10 years. So the value of savings in the private sector that could be re-invested in innovation and creating new capital – which is what produces more well-being for people – is halved every 10 years.

We can safely say, as an approximation, that the activities of government mean that production in the US economy is at half the level of its potential. Consequently, entrepreneurship is at half the level of its potential. This implies that the well-being achievable by people as a result of entrepreneurial production is at half the level it could be. We could see twice the level of well-being from twice the level of production were it not for government crowding out entrepreneurship. 

And since entrepreneurship is love in action, the level of love in society is halved. Entrepreneurs work on empathy – they’re like angels, understanding what people want, and what dissatisfactions are burdening them, and then working hard to help people shed those burdens. They love their customers, and seek to earn customers’ love in return. It might be called customer service, or customer loyalty, or customer satisfaction, but in reality, it’s love. The greater the level of entrepreneurship, the greater the love. 

So there is potential for twice the well-being, twice the production, and twice the love compared to what we experience today. If we can attract more people to entrepreneurship, and point more consumers to the enjoyment of entrepreneurial output, we’ll go a long way towards achieving the kind of society we’d all love.