Consuming Is Not Mindless Buying Of Stuff. It Is Social Co-Ordination Through The Exercise Of Choice In The Marketplace.

[postintro]This article continues the occasional series from Professor Raushan Gross on The Institutions Of Entrepreneurship. Entrepreneurship is a powerful pathway to innovation, growth, prosperity, and a better life for all. Its emergence and thriving are not automatic; it requires enabling institutions. Professor Gross will analyze and explain the institutional supports required for entrepreneurship to play its role in elevating society to the highest levels of achievement.[/postintro]

The writer of a recent Forbes article doesn’t want consumers making their own choices about what to buy and how much to buy. Instead, he provides a plan for consumers to avoid what he calls excess consumerism. In other words, what the writer suggests is essentially that “excessive consumption” is terrible for you and everyone else.

To put the matter mildly, the concept of “excessive consumption” has no basis in how flesh and blood people operate in the real world. This view of excessive consumption does not account for the fact that people’s goals are not focused on buying stuff. They are making individual choices using their own income and making their own decisions to fulfill their own needs and wants. They are not seeking the judgment or moral approval of Forbes writers.

One thing is for sure, and that is people prefer to obtain what they want now rather than later. Real people have time preferences – this statement is far from new. Each of us has time preferences, and we express these preferences in the market, where we make decisions on how we spend our time and income. For example, if I asked you to choose between taking $50.00 today or $50.00 in two years, which option would you choose? If you had the option to purchase bread for $1.50 today, would you buy the same loaf of bread tomorrow for $3.00? These examples clearly show that people make their choices to satisfy their want-satisfaction under personal time preferences. Unfortunately, the idea of consumerism, or excessive consumption, posed by the recent Forbes article clearly shows a widespread misunderstanding of how real people operate in the marketplace.

The Consumer Confidence Report finds consumer confidence has improved since December 2020, including a reported uptick in January 2021, and stated that “Consumers’ expectations for the economy and jobs ……..advanced further, suggesting that consumers foresee conditions improving in the not-too-distant future.” This is good news for consumers and producers. Consumers are confident in the market conditions for consumption, and guess what – the customer still rules!

Let us face it, the idea of excessive consumption in the aggregate is all wrong. Those who support the notion of excessive consumption do not see human behavior as it is but rather how they think it should be. What is essential for a functioning marketplace is not buying more than a Forbes writer believes that one may need, but how people choose to buy more or less of what they want. The market process is about consumers making personal choices using their own time and income to buy what makes them happy and is useful toward their goals. What is wrong with that? I love coffee, and I tend to buy coffee from different places, and I buy beans to make coffee at home. Should a coffee shop owner tell me that I can buy only one bag of coffee because three bags of coffee is excessive? This is true of most things like shoes, streaming movies, and exercise downloads. What may be more for one person can very well be less for someone else.

You see, when it comes to consumption, people tend to pick and choose for themselves what is excessive and what is not. The Forbes writer’s proposition is: what is excessive to me should be excessive to everyone else in the world. However, excessive consumption cannot go beyond what is produced—as we all know, there is scarcity.

Like most people, I want to buy what I deem useful, necessary, and has value. For one thing, consumers are not bumbling idiots – they have goals in mind as they shop for items. Consumers are attentive to prices, needs, timing, and market conditions related to their situation. As long as excessive buying does not harm others or is illegal, they should enjoy an economic system that produces material goods for consumers’ purposes and enjoyment. My enjoyment is a hot cup of joe, and you enjoy power tools or clothes. We can enjoy these things because we earn income to buy them, and they bring joy.

Let us get to the point; consumers who “buy excessively” are, in reality, exercising their freedom in the marketplace. Consumers can determine on their own to either buy fewer or more significant amounts of bread; however, if they buy fewer amounts of bread, they will cause the incomes of wheat producers to fall. On the other hand, consumers who purchase more video game downloads raise the incomes of people employed in that industry. Moreover, the opposite effect happens when consumers are told not to make their own choices in the marketplace. Do not buy more than two cups of coffee a day as that is excessive. Ha!

We must remember that production takes time. Rome was not built overnight, and neither were the items bought in-person or online by millions of people every day. That means if less is purchased, less will be produced in the future.

Producers and manufacturers determine what to make more or less of based on market demand. Demand begets production. The market provides for those willing to buy, and people who are not willing to buy do not stimulate production. Producers accommodate mass demand with scarce resources. Consumption is a balance of scarcity and abundance, and the outcome creates more choices for consumers. You see, economic thriving does not revolve around buying stuff, it is the outcome of consumer choice.

On the whole, excessive consumption may not fulfill a Forbes writer’s desires, but it may bring true happiness for some people. People who buy – whether excessively or not – fulfill their economic role of supporting business owners and their local community. To assert that consumers should stop “excessively” buying products assumes away the prospect that people do not change shopping patterns or increase family sizes over time. I was always told that you do not bite the hand that feeds you. The market is the only social place where the coordination between consumers and producers can facilitate goals and mutually beneficial choices for everyone involved via the buying process. These “excessive” purchases fuel the economy, which helps all people flourish and live their best lives.

103. Steven Phelan: Embrace Complexity, Pursue Continuous Innovation, Don’t Waste Time on Planning

A rapidly advancing strand of theory has enabled great advances in the understanding of complex adaptive systems. Austrian economics is quintessential complexity theory; Austrians recognize that economic systems exhibit emergent outcomes as a result of the myriad interactions of consumers and businesses, value propositions and value perceptions, technologies and channels, and the innumerable transactions and exchanges that take place. The future is unknowable — we can’t know what will happen, and we don’t even know what can happen — and the system can sometimes feel turbulent and chaotic.

How should businesses manage complexity? They shouldn’t. It’s not manageable. No plan survives the first contact with customers is the way Steve Blank famously puts it.

What’s the answer? Don’t plan. Implement an Austrian Business Model and embrace the complexity of the marketplace.

Key Takeaways & Actionable Insights

How do you do that? Professor Steven Phelan uses the complexity theory metaphor of the dancing rugged landscape. Think of the market or business sector in which you are operating as a landscape of peaks and valleys. You can see some of them but not all of them. Your view may be improved if you have more knowledge about where you are and where you are trying to get to, but knowledge is never complete. And the landscape is not stable — new peaks form, old peaks move and crumble, valleys become deeper. The pursuit of new economic value is the search for peaks, locations of high value that your business can capture, if you can get there. A plan won’t get you there, because you can’t see a pathway and the destination is going to move and change anyway. And you might identify another, better peak as you explore, and you’ll make an unplanned change in your journey to switch destinations.

Professor Phelan sums up the many choices open to entrepreneurs in complex environments under two approaches.

Approach 1: I believe I can see a peak, and identify a pathway to reach it.

You will never be right. But there are smart actions:

  • Be humble: be conscious that you may be proven wring.
  • Act fast: test, test, test to prove the peak and the path.
  • Be agile: prepared to change or pivot when circumstances and data change.
  • Be aware of competition and fast followers and adjust accordingly.
    • Refine / redefine your niche to further differentiate.
  • Build fortifying uniqueness around any peak you find.
    • Culture
    • Brand
  • Build-in continuous change and innovation.
  • Assemble multiple peaks, reducing dependence on any single one.

Approach 2: I don’t know where the peak is, but I believe I am in an opportunity-rich landscape.

Don’t get trapped — and waste all your resources — in blind random searching.

  • Run multiple experiments — small, medium, and large.
  • High speed of sorting through outcomes.
    • Example: Big Pharma seeds multiple biotech startups, acquires winners.
  • Choose customers to serve first, rather than choose products or services to produce.
    • Customer need is the beacon to guide the search
    • The customer need is never fully understood
    • And it’s always changing
    • The work of identifying it is never complete
    • But it is the guiding light
  • There are no events (like product launches) only the continuous flow of searching, responding to customers, and changing in response.

As Professor Phelan states: the work is never done. No landscape is unchanging. No peak lasts forever.

Additional Resources

“The Entrepreneur In A Dancing Rugged Landscape” (on Twitter)

“The Complexity of Opportunity” by Steven Phelan (PDF): Download Here

“Austrian Theories of Entrepreneurship: Insights From Complexity Theory” by Steven Phelan (PDF): Download Here

“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:

Apple PodcastsGoogle PlayStitcherSpotify

Take A Job? No, Make A Job.

The institutional and cultural guidelines today for personal and family income tell us to take a job. The government publishes jobs data as a key indicator of the health of the economy. They publish the inverse set of data – unemployment statistics – for the opposite reason, an indicator of the unhealthy state of the economy. We are subject to reports and commentary on job creation and job destruction. There are blue-collar jobs and white-collar jobs, and there are “non-jobs” in the so-called gig economy (which is institutionally and culturally and frowned upon because it does not provide “stable” or “reliable” jobs, and doesn’t offer “job benefits”, thus exposing gig workers to some set of vagaries or injustices).

Jobs are a product of the industrial revolution. Serfs and peasants in the feudal economy didn’t have jobs. They were “tied to the land” as the history books tell us, either farming for the aristocratic landholders or scrambling for subsistence on land they didn’t own. As soon as factories appeared, so did “jobs”. Somehow, the term tended towards tasks that were “low” and menial.

A job is something the worker takes. It is given to him or her as a gift, a privilege, an act of generosity of an employer. We should be grateful for our jobs, and try hard to keep them, not lose them. 

Concepts such as the minimum wage level for a job are intricately entangled in the hierarchical job-granting schema. The power center determines for you how much value you are deemed to generate.

Our entire lives are constructed around jobs. We consume education in order to become qualified for a job. We plan to fund our pension income from the proceeds of a  job. We access the healthcare system via the benefits provided to us as a result of our job. We call a job held for a long time a career. Jobs overwhelm lives.

What if the institutional and cultural guidelines were different? What if the life-system we are plugged into from birth was not so dominated by the concept of jobs, of working for corporate employers?

Reframing how we think of the structure of the economy.

The picture we paint of the economy when we talk in terms of firms creating jobs for employees to take is hierarchical. We look up to “Big Business” and rank them on their number of employees. These companies make up the DJIA and S&P 500 indexes that we talk about every day. Smaller companies don’t get a mention. They sit lower down the hierarchy.

If we reframe this picture to think about a network rather than a hierarchy, we can assign a more equally important role to every node and every connection. We can see productive activity distributed across the network, with opportunities throughout. The economy is a collaborative system of production in which there are innumerable choices for each of us to decide how to contribute.

The gradual abandonment of hierarchy in organization is, in fact, quite well advanced in the digital age. Our thinking about jobs and employment needs to catch up.

A life of production versus a life of earning.

Our reward for working at a job is often expressed as earnings. Not only earning dollars, but earning a good living, earning our keep, earning a promotion. We earn by keeping in line, following orders, performing tasks. In the collaborative economic network, we can be producers rather than earners. We focus on how much our productivity in generating output to nearby nodes – team-mates, partners, customers, the next stage of the value chain – so that our connections are strong, and we are evaluated as a strong and reliable link.

Our time and effort is focused on how to be more productive, rather than how to fit in to an administrative harness. Our creativity is liberated and we evaluate our work-life for its stimulation rather than its weekly earnings.

Division of labor and division of knowledge.

Economists have identified a phenomenon they call division of labor as one of the great secret sources of job productivity. The more narrowly each individual worker specializes, the better the combined organizational outcome. This thinking has been pervasive since Adam Smith’s picture of the pin factory in The Wealth Of Nations.  

‘One man draws out the wire, another straights it, a third cuts it, a fourth points it, a fifth grinds it at the top for receiving the head; to make the head requires two or three distinct operations; to put it on, is a peculiar business, to whiten the pins is another; it is even a trade by itself to put them into the paper; and the important business of making a pin is, in this manner, divided into about eighteen distinct operations, which, in some manufactories, are all performed by distinct hands’.

The division of labor reduces us all to pin head grinders. The goal is to make each of us so specialized in our function that we can only operate in a hierarchy, we can only perform one narrow task, and we are easily replaced by another individual who can be quickly trained in repetitive pin head grinding.

There’s another alternative, and that might be called division of knowledge. Knowledge is the source of economic production, increasingly valuable when we add to it, whereas labor is a cost, to be reduced and, if possible, eliminated. Every individual has unique knowledge; it’s experiential, subjective, an act of cognition. The most valuable knowledge is tacit, not subject to analysis and not easily shared, guiding individual activity in unique ways. 

Individuals can collect, curate, polish and adapt their own knowledge to make more of a contribution to collaborative economic production. They can aim to be best at something in their network based on unique, individual tacit knowledge. It might be welding metals together or writing code or detailing cars or growing vegetables or setting prices for hard-to-price items. They can easily find out what knowledge is required and valued in nearby parts of their network, and adapt appropriately, exhibiting their knowledge for the most eager buyers.

Division of knowledge is more empowering than division of labor.

Measure your own performance.

 One of the ways that the job-granting hierarchy exerts control over the job-taker is performance reviews. The employer makes rules about what constitutes desirable performance, and designs ways to measure how well the rules are internalized by employees. Those job-takers who conform best are those who are rewarded with pay increases, promotions and recognition. Performance attributes like “works well with others on teams” and “achieves departmental goals” are designed for the benefit of the hierarchy, and not as guides to self-realization for individuals.

Many of the corporate performance programs require the individual employee to undergo a personality evaluation, often using industrialized frameworks such as the Myers-Briggs Typology Indicator, literally assigning individuals to pre-determined boxes and using the classifications to evaluate their ability to fit in. They’re not examining your personality profile to enlighten you.

Such performance criteria and performance measures are intended to be tied to incentives, to be a medium of motivation. But the high-powered incentives that truly motivate are values such as purpose and meaning, and the sense of achievement that comes from an individual effort to attain a self-chosen goal of the highest order. In a large firm, individual effort can have only a trivial effect on company performance, or even team performance in a corporate context. And there is usually no place for truly individual performance. That would not constitute working well with others.

As an individual entrepreneur, or a founding team member, or a critical member of a small business, it is possible to maximize personal achievement, elevate personal incentives, and take a more direct route to purpose and meaning. Data indicate that small companies are better at attracting superior talent, better at rewarding individual performance, and better at nurturing the kinds of innovation that motivated individuals can contribute. Often, these innovations are better ways to work: new routines, new capabilities, new knowledge sharing. Better ways to work mean more achievement, and more fulfillment for those who participate in the new ways. People-led process innovation becomes a virtuous circle.