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180. Raushan Gross On the Newly Emerging And Newly Enabling Institutions Of Entrepreneurship

Entrepreneurship today is a movement, a welling-up of new economic creativity, combined with a great desire for economic freedom and the joys of self-reliance and discovery. The movement is newly empowered by enabling institutions that simply weren’t around a few years ago, including the internet and its digital economic platforms. Professor Raushan Gross is a great observer and great documenter of this entrepreneurial surge, and he joins the Economics For Business podcast to share some of his original and distinctive observations about the very human aspects of his new entrepreneurial studies.

Key Takeaways and Actionable Insights

Let’s not over-theorize and over-professionalize entrepreneurship: it’s people finding new ways to thrive by creatively serving other people.

There’s an explosion of university entrepreneurship programs, entrepreneurship research and entrepreneurship methodologies. There’s an attempt to professionalize entrepreneurship, to make it a product of business schools.

Raushan Gross sees things differently, through a humanist, subjective and ethical lens. He looks at the culture of entrepreneurship, the social movement of individuals making their way in life in a new manner, seeing new opportunities to make their lives better for themselves and their families by making life better for others.

There’s a newly emerging set of institutions and a new class of entrepreneur: the digitalpreneur.

Economists take an interest in how institutions shape behavior and economic activity. They see institutions as constraints. They sometimes call them “the rules of the game”. Professor Gross has a different take. The new institutions of entrepreneurship — the internet, digital platforms, e-commerce, digitization in general — are not constraining; rather, they are openings to a new space with new possibilities. This digital space is welcoming. There’s abundant knowledge to be shared. There are new ways to think about access to resources, about production and marketing and organization. There’s a new world of price signals, much more flexible and fast-changing, and the route to cash flow and profit is faster.

Professor Gross identifies digitalpreneurs as a new economic class: not higher or lower, not defined by their origins or background, free to move at any speed and to access any place in their relentless, unbounded pursuit of entrepreneurship.

Today’s entrepreneurs are rewriting economic history: from the invisible hand to the visible hand to the digital hand.

Adam Smith introduced the metaphor of the invisible hand — the concept that individual economic actors and firms entrepreneurially pursuing their own profit goals generate the economic system we call free market capitalism, with benefits for all of society. Friedrich Hayek expressed a similar idea as “spontaneous order”. The invisible hand guided the rapid growth in real standards of living of the industrial revolution.

Then the visible hand imposed itself: the concepts of management control, and of planning and centralization. Creativity, innovation, and rapid growth were suppressed, while bureaucracies expanded. We got “Bullshit Jobs”, in David Graeber’s locution, from which creativity and caring were expunged.

Professor Gross takes us beyond both the invisible hand and the visible hand to the digital hand, which gently guides digitalpreneurs to participate in or even create new markets. The digital hand is generative. It enables digitalpreneurs to operate their own digital platforms, to construct their own digital economy, to assemble their own economic knowledge and to find their own unique place in the knowledge economy. The digital hand opens up new pathways to economic freedom.

Digital entrepreneurship can be conducted at any scale, but watch out for the dead hand.

Where are the corporations in their embrace of digitalpreneurs? Certainly, there are the new digital corporations like Amazon and Google who seem willing to hire members of the new class and turn them loose in creative experimentation. But what about the old economy corporations who need to make the transition to the new world? Are they hiring entrepreneurs? Are they enabling entrepreneurs, freeing them from bureaucracy and from the command-and-control hierarchy? The evidence so far is that they are not.

How to integrate the entrepreneurial orientation into a corporate organization remains an unsolved mystery. How can the corporate advantages of reach and scale be leveraged to further realize the senses of purpose and meaning that drive entrepreneurship? How can corporations shift to the entrepreneurial culture?

They need to find ways to eliminate what Professor Gross calls the Dead Hand — bureaucracy, regulation, control, risk-aversion, centralization, procedures, and rules.

But corporate culture is not the only barrier to the realization of the entrepreneurial society. There are other cultural barriers to overcome.

Professor Deirdre McCloskey is famous for her analysis that the catalyst for what she calls The Great Enrichment — the 3000% increase in real standards of living in certain Western countries from 1800 to the present — was a change in how we talked about entrepreneurship. The perceptions and descriptions of the bourgeois life of commerce transitioned from scorn to admiration. Entrepreneurs came to be seen as bold and innovative, a force for good, providers of desirable services enhancing the quality of life.

Professor Gross sees a fresh need for such a change in language and cultural support for the new age of digital entrepreneurship. One example he gives is the language of venture failure. Initiatives that are concluded early or don’t hit some target or don’t attract sufficient buyers or don’t generate enough profit to be sustainable are deemed “failures”. This characterization tends to lead to erroneous conclusions about risk (as in risk of failure) and about the people who engaged in the initiatives (“failures” or, worse, “losers”).

There’s a much different and better way to frame the same data as learning, and augmenting the pool of knowledge. When we think of entrepreneurship as a flow, we can visualize how information flows from the past to the present, elevating the intelligence of every entrepreneur and every firm that’s operating today. Not only does knowledge flow, it compounds, so today’s entrepreneurs can be exponentially more informed than their predecessors.

The more we adopt this win-win cultural approach to cumulative entrepreneurial knowledge-building, as opposed to the win-lose language of failure and success, the closer we’ll come to the beneficent entrepreneurial society that Adam Smith imagined, before he was so rudely interrupted.

Additional Resources

Join Economics for Business today and receive a free copy of The Emerging Institutions of Entrepreneurship eBook by Raushan Gross: Mises.org/E4B_Join

179. Mark Packard On Entrepreneurial Valuation, Part 2: How Entrepreneurs Create Value

There is an excellent, deeply researched, Austrian economics-founded theory of customer value: the value learning cycle, which we explored thoroughly in Episode #178 (Mises.org/E4B_178). How do entrepreneurs and executives apply that theory to create customers, delight them, and grow strong brands and businesses? That’s the subject of the second part of Mark Packard’s business handbook for value creation, Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers (Mises.org/E4B_179_Book).

Key Takeaways and Actionable Insights

Entrepreneurs can’t directly access the customer’s mental model, but they can apply empathy to run simulations.

Entrepreneurial empathy is the ability to see the world through the mental model of the customer. We all see the world through mental models rather than directly, and each of us has our own, unique mental model. But mental models can also be shared and aligned. A mental model is a way of thinking about real situations or about the real world. It’s quite possible to describe someone else’s mental model. We can first ask them questions (“How do you think about your current situation?” “What do you do when the car you drive gets to 50,000 miles on the odometer?”) and then run hypotheses or ideas through the model that emerges (“How do you like this?”, “How does this make you feel?”, “Would you buy this product?”)

Empathy is knowledge-based, and therefore can be practiced by any entrepreneur.

It’s not the case that some people are more capable of empathy than others. Since empathy is knowledge-based, it can be learned, developed, and trained. It’s a process of filling different buckets of knowledge about your customer. There’s factual knowledge about them, as well as factual knowledge about their consumption or usage (e.g., location, frequency, any reports, or ratings they’ve provided). And then there’s experiential knowledge — what an experience felt like to them.

Only the customer has this experiential knowledge, only they can feel it. But if the entrepreneur can understand the customer’s mental model, it’s possible to simulate what that experience might feel like — feel what they feel. It’s possible to get closer and closer by experiencing it yourself: eating the food you’re offering them or the beverage you’ve designed, using their mental model rather than your own. The customer’s experiential knowledge is tacit — it can’t be communicated directly — but entrepreneurs can get closer to it through simulation, and interpret it through empathic technique.

Be aware that there is always the risk of what Mark calls interpretive loss — we listen or observe but we don’t interpret the data properly or fully. Our downloadable pdf provides direction on where interpretive loss occurs and how to safeguard against it.

There are some techniques to reinforce the accuracy of empathic investigation.

  • Lead users: In every category, there are users who feel needs and experience unsatisfaction / dissatisfaction more intensely. Give investigative priority to them.
  • Contextual in-depth interviews: Communication can be more productive using specific techniques from our E4B tools library. The contextual in-depth interview technique is one of our useful tools.
  • Ethnographic deduction: Ethnography is the technique of observing users in action. It’s a better tool than a survey or questionnaire — what users do is more informative than what they say when answering surveys. Researchers deduce motivations from observation.
  • Behavioral data: Some data streams can be the equivalent of ethnography — observing users buying or searching as an indicator of their needs, preferences, and concerns.
  • Entrepreneurs can also learn from themselves: We are all both consumers and producers. In the categories that are most important to you, observe your own behavior as a user. Be aware of your concerns as a customer. Make your empathy channel customer-to-customer.

From value propositions to innovation.

Developing a value proposition is a problem-finding process. Designing an innovation is a problem-solution process.

Problem-finding is the development of knowledge of a problem to be solved from the customer’s perspective, using the experiential learning from the mental modeling exercise. A problem is not the same as a need — it’s a specific gap in the solution landscape of products and services from which the customer can choose, a gap that can be filled with a new solution yet to be identified but capable of identification.

Problem-solving is the application of resource knowledge and technical knowledge to identify a new solution. The entrepreneur must navigate multiple uncertainties to arrive at a solution — demand uncertainty (is there real demand?), technical uncertainty (will it work?), resource uncertainty (will I be able to gather the resources to get to a solution?), capability uncertainty (can I do this?), and competitive uncertainty (will someone else beat me to it?).

Mark’s book includes a multi-step process for problem-solution creativity. One of the most interesting is knowledge combining.

What’s a pancake boat? It’s a combination of two very basic words and ideas that represents the potential for something new. Perhaps a very flat-profile boat for floating under low bridges. Or a breakfast barge touring the harbor. The point is the combination. When entrepreneurs can combine technological knowledge with problem knowledge, it’s possible to invent a new solution without inventing a new technology.

Mark has two suggestions to help with knowledge combining. One is to become interested in technologies. If you are having a hard time devising a solution, it’s probably because you are not familiar enough with technologies that are already available to do so. Find tech websites that can keep you up-to-date on the latest discoveries and applications. The more you understand about the properties and capabilities of resources and technologies, the better you can leverage those properties and what they do.

The second suggestion is a specific method. List as many different resources, technologies, and skills that you know about — software skills, hardware skills, people skills, technologies you’ve worked with, processes you’ve worked with, etc. Keep the list updated.

Then turn to the problem you are trying to solve. Mentally step through all the resources on your list and bring each of them into active memory. Try to think of a possible solution using each one. Keep going through the whole list. You’re bringing technical knowledge schemas forward while holding your problem knowledge in active memory.

Do any of the solutions stand out? Are there any that are truly outside-the-box? Are any of them impossible with current technology? That’s good. Do more research. You might find a breakthrough answer.

It takes time, commitment, and resources, but when you are passionate about the entrepreneurial process the effort will pay off big time.

Entrepreneurs get inside the mind of the customer to make the world a better place.

The goal of entrepreneurship is to enhance and improve the state of well-being experienced by customers. To achieve this goal, entrepreneurs aim to understand the customer’s mental model, and run creative solutions — potential futures — through it to simulate the customer’s new experience. It’s a counter-factual exercise, but entrepreneurs can improve their capacity, and their odds of success, with practice, commitment, and the use of some of the cognitive techniques Mark Packard recommends.

Additional Resources

“Contextual In-depth Interview Technique” (PDF): Mises.org/E4B_179_PDF

“Interpretive Value Learning” (PPT): Mises.org/E4B_179_PPT

Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers by Mark Packard: Mises.org/E4B_179_Book

178. Mark Packard On Entrepreneurial Valuation, Part 1: Value Learning

Getting into the minds of customers is the universal need of everyone in business. A new book by Mark Packard, Entrepreneurial Valuation, provides a new understanding of how customers identify value in the constant, never-ending flow of the value learning cycle. Mark joins Economics For Business for a two-part episode on how entrepreneurs can better understand value in order to delight customers.

Key Takeaways and Actionable Insights

Getting into the minds of customers is the universal need of everyone in business.

The business world is enthusiastically adopting the insights of Austrian economics. They appreciate the unique economic perspective that can help grow and strengthen customer-facing businesses — and that means all businesses. Professor Mark Packard is presenting his insights on customers and how their minds work when choosing what to buy in a new book, Entrepreneurial Valuation, with the sub-title An Entrepreneur’s Guide To Getting Into The Minds Of Customers (Mises.org/E4B_178_Book). It’s a business book for every business and every businessperson.

The first step is to experience value as customers experience it. They learn it.

The purpose of business is to create value for customers. And for customers, the pursuit of value is everything. It’s life — a never-ending process of identifying what they expect to be valuable to them and trying to weigh up their choices between alternatives. Human beings are always valuing, all the time. In fact, Mark makes the point that we should think of value as a verb, not just as a noun. Value as a noun has a specific meaning: it’s an experienced benefit that constitutes a change in well-being from a state of unwellness to a better-off state. The benefit is the experience, and it can be ascribed to something that made us feel better off, which therefore has value.

Valuing — the verb form of value — refers to human beings constantly deciding what to do and what to choose based on their valuation process. And that process is learning — learning from previous value experiences, and learning from observing others. As customers, people are always asking: what makes us and others the best off we or they can be?

Entrepreneurs must have their own, complementary, value learning process: learning what customers value and, ideally, what they will value in the future.

Customers can be unsatisfied or dissatisfied. It’s important that entrepreneurs address these value states differently.

The default state for people is unsatisfied. We have unmet needs that we feel all the time. Mises called it a state of uneasiness. Needs like hunger can be satisfied in the short term, but the satisfaction degrades quickly. Needs like security or freedom or friendship may always be unsatisfied, or at least part of the time. There is always a state of greater well-being to aspire to.

Dissatisfaction is a different state. A customer may have applied their value knowledge — made a valuation — to predict a future value experience, and it falls short of their expectations. They made an error. This results in a feeling of dissatisfaction

Both states are opportunities for entrepreneurs: to meet a hitherto unmet need, or to substitute satisfaction for dissatisfaction via a new or better solution. It’s important to know the customer’s state of well-being and its source.

Customers have limited value knowledge and considerable value uncertainty, yet they must make value predictions.

Customers use the value knowledge they possess, from previous value experiences or observing others in the market, to try to predict a future improvement in well-being for themselves. What choices should they make to achieve this improvement?

How do they make the prediction? They perform a mental simulation of future value experiences. They imagine themselves having a future value experience with a particular product or service. Via the simulation, they form their predictive valuation: the benefit they expect to experience in the future.

When they actually use the product or service, they assess the actual value experience and compare it with the prediction, thereby updating their value knowledge. They ascribe to the product or service the satisfaction or dissatisfaction experience they feel. Or they might ascribe it to a set of circumstances or some other context. In any case, they have a new mental model: a new experience they can ascribe and use for future predictions.

Value learning is a cycle.

  • Self-assess to identify unsatisfaction and dissatisfaction;
  • Search for new value propositions with new satisfaction potential;
  • Compare the new value proposition with alternatives (and with others’ experiences);
  • Make an economic calculation: willingness to pay;
  • Purchase;
  • Usage experience — including objective value experienced in consumption and subjective value experienced as degrees of feelings of satisfaction (e.g., delight at exceeding expectations versus satisfaction at meeting expectations versus disappointment at failing to meet expectations);
  • Assess usage experience compared to value expectation;
  • Adjust value knowledge base and revise future expectations.

Austrian economics helps businesses get into the minds of customers to monitor and understand their value learning.

Economics is a much better discipline than finance on which to construct an approach to growing a successful business, because economics is the science of choice: how customers choose the ends they pursue and how they choose the means they perceive as best for attaining their ends.

It’s the Austrian school of economics that is most useful. Traditional economics believes that customers seek utility — what’s useful to them. But subjective value doesn’t reside in utility, it resides in the satisfaction that comes from the feeling of making the best choices. Behavioral economists believe that customers have a tendency to make poor choices (from the economists’ point of view) because of incomplete value knowledge.

But Austrian economists accept the customer’s mind as it is. The goal is to understand how customers choose and how they experience value in their everyday lives, how they negotiate value uncertainty, how they set expectations for the future and how they compare actual experience with expectations. What goes through their minds? To know that requires getting inside their minds, which is what Professor Packard is trying to help us to do with his new book.

Additional Resources

“Experiential Value Theory: How Customers Think About Value” (PPT): Mises.org_E4B_178_PPT

Entrepreneurial Valuation: An Entrepreneur’s Guide To Getting Into The Minds Of Customers by Mark Packard: Mises.org/E4B_178_Book

“Tools For The Value Learning Process” (PDF): Mises.org_E4B_178_PDF

177. Mark McGrath On After-Action Reviews

The business-as-a-flow orientation embraces continuous adaptive change within the firm. Traditional slow-motion control mechanisms like strategy and planning are no longer appropriate. The new toolkit that entrepreneurs are developing includes the after action review (AAR), a learning tool rather than a misguided attempt at predictive control.  

Key Takeaways And Actionable Insights. 

In a VUCA world, entrepreneurial orientation embraces change and adaptation in order to reach goals. 

Learning fast is critical in times of accelerated change. A business firm must change at least as fast as its market and its external environment if it is to survive and thrive – ideally faster. In earlier podcasts, we’ve made reference to the OODA loop as a non-linear change management framework: Observe changing data, filter those Observations through your firm’s capabilities, culture, heritage, and experience to understand what the new data means to your firm specifically, re-Orient if it’s indicated, make new Decisions and take new Actions, and monitor the feedback loops for updated Observations. Speed of progression through the loop is a competitive advantage – make changes faster than your competitors. 

One of the keys to successfully managing change is a bias for action. 

It’s possible that in some situations some businesses may fear taking action – they lack confidence in their own hypotheses and are concerned that their action might be “wrong”. Austrian entrepreneurship takes a different perspective. Entrepreneurial orientation and intent shape decision-making by giving it a high potential focus and, thereafter, every action is framed an experiment from which to learn. Learning enables a greater capacity for reframing. Curt Carlson, in E4B podcast #175, told us that relentless reframing is key to success in innovation. Learning through action is paramount. 

The tool for learning from action is the AAR – After Action Review. 

The After Action Review is a simple device that asks the questions: what did we intend would happen, what did actually happen, what can we learn from what happened, what will we change next time we take action. 

  • Intent – What are the intended results and metrics? 

It’s important to continually review the shared understanding of intent among those participating in any action or project or initiative. Shared intent is the mechanism that supplies direction and thrust so that everyone is moving in the same direction. It’s sometimes called commander’s intent (in the military) or leader’s intent (in Agile team science). It’s key that every team member subscribes to and can articulate the intent. 

  • Performance – What happened? Is there a performance gap compared to intent? 

“What happened” can be a challenging question because observation is often subjective, and individuals in different vantage point and with different perspectives can provide different reports or estimations of what happened. Cultural factors become important – front line actors and individuals located lower in a hierarchy must be able to speak freely about what they observed without fear of contradiction or condemnation by superior. A performance gap must be viewed as a learning opportunity that is good for the entire team and the firm as a whole.  

  • Learning – What was the cause or source of any performance gap? 

In a high-speed learning culture, teams are eager to identify causes or issues that give rise to performance gaps. In complexity thinking, it is not always possible to identify linear cause-and-effect linkages, but it’s generally possible to identify areas for improvement as a result of experiencing a setback. It may simply be necessary to run more experiments until a better performance can be attained. It may be possible to identify obstacles that can be removed. It may be possible to identify risks that can be mitigated. In any of these cases, learning via experience (i.e., after action) advances knowledge and augments adaptiveness. 

One possible learning is that the intended result is not, in fact, within the capacity of the firm, leading to either a decision to augment capacity or a decision to redirect existing resources into other lines. 

  • Next Time – What should we change? 

Learning leads to new hypotheses which can be implemented through new action. The After Action Review identifies what changes in behavior are appropriate to try in a future action. There’s the opportunity to eliminate waste, or abandon no-longer promising trials, or experiment with improved ideas. In a learning culture, there is eagerness to return to action armed with new knowledge and to explore new potential. 

AAR’s can span all time periods: before action, during action, after action. 

When should a firm conduct AAR’s? All the time. In fact, there’s a role for before action reviews, during action reviews and after action reviews. All have the same structure. 

  • What is / was / is going to be our intent? 
  • What challenges will we expect to face / are we facing / did we face? 
  • What have we learned in the past / what are we learning right now / what caused the latest gap? 
  • What will make us successful this time / what adjustments should we make right now / what will we change next time? 

A learning culture and orientation are critical to the successful application of AAR’s. 

Learning via AAR’s is not mechanical, it’s cultural. The culture of the firm must be that there’s no development, no progress, no improvement without learning. Mark McGrath links the learning culture to the growth mindset. The relevant assessment is not one of strengths versus weaknesses but the mindset of the firm compared to that of its competitors. Seeking growth is a mindset, and so is learning. It’s a humble mindset in which we recognize our bounded understanding and seek eagerly to augment it with new knowledge. 

There are simple shared rules for individual AAR’s and for the learning culture: shared goals and mental models, open to every level of the organization, psychological safety, transparency, shared findings, preparation for next time. Within these rules, every firm can build a capacity for learning that becomes a capacity for growth. 

Additional Resources 

E4B AAR template 

Background reading – nextforge.com 

Orientation: Bridging The Gap In The Austrian Theory Of Entrepreneurship (AERC 2022 Paper) 

Mark McGrath on LinkedIn 

OODA Loop 

176. Peter Lewin and Steven Phelan: How Do Entrepreneurs Calculate Economic Value Added? Subjectively.

At the core of the entrepreneurial orientation that is the engine of vibrant, growing, value-creating, customer-first businesses, we find the principles of subjectivism and subjective value. Subjective value embraces not only the value the customer seeks, but also the value that entrepreneurs establish in their companies: capital value. Once businesses master these two principles in combination, they can open new horizons of innovation and growth.

Key Takeaways and Actionable Insights

A fundamental advantage of Economics For Business over traditional business schools is the understanding of subjective value.

It’s hard for conventional businesses, and for the traditional instruction in business school, to fully embrace all the insights of subjectivism and the subjectivism of value. The traditional bias is towards numbers, quantification, prediction, and financial control.

Value is conflated with price and profit. Value is what customers will pay, cost is what the producer pays for inputs, and profit is the difference. Value is inherent in the thing that is produced. Finance and accounting are the numerical tools for computing these relationships.

When business embraces subjectivism, the value is not in the thing. Human minds bring value to the thing. Value comes ultimately from the consumer or end-user. They evaluate the offerings available to them and make value decisions, to part with their money (or not) to claim the value that’s offered.

Value is better thought of as a verb rather than a noun. It’s an emotional driver of decision-making.

Firms can’t impose their concepts of value on customers.

A key difference for the subjectivist approach is that customers alone determine value and producers can’t create it and sell it. Value is experienced by customers and, of course, experience lies entirely with them and can’t be reproduced or projected or simulated by producers.

That doesn’t mean that there’s no role in value generation for businesses. Steve Phelan broke down the firm’s value role into 3 parts: value imagination, value delivery and value capture.

Value imagination is a belief about the future — entrepreneurs imagine (or have a “hunch” about) a future in which a target customer experiences value from the producer’s offering, the goods and/or services they make available to customers. This imagination step is a major component of the entrepreneurial journey construct we employ at econ4business.com to help businesses generate value and grow. It’s creativity at work — where value creation starts.

Value delivery is implementation of the imagined value: designing the goods / services for commercial offering, assembling all the components required for implementation (including people in team roles as well as production assets) and taking the offering to the marketplace with a price and a value communication bundle.

Value capture concerns how much of the value experienced by the customer flows back to the producer. Typically, value production takes place in a system — perhaps including retail channels, or a wholesale partner, or a bank of financial partner. How much of the value flow do they take? Or how about competition, who might copy and undercut. Or suppliers who violate contracts or under-perform on contracted services. Entrepreneurs must pay close attention to value capture.

Subjective value thinking extends to business investment decisions.

Subjectivism applies not only to value but to the assets of a producing firm. The subjectivist approach understands assets as providers of potential services that customers might value. Most classes of assets (including people) can be assigned to multiple different uses and multiple configurations for the provision of different services. Entrepreneurship weighs up — evaluates — all the possibilities and assigns the assets to their greatest value generating uses.

Value calculus assesses the value-producing arrangements inside the firm.

Entrepreneurial producers of value face in two directions: outward to the market and customers, and inwards to the firm and its internal organization.

Looking inwards, producers must calculate which assets — including both human capital assets and physical assets — in which combination result in the greatest value for customers at the least cost. This requires an evaluation that assesses value flowing to the customer from the firm. Since value is subjectively determined by the customer, this calculation is extremely challenging. Peter Lewin called it subjective quantification, and Steve Phelan used the term value calculus. It’s a combination of qualitative and quantitative assessments that’s learned over time. It’s highly contingent on the (changing) value preferences of customers.

Internally, managers must combine their people assets and physical assets in a way that produces most value based on this uncertain and changing value calculus. Entrepreneurs and owners can’t be the decision-makers for everyone, and so the organizational technology must be designed for greatest value generation. Instructively, that organizational technology has been changing over time — from highly structured and divisionalized organizations to today’s more open, networked, and interconnected organizations.

The tool for capturing this value calculus is EVA — economic value added.

Capital is a value. In fact, Ludwig von Mises remarked that it was unfortunate that business ever coined the term capital goods, because it tends to make us think of capital as something solid and fixed. It’s not — it’s the result of the value calculus that Steve Phelan talks about.

Capital value can be measured, but not in the way that is captured on a P&L or a balance sheet — creating numbers that appear to be exact, and fixed and fully determined. Entrepreneurs must estimate capital value and the estimate is that of the valuer. They do so algorithmically — there’s a process and a routine but it’s not necessarily mathematical. It includes breaking down the asset combination into smaller and smaller components — perhaps individual people or teams, or perhaps divisions versus the entire company, or perhaps some set of components that can be thought of as an integrated grouping — and assessing their relative capital value contribution. Money values can be used since this helps the expression of relative value, but the algorithmic computation is never exact. Its validity is always in the eye of the valuer. The goal is to find costs that don’t add value, or don’t add as much value as other costs.

Accounting and finance — one looking to the past to measure what happened and one looking to the future to predict what will happen — offer objective-looking numbers, but they truly reflect the subjective value calculus of the entrepreneur in trying to allocate economic value added as accurately as possible.

Additional Resources

“An Austrian Theory Of The Firm” by Peter Lewin and Steven Phelan: Mises.org/E4B_176_PDF1

Austrian Capital Theory: A Modern Survey of the Essentials by Peter Lewin and Nicolas Cachanosky: Mises.org/E4B_176_Book

“Entrepreneurship in a theory of capital and finance — Illustrating the use of subjective quantification” by Peter Lewin and Nicolas Cachanosky: Mises.org/E4B_176_PDF2

175. Curt Carlson: Value Creation as a Life Skill

Curt Carlson has devoted his life to value creation and innovation — VC&I as he sometimes characterizes it. He has been CEO of SRI, a “pure innovation” company where the business model was to create important new innovations that positively impacted the lives of many people. Examples of his innovations are Siri (ultimately sold to Apple) and HDTV (the technology that enables the streaming so many people enjoy today).

He started a consulting company called Practice Of Innovation, which established methods of innovation available to everyone and every firm. Now he teaches at University, aiming to develop a new generation of innovators.

He talks to Economics For Business (econ4business.com) about value creation and innovation as a life skill.

Key Takeaways and Actionable Insights

Value Creation is a complex adaptive system.

Value creation is a system of many agents, components, arrangements, technologies, constraints, and unpredictable emergent outcomes. There are a challenging number of variables, and there’s a requirement for highly integrated collaboration and recursive and iterative process, utilizing adaptive feedback loops and continuous readjustment. It’s hard — and quite rare — to get right and easy to get wrong.

The essential element of value creation is the mental model.

The mental model for value creation is solving important and meaningful problems for others. It shouldn’t be about launching a new business or a new technology, but about helping others. And, since people don’t think in terms of “I have a problem to solve,” the value creator must also understand the customer’s mental model. They experience dissatisfactions. They wish things could be better. They make trade-offs. They can’t always articulate what they want. They have to learn what to want, and value creators can help them to understand what they can want in the future.

Mental models are fundamentally important to the creation of value. We all have mental models of the way we’d like the world to work. The value creator is able to identify — “get inside” — others’ mental models and see the world the way others see it. This perspective is vital — the critical first step in the value creation process.

The calculus of value is subjective.

Value can only be defined by the individual who experiences it. Individuals make a mental calculation of value – it might include some numbers and some thoughts, feelings, preferences, and ideas. They are able to make this calculation in their own mind, even though the potential costs and benefits lay in the future.

The dimensions of value are many. When evaluating the purchase of a car, for instance, the price is part of the calculation, but so is the appearance and pride of ownership, the comfort, the gas mileage, the color of the seats, the cost of maintenance, and many, many more features and attributes and functional and emotional benefits.

Despite the difficulty and complexity, people are agile and adept at making this complex calculation. Value creators must be able to appreciate how customers make the subjective calculation — the calculus of value.

The removal of barriers to the experience of value is a good way to create it.

Convenience is often highly valued by customers. It represents the removal of barriers to value – easier to operate, less time taken, less physical or mental effort required. These are all valuable. The iPhone provided a more convenient way to enter data (responsive touch screen versus traditional keypad), and this played a big part in its adoption and success. The mental model is that people want to do things that are easy to do. They don’t want the clumsiness of a tiny keyboard on a phone. They don’t want to read a 20-page user guide for a new piece of software. They don’t want packages that are difficult to open or retail stores that are crowded and hard to shop. Identifying and understanding mental models like these gives skilled value creators their competitive advantage. If barriers are perceived negatively by customers, then create value for them by getting rid of barriers.

A need is not a problem to be solved. A need is a mental model. Reframing is the tool for understanding.

Curt uses the example of the slow elevator in a prestigious office tower. Residents complain. Engineers might try to solve the problem by re-engineering the elevator for greater speed. A value creator would try to identify the mental model of the complainers. That’s reframing. They are annoyed because they feel that their valuable time is being wasted; they’re bored for a few seconds. Understanding this mental model opens up the possibility for new value approaches. Add a digital screen in the elevator with a news feed so that people can use the time to catch up on the latest headlines. Or add a mirror so that they can use the time to check their clothes and hair before going into the meeting.

Most value creation challenges can be better addressed through reframing. In fact, Curt describes his innovation method as “relentless reframing”. The art of value creation is teasing out the customer’s mental model. Do it again and again, back and forth between the value creator and the customer, to get the understanding of the customer’s mental model right.

Value creation is coupled with innovation: VC&I.

The definition of innovation is not just the new idea or new product or new service. It’s the sustainability of any new solution once it’s delivered into the marketplace. Customers use it and prefer it, they pay enough for it to sustain the financial business model, they repeat their purchases and provide supportive comments and assessments. To be truly sustainable, the innovation must appeal to a lot of people, not just a few early adopters. The benefits must be greater than the costs to the user, based initially on their value calculus, and subsequently on their actual experience. And the offering must be better than competition. To get customers to change from a competitive offering, Curt says the degree of superiority must be 2X to 10X.

Curt uses the N-A-B-C process tool as a methodology for innovation teams.

On previous visits to the Economics For Business podcast, Curt has laid out the framework of his N-A-B-C model and how to use it. See our E4B graphic tool (Mises.org/E4B_175_PDF) and the Key Takeaways summary from the podcast #37 (Mises.org/E4E_37).

N = Need: Identifying and understanding the customer’s mental model, and perceiving the world as they perceive it, getting to their perspective of how the world can be improved. This is where relentless reframing applies.

A = Approach: Designing an innovative solution with a sustainable business model. The temptation is always to jump straight to the approach without truly understanding the Need, according to Curt. This always leads to error and requires a pivot.

B>C = Benefits Per Costs: This is the customer’s value calculus, very hard to get right as a result of its multi-dimensionality and combination of qualitative and quantitative measures.

C = Competition: What are the alternatives among which customers are choosing, whether direct or indirect – remembering that not buying anything is an alternative they’ll consider. Overcoming inertia requires a high degree of superiority.

Our econ4business.com toolkit (Mises.org/E4B_175_PDF) includes a full explanation of how to apply this tool.

Value Creation and Innovation is a life skill that can be taught to everyone.

Solving others’ problems is a deeply human activity. We’re all wired to do it for each other, every day. Value creation can be taught to kids of any age in school, and it can become a life skill. It can be taught to people studying any discipline in universities and colleges, from humanities to hard sciences, so that they can apply it in their field. It can be taught in every firm, whatever the line of business.

The resultant life skill is the mental model that life is about solving meaningful problems for others. It’s about understanding and appreciating others’ mental models. Reframing is the tool for gaining this understanding. Value creation is a fundamental capacity for everyone. They can make an impact on society by solving problems that matter.

Additional Resources

“N-A-B-C Innovation Process” (PDF): Mises.org/E4B_175_PDF

Curt Carlson on Innovation Champions: Mises.org/E4E_91

“Answering the Million Dollar Question (Part 1)—How Value Creation Forums Help Create Winning Research Proposals”: Mises.org/E4B_175_Article