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107. Ivan Jankovic: The Special Understanding of Entrepreneurship by Americans of the Austrian School

Austrian economics has always been on the leading edge of innovative thinking applicable to business. Back in the last century, there was a group of American economists of the Austrian school who greatly advanced theories related to subjectivism; that is, the role of human beliefs and preferences, and of the market as a process. Here are some of the insights they gave us about entrepreneurial business.

Download The Episode ResourceEntrepreneurship Drives Markets, Innovation, and Value Generation – Download

Key Takeaways & Actionable Insights

The function of entrepreneurship is the generation of new subjectively perceived value.

These economists got the name The Psychological School, because they understood that value is a function of human feelings, preferences and beliefs. The secrets to the successful pursuit of new value are not found in data and mathematics, but in human motivation.

The activity of entrepreneurs is the development and implementation of value-generation business models.

The twentieth-century economists we talk about on the podcast this week would probably never use the term business model. But their concept of the market as a process governed by subjectivism would embrace this modern term. A business model is a recipe for identifying value potential — an analytical outcome of understanding customer preferences — assembling a value proposition — a creative act of the entrepreneur — and enabling the customer to experience value, some of which can be captured by the entrepreneur via exchange if the business model is well-constructed.

Who are entrepreneurs?

Historically, some economists have debated whether entrepreneurs play the role of managers of the assets and activities of firms, or the role of owners establishing the asset base and purpose of the firm, or the role of capitalists providing the enabling financial capital. From the subjectivist point of view, it’s not a difficult question. Entrepreneurs are those engaged in the business of pursuing and generating new value. They might play one or more roles (manager, owner, capitalist) at different times in the pursuit.

Those in business firms who do not have an entrepreneurial role are the bureaucrats engaged in governance actions with no customer value, imposed by external influencers, usually government.

How do entrepreneurs generate value?

These economists understood the market as a process of individuals interacting to exchange. Therefore, they were able to establish that entrepreneurial value generation is a process and that it can be systematized (which is the essence of our Economics For Business project). A process has a beginning — in this case the identification of value potential, which requires a deep understanding of subjective value) and an end — the facilitation of value to the point where the customer can easily exchange for it, activate it, and experience it. It’s not necessarily linear, rather it’s recursive and dynamic, a continuous creative flow of knowledge gathering and learning and responding via innovation.

How are entrepreneurs compensated?

These economists realized that it represents a poor reflection of real life to identify the compensation of entrepreneurs solely with profit. On the monetary axis, they can just as well be paid in wages or dividends or other forms of monetary compensation. On the non-monetary axis, these subjectivists fully understood the concept of psychic profit: that entrepreneurs can do what they do for their own individually-perceived motivations, including achievement, fulfillment, the reward of serving others, and the purpose and meaning found via the entrepreneurial journey.

 

Additional Resources

Entrepreneurship Drives Markets, Innovation, and Value Generation (PDF): Download Here

Professor Jankovic’s Book, Mengerian Microeconomics: The Forgotten Anglo-American Contribution to the Austrian SchoolBuy on Amazon

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.

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104. Professor Mohammad Keyhani on Generativity, The New Digital Pathway to Business Growth

Our metric for business is value generation. The scope of Economics For Business is not determined by business size or type — we don’t label firms as small, medium or large, or by the stage of their development, or by industry.

Download The Episode ResourceHow Generative Is Your Business? – Download

Key Takeaways & Actionable Insights

We see business through the lens of entrepreneurship, defined as the intentional pursuit of new economic value. A reasonable proxy metric we can use is growth. Business growth is consequence of generating new economic value. That value is determined by customers, and a growing company is creating more customers and/or adding to its share of customer dollars spent in value exchange.

The changing dimensions of business growth.

The economic route to growth is changing. In today’s markets, we often see speed of growth that goes beyond historical expectations. Business models can expand their reach and accelerate their performance over networks faster than ever before.

An Austrian perspective on business enables entrepreneurs to perform in a high-growth environment: Austrian entrepreneurs recognize the boundaryless-ness of markets, the flexibility of capital combinations, and re-combinations to respond to the rolling flow of value learning signals from consumers, and the benefits of shedding control in order to accept complexity and emergence. Austrian entrepreneurs are well-placed to enjoy success in today’s markets.

Professor Mohammad Keyhani sums up the Austrian entrepreneur’s advantage in the term Generativity.

The generativity of a system is the capacity to produce unprompted, unanticipated change through unfiltered contributions from a large, broad, and varied audience. The concept of generativity is closely aligned with the Austrian ideas of spontaneous order and emergence.

By way of an example, the concept has been applied to technologies, where the characteristics of generativity can be identified as the increase in participation as an input and the increase of innovation as an output. One of the results of this thinking has been open innovation: anyone can participate (e.g., when corporate research is not limited to a corporate R&D lab, ideas can come from anywhere outside the corporation), and more and better innovation is an outcome.

One of the potential effects of generativity is to overcome knowledge constraints. Open innovation is an example: even the biggest corporation with the best minds in its employment can not possibly have a majority of good ideas. They don’t even know what answers they should be looking for.

Detaching the search process from the searcher.

When we face knowledge constraints, we search for answers. But a searcher only knows to search in certain places. Generativity can separate the search from the searcher, unleashing the search process to look in places that would be blind spots for the searcher. Similarly, generative design can generate product ideas that the human designer could not.

The incentives of the market can take control of the search process. The demand side (via broad, unfiltered participation) defines the problem to be solved and the supply side (via equally broad and equally unfiltered participation) creates solutions.

Generative characteristics can be built-in to a product or service.

5 characteristics of generativity in products are:

Leverage: the product can be put to many uses, and users can do many things with it, including those that the product designer could never anticipate.

Adaptability: the product can be further modified to broaden its range of tasks even further; new code can be contributed by users, accessories can be added, and so on.

Ease Of Mastery: there are no or low barriers to broad usage and broad adoption due to unusual or hard-to-acquire skills.

Accessibility: the product is accessible to everyone and its usage is not limited to a specific set of users.

Transferability: The advances in and changes to the technology made by some users are transferable to all users; new users can build on what previous users have contributed.

Generative products are tools for entrepreneurs.

Generative products are a little hard to describe or categorize. They’re more like toolkits rather than specific use products. Professor Keyhani started a website to curate some of these kinds of tools / toolkits for entrepreneurs: Entrepreneur-Tools.Zeef.com/Keyhanimo

Some examples he mentions:

Zapier.com and Integromat.com link web apps and digital tools together via API’s to assemble automated workflows.

Airtable.com — flexible and powerful cloud-based relational database for regular users.

No-code software development tools like Adalo.com (build your own app), Voiceflow.com (build your own voice app) and Bubble.io (anyone can be a software developer).

There is a broad future growth path in generativity.

Let users generate innovations; let them accumulate (new users can build on the innovations of earlier users); focus on capturing as much of the value as is appropriate for the entrepreneur-as-orchestrator.

Additional Resources

Professor Keyhani’s website: MohammadKeyhani.com

How Generative Is Your Business? (PDF): Download Here

“A Theory of Digital Firm-Designed Markets: Defying Knowledge Constraints with Crowds and Marketplaces” by Mohammad Keyhani, et al  (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.

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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.

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100. Jeff Deist: Animating Economics to Serve Real People and Real Businesses

Economics is treated by many as an arid field of mathematical modeling. Human beings are treated as data in the model, almost the way physics regards atoms and molecules. This approach to economics doesn’t help people much; it doesn’t help us understand the world, and isn’t helping us build a better future.

Economics is an animating science. Austrian economics is humanistic; it treats humans as people, pursuing their hopes and dreams, frequently changing, seldom predictable, and never acting like data in a model.

That’s why we see our brand of economics as animating: helping people to understand better how to identify the best means for their chosen ends. For businesspeople, that translates into knowledge, processes and tools to help businesses grow and thrive.

Download The Episode Resource Entrepreneurial GPS – Download

Key Takeaways & Actionable Insights

The role of the entrepreneur

Entrepreneurship is the animation of business. It’s action; the exciting process of turning business knowledge and market signals into commercial solutions with the application of imagination, insight, creativity, resource assembly, and agile adjustment.

A big part of what makes Austrian economics different and better for business application is the understanding of the role of the entrepreneur and the entrepreneurial function in the economy. Jeff Deist articulated this role as a nexus between capital and markets, and the entrepreneur as the individual taking risk, employing their own property and having skin in the game. It’s an exciting role.

Entrepreneurship and value

Entrepreneurial business is the intentional pursuit of new economic value. The pursuit requires a deep understanding of the concept of value, an understanding that Austrian economics provides. Ever since Carl Menger established the concept of subjective value, Austrian economists have been deepening their understanding still further. Today, we recognize more than ever the role of the customer in value creation; since value is their experience, they are active collaborators. Entrepreneurs harness this collaboration. Think of an iPhone. Apple designs and assembles it, and then a large part of the value experience comes from the user adding apps, composing and sending and receiving messages and e-mails, choosing videos to watch and podcasts to listen to, eagerly contributing to the value experience that they themselves enjoy.

Value is what users make it.

Individualism and diversity

Entrepreneurial economics recognizes the role of the individual. It respects and honors the individual choice. Each individual, in the role of both consumer and producer, exhibits different preferences, personality, and psychology; we live in different places and in different contexts; we each have different needs and wants.

There are many favorable outcomes from individualism. One is the vast global diversity of the marketplace, whether exhibited on amazon or Alibaba or Grainger.com for industrial supplies. Another is economics as an engine of humanity and peace, which is the context for entrepreneurs providing goods and services globally to customers.

Specialization, achievement and satisfaction

Economics For Business aims to help all businesses and all entrepreneurs to find their specialization in this global ecosystem. We apply the economic principles of the specialized division of knowledge and division of labor. We all have knowledge that is unique to us, and we can all find an application of that knowledge in business.

Bob Luddy, who has been a guest on our podcast, founded CaptiveAire, a company that specializes in restaurant ventilation systems, providing benefits of safety, comfort, clean air and regulatory compliance to a broad range of foodservice customers. Bob stresses the value of specialization to become the leader in a category – a share leader and a knowledge leader and an innovation leader. And he’ll tell you that the non-material rewards of economic specialization are delightful, including satisfaction, achievement, earned respect.

CaptiveAire is a great example of considered specialization – it’s not in a high tech category (although there is a lot of tech incorporated in CaptiveAire’s product and service bundle), or an internet business or a software business. Find your customers, find a need that is not being filled, and build from there.

Big data versus big empathy and big insights

We live in an era where more and more data is being collected, compiled, processed and analyzed by producers (as well as non-economic actors such as governments, of course). As the sources of data, many of us have concerns about this trend. The economic principle that is more important for businesses, however, is that, no matter how “big” the data sets are, they do not have value (they are not causal data) until they provide or reveal some qualitative understanding of customer feelings, motivations or attitudes. These are the data that are genuinely useful to businesses. The Economics For Business method to develop this understanding is empathy, and we have a full toolset to help entrepreneurs apply it.

MBA-ization versus products, people and active learning

Jeff quoted Elon Musk on the subject of MBA-ization of business: too much focus on financial modeling and spreadsheets, and not enough on deploying engineers on the factory floor to develop, introduce and continuously improve great products that provide the customer with a delightful experience. Jeff concurred that MBA programs and business schools have become bogged down with a lot of dead weight, and have obscured some of their market-facing functions. They don’t provide the value they ought to provide for the tuition charged.

Economics For Business can provide the 20% of business school knowledge that’s actually valuable, and add new content – informed with Austrian insight – that’s even more relevant, plus the methodology and tools to apply the knowledge in business practice.

This approach is based on the educational science of active learning. In this view, learning is not achieved via books and lectures (which are necessarily backward-looking) but via the receipt of tools and methods and techniques, applying them oneself in real-life situations, and learning from the feedback received from people and markets and business results.

Building experience and sharing experience.

Active learning is the accumulation of experience. It is the unique experience of entrepreneurs and their teams gained from the operation of their businesses that constitutes the division of knowledge flywheel that continuously reinforces their advantaged position in the marketplace.

There is a time value to experience; it takes time to accumulate. On the Economics For Business platform, we’ll aim to identify ways to share experience to speed up the experience-gathering timeline. Q&A and discussion within our entrepreneurial community is one way. Another is mentoring, whereby experienced business people can share what they’ve learned over time.

Economics as a route to work and life satisfaction.

In his book Dynamism, Economic Nobel prizewinner Edmund Phelps tells us that, according to individually reported life satisfaction scores (e.g. Pew Research Center surveys and other similar surveys), the greater part of life satisfaction results from production activities rather than consumer activities. The purpose and meaning of taking on challenges, achieving results, making discoveries, self-reliance, and success in meeting goals are found in participation in the production side of the economic system. We hope to play our part in the stimulus of those satisfactions via the Mises Institute’s Economics For Business project.

Free Downloads & Extras From The Episode

Economics For Business utilizes a journey metaphor for the entrepreneurial process. Take a look at our visual summary: Download the PDF

“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

92. Clay Miller: 5 Austrian Principles Applicable to Your Business Today

Principles of Austrian economics have immediate applications in business. Clay Miller, a deeply experienced and highly successful global tech entrepreneur, makes the case via five principles drawn from five easily-accessible sources of Austrian economic theory, with many accompanying examples.

Key Takeaways & Actionable Insights

Principle 1: The distribution of knowledge requires disaggregated thinking.

Source: “The Use Of Knowledge In Society,” F.A. Hayek – Get It Here

Hayek wrote this paper as part of a research program into the problem that economics tries to solve. He defined it as a knowledge problem. Knowledge “never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess”.

The implication he drew was for central planning by governments and their departments and committees that would attempt to plan production or set prices. Such central planning is impossible because dispersed knowledge can not be aggregated and so the planners never have enough knowledge on which to base a plan.

Quote

“The statistics which such a central authority would have to use would have to be arrived at precisely by abstracting from minor differences between the things, by lumping together, as resources of one kind, items which differ as regards location, quality, and other particulars, in a way which may be very significant for the specific decision. It follows from this that central planning based on statistical information by its nature cannot take direct account of these circumstances of time and place…..”

Application

In our Economics For Business project, we have the opportunity to help entrepreneurs apply the same principle to business knowledge, or data. Too much aggregation can obscure information that is really important and most useful for improving business performance.

Here’s an example. A frequently used KPI (Key Performance Indicator) is average revenue per customer. It’s calculated by aggregating all customer revenue into one number and dividing by the number of customers. For this to be actionable intelligence, it is necessary to assume that spending by each customer is very uniform. But consider the case where average revenue per customer is $190 for a customer base of 10 users, composed of 9 who spend $100 each and one who spends $1,000. The KPI does not suggest that each new customer you acquire will spend $190. In fact, it’s more likely they’ll spend $100. And, in fact, what you would really like to know is the profile of the $1000 customer and whether that profile, applied in recruiting new customers, would enable you to recruit more $1,000 spenders. You really want to choose metrics that can provide insight into individual customer behavior — like the nature and motivation of the one $1,000 spender.

Similar Austrian thinking would apply, for example, to Google analytics, which can profile the type of customer interacting with your website or app, and observable behavior such as conversion rate by page visited, or abandonment rate for specific pages. These are disaggregated statistics that can help you serve customers better.

Austrian thinking is rigorous in seeking to identify cause and effect, and to ensure that correlation is not mistaken for causation. A simple example is restaurant data that exhibits a 30% increase in customer traffic on Tuesdays. There’s a correlation between day-of-week and traffic increases — but it’s not causation. Tuesday does not cause the traffic increase. What does? It requires digging to find out, perhaps, that a local firm offers a perk to office workers to pay for them eating out on Tuesdays. As Hayek would say, this is specific knowledge of time and place, more likely to be qualitative than statistical, embracing the subjectivity that’s central to Austrian economics.

Principle 2: Consumer Sovereignty requires that entrepreneurs are directed by their customers.

SourceBureaucracy, Ludwig von Mises: Get It Here

This book focuses on the inefficiencies and ineffectiveness of bureaucratic organizational structures and processes. In a chapter titled Profit Management, Mises defines the Austrian concept of consumer sovereignty. Understanding and applying this concept is central to entrepreneurs’ capability to create effective value propositions for their offering, brand or business.

Quote

“Thus the capitalist system of production is an economic democracy, in which every penny gives the right to vote. The consumers are the sovereign people. The capitalists, the entrepreneurs, and the farmers are the people’s mandatories. If they do not obey, if they fail to produce, at the lowest possible cost, what the consumers are asking for, they lose their office. Their task is service to the consumer. Profit and loss are the instruments by means of which the consumers keep a tight rein on all business activities.”

Application

Consumers are the ones driving production. It’s up to business managers to make sure that every decision is towards bettering the value proposition offered to customers.

For example, the décor in a restaurant should be chosen not because the owner favors it or because an interior designer decrees it, but for the purpose of enhancing the value experience of those consumers the owner wants to attract and to serve. This requires empathy. Consumer sovereignty and entrepreneurial empathy go together.

Because consumers are the ones valuing what is produced, they are the ones ascribing value to the product or service the entrepreneur produces. The entrepreneur needs to anticipate what they value, and to do so requires ever-greater closeness to the customer. Clay described the value provided by simple but tasty barbecue restaurants in his home state of north Carolina, in a décor of plastic and paper and small booths. But that wouldn’t attract the customers who prefer fine dining in a five star restaurant. The customer decides what experience they value.

Startups can usefully anticipate consumer preferences by creating an imaginary perfect customer, and thinking through the value they want and the value the business can facilitate for them. Once in production, get as much feedback as possible on the actual value experience and the customer’s feeling about it. Every decision made inside the business needs to be for the purpose of and directed towards improving the customer value proposition and value experience.

Principle 3: Human value scales are complex and ever-changing and entrepreneurial empathy is required in order to reach an understanding of customers’ value dynamics.

SourceHuman Action, Ludwig von Mises: Get It Here

Human Action is the magnum opus of Austrian economic theory. Every chapter will yield great insights for business. Clay selected value scales as a topic.

Quote

“It is customary to say that acting man has a scale of wants or values in his mind when he arranges his actions. On the basis of such a scale he satisfies what is of higher value, i.e., his more urgent wants, and leaves unsatisfied what is of lower value, i.e., what is a less urgent want. There is no objection to such a presentation of the state of affairs. However, one must not forget that the scale of values or wants manifests itself only in the reality of action. These scales have no independent existence apart from the actual behavior of individuals. The only source from which our knowledge concerning these scales is derived is the observation of a man’s actions.”

Application

When a person makes a decision to purchase your product or service, they conduct a quite complex evaluation to integrate your offering into their scale of values. And the values and the scale is constantly changing. Consumers are not static robots. Their circumstances change, their preferences for saving or spending change, their time of life or even time of day demand rearranging of value scales.

A consumer may have a high preference for Krispy-Kreme donuts. But then they go on a diet. Their value scale changes. Losing weight and increasing fitness are now higher values than enjoying a donut. If you are the Krispy-Kreme donut franchisee, it’s important to be aware of the value scale change, and to empathize with the customer. Maybe you could develop a promotion called “Cheat Day” that rewards them with a donut treat after a week of exercise and donut restraint. As Wayne Gretzky used to say, skate to where the puck is going to be, not where it is now.

How can you understand value scales? One interview with a customer — what a researcher would call deep, rich qualitative information — can be worth much, much more than survey data. Mises said that we can only know an individual’s value scales by observing an individual’s actions. Having them answer a survey question such as “How highly do you value this item?” or “What price would you pay for this item?” does not indicate how they would fit the item into their value scale. They may say they would pay $250,000 for a Ferrari, but, when they weighted the experience of owning the Ferrari versus the opportunity cost of foregoing other experiences, would they actually make the purchase? The survey answers won’t tell you.

Entrepreneurs are rewarded for estimating correctly what the customer values and creating the appropriate value proposition.

Principle 4: The market is a discovery process, with uncertainty on both sides of market exchanges. All entrepreneurial actions are tests, with no certain outcomes.

SourceCompetition And Entrepreneurship, Israel Kirzner: Get It Here

This is a seminal work on entrepreneurship. One of the major themes is that markets are a process of discovery. That insight directs entrepreneurs to think in dynamic, process terms. The entrepreneur experiences uncertainty in what he or she is producing, because they are not sure of what customers will value in the future. The customer is uncertain, too, because they’re unsure of how they’ll value what the entrepreneur produces. Whenever we, as consumers, feel trepidation about “pulling the trigger” on a purchase, we are experiencing this uncertainty. Meanwhile, the producer is anxiously discovering the receptiveness to his or her value proposition.

Quote

“The market process, then, is set in motion by the results of the initial market ignorance of the participants. The process itself consists of the systematic plan changes generated by the flow of market information released by market participation — that is, by the testing of the plans in the market.”

Application

Kirzner points out that every plan an entrepreneur has, every value proposition, every offering made to prospective customers can only be a test, a trial. Nothing in the market can be certain. Entrepreneurs are trying to anticipate what customers are going to value, and they can never be sure in advance.

That’s why entrepreneurs use empathy, to imagine, if they were the customer, what type of experience the customer would be looking for. Entrepreneurs must imagine what customers might enjoy in the future. They must seek the customer’s agreement that, “Yes, your product or service delivered what you promised and made me feel better.”

One implication of Kirzner’s principle of “market ignorance” is for branding. If a brand has accrued a certain level of market reputation, consumers will feel less ignorant. They will feel they “know” a brand that’s been producing for 100 years, that is symbolized by the 3-point star that can be seen everywhere, and that is trusted and approved by many other consumers. A brand represents the stored experience and the stored reputation of many customers.

Principle 5: All entrepreneurship is for social good, and more social good is achieved by subjecting business to the marketplace test of profit and loss.

SourceAustrian Perspectives on Entrepreneurship, Strategy and Organization, Peter G Klein, Nicolai Foss, and Matthew McCaffrey, “Austrian Perspectives On Entrepreneurship, Strategy and Organization”: Get It Here

In Chapter 4 of this book, the authors discuss the concept of social entrepreneurship. This is an idea that seems to be gaining traction, especially among millennial business owners and millennial entrepreneurs. The idea is that business should be focused on something more than profit and loss. It should provide some “social value”, making the world better. Klein, Foss, and McCaffrey provide some robust Austrian thinking with regard to social entrepreneurship.

Quote

“However, these metaphors (“social value”, etc) often imply a false conflict with traditional entrepreneurship. For example, the contrast between conventional market entrepreneurship and social entrepreneurship implies that the former is somehow not social, or even anti-social. This is misleading, however; for example, Austrians would respond that Mises’s calculation argument demonstrates that the entrepreneurial market economy is profoundly social. Entrepreneurs, by bearing uncertainty in an effort to satisfy consumers, work ceaselessly to improve the welfare of all members of society, and their work in turn strengthens bonds of cooperation between individuals and communities, while at the same time disincentivizing conflict and exploitation. This is social behavior in its most fundamental form.”

Application

Steve Jobs improved society greatly by inventing the iPhone. The impact on society was considerable — better communication and information sharing, and higher productivity for billions of people.

Every venture — including social ventures — must grapple with basic economic problems. Taking on a social mission does not relieve the firm of the pressures of the marketplace. Social enterprises are business organizations, and if they earn revenues through the sale of goods and services, they must apply judgement to allocate scarce resources in the face of uncertainty. Genuine participation in the marketplace requires them to be subject to the profit and loss test.

Klein, Foss and McCaffrey make the point that “social value” is incalculable. What’s good for one individual is not the same as for another. Individuals value things subjectively. When a business pleases one group, it may be adversely affecting another.

Profit is not evil. It’s impossible to make a profit without serving your fellow man. You are doing good for society by being an entrepreneur, by producing things that people want and value. You forego your own consumption by investing in your business, and so you are making a sacrifice to serve others. And if social entrepreneurs are not subjecting themselves to the profit and loss test — if they are supported by charity or grants — then they are not receiving the signals form consumers that they are allocating scarce resources in the way that consumers — i.e., society — prefers.

The ethic of entrepreneurship is to serve, and to make others’ lives better, and to receive the approval and reward of customers via the profit and loss mechanism of the market.

Free Downloads & Extras From The Episode

“The Use Of Knowledge In Society,” F.A. Hayek (American Economic Review, Vol. XXXV, No. 4, September 1945; pp. 519–30): Get It Here

Bureaucracy, Ludwig von Mises (Yale University Press, 1944): Get It Here

Human Action, Ludwig von Mises (Mises Institute, 1999): Get It Here

Competition and Entrepreneurship, Israel Kirzner (Liberty Fund, 1978): Get It Here

Austrian Perspectives on Entrepreneurship, Strategy and Organization, Peter G Klein, Nicolai Foss, and Matthew McCaffrey (Cambridge University Press, 2019): Get It 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

90. Per Bylund On A New Austrian Business Paradigm: Facilitation Of Value

In our project to make a useful link between Austrian economic theory and business practice, we earlier introduced the Austrian Business Model. This is a recipe to make a profit – a template adaptable to any individual firm.

Download The Episode Resource The Austrian Business Paradigm – Download

Key Takeaways and Actionable Insights

What exactly do we mean by paradigm?

A paradigm is precedent to a business model. It’s the underlying way of thinking – a set of values, beliefs, concepts and practices that combine to constitute a distinctive entrepreneurial approach to business.

Per Bylund’s exposition of the principle of Facilitation Of Value leads to a new – Austrian – paradigm for business. Here is the framework:

The Purpose Of Business is to facilitate value for customers.

In today’s interconnected, fast-changing world, businesses are formed and managed with the intention of ensuring value experiences for customers. This challenge is fraught with uncertainty, because value is an emergent – and therefore unpredictable – property of the interaction of people, artifacts and behaviors in complex systems.

Customers, whether consumers or businesses, operate in their own system. They must fit everything they consume into their existing system – their life or their business processes and organization.

Customers experience value in their own systemic context. If they own a car, for example, they experience ownership value within a system of taking kids to school, commuting to work, and shopping, as well as in an intersecting system of service, maintenance, fueling, accessorizing and replacing worn parts.

Businesses interface with the customer’s systems from their own system of design, procurement, resource management, partnering, warehousing, distribution, payments, technological enablement, regulatory compliance, communications and many more elements. A business system facilitates value to realize the customer’s experience within their own system.

The value of any offering is positively perceived by customers when the fit into their system is felt to be a good one and the offering contributes to system improvement or enhancement in some dimension. Uncertainty is always present because the system improvement can not be predicted with certainty in advance.

Austrian economics provides the principles for entrepreneurs, managers and strategists to establish a unique, sustainable, profitable and scalable process to facilitate value for customers.

The end-user / consumer takes the primary role.

A business can not be an assembly of resources or an expression of core competencies or the implementation of innovation in isolation. It can’t be the result of a strategy to penetrate a market or disrupt a competitive set without first understanding the hopes and dreams and aspirations of customers. It can’t be a simplistic choice from a set of business models on the business school shelf.

A business must stem from giving the customer the primary role. The very purpose of a business is to please customers by serving their needs, and so their perception and preferences must define the business design. Since the needs of customers are subjective, idiosyncratic, changeable and context-dependent, methodological individualism – making the individual the unit of analysis, rather than groups or segments or markets or industries – is the indicated approach.

This approach is a lot different than ideas of shareholder value or stakeholder value. It is sometimes acknowledged in terms such as consumer-centricity or consumer-first. But those commitments tend to be tactical and implementational. Relentlessly and unfailingly taking the point of view of the customer is fundamental to the new business paradigm. It’s what make business purposeful and ethical, sustainable and responsible.

Value is determined by the end-user or consumer.

What consumers seek from business is value. Value is hard to define and challenging to quantify because it is a subjective experience of the consumer, within that consumer’s own individual context. What’s perceived as valuable by one individual consumer will not be the same as another individual, and any individual can change their perceptions or their ranking of what’s more valuable at any time.

Value, therefore, can not be created by a firm or a brand, despite the traditional use of that language. Value is formed in the consumer domain, as an emergent property of the consumer’s choices, behaviors and context. Take a laptop PC for example. The value experience changes depending on whether the user is a gamer, an executive in the financial system, or a video editor. It varies based on the software the user installs, the usage advice he or she receives from peers and experts, the quality of the user’s network, their preferences for in-use performance, and many more variables. You can examine the same value experience thought experiment for any good or service of your choice, e.g. the value of an Audi A8 to a family of 6 living in rural South Dakota compared to a family of two in Manhattan with a one-bedroom apartment and a single parking space. Value emerges in lived experiences within these varied contexts.

For a business to business enterprise, it is sometimes expedient to limit the value analysis to the final purchaser / end user. There are sometimes some special value considerations in these contexts. For example, business customers tend to evaluate every economic choice in money terms – does it lower costs or contribute to higher revenues? But it is also the case that a business customer is often, in fact, multiple users (whether a procurement committee or a department all using the same item), and so a group rather than individual assessment of value is appropriate. Nevertheless, value remains a subjective, idiosyncratic, changeable phenomenon.

Empathy for customer dissatisfaction is the starting point for business development.

Dissatisfaction with the status quo – Austrian economists sometimes call it unease – is the raw material for business development. The genius of consumers is to always sense that their experience could be better than it is.

Empathy is the diagnostic skill of observing and analyzing behavioral data and deducing emotional drivers for change and innovation. A customer searching online for more efficient home heating solutions may be dissatisfied with the ambient conditions in the home, or with the level of his or her gas bills. An individual interview can determine which of these – or other alternatives – applies and point the way to a desired solution. The entrepreneurial practice is to focus empathetic attention on the inner drivers which are manifested in observable behavior.

There is no shortage of customer dissatisfactions to be addressed by businesses. The skill of empathy is to advance beyond taking the point of view of the consumer and to feel the experience that the consumer feels, and to identify the feelings that really matter. This is counter-factual – it’s not actually possible to feel what another human being feels – and is therefore an act of imagination. Imagination provides the energy for consumers’ dissatisfaction (they imagine a better future) and for entrepreneurs’ creativity (they imagine what dissatisfaction feels like for the consumer, and they imagine solutions to that dissatisfaction).

Empathic design

To advance from imagination to a business plan is an act of design. Design can be captured as a process in which an innovating business creates a blueprint for a good or service or technology or other artifact that presents a practical solution to a customer. There are many design process alternatives. The shared design principle is to start with an identifiable customer with a problem to be solved, and progress towards a solution with which the customer can interact and can evaluate.

Early prototype solutions should be adequate to share a resonant imagination between entrepreneur and customer, and to stimulate realistic responses from customers regarding features and attributes they do or do not find valuable, and flexible enough to accommodate frequent iterative adjustments based on those responses.

Uncertainty exists as a barrier to be overcome in the delivery of new solutions to customer dissatisfaction. Adaptiveness is the entrepreneurial response to uncertainty.

Uncertainty is integral to the business paradigm. Uncertainty can be experienced as the impossibility of predicting the future because of the extreme complexity of the interactions of customers, entrepreneurial offerings and potential solutions, opportunity costs, transaction costs, environmental factors and other system elements. The response to uncertainty is adaptation: making a change in a business offering and monitoring the resulting change in customer acceptance, customer behavior, customer interactions or other consequential results. Favorable changes are preserved, unfavorable ones discarded.

Continuous dynamic change then becomes the norm for businesses in an adaptive system. There is no equilibrium, no stasis, no predictive planning, no stable combination of assets or resources. There are no system-imposed or structural boundaries to a firm’s activities, just the subjective entrepreneurial judgment about interaction with customers to facilitate customer value. In complexity theory terminology, customer value is the constraint to the system that can shape change and emergent outcomes (think of Steve Jobs constraining his designers to “no buttons” on Apple devices).

Businesses accumulate capital as a result of the flows of income from customers.

The measure of business effectiveness is the flow of income from customers. Insofar as entrepreneurial actions set in motion a flow which is projectable into the future, a business is in a position to make capital investments both to expand its capacity to generate income flows and to create new innovations to stimulate new flows.

Current flows are subject to change at any time when customer preferences change, or their environment changes or there are shocks to the customer’s system. Entrepreneurs must develop accurate appraisals of which of their assets – in what specific combination – are most responsible for generating income flows, and establish them in such a way as to be flexible in rearranging them and recombining them in response to (or in anticipation of) market change.

Future flows from investments in innovation are uncertain and unpredictable. Entrepreneurial skill in identifying productive investments (foresight) differentiates more successful from less successful firms.

Free Downloads & Extras From The Episode

The Austrian Business Paradigm (PDF): here.

“The Austrian Business Model” (video): https://e4epod.com/model

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