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How Creative SMEs And Their Digital Assistants Will Elevate The Second Economy To First Position.

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When we think of “the economy”, we tend to think about actions and interactions directed and organized by people, in a physical world of machines, factories, buildings, roads, airplanes, offices and houses and cars. This physical world is where production takes place, whether those products are goods or services. Phones are manufactured, planes take off, banks make loans, and meetings are held, whether on zoom or in a conference room.

Over the most recent decades, a digital infrastructure has been growing alongside this physical economy. Or perhaps the better analogy is that the digital economy is growing under the physical economy like a root system under a forest, unseen but penetrating ever further. W. Brian Arthur, in an essay in McKinsey Quarterly, characterized this growing digital infrastructure as a “deep and slow and silent” transformation.

Shifting his analogy from root system to information exchange, he described a “conversation conducted entirely among machines”. His illustration depicts a traveler checking in at an airport. By placing a credit card or a frequent flyer card into a machine, the traveler initiates a process that automatically generates a boarding pass, a receipt and a luggage tag. While this is going on, computers check the status of the traveler, the status of the flight, the traveler’s identity with TSA, the traveler’s seat choice and access to lounges. There may be an automatic check with passport control, and with ongoing flights. Several more “conversations” are automatically informed, such as one about weight distribution of the airplane and another about air traffic control. These conversations take place automatically among servers, switches, routers and other internet and telecommunications devices. They occur in a few seconds for this one traveler, while they are ongoing for all travelers and for the air transportation system, with the conversations becoming smarter and smarter and more and more informed as more data flows.

Professor Arthur sees this digital infrastructure, and the conversations running through it and the automated processes it enables, as “the second economy”. It does not produce anything tangible, but it enables a lot of tangible outcomes. It helps architects design buildings and helps construction companies and contractors to build them. It tracks sales and inventories and supports transportation systems to ship goods from one place to another. It supports banks making loans and doctors conducting surgeries. It’s a kind of neural system. It provides intelligence – a neural layer that can sense and compute information and respond and make appropriate changes. Rapidly, this neural layer will develop more and more intelligence to support what people do in the physical economy.

There’s a worry that he cites – and which is shared with many intellectual commentators: that there is an adverse impact on jobs. The greater productivity enabled by the neural layer of the economy means that overall physical output requires fewer people to produce it. Physical jobs for people will disappear. He calls for the welfare state to compensate for this development via income and wealth redistribution schemes. 

But there is a totally different way to look at, and to welcome and celebrate, the development of the second economy. It is that those disappearing jobs will be replaced with entrepreneurship. The new, digitally-evolved neural layer will empower more creative entrepreneurship and more innovative value generation. Value is a subjective emotional experience of human beings, not of machines. It requires human empathy to understand the search for value, the desire for more satisfactory experiences, and it takes empathy to imagine and design the new solutions and offerings that can deliver this betterment in a human context. That’s the value that comes from entrepreneurship. What’s exciting about the new digital layer is that it helps entrepreneurs to generate more value.

Jim Spohrer, the Director Of Research at IBM’s Almaden Research Lab and head of Cognitive OpenTech, talks about digital assistants for entrepreneurs, and A.I.-based cognitive mediators capable of supplementing entrepreneurial capabilities – making entrepreneurs better at gathering the knowledge that they need to do business, better at negotiating, better at building business models and better at deploying them in new ways to serve customers. In Jim’s imagination, we’ll all have 100 smart digital assistants to help us in the near future. What will we be able to achieve? What will 1,000 entrepreneurs each with 100 digital assistants be able to achieve? How about 1 million or 10 million such augmented entrepreneurs?

One thing we can probably predict with confidence: those entrepreneurs with digital assistants will achieve more than the jobs displaced by automation. In fact, we can expect a new army of entrepreneurs to ride on the neural layer that Brian Arthur describes. They’ll be more empowered and more innovative and better at serving customers than the status quo of performing jobs in a hierarchy.

The best use of the term “Second Economy” is not for the digital automation infrastructure that is developing. We can make better use of the term to describe the entrepreneurial small and medium sized enterprises (SME), newly empowered by digital assistants, and newly expanded in numbers by people transferring from the jobs economy to the entrepreneurial economy. Together, this new service system will unleash new cascades of value-generating innovation for their customers, their communities and their employees. SME’s are already the second economy, in that they account for 50% of GDP and over half of new job creation in the U.S. They are already creating new economic value at a fast rate, yet they are largely forgotten while economic analysts focus on FAANG corporations and the New York Stock Exchange and the S&P 500.

In fact, we can expect that SME’s utilizing the digital assistance of the neural layer of the economy will become the First Economy, leading the way in innovation, job creation, and economic growth. The economy evolves as technology evolves, and the next cycle will raise digitally assisted entrepreneurship in first position.

Entrepreneurship Is Our Highest And Most Productive Technology.

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Technology is a means to a better life. Few would dispute the case today. Whether you think of food production or air conditioning or medical services or smartphones and computers and software, our living and working conditions are better as a result of technology. We would not want to back to pre-technology days, and most of us would not want to go back to the earlier technology days of, say, the 1700’s. There was technology back then, but it couldn’t be as useful to us as it is today.

W. Brian Arthur has written a useful book called The Nature Of Technology: What It Is And How It Evolves. At the outset, he asks the question: what is technology? How do we define it? He proposes three separate but related definitions:

  1. Technology is a means to fulfill a human purpose, a means to an end as economists phrase it. The means might be a diesel engine to power your car to get to work, or a roller bearing to reduce friction in the work of a machine. Technology is always a means to carry out a human purpose.
  2. Technology is an assembly of parts and practices. Bio-technology, for example, combines many toolboxes of individual technologies and practices such as laboratory research and injections into the human body.
  3. And technology can mean an entire collection of devices and practices available to us as a culture or a society.

Arthur illustrates the three meanings with reference to a F-35 carrier-based fighter aircraft. It’s a means to the end of displaying power and making war. The aircraft itself is an assembly of parts and practices: a jet engine, wings, avionics. Each of these is an assembly of sub-assemblies: the jet engine has an air inlet system, a compressor system, a combustion system, a turbine system, and so on. Each of these sub-assemblies has components. And they all use the practice of engineering. 

And the F-35 is part of a larger collection of devices that constitute the carrier battle group, the Navy, the armed services, and the military-industrial complex.

Then Arthur adds another element to his definition of technology. In all its forms, technology harnesses phenomena. Oil refining harnesses the phenomenon that components of vaporized crude oil condense at different temperatures. A hammer harnesses the phenomenon of transmission of momentum from a moving object to a stationary one. A humble radio receiver harnesses phenomena including induction, electron attraction and repulsion, voltage drop across resistance, frequency resonance and more. Arthur’s point is that phenomena are the indispensable source from which all technologies arise.

What this excellent author and his penetrating analytical description of technology in society misses, it seems to me, is the most productive and beneficial technology of all: entrepreneurship.

Entrepreneurship is technology in every one of Arthur’s definitions. It is, first, a means to fulfill a human purpose. That purpose is a better life – to bring into being a better set of circumstances, a preferable set of conditions, than exist today. Entrepreneurs pursue this end for others now, in order to achieve it (later) for themselves. 

Entrepreneurship is also assembly. In fact, economists use that very word to portray the act of entrepreneurship: assembling resources, capital, processes and people, and organizing them in teams and firms and corporations in order to achieve their human purpose. Entrepreneurship brings about lasting institutions to transmit the achievements of assembly across generations and across geographies.

And entrepreneurship is a collection of actions and practices for the benefit of society and the strengthening of culture. We study entrepreneurial history to understand how the actions of individual entrepreneurs, embracing risk and defying uncertainty, have led to civilizational advance, scientific understanding and commercial discovery. Entrepreneurship drives social evolution and technological evolution. Entrepreneurs experiment and try new approaches and build new devices so that we can all benefit from the learning that comes from both success and failure. The entrepreneurs bear the brunt of the failures and the rest of society benefits from the successes.

And what are the phenomena harnessed by entrepreneurship? The first is the most fundamental of all: the phenomenon of human action: that humans act, take decisions and make choices in order to improve their subjectively-perceived conditions of life, to make things better. And there is a special second phenomenon that is particularly harnessed by entrepreneurs, that of anticipative understanding (as Ludwig von Mises termed it): the reasoned, sensible, intuitive anticipation of that future better life, based on their tacit knowledge, their subjective understanding, their empathy and their experience. Successful entrepreneurs harness this phenomenon better than other people, though it may be available to all.

It is not the technology of the F-35 or the computer or the smartphone or of biotech that makes life better, or that advances civilization. Those are secondary outcomes of the complex human system powered by entrepreneurship. The conditions of life can be continuously improved and our human state can be continuously elevated because we have entrepreneurs who can harness the phenomenon of human action aimed at betterment. Entrepreneurship is the meta-technology, making all sub-assemblies and components possible, continually driving advances in other technologies, society, the economy and civilization.

For A New Entrepreneurial Organization Of Our Economy.

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Biologists tell us that life is not the result of the carbon-based matter of which we are composed but of the organization of that matter. For example, none of the atoms or molecules or neurons in our brains are conscious, but the ways they are connected and organized results in consciousness as an emergent property.

Biological systems and economic systems have many shared characteristics, and the influence of organization on system outcomes is one of them.

The organization of firms in our system of economic production may be becoming dysfunctional. Instead of a network of highly productive entrepreneurial innovators driving betterment and economic growth, some sectors of the economy are witnessing  new forms of more concentrated organization in which dominant large corporations command outsize shares of transactions, revenues and profits.

Why is this a problem? We can identify at least two consequences of this trend. One is the emergence of what Ludwig von Mises called in Human Action “a salaried managerial oligarchy”. Such an organization is the opposite of what drives innovation and growth.  What Mises calls “the marvelous achievements of corporate business” are determined by the entrepreneur who decides “without any managerial interference” where to employ capital and how much capital to employ. These are “the essential decisions which are instrumental in the conduct of business. They always fall upon the entrepreneur”.

The second, related, consequence is the build-up of bureaucracy in large corporations. These bureaucratic structures are counter-productive – i.e. their purpose is not to increase productivity but to constrain it. Much of the bureaucracy results from a response to or is a requirement of government intervention. A lot of the bureaucratic activity falls under the heading of compliance, i.e. confirming the corporate subordination to government regulation and interventions.  The rest of the “woke” HR internal policy making is similarly driven by government requirements for demonstrated alignment with so-called social justice policies.

A more entrepreneurial organization of the economy around smaller, innovation-focused firms could result in less waste of resources and people by eliminating or reducing the total incidence of bureaucracy. We could also expect less lobbying for government favors (another form of wasted resources and effort), and less corporatism (the tendency for government and corporations to converge in counter-productive activities such as surveillance and anti-competitive lawmaking).

On the positive side, we could also expect that more entrepreneurial organization will produce a shift back to consumer sovereignty, the positive feedback process whereby consumer perception of value determines what goods and services are produced. Government and their corporate allies would rather believe that they know better what consumers should value, and would like to enforce their superior knowledge by limiting consumer choice. Healthcare and health insurance are a good example: an unholy alliance of big corporations and big government leaves consumers with an artificially narrow set of choices at artificially high prices. The energy sector is analogous to healthcare; the recent Texas blackouts provided an example of regulated corporations in alliance with their government controllers reducing the available options to the degree that the constrained power supply was unable to meet demand at a critical time. Entrepreneurs exist to ensure that supply meets demand, and the government-corporate failure in Texas was a particularly egregious example of how this feedback loop can break down.

The economy is a network of trust relationships. We can’t create complex, durable networks of cooperation unless the contracts between the customers and firms who are cooperating are fair and inclusive and engender trust. People are beginning to suspect that the contracts with big business corporations are unfair. Facebook, Google, and others take individuals’ personal data and re-sell it in different forms without compensating the individual who generated it in the first place. Amazon offers a platform to third-party sellers then uses the learning obtained to under-price them or undermine them through the use of corporate economic power. Energy providers conspire with government to limit user choices and drive up prices.

In an entrepreneurially organized economy, we’d base exchange on fairer contracts that are more innovative, more dynamic, and more inclusive in terms of sharing the gains of growth, and we’d create positive networks or positive feedbacks, where fairness and inclusiveness lead to more cooperation in the system. We’d put simpler – less corporately bureaucratic – pieces together to generate responsively dynamic behavior in economic systems. The crony capitalism of big government-entangled corporations has damaged the idea of fair economic contracts and thus has actually harmed the positive consumer feedback loop. This reduces trust, thereby reducing capitalism’s capacity to innovate and reducing capitalism’s capacity to create progress. Instead, it has created a system that rewards rent-seeking and value extraction rather than value creation.

112 Peter Klein: When Policy-Makers Discover The Benefits of Entrepreneurship, They Can’t Resist Intervening

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Innovative entrepreneurship is the segment of the entrepreneurial economy that is especially highly focused on innovation via new products and services. Within innovative entrepreneurship there is an even brighter spotlight on NTBF — new technology-based firms that are cutting edge, scalable, and fast-growing. They represent only one form of entrepreneurship, but one that is very interesting. Indeed, they attract the interest of government and government policy-makers. A recent special issue of the Strategic Entrepreneurship Journal, a top journal for which our friend Peter Klein sits on the editorial board, examined the impact of policy on entrepreneurship itself and on the institutional and social challenges of these policy interventions.

Key Takeaways & Actionable Insights

Government policy-makers take an interest in innovative entrepreneurship when they are trying to grab some credit for economic growth and improved goods and services.

Both micro policies and macro policies aim at stimulating successful entrepreneurial and innovative outcomes. Policies to encourage the growth of green energy supplies, for example, are a micro policy; they apply only to firms engaged in particular activities. Changing bankruptcy laws (so that the reallocation of assets can proceed faster and more smoothly) or an educational initiative to support entrepreneurship teaching in school would be classified as macro policies: trying to create a new set of conditions that apply to all firms, all entrepreneurs, all technologies.

Government doing nothing to intervene is another — highly desirable — kind of macro policy: maintaining a social order in which entrepreneurs can operate with the least uncertainty about the future regulatory environment.

At minimum, government interventions in favor of entrepreneurship fail to properly consider trade-offs.

Analysis of policy starts from trade-offs. Every policy has trade-offs. Economists are the ones to point this out. Politicians just want one button to push to achieve one specific goal. All that is needed, they presume, is a piece of legislation that provides a tax break or a subsidy to the firms they want to succeed. But there are always trade offs. Directing funds or capital to one group of firms diverts it from another group. The consequences are unknown and can’t be known. What if the current crop of battery technologies, for example, do not include the one that will emerge as a more efficient alternative in the future? By subsidizing today’s technology do we constrain the emergence of a better one in the future?

Evidence suggests that neither macro policies nor micro policies are successful or effective.

One example of ineffective micro policy is intellectual property protection for selected technologies or firms. One of the papers in the Strategic Entrepreneurship Journal special edition looks at fast tracking patents for particular technology areas. One of the outcomes identified is the diversion of resources to overinvestment in legal protections and excess litigation with all its attendant economic costs.

Regulatory systems are another form of macro policy. An example is the number of days it takes to get the permits to open a new business. Reducing this would be a macro policy that could be effective. Peter Klein made the comparison between Singapore vs India on this variable, pointing out the correlation with greater speed of innovation in the former, encouraging new and unintended applications of technology.

But often, regulatory permissions favor well-funded and well-connected firms over the young and agile, and certification signals may not be completely accurate about underlying quality.

Micro interventions are targeted to boost outcomes by helping a particular firm or technology. Bureaucrats claim they can make better decisions than the market about resource allocation. They identify so-called “market failures” to be corrected (like fossil fuels causing pollution), and market decisions that they believe should be over-ridden. They don’t want to let consumers buy the gas-powered SUVs they prefer.

There’s no reason to believe these policy makers will get their decisions right. They certainly don’t have the incentives to do so, since they are not governed by profit and loss. They can easily pick the wrong projects.

Some interventions may be dismissed as irrelevant, but they may still produce distortions.

The papers in the Strategic Entrepreneurship Journal special edition point out that many of the cash payments / subsidies / tax breaks are given to firms that would have launched any way and been successful anyway. One paper (not in this collection, but cited by Professor Klein) found that the major effect of research grants in STEM is to increase the salaries of scientists rather than encourage scientific experiments that wouldn’t otherwise take place. The result is not better science, but a better life for scientists (that is, those who know how to win grants).

The private sector can stimulate basic science and government subsidies are not needed. For example, pharma companies encourage basic research at private companies via the incentives they provide via M&A strategy — an exit plan from the lab for basic science. In general, firms trying to develop new products and services for the market do a lot of the scientific discovery in the early stages of production. The government is not needed.

When government does provide venture capital (more frequently in Europe and Southeast Asia than in the US), the researchers reporting in this journal edition identified the receipt of such funds as mostly a marketing signal, enabling firms to enroll bigger partners, or get a prestigious underwriter for their IPO as a consequence of the positive imagery derived from being a subsidy winner.

Non-policy is a more promising and potentially more effective approach to encouraging entrepreneurship.

Culture is an example of non-policy. A culture that encourages experimentation and creativity, and assigns a low level of stigma to boldness whatever the result, is likely to attract more investment and accumulate more capital than a culture of more traditional norms favoring continuity. Cultural evolution like this is less likely to occur in a system where the state directs investment and chooses industries and sectors for support. One outcome is a negative view of business when business success is determined by getting close to government: in those cases, individuals tend to think badly of all business, including entrepreneurial businesses.

The verdict: maintain a healthy skepticism about the case for interventions to support entrepreneurship.

Overall, the evidence is not in favor of either macro-interventions or micro-interventions to stimulate innovative entrepreneurship. How should the individual entrepreneur think? It may be an ethical issue: whether or not to accept government subsidies or support. Nevertheless, the entrepreneur must make the best use of available knowledge, which includes knowledge of the regulatory regime. One of the papers in the collection finds that entrepreneurial businesses can make better connections with the right kinds of capital and partners as a result of government involvement. At some level, this kind of knowledge is a defensive mechanism for the real world.

And at least the regulators and policy makers are recognizing entrepreneurship as a positive force for growth and for good.

Additional Resources

“Effects of Institutions and Policies on Entrepreneurship” (PDF): Download PDF

Read the management summary of the Strategic Entrepreneurship Journal special edition (PDF): Download Paper

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

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The New Economics Of Value And Value Creation.

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A breakthrough paper published by Dr. Per Bylund and Dr. Mark Packard in January 2021, titled Subjective Value In Entrepreneurship, points to ten radical shifts in business thinking. We consider each one in turn. This article is number two in our series. (Previous article here.)

There’s classical economics and there’s Austrian economics. There’s classical physics and there’s quantum physics. In each case, the emergence of the new science requires rethinking of the “rules of the game”. In the case of quantum physics, not everything about Newton’s Laws, or even Einstein’s Theory Of Relativity, can be thought of as accurate any more, and the things we think of as existing in spacetime (the three dimensions of space plus the dimension of time) are not everything that exists nor everything that is real. It is the study of energy at the smallest possible scale in quantum physics that reveals new insights and new knowledge. At this level, the rules are different.

The equivalent perspective in Austrian economics comes from methodological individualism – the study of economic energy at its smallest possible scale: the individual, individual choices, and individual transactions. These interactions and transactions roll up into the complex, swirling, ever-changing systems we call firms, markets and, ultimately, economies. But it is the study at the individual level that yields new insights and new knowledge, just as in quantum physics.

It is in this spirit that Dr. Bylund and Dr. Packard approach the subject of economic value. Progress in the world is the creation of new economic value. Who creates it? The answer is not what most people think. Consumers create value. That’s because value is a feeling, the emergent outcome of an experience that the consumer judges to be of value to them. Their assessment occurs in their own mind, after the event of the experience, and is entirely individual. Value is, in other words, subjective. There is no value without consumption.

This realization compels a re-thinking of the concept of value in business. It is typical, today, to talk of businesses as “creating value”, and to think of some firms as creating more value than others as a result of competitive advantage or superior strategy. The methods of measurement for these assessments usually involve financial variables such as profits or stock price appreciation or margins.

But this approach is not accurate, and it’s not right. Businesses, firms and entrepreneurs and their brands and offerings are parties to value generation. They’re just not the creators, because there is no creation without consumption.

So, if they don’t create value, what do they do? They pursue new value on the customer’s behalf and they capture some portion after customers create value, providing themselves (and, by extension their customers) with the sustainability required to continue to offer innovative value propositions in the future.

Here’s how that process works out

Identifying value potential in response to customer signals.

After customers create value in consumption, they evaluate it in comparison to their expectations and to alternative satisfactions they could have chosen. If there is a discrepancy on the downside, they emit a market signal we call dissatisfaction. The genius of customers is to be able to identify potential improvements through this mechanism of dissatisfaction. They are always seeking a better experience, no matter how good the latest one might be. In this way, they are the driver of innovation and economic growth.

But dissatisfaction signals are not always easy to interpret. The famous observation attributed to Henry Ford applies: if I’d asked them what they want, they’d have told me “faster horses”. Ford’s customers were dissatisfied with the transportation experience offered by the best horses (and carts) of the time, but couldn’t wish for the inexpensive automobiles that Ford eventually developed.

We could say that Ford identified the value potential in the desire for faster horses. Consumer signals require interpretation, and that constitutes one of the major contributions, and major skills, of entrepreneurial businesses.

Value Facilitation

Once value potential is identified and confirmed, the role of business is to make it easy, convenient and enjoyable for customers to experience the new value. Value facilitation means taking a proposed new or improved product or service all the way to the point where the customer can buy it and experience it. We might say that value facilitation is the traversing of the last mile and the last foot into the customer’s domain.

Facilitating value means making the least amount of work for the customer. We don’t think about work as something the customer has to do. But the concept is important in identifying barriers to purchase and barriers to usage. If the customer has to learn new software, a new interface that doesn’t work the way they’re used to, or a new car dealership whose customer service process is different, it’s all work. If a customer has to drive to a store instead of accepting delivery at the office or home, it’s more work. If a truck requires more maintenance, it’s more customer work. If the customer must do some research to find out about a brand that was previously unknown to them, it’s more work. Economic science recognizes the disutility of work. If there’s a possibility of achieving a benefit with less work, that’s the benefit the customer will choose.

Value facilitation is the business activity of minimizing the amount of work the customer must do to experience the benefit on offer, reducing the barriers to purchase and usage to zero.

Capturing value

When the value facilitation process is taken to the max – the last foot – the value experience is ready for capture.

On the customer side of the transaction, the final step is translation of their value assessment (which includes the weighing of multiple value perspectives, and especially relative value compared with what else they could use their money for) into a monetary expression we call willingness to pay. The willingness to pay means the customer perceives more value in the potential experience on offer than in holding on to their cash or using that cash for alternative purposes. It can only occur when the benefit they anticipate exceeds the price asked by the entrepreneurial business making the offer. There might be some negotiation (special promotions, discounts, coupons, incentives, and so on) before the willingness to pay is finalized and expressed in a purchase.

The customer captures value by buying and using and experiencing what they bought. This might be immediate (like an ice cream cone) or delayed or spread over time (like a car). 

The business captures value when they receive the cash, and subtract all the costs of production. The quality of the business model determines how much of the value the business captures, and how much is lost to costs or shared with partners in the value delivery network or supply chain. Some business models capture more value than others. For example, selling direct to consumers via the internet usually empowers sellers to capture more margin than going through a 3rd party retailer and wholesaler network and sharing margin with them. There’s both more value for the consumer (delivery versus pick-up, speed, convenience, etc) and more to be captured by the producer.

Besides negotiating price, the producer’s role at this stage is to monitor the customer’s value experience – did it go smoothly, did it meet expectations, are there any dissatisfaction signals to be picked up?

Value agility – strong feedback loops and responsive innovation.

Value facilitation is never complete. The entrepreneurial business must become adept at reading consumer signals after the value experience and value capture. This is accomplished by keeping open the feedback loops from the end-user to the business – contacting, monitoring, listening, processing, and ensuring that the feedback enters and is absorbed by all parts of the business, not just the call center or the marketing department. Every part of the business should be entrepreneurially empowered to respond to end-user reactions and signals. A firm with value agility is organized differently, with every possible touchpoint and listening point ready with a response.

This value agility and readiness spontaneously organizes continuous innovation, making changes to firm behavior, policies, outputs, services and delivery to aim for the best possible accommodation of changing and evolving customer requirements. Continuous change is the norm for the entrepreneurially empowered firm.

Quantum Economics

In quantum physics, entities in a quantum state emit what are called “offer waves”. Other quantum entities absorb these offer waves and send out a “confirmation wave”. When the offer wave and confirmation wave match, a real-time event occurs as a result, although very rarely, because the quantum states and offer waves are continuously changing. The quantum states and the offer wave and confirmation wave are real, but they do not occur in the dimensions of spacetime (the three dimensions of space plus the dimension of time that are the “container” for everything we can observe and experience with our senses). They occur in quantumland – a land of probabilities, possibilities and potential that are not yet quite real to the human observer.

The economics of value can be thought of in the same way. Consumer dissatisfaction is the emission of offer waves: I will be your customer if you can solve my dissatisfaction. Entrepreneurial action can be thought off as the confirmation wave, sometimes but rarely providing the right response and precipitating a real event, a transaction. 

There is no concept of cause-and-effect or stimulus-and-response. The offer wave and confirmation wave exchanges are occurring simultaneously, at all times, in all directions, amidst continuous change. Professors Bylund and Packard painted the picture of consumer and entrepreneur co-navigating a sea of uncertainty in a shared quest for a higher value state. Each has a role, but neither is the stimulator or responder. Both of them play both roles at the same time. The new rules of value require us to think differently than we’ve been taught in the past.

Watch this video for a quick review of the 4V’s Business Model

Value Is A Process – the Essence Of Entrepreneurship.

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This article is a summation of arguments made in a recent academic publication in Small Business Economics Journal, entitled “Subjective Value and Entrepreneurship” by Drs. Per L. Bylund and Mark D. Packard.

 

What is the value of a pizza?

If you asked a standard economist, they might—thinking themself quite clever—ask in return, “well, what would you pay for one?” Now, that’s a fine response as far as it goes. But in neoclassical economic theory, that’s not as far as they seem to think.

Standard economists will readily admit that value is subjective, but what they mean by that is not what subjectivists mean by it. See, in philosophy of science, social science divides down strict lines of ‘objectivism’ and ‘subjectivism.’ The objectivist—also realist or positivist (these are distinct terms, but align in the objectivist paradigm)—sees the social world as comprising real things, objective phenomena that are more-or-less stable and causally deterministic and, thus able to be studied as such. In other words, social reality is in principle no different from physical reality, and we can study it the same way. Yes, it’s true that there’s tons of noise and randomness when studying social phenomena, which require statistical methods to find causal relationships, but the same is true of certain natural sciences too, such as climate science (not exactly a ringing endorsement in many libertarian circles).

Applying objectivist philosophy to the value concept, the assumption is that value is real and objective. A pizza has value—it’s there in the pizza. But what’s interesting about this value—which has been defined as ‘marginal utility’ since 1871—is that it’s different for everyone. Utility, of course, is usefulness—how much benefit I would get from the pizza. But utility is different for everyone—we have different tastes, dietary needs, and so forth. What this means is the objectivist economist—which is most of them—understands value as objective but idiosyncratic. ‘Idiosyncratic’ is synonymous with ‘subjective’ if you’re an objectivist.

But philosophical subjectivism, as the Austrian School espouses, sees the social realm very differently. There is no “social reality,” strictly speaking. A job, a marriage, a personality, a reputation—these don’t really exist. ‘Reality’ references the physical realm—what the natural sciences study. The company Google is just a concept—a figment of our imagination. There are real people that ‘belong’ to the Google organization; there are physical structures that comprise Google’s offices (the Googleplex); Google even creates some physical products. But the organization ‘Google’ is just a concept that Sergey Brin and Larry Page conjured and was granted ‘legal status’ (which is just getting another imaginary organization’s imaginary stamp of approval), which solidified the concept ‘Google’ as a ‘legal entity’ into the minds of people that is—for most intents and purposes—for us as if Google were a real ‘thing’. Lots of social constructions are like that: marriages, job titles, fictional characters like Harry Potter, etc. Many more are flimsier: relationships, reputations, scientific knowledge, etc. These have little or no institutional status, and so evolve with the whims of society. Studying social phenomena from this subjectivist perspective, then entails understanding what people think about those phenomena, how they understand them and why.

Value, from a philosophically subjectivist viewpoint, is very different from the objectivist concept of value as objective, idiosyncratic usefulness. Instead, subjective value occurs in the mind.

There are two key aspects of a subjective value concept, which we can distinguish by the form of word (i.e. part of speech) that it takes. As a verb, value (i.e. to value) is a prediction of or reflection on a benefit (depending on the context of the valuing). To say “I value the pizza” means either ‘I expect to benefit from the pizza’ or ‘after eating the pizza, I recognize benefit gained from it.’ As a noun, value is a conscious experience of benefit. This means that there is no value until it’s been experienced. When you understand the experiential nature of value, then we can’t equate predictions of value (value as a verb) with real value (value as a noun).

So when we ask, again, what is the value of a pizza, the right retort, from a subjectivist perspective is not “what would you pay for one,” but “how much benefit did you experience from it?”

To show how and why this matters, consider an example. Let’s say you’re hungry and are in the mood for pizza, enough so that you’re willing to pay up to $20 for one. So you ordered a pizza from Bylund Pizzeria around the corner for $10, who makes the pizza at a cost of $5. You have it delivered and leave $2 for tip, bringing your total outlay to $12.

In the traditional economic analysis, the example stops here. You have all the information that you need to calculate total economic value created. Economists estimate value as willingness-to-pay or WTP—how much you were willing to spend to satisfy your want, $20 in this case. The price P ($10+2) and cost C ($5) are the other two relevant factors. Total economic value creation is calculated as WTP-C, the total new consumer value minus the cost in resources and labor to produce it: $20 – $5 = $15.

But the subjectivist framework doesn’t stop here. Again, value hasn’t emerged yet, since it hasn’t yet been experienced. So let’s keep going. You sit down to the table, open up the pizza box and find a beautiful pizza with a fat cockroach crawling on top of it. You slam the box shut and run it outside to the nearest dumpster.

So let’s redo our economic value analysis now. Value isn’t WTP, it’s the benefit experienced. What was the total value achieved from the pizza? Zero. Probably even negative—you could say that you experienced harm rather than benefit, both in the trauma of the fright and in the fact that now dinner is going to be late. Let’s plug in zero: $0 – $5 = -$5. In other words, economic value was destroyed in the transaction—$5 of resource were expended for absolutely no benefit.

Life is an endless value journey—action and experience are continuous from birth to death. This journey is a learning process. What valuation should we assign goods, services, and activities? How should we prioritize our activities and expenditures to maximize our value experiences and well-being?

The principle of diminishing marginal utility—that consumption of a second unit of a good is not as valuable as the first—is widely known and accepted. But what’s not widely admitted, although we know it intuitively, is that the needs that we must satisfy to maximize well-being are dynamic. We keep getting hungry over and over again. One might break an arm, birth a child, pick up a new hobby, or start a new diet—changes that alter the things we value most. Similarly, changes are going on around us that have similar effects—changes in the weather, new innovations, pandemics, and politics.

Value is a process—one that we’re not just constantly engaged in but also constantly monitoring and learning from. It is in this process—in advancing it forward—that we find the essence of entrepreneurship.