Friday, November 22, 2019

How Entrepreneurs Build the World

Per Bylund Austrian cover 750x516
 
This is important as it provides a superior conceptualization  of the critical role of the entrepreneur. Read and do digest.

It underlines my major beef with so called economic theory which is that it is far from been complete and yes, it really models central planning because it adopts mathematics whose application is reasonably inappropriate.  There is scant understanding of the discontinuous nature of human activity and it all gets assumed away.

My own work is empirical and focuses on the economic role of the natural community which will naturally throw up both capital and the chap to lead it all.  Yes the chap will come along..

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How Entrepreneurs Build the World

Jeff Deist: Professor Bylund, you grew up in Sweden. What stands out from your childhood?

PER BYLUND: I grew up in a suburb of Stockholm, separated from Stockholm by just a lot of nature. It’s close enough to be part of the Stockholm metropolitan area, but far enough away from it to be on its own.

When I grew up in the 70s and 80s, I was given a very romantic view of Sweden and how everything worked, but I only realized later it wasn’t very true. It was the happy 80s, so there was no end to public funds for anything. Everybody went to free dental care and everybody had their teeth fixed, so everybody could have good smiles. I did that as well. During the early grades — from first through sixth grade — we had a lady who was hired only for one task. She visited each class once a week with a big tray of very colorful little plastic cups with fluoride. You were supposed to just swoosh that fluoride in your mouth between your teeth and then spit it out, but the beauty was that we got to keep the cups, so that was something that all the children collected back then. We got hundreds of those different fluoride cups in different colors. That gives you sort of a taste of what growing up in Sweden in the 70s and 80s was like. No problems. More money and government takes care of everything, basically.

JD: We hear a lot about Scandinavian models of governance. What can we learn from Sweden today, a country of 10 million people?

PB: We can learn a lot. Sweden is a story that goes back more than the past 150 years — going from being the poorest country in Europe to being the world’s fourth richest in 1970. That’s totally a free market story. It’s about deregulation, it’s about limiting the powers of government. It’s about separation of powers between the king and the parliament. There was lots of investments in infrastructure, but only in the supportive sense. There was not a whole lot of welfare state. That meant the welfare state started to grow, but not as fast as the economy, which means that the economy can cover for all the inefficiencies of the welfare state before the 1970s. And then, the more important lesson — or the not-so-common lesson — would be that the welfare state was started in 1970 and it really went berserk and it completely imploded after 22 years. So, that’s how fast it goes if you try to nationalize everything and really go for socialism.

You can see policies Sweden pursued back then are policies that politicians today are promising. One of the things that was a turning point in the 80s, at least policy wise and in people’s ideological consciousness was the Employees Fund. It was this new progressive proposal that the government would tax corporations and put part of their profits into a fund that was going to be run by the national labor unions. This fund had only one purpose and it was to reinvest that stolen profit into buying stocks in those corporations. It was nationalization, not of single businesses, but of the whole free enterprise system. And that was the wakeup call for the nonsocialist part of the Swedish population. As a result, there was a huge protest. If you know anything about Swedes, Swedes do not protest. The way we tend to say it about ourselves is that a Swede is really angry if he closes his fist in his pocket. You don’t get more out of a Swede. So, when you have tens of thousands of people protesting the government, of all things, in Sweden, it is a really big thing.

Beginning in 1970, progressive policies were enacted throughout that decade, depreciating the currency numerous times in a few years, just to cover the holes and increase exports to cover the expenses of the government’s progressive policies. Then in ’92, when the Swedish currency completely imploded, they set interest rates to 500%, trying to defend the fixed currency exchange rate. They couldn’t defend it, so they let it go and it immediately dropped substantially in exchange value. Then, surprise, it became a repeat of the Golden Century — from 1870 to 1970 — when government wasn’t the main driver of the economy. After 1992, all the parties agreed to cut back on the very generous universal welfare system. That is where Sweden is right now. The government is still very big even after they cut back a lot. Now since there is a little more money, they are discussing how to expand the welfare state, as politicians always do.

JD: As a young man in Sweden did you make a conscious decision to leave for America, or to become an academic?

PB: Yes, that was a conscious decision. I always was playing with the thought of having the whole world as a platform. I was always fascinated by, and dreamt in some sense, of moving to the US. That was a dream come true. Pursuing an academic career, that was a conscious choice. I was an IT consultant in Stockholm. I had a Master’s degree in informatics and I was working as a senior software developer and business consultant. But I spent basically all my time, when I’m not in the office, writing libertarian columns online. I published around 200 columns in one year on all different websites. Mises.org was one. And my then-girlfriend, now wife, simply asked me, “you don’t like your job, all you do is just study philosophy and economics, why don’t you quit your job and go back to school and pursue an academic career?” And like any man confronted by his woman, and being young, I immediately decided to do it.

JD: But why America in particular?

PB: The reason I ended up in the US is simple. I applied for PhD programs in Sweden, for three years. But I couldn’t get into those PhD programs. Part of the reason is that they are fully funded and are in reality full-time employments with an okay salary. You can only pursue a PhD in areas where you already have previous degrees. Swedish academia works like it does all over Europe. Your bachelor’s degree is very focused, and then you study your major and minor and nothing else. After that, you can pursue a Master’s and then you can pursue a PhD in the same discipline. I had, at that point, a degree in informatics that I was sort of basing my career on. And on the side, I was studying political theory at the university. I finished a Masters degree in that too. I was trying to get into a PhD program in political theory as a libertarian, and as a white heterosexual male. That made me sort of the last applicant that they would choose. I think the best year during which I applied they had four open positions in the country. I was not going to get any of those. I had one interview in three years. Then I sent my résumé to friends at the Mises Institute. I think the very next day, I get an email from Peter Klein saying “how about Missouri?” And that’s how I ended up in the US.

JD: Fast forward to today, and you’re a professor of entrepreneurship at the business school at Oklahoma State University. You’re very active on Twitter. You write for popular outlets like Entrepreneur magazine. Do you intentionally seek out a popular audience, beyond the parameters of a normal tenured professor?

PB: To some degree. I’ve been influenced by people like Joe Salerno, who says that an economist should really see economics as a vocation and not a professional career. I think that is correct. I also recall Mises saying that a public intellectual should be just that, a public intellectual. I realized the limitations of the classroom. I remember from my college career, you studied really hard for the test and then you go and party like hell to forget everything, so you have some space in your brain for the next test. People don’t really remember what they study a whole lot. But they do remember good stories and I think they need to be reminded over and over again of what the truth really is.

My job and my role as a professor is, yes, teaching in the classroom, and yes, do research, which is the main task. The job is also to reach out with everything I know and everything I’ve come across and with everything I learn to help others understand the world better. Today, most college professors are progressives and they definitely do not hesitate to take their own “arbitrary theories” of the world and make that their starting point in what they teach. So, I don’t see why I shouldn’t be able to tell the world about Austrian economics and how free markets work. For us as Austrians, it’s not as arbitrary as it is from a progressive perspective. We start with the action axiom and then we derive truths from there. It’s not an ideological thing. I’m spreading knowledge. I’m spreading what I know and what I understand. What I’ve learned doing this, both online getting comments from readers, and especially on Twitter, is that I get a lot of pushback. But I get a whole lot of questions too, and questions that make me have to rethink some things and dig deeper into my own knowledge. I use the classroom in the same way. I teach stuff that I know, but I encourage pushback and it’s all discussion-based, meaning I want them to push back and ask hard questions because that’s how we can all learn. It’s sort of a discovery process, overall, for both me and for others.

JD: You’re adept with Twitter. Despite the character limit, you don’t use it for trite self-promotion or sound bites. You actually create substantive threads.

PB: You know that’s really odd because Twitter is supposed to be this really fast medium — just slogans and stuff like that. I found out very quickly that the really long threads consisting of 30-35 tweets, with one argument building up throughout in those tweets, those are by far the most popular ones. Those are the ones that people retweet. Those are the ones that people like. Those are the ones that people connect with you and ask questions about. They go through private messaging on Twitter itself and that’s how I get the little following I have on Twitter. It’s totally through those longer ones, and it happens over and over again. When I think I write something really clever and really cool in just one single tweet, even if I retweet it a bunch of times, it just never takes off. People don’t really like slogans as much.

JD: A recent example of your Twitter campaign is a lengthy conceptual thread concerning value. People still struggle with the labor theory and marginal utility. They think cost, time, and inputs determine value, and ultimately determine prices. Why does this still trip people up more than a century after Böhm-Bawerk explained it?

PB: It is the power of economics, and I think it was Mises who somewhere said that the power of economics is to show people that it’s really the opposite of what it looks like. I think that is at the very core: people think they see things, they think they understand things, and they just create those patterns. The patterns do exist and they do observe the patterns, but they do not recognize the actual processes that create those patterns. And the role of the economist is to point out that these are the true processes, whereas everybody thinks that those processes are very different.

The labor theory of value was debunked by Böhm-Bawerk almost 150 years ago, and yet, it’s very much alive because that is where people start. They think of value as objective and they think of value as being the creation of labor. But it is really the other way around. We invest labor because we think we’re going to end up with something valuable. I think that is the very core of the Austrian school. It’s also a core insight that completely changes how you view the world and I use that a lot when I teach entrepreneurship. That’s something that entrepreneurs figure out themselves because they make so many mistakes following the objective-labor-theory-of-value type of view of the world. They realize that it doesn’t matter what they think or what they think they have seen, but value is truly in the eyes of the consumer. They have to figure that out and that’s their task. Entrepreneurs in general, especially experienced entrepreneurs, are truly and fundamentally Austrians.

JD: Even entrepreneurs focus too much on cost?

PB: Yes, it is strange, but people tend to think of cost, which makes sense, when you’re producing something. What do you have first? Well, the thing you have first is the cost, and because you assume that cost, you have a product that you can then potentially sell and make a profit. If you think about it in technological terms, it makes sense to start with the cost because there is value. But, as Menger showed us, that’s not the case. We pursue this end because we think the end is valuable to us. We expect value from this end and therefore we are willing to assume those costs. And there we go again. 

It’s exactly the reverse of what we think of the world, but people are really, really sure that it’s cost that creates value. Unfortunately, they are taught that in school, too. I mean, it’s intuitive. For most of us just observing the world, there isn’t much pushback, not even in school. Not in the first 12 years, not in college, even if they major in economics. They’re not going to understand subjective value, they’re just going to look at it as money values and it’s not until they encounter a professor associated with the Mises Institute, or Austrian economics, that they’re going to get some pushback. By then they’re already old and you know about old dogs and new tricks. It’s hard.

JD: Why did you decide to specialize in entrepreneurship and theories of the firm?

PB: It happened through Peter Klein. When I started, he was an assistant professor, still not tenured, in the Department of Agricultural Economics at Missouri. But agricultural economics is not “real” economics, if you ask any economist. The department was a little bit weird and marginalized to begin with and they are, of course, very focused on farming and agriculture. But there was also a focus on regional economic development because they are an outgrowth of the land grant mission as with many public universities. In this department, they had an eclectic approach to economics because there was already a group of professors doing entrepreneurship and transaction-cost economics. It was a little more practical and applied than a regular economics department.

But in my work there, when reading Ronald Coase, I immediately realized that something is completely and fundamentally wrong with his thesis. I couldn’t figure out exactly what, so I dedicated my dissertation to, in a sense, disproving him and drafting my own theory of why there are firms and what sort of function they have in the market economy. That idea was interesting because it also has to do with the Mises Institute.

I was sitting in the second floor of the Mises campus as a Research Fellow during one of my first summers as a grad student and sifting through books by Mises. I was reading up on, and trying to figure out, what the heck is going on in the economy overall and how to understand where productivity comes from, and where wealth comes from. And it suddenly just struck me that maybe it has something to do with specialization. I remember going immediately to Joe Salerno’s office and asking him if he thought that was a good project to work on, and he looked at me and said, basically, “huh? I’ve never heard that explanation for the firm before.” That, of course, was enough for me to think that that’s something worth pursuing. If he has never heard of it, then obviously there’s got to be something there, or I’m completely wrong, and if so then I’m going to figure that out. Peter totally approved of the idea too, and I pursued that. My dissertation is, in a sense, a refutation of Coase’s concept of the firm. My position was, “how can you have firms if you don’t have the entrepreneur at the very core?” So, that became it.

And how did I get into the professional academic career as an entrepreneurship professor? Well, there’s a bunch of luck and coincidence, because both Peter and I were in the Department of Agricultural Economics. It’s not an obvious path to move into the business school and start teaching and doing research there. I mean, as competitive as it is to try to get a tenure-track position, if you have training in a completely different discipline, then you’re basically excluded. So, how do you do that?

Here is where luck and coincidence play a part. I was playing squash with friends in grad school. One of them was in the Management Department where entrepreneurship is usually studied. It happened he was also playing squash with his advisor, who turned out to be the new department chair in Management. So, I played his advisor as well and the advisor said, “oh you’re an entrepreneurship guy, right? … We need someone to teach entrepreneurship because we don’t know anything about it and no one’s really interested in entrepreneurship in our department. Do you want to teach for us?” So, my first job after graduating was one year of adjuncting, which I can’t recommend to anyone because it’s nuts, and not really paid. I made less money being an adjunct teaching seven courses that year than I did as a grad student.

That year a research position at Baylor University also opened up, and they were looking for someone in entrepreneurship and policy. The position was also associated with free enterprise. It turns out that if you want something in entrepreneurship and policy, you are in a very bad position because entrepreneurship scholars know nothing about policy and those who do know something about policy are either political scientists or they don’t know anything about entrepreneurship because economics threw out the entrepreneur from their models a long time ago.

I was the only candidate for two positions and I fit in perfectly as an Austrian economist studying and teaching entrepreneurship. I got that research position. It was a three-year position and that gave me enough time to just do research and try to get published in the journals, which is necessary to get a job in academia. And that, in turn, led to my position now at Oklahoma State. It was quite a bit of luck and lots of coincidences. The reason I have a pretty good career, and a good position now, is basically because I was playing squash with the right people and because I happened to be with Peter and other professors doing entrepreneurship stuff. And now, of course, Peter is at Baylor, so we both moved away from agricultural economics.

JD: Distill for us your theory of the role of the entrepreneur, and your theory of the firm. How does the Austrian school inform your thinking? 

PB: My focus is on studying the problem of production. We know that through the more intensive division of labor, we get more productive, but we also know that the market economy is decentralized. If it’s decentralized and it is also very specialized, that means that you have to also be compatible with everything around you in the sense that if you’re specialized, you use standard inputs to produce standard outputs in any supply chain or production process. So, how do you get from there to introducing highly specialized production processes? You can’t do it individually. I can’t suddenly specialize in the standard way of thinking of specialization, which is simply cutting up an existing task into smaller and smaller, more and more narrowly defined subtasks. If I have this standardized task that I am carrying out, if I say “well, I’m really good at this one-third in the middle,” I can’t just do the one-third in the middle because that makes me incompatible with both the other standard inputs traded in the economy and I will not produce complete outputs that someone else can use. If I do the middle third, I have to combine my efforts with the first third and the second third. I have to work collectively with them to organize and coordinate the introduction much more intensively than a specialized production processes.

I developed this imaginary construct of this specialization deadlock. The deadlock is this: if we push people to just continue specializing as much as possible, we’re going to end up at a point where no one can specialize any further because that will make them incompatible with the economy, and then whatever they’re producing is incomplete. They will not be able to be part of any existing production process. And from there, of course, the solution is, in a sense, obvious. You need someone to come up with the idea for how to replace a part of the production process or the whole production process, whatever it is and coordinate those new tasks that need to be carried out. You need to create this whole process, in a sense, with new types of specializations that have not existed before. Obviously, the whole thing stands or falls with everything working out because if anybody fails in this new chain that you’ve created, it is itself incomplete and incompatible with the rest of the economy. In order to break free from the specialization deadlock, you need to create these islands of more intensive specialized production. This must be coordinated by and led by the entrepreneur, who Mises has as the driving force of the economy.

Ludwig Lachmann talks about it as the truth function of the entrepreneur: it is to change the capital structure of the economy which is exactly what this is. This is how you make the production structure more roundabout: by splitting tasks up in more specialized subtasks, introducing capital potentially to make this happen. For me, at least, it fits perfectly in how the market economist solves that problem of specialization itself.

JD: Mises characterized entrepreneurs as “uncertainty bearers” and Israel Kirzner characterized their alertness to opportunities. Is this a distinction lay people like me should care about?

PB: I think it’s very important to understand the role and function of entrepreneurship as creation of new goods and services, and new conceptualizations of goods and services. I like to call it more the facilitation of value, since value is in consumption. The consumer can create the value by simply consuming a good or service, but where do these goods and services come from? They come from entrepreneurs trying to figure out how to better serve the consumers. That makes it very clear that the judgment necessitated by entrepreneurship — and the uncertainty-bearing function and also the imagination of it — are really core to understanding the economy overall.

JD: When Mises says uncertainty that means risk, the possible loss of capital and time. We might call it skin in the game. As you know business school critics like Nassim Taleb say entrepreneurship and business acumen can’t be taught. Professors aren’t business people with skin in the game. Give us your take: can entrepreneurship be taught?


PB: The short answer is yes and no. What I mean by that is simply I don’t think you can teach how to be a successful entrepreneur. That’s pretty obvious because if you could teach that, then obviously I, and other professors, would know how to be successful in the marketplace, and then why the heck would we be professors instead of not making money in the economy? We do not know how to actually be successful, but we know how to avoid a lot of errors that people make. What you teach first is all the tools that are either necessary or have a function: accounting, marketing, and all this stuff that business schools teach. In terms of entrepreneurship per se, learning how to think about business and where value comes from can be taught and it has to do with what we were talking about before. Understanding value and how to get to it, is very important. There really are two components to this. The first part is to understand the economy — that is, sound economics — so you don’t start investing just before the bubble bursts, so that you’re not tricked by asset bubble thinking. The other part is to understand people, primarily consumers, being able to put yourself in their shoes and understand what would create the most value for them. What are the most urgent and important problems that they have? How can you satisfy their wants or help them move away from the uneasiness that they’re feeling? Those two aspects can definitely be taught. Maybe not completely, but enough to understand how to not mess up as an entrepreneur.

JD: Austrians suggest that many entrepreneurs don’t recognize how important monetary policy really is. Professor Bryan Caplan criticizes Austrian business cycle theory on the ground that smart business people could figure out the booms and busts central banks create, rather than fall prey to malinvestment. Do you think this holds up?

PB: Entrepreneurs are not specialized in economic theory, and why would they be? Economic theory is not always super applicable to what they’re doing, and there is an opportunity cost to learning stuff and deep diving into most of the aggregate data. So theory is probably not worthwhile. There’s also this little thing called profit. During a boom — even an unsustainable boom — you can make tons of money if you are investing right. And most entrepreneurs think they are investing right and they’re following signals that are false because the interest rates are too low. Even if they know that the bubble will burst, why would they sit at home and not get that money that is available for them? They can grab the money by running a business. What they need to do is get out before anybody else. They usually think that they can do that, when they see the signs. I don’t think even if you have the time and interest in learning business cycle theory, you would be a poor entrepreneur if you just said, “well, this is an unsustainable bubble, so I’m just going to sit this one out.” Besides, it could be an unsustainable bubble that lasts for 10 years, like we’ve seen now, since the financial crisis. Are you just going to sit on your hands and not make any money for 10 years just because you know that this bubble will eventually burst? That doesn’t make any sense at all. Many entrepreneurs do get out in time, so it’s not really about learning because every actual situation is unique in many ways. Learning the theory which tells you what is going on in universal terms, theoretical terms, that definitely helps you. But it doesn’t help you to get out in time because the timing of it is not down to the theory that can help you predict.

JD: I have one last question for you. Critics on both the Left and Right increasingly seem to claim economics is not a real science or discipline. Economists just provide intellectual cover for business interests. There are no economic laws, just policies that legislatures can command. I’d like your response.

PB: I think it’s silly. That’s my short answer. What it really shows is, in a sense, economics has made its own bed because economics is not very helpful. Economists, using math and throwing out the entrepreneur, what they’re doing is providing the planning tools for the central planner and they think that they can do it. The recent Nobel Prize is just proof of this, that they’re conducting experiments thinking that they can find real truths about how to produce better policy so that they can make micro adjustments to society and the economy and create better outcomes. What they’re missing is that we’re dealing with people, so it’s not truly mechanistic. But, just because it’s not truly mechanistic doesn’t mean that there aren’t patterns to it and regularities. There are regularities to the economy. But better understanding can be directly derived from us as people, and also from what we do, and especially our actions. We’re always trying to attain some value that we think is valuable enough for us to pursue. That’s the axiom that Mises develops with praxeology, and that explains this really well. The problem in economics now is that they have completely thrown out subjective value. Now they start with using proxies by looking at money price instead of subjective value because it fits their models better.

But now they don’t even know that there is such a thing. I was fortunate, I suppose. I took my advanced microeconomics course at Missouri, and was taught in the economics department and not in the ag commerce department. That professor started by saying, “we know that value is subjective. Assuming that we could still plot it in the utility function and use utils, we should be able to maximize it as well.” Then he started filling the blackboard with one big equation and the rest of the semester was trying to maximize this equation with using partial derivatives of different variables. He was part of the old guard in the sense that he recognized that value is subjective, but he just chose to disregard it. Whereas now, I don’t think there are any economists being trained in economics programs, at least not in the classical sense, because they are now technocrats. They don’t think about economic issues. They think about how to program different statistics programs and how to check their results for biases and then they come up with some clever explanation for their findings. They use economic terminology, but there’s really no economic understanding behind that at all. They’re trying to predict and they’re trying to get into a career in government basically, trying to help policymakers produce better policy, which is very different from the type of economics that we do in Austrian economics.

We’re trying to understand the world and help people become better people. We’re not trying to push people around the way you do with policy and always create new problems because that’s what policy ends up doing. There are both large and small problems, but still problems. This is because there are unintended consequences. They assume that people are not people. In other words, we can tell a story about what is actually going on, that people can understand and learn from.Real life entrepreneurs, they understand Austrian economics, they just don’t have the tools, the terminology or the theory. They have the experience telling them exactly what we know — that is Austrian economic theory is correct in how it explains the market economy and how it works. That’s how we can explain all these problems that come out of policy and all these errors made by politicians. We can, in this sense, predict or at least foresee all the suffering that people will have to go through simply because they want these quick fixes through policy that have never worked and will never work. Economics is a social science, but it’s definitely also a tool for uncovering the true state of the world and the true dynamics of the world. At present, there are really two categories of people who understand the world and understand the economy and those are experienced entrepreneurs and Austrian economists.

JD: Is it an overstatement to say most mainstream economists have no concept or theory of the entrepreneur at all? They think individuals are interchangeable widgets?

PB: The way they treat entrepreneurship is to look at startups. For these economists, the aggregate number of businesses and jobs being created is all they’re interested in. They have no conception of the entrepreneur as a person, or the entrepreneur’s function in the economy beyond just jobs creation. It makes me think of the famous Schumpeter quote about how studying the economy without the entrepreneurs is really Hamlet without the Danish prince.

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