Video Transcript: Applications of Austrian Economics to Business and Management

One of the issues that often comes up this week, particularly when discussing  political economy or libertarian theory, people often ask, well, that's a really  interesting theory, but that could never work in practice, right? I mean, how could you really have free markets doing X, Y or Z, or if we didn't have the government doing this, how could we possibly survive? And probably you've attended  several talks already this week that have addressed these kinds of objections,  providing some examples of how things might actually work in practice. What I  want to do this afternoon is address sort of a similar question, but about Austrian economics more generally. In other words, people often say, Boy, you Austrians  are really into your theory. You do praxeology. You have all this deductive  reasoning. You spin out these long, sort of complicated ideas. You write these  ridiculously thick books. I mean, who could possibly get through all these  pages? And there's, you know, in human action, there are some historical  illustrations, but this is really a theory book. And man, economy and state is  almost entirely a theory book. Is there anything practical that you can get out of  Austrian economic theory for day to day life, and in particular, for business, for  commerce, for management and so forth. Now I teach in a business school, and I teach principles of Austrian economics to business students and to business  professionals, to executives, all kinds of practitioners, members of the  community and so forth, and I've found that business professionals are very  receptive to the theories and concepts and arguments provided by Austrian  economics. In fact, I would argue that Austrian economics is even more of a  practical subject than other kinds of economics, right? Why do I say this? Well,  think about how Austrian economic theory differs from the economic theories  you get in most of the textbooks, most of the university classrooms, analyzes on  TV and so forth, sort of mainstream neoclassical economics. Well, as we've  already discussed this week, the Austrians have a particular way of approaching markets and prices that is causal and realistic, right? We're not using  mathematical equations to try to solve for some kind of equilibrium conditions.  We're trying to explain the actual prices and other phenomena that we observe  in the market, and trying to explain them using in terms of cause and effect,  right? Why did these prices go up? Why did this industry succeed while and  some other industry did not? Why was this entrepreneur more successful than  some other entrepreneur and so on? We have this very practical emphasis on  firm and resource heterogeneity. One of the first things you learn in your intro  undergrad econ class is, well, let's, let's start with a model of identical  consumers and identical producers engaged in perfect competition. And you  know, okay, 18 and 19 year old freshman. You know, their eyes will glaze over a  little bit, but they will dutifully take notes and regurgitate this material back to the  professor on the exam. But, you know, try, try doing an executive MBA seminar  and say, well, let's imagine a world of identical, homogeneous firms. By the way,  we'll make it an infinite number of them. So we can do all this in the limit and 

make the math work out. I mean, they're already out the door at that point, okay, but Austrian economics emphasizes that people are different, that firms are  different, resources are different. We don't have schmoo capital, as Roger  garrison was describing it. We talk about actual, discrete goods and services  that are used by producers to make stuff. We point out that the attributes of  resources are not given by their objective characteristics, but by the way, they  are perceived subjectively by consumers and by entrepreneurs. Right, the value  of a machine to an entrepreneur is not determined by its physical  characteristics, but by its place in the entrepreneur's subjective production plan.  Okay, anybody who's been an entrepreneur anyone who has tried to use  productive resources to make goods and services to sell to consumers will know exactly what this means. Business firms are not mathematical abstractions. We  don't have one equation that represents the firm, right. Rather, we regard firms  as bundles of heterogeneous resources, and if you go to a factory or a service  business, what do you see bundles of heterogeneous resources, machines,  inventory, workers, managers and so forth. Okay, we discussed a little bit  already on Monday, the role of the entrepreneur in the Austrian system. Joe  Salerno has described how entrepreneurs use economic calculation to plan and  to evaluate the results of their of their of their actions. So the emphasis on  uncertainty, on entrepreneurial judgment, on the importance of ownership of  resources, the critical role of financial markets in the economic system, right?  Again, these are all things that make perfect sense to business professionals, to business students, business practitioners, where they wouldn't say the same  thing about the way, about the economics that they learned in some of their  textbooks. So what I want to do in the next few minutes is just walk you through  a series of examples or illustrations of some practical business and managerial  topics in which Austrian economics provides some unique insight. Let's start with cost. Cost is a little bit can be confusing in mainstream treatments of economic  production and profit and so forth, right? So what you typically get in an  economics course is some sort of, really comes from Alfred Marshall, this kind of cost curve analysis of the firm's behavior, right? So give for a given production  technology, given prices of inputs, right? Firms can calculate an average cost  curve and a marginal cost curve. And, you know, depending on market  conditions, the firm can will try to maximize its profits by producing where  marginal revenue is equal to marginal cost and so forth. Most of you have are  familiar with this kind of analysis from courses that you've taken or maybe other  things that you've seen the problem with the standard approach to costs, and by extension, profit maximization, is the idea that costs are exogenous, in other  words, that costs are fixed and external to The firm. The plant manager wakes  up in the morning and looks to see, ah, what is the price of labor today? What's  the price of this particular input? What's the price of that input? And then sort of  calculate, oh, well, if I produce 25 units, my costs are going to be $500 if I 

produce 26 units, my costs are going to be $520 let me compare that to my  marginal revenue and decide what I want to do, how much I want to produce.  Okay, so the idea is that firms and managers are kind of responding to costs.  Now, where do these costs come from? Right? What determines the costs? Tom Woods referenced this briefly in his opening talk on Sunday night, right? Of  course, we cannot explain firm behavior. We cannot explain market outcomes,  starting with the assumption that costs come from somewhere else, because we need first to explain, Well, where do these costs come from? Because costs are  prices, right? Cost is another word for the price that the producer pays in the  market for goods and services, or that we as consumers pay for things that we  consume. Right? We all understand, you know, how much did it cost to buy that  Big Mac? Well, that's the that's the market price of Big Macs, and that's, I  exchanged that many dollars for a Big Mac in the market. We say, Well, but, but  what's the price? What's What are McDonald's costs to produce those Big  Macs? Well, that's the price that is paid in the market for beef and hamburger  buns and fast food workers and electricity and so forth, right? So costs are just  prices as seen from the producer's point of view. And the key sort of Austrian  subjectivist point is that all costs ultimately are opportunity costs. All costs are  opportunity costs, meaning that when we say, well, it costs McDonald's so many dollars to produce this many Big Macs, what we mean is McDonald's, or  someone in the economy is not enjoying the benefits of some other goods and  services that could have been produced and sold had the hamburger meat. The  cows, the feed for the cows, the land on which the cows graze, and so forth, and all the other ingredients not been used for something else. Right? So costs are  values for gone. What we need to try to figure out is, how do we translate these  values for gone into dollars that represent the accounting costs that are paid by  producers. Okay, so a few things to think about here. You know. First of all, the  entrepreneur sometimes has control over individual factor prices. So you know,  if I'm just a mom and pop operator, I set up shop here in Auburn, Alabama, and,  you know, I want to food truck. I'm going to make hamburgers. I buy hamburger  meat. You know, I may not be able to exercise much bargaining power over the  price that I pay for hamburger meat. It's kind of a generic commodity. There are  lots of people in Auburn who want to buy hamburger meat, and it's not like I can  go down to Walmart or Kroger or the local, you know, grocery store and say,  Yeah, you know, 2.99 a pound is a little high for me. Would you take 1.50 I  mean, if you say that at Kroger at Walmart, you know, they will call security to  have you escorted out. Okay? But now it may be that I'm buying from a small  vendor. Maybe I'm buying organic grass fed beef from this one farmer, and we  actually do sit down and negotiate over the price. And of course, if I am a large  buyer, if I am the McDonald's Corporation, right, assuming I'm not vertically  integrated, and I don't own my own cows, I have a lot of buying power in the  market for beef. In fact, it's the small farmers who feel like, you know, they're 

sort of taking the price that is set by McDonald's, rather than McDonald's having  to take the price of beef as being given somewhere else. Okay, so many times  the entrepreneur actually can influence the price that is paid for some or all the  inputs, and thus have influence over the cost that is paid by that entrepreneur.  But all entrepreneurs can influence the prices of their inputs indirectly, through  their choices of production methods. Okay? So just as we say, Look, when I  Peter Klein, go to Walmart to buy a tube of toothpaste, I don't bargain, right? I  just sort of take the price as given. I either buy toothpaste or not. But of course,  if lots of consumers decide they don't like a particular brand of toothpaste, the  demand for that toothpaste will fall. Walmart will realize lower revenues from  selling that toothpaste, and they'll decide, you know, they might, they either have to lower the price or get rid of that product altogether, right? So, of course, an  individual consumer may not have a lot of influence over the price of toothpaste, of a tube of toothpaste, but of course, it's still the case that tooth the price of  toothpaste is set by the supply and demand for toothpaste. Likewise, a mom  and pop operator, you know, the guy who operates a little food truck, may not be able to influence directly the price of hamburger meat by trying to bargain with a  large meat supplier, right? But I could always choose to use a different kind of  meat. I could choose to locate in a different area. I could choose to sell chicken  sandwiches instead of hamburgers. I could use, you know, I could sell tofu  burgers. I could switch to it, you know, organic or non organic, or grass fed, or  whatever. Right? There are lots of different ways that I can make sandwiches or  burgers or food, or however we want to define the product that I'm selling. And  thus I am exercising some influence on the price of my inputs in this indirect  fashion. Okay, so in other words, the prices of factors are determined in markets for those factors just as the price of a consumer good is determined in the  market for that consumer good. And we can use the causal, realistic principles  of pricing to explain factor prices just as we explain other prices. Great source  on this is a book by James Buchannan called cost and choice, which it provides  a very sort of forceful critique of the neoclassical cost curve approach, which  starts by assuming exogenous cost and then goes on to derive firm behavior.  Okay, cost sounds boring, except for you accountants in the room, you're boring  anyway, normal people think that cost is pretty boring, but actually, if you think  about it, cost accounting is really central to. To Austrian theory. Think about  Mises argument on the impossibility of rational economic planning under  socialism. It's usually described as you know, Mises showing why socialism  doesn't work, because you don't have private property, and so the socialist  planner doesn't have any way to know if it's more, you know if it's more, more  rational or efficient to build a railroad here, or build a railroad there, or not build a railroad at all, and so forth. But really, Mises argument about socialism is not  essentially about socialism, the impossibility of rational economic planning under socialism is just an application. It's really a cost accounting argument. It's really 

an argument that rational economic decision making requires the use of  numbers, right? You have to have some way to estimate what is the total cost of, you know, choosing course of action A versus course of action b, so that I can  compare a and b as a producer, right, as an organizer of production, and I can't  add up heterogeneous units of factories and machines and tools and workers.  To come up with a meaningful aggregate number. I need some unit of  comparison. In other words, I need prices. If I add up, you know, I can calculate  my total cost in money of this production method versus my total cost in money  of that production method and decide what's the least cost, least costly method  of production. I mean this Mises point is that will the socialist planner? This is  impossible under socialism, because you don't have private property for  factories, therefore you don't have markets for factories, therefore you don't  have prices for factories, therefore you can have no meaningful cardinal  numbers to stick into your you know, computation. But essentially, what Mises is  saying is that, is that in a market economy, you need prices for resources, prices for factors of production so that entrepreneurs can calculate costs and  revenues. Okay, it's really an essay on cost accounting. There's a really good  section on this in Mises little book bureaucracy, which is not one of his most  highly read books, but it's one that I that I would recommend. I mean, for one  thing, it's short, it's easy to read, and it contains a nice summary of some of  Mises major, major arguments, particularly on this point, he has this great way of expressing the calculation problem. And it's something like Mises says, you  know, in a capitalist economy, by means of their prices on the market,  resources, factors, it's like they're shouting out to the entrepreneur, use me or  use me here. Don't use me. Use me there. And he says, you know, under  socialism, the factors of production are mute. Okay? They they don't speak  because there are no prices in which, they don't have prices. But it's a very nice  summary of the calculation argument, in a way that I think is actually a little bit  clearer than the summary you get in his book on socialism or even in human  action. In particular, it's in the section where Mises distinguishes what he calls  profit management from bureaucratic management. And Mises is talking about  large complex organizations with multiple sub units or subsidiaries or divisions.  And he points out that, you know, in order to manage a large complex  organization, a certain amount of decentralization or delegation is required.  Mises says, Look, under capitalism, the central managers of the firm can say to  each subsidiary or each sub unit, look, we'll give you a lot of discretion to  manage your affairs as you see fit. We will look at the net contribution to total  profit made by your division or your subsidiary and evaluate you in that light,  right? So if it's, you know, imagine that the Mises Institute were a for profit  organization. You might have a book publishing subsidiary and a, you know,  online education subsidiary and a merchandise subsidiary. Each one can have  its own income statement right, its own statements of profits and losses, and the

central management can use those divisional income statements to decide, you  know, should we really be, even really be in the book publishing business, or  not? Well, book publishing is not contributing very much to our bottom line  compared to doing online education, therefore, we should shift more of our  activity from books to online education. Mises says, well, could you use this kind of a system in a government setting? So for example, take the police  department. So the police department has beat cops on the street who are  patrolling the street, and it has detectives who investigate solving other kinds of  crimes, and there are public relations things that the police department does and so forth. How should the police department allocate its resources across these  different activities? How do you evaluate the effectiveness of these different  activities? Well, you can't use profit and loss, right? Because the goods and  services, if they are valuable, that are produced by the police department,  they're not bought and sold in markets. So there's no there's no market price for  policing services, and so there's no way to know whether a particular activity is  contributing to the bottom line or not, because there is no bottom line, right? The police department does not produce things that it then sells on the market.  There's no market test. I mean, it's like, you know, imagine that you said to  police in downtown Atlanta, your compensation is going to be based on the  number of arrests you make, and each division will get more resources and will  get rewarded based on how it meets this criteria. And promotions for individual  officers will be based on this performance criterion. I mean, you can imagine the  result that you would see. We see this already, right? We all know be extra  careful not to speed when it's near the end of the budget cycle or end of the  month, when don't speed through certain little communities where they're known to be profit maximizers, revenue maximizers, right? Mises doesn't claim that  policing is illegitimate, or that, you know, the government, he doesn't even claim  that the government shouldn't provide police services, but he says they can't  manage their operations in this decentralized fashion that private entrepreneurs  can, because they don't have Profit Loss signals there's no market test. Okay?  Now, Mises recognizes that even in a private company, you have some  challenges, for example, how to allocate overhead cost among different  activities, but this is something that entrepreneurs are figuring out as firms  compete with each other. Some interesting recent work on accounting principles from an Austrian perspective, for example, there's a Thomas Taylor article,  because it's 15 years old now, talking about accounting practices as kind of  social constructs, or social conventions. And he offers a kind of Hayekian  evolutionary argument for how particular conventions come to be established,  like activity based costing or EVA and so forth. There are a lot of, you know, new accounting practices that come into fashion. And Taylor says we can explain  these as attempts by market participants to come up with reasonable social  conventions that allow them to solve certain kinds of coordination problems. You

know, I spoke on Monday, and I guess all of you were there because it was a  because it was required on entrepreneurship. So I don't need to say much more  about that, but just to remind you that, you know, in in a kind of a long run  equilibrium state, we still have earnings for factors. We have interest payments  to capitalists, but we don't have entrepreneurial profit and loss, because there's  no uncertainty, right? But on a day to day basis, in the real world, entrepreneurs  earn profits and losses based on their ability to anticipate future prices and  market conditions. And you know, the unique role of the entrepreneur is to  arrange the factors of production under uncertainty, just not quite the same thing as innovation or discovery, but rather it's something that implies ownership and  judgment. Now this is extremely practical, because that's exactly what resource  owners do. It's exact. This is exactly how entrepreneurs behave. Just to remind  you, right? Austrian economics helps us to see what profit is not. Okay, so profit  is not interest. Profit and interest are both financial returns to business owners. I  mean, they're dollars, right? If I'm a business owner, I get these dollars in my  pocket after I've paid out all my factors. And you know, they're maybe, to me, $1  is $1 but analytically, we understand that there can be different sources from  those dollars, right? So to the extent that you know, part of that business  income. Comes from the fact that when I pay for my factors, I'm paying a  discount relative to their marginal revenue product, because I'm paying them up  front, and I'm only receiving the returns from selling my output later, and so I'm  getting an interest return right to compensate my factor owners for time  preference, right? Basically, I'm lending them some money ahead of time before  they've produced something that I can actually sell, and I get an interest return  for doing so, right? But that's that's different from the part of my business income that comes from being able to buy some factors at prices that are below their  realized discounted marginal revenue products, and I get losses to the extent  that I pay for factors more than what I will eventually get a discounted marginal  revenue product. And again, to see this, you can imagine a world in which there  is no uncertainty about the future, but you still have the passage of time and  time preference, so business owners would still earn interest in the evenly  rotating economy, but there would be no profits and losses, right? So, of course,  income in an economic sense is not exactly the same thing as income in an  accounting sense, right? Accounting income includes profit interest and the  entrepreneur's implicit wage. So when we talk about profit in an economic  sense, we're thinking of profit as a functional category, as a reward to successful uncertainty bearing. But you don't see that on the income statement accounting  majors, you know, there's just net accounting income, there's total revenues  minus total costs. You know, analytically, you have to try to conceptually  separate that net income into interest, implicit wage and profit. But doesn't show  those things don't show up as line items on the income statement, right? Profit is not an automatic return to capital, which some people seem to think. Some 

economists seem to think, Oh, well, if you have capital, capital is like a it's like a  banana tree produces a certain number of bananas per year just automatically.  So if you own some capital, it just sort of spits out some interest. That doesn't  make any sense. I think Roger Garrison had some discussion of that. And profit  is not a markup over production costs. People think, Oh, well, the way you make money in business, I'm going to produce whatever. I'm going to produce books.  And you know, here's how much it cost me to produce a book, I add 15% and  send it out into the market, and that's where my income, that's where my profit  comes from. I mean, look, sellers are free to add whatever markups they want to goods and services they sell. That doesn't mean anybody's going to pay that.  Right? The price that's paid is determined by supply and demand. The actual  market price depends on supply and demand. Of course, the seller can post  whatever price he or she wants, but that doesn't mean that's the price that you  will actually receive for selling your goods and services. Okay, just briefly talk  about business strategy. There's lots of literature on this, by economists and by  other kinds of scholars. You know, strategy is really about inter firm performance differences. Why do some firms perform better than others? And the dominant  approach to business strategy is what is often called the positioning approach,  derives mainly from the research research by Michael Porter, and essentially it's  neoclassical monopoly theory or neoclassical industrial organization Economics, sort of flipped, flipped around. So in standard neoclassical monopoly monopoly  analysis, it's explained that while monopoly is harmful because there's  inefficiency and deadweight loss and so forth and and perfect competition in  which firms don't earn any profit, is better from society's point of view. Well,  Porter took that conventional analysis of monopoly and competition, and said,  Okay, but what if I'm the monopolist, or I'm a would be monopolist, right? I don't  care about efficiency, I don't care about social welfare. I care about making a  bleep load of money. Okay? And if monopoly theory says, Well, when you have  barriers to entry, then you have a downward sloping demand curve instead of a  horizontal demand curve. And there are monopoly profits to be made. I'm like,  Yes, I want that. Okay, how do I create barriers to entry? Porter says, Oh, well,  you know, you should do things like try to get patents on the. Technologies that  you use or the products that you sell, try to differentiate your product from that of rivals. So you can get some monopoly power. You can try to engage in  predatory conduct, try to drive your rival out of business, so then you can be left  as the winner in the market. I mean, so the idea in Porter's strategic positioning  approach is that the way to make money is to outmaneuver your rival. You know, kind of like in a like, a like in a military conflict, outflank your rival and drive your  rival into the ocean. You know, through your advertising and your product  differentiation and so forth, intellectual property, et cetera. There's not much role  for Austrian concepts like uncertainty and entrepreneurship and actual  competition, as opposed to textbook perfect competition in those kinds of 

models. Now, in recent years, there's been some challenge or critique of the  Porter approach by what is sometimes called resource based, resource based  or capabilities approaches or theories to strategy which say that no really why  some firms perform better than others is because those firms have better  resources and better capabilities or competencies than their rivals. Okay? So  when you hear people talk about the core competence of an organization a  company, this is the kind of thing that they have in mind. So it's different from  Porter, in that instead of emphasizing trying to gain monopoly power, you're  trying to acquire critical resources that other firms don't have, and use those to  attract customers to your products, as opposed to those of your rivals. Now in  many ways, I think this is an improvement over the Porter approach, but it's still  essentially based on neoclassical competition theory, with just just focusing on  factor markets rather than product markets. Okay? So the idea is under perfect  competition, there would be no unique resources or capabilities. All firms would  be able to produce exactly the same thing. So firms are trying to create or  exploit some kind of friction or imperfection in the factor markets, you can get a  better resource or a better combination of resource than your rivals. Well,  Austrian economics offers some some additional insight into strategy that is  particularly useful. One is to focus on the role of the entrepreneur. Right?  Entrepreneurs differ in their ability to engage in production, to appraise and  combine resources in anticipation of profits and so forth. Right so the superior  financial performance of companies is ultimately attributable to the superior  entrepreneurial judgment of entrepreneurs who are responsible for those  companies. Okay, remember, entrepreneurial judgment can be better or worse.  It can be it can be good or bad. It can be strong or it can be poor, right? And  when entrepreneurs are good at what they do, they earn profits as opposed to  losses. Okay, so, and there's an emerging literature, academic literature, in  what's called strategic entrepreneurship, which is trying to take the insights from  entrepreneurship theory and apply apply them to business strategy, trying to  explain inter firm performance differences in terms of differential entrepreneurial  judgment or differential quality of entrepreneurial judgment. Another advantage  of attractive feature of this approach for us is that it places the emphasis where  it belongs on subjective consumer preference. Right? What entrepreneurs are  trying to do is anticipate the needs, desires, wishes, beliefs of consumers. So,  you know, Apple is one of the great companies of the late 20th century, and  Steve Jobs was a great entrepreneur. But, you know, there's a famous  statement attributed to Steve Jobs that has that, I think, has been very  misleading to people who study entrepreneurship and strategy, and that's you  might remember Jobs supposedly said, you know, well, at Apple, we don't do,  we don't do marketing research. We don't do we don't do surveys focus groups,  because the consumer doesn't know what he wants until we tell him. In other  words, we're so innovative, we we introduce these brand new things onto the 

market, and then everybody wants them, right? But we can't ask people in  advance. How do you think? Do you how much would you be willing to pay for  for x because they've never seen an X before? Okay? I mean, some of this is a  little exaggeration on Steve Jobs' part, right? But this kind. Reasoning has led a  lot of people, especially in the tech sector, to think, Well, look, I mean, consumer preference really doesn't matter. It's about introducing the coolest, techiest,  geekiest, most awesomest thing, app or piece of hardware or service, and then,  of course, it's going to go viral and I'm going to become a bazillionaire. But of  course, that's silly, if you think about it for even five seconds, because of only a  very tiny fraction of the apps and products and so forth that are introduced  actually do become profitable, let alone become highly profitable. So yeah, in  hindsight, it's easy to look at Apple products and say, Well, hey, they just pushed the market in a direction that it never would have gone otherwise, right? But I  mean, if consumers just if consumers didn't like those products, then it wouldn't  be the case that they wouldn't have been successful. Steve Jobs cannot just  create demand on his own. He, like every entrepreneur, is trying to anticipate  what consumers will ultimately be willing to do. Okay, a brief note, because  students often ask about this. You know what? About game theory? So a lot of  research and strategy, especially research and strategy that's done by  economists, emphasizes game theory as kind of a tool for formalizing strategic  interaction. Most of you, you've seen the prisoner's dilemma and other kinds of  examples where game theory is used to understand interaction. You know, as  Austrians, should we reject game theory as a tool for understanding strategy,  because of various objections to use of mathematics that that that you know  already well, I want to give a qualified answer to this and say that used properly,  a little bit of Game Theory, in my opinion, can is perfectly legitimate, right? As  long as we restrict ourselves to sticking to our core principles, like that utility is  ordinal rather than Cardinal, that we don't make interpersonal comparisons of  well being and so forth. So really, if you think about it, the standard kind of  Prisoner's Dilemma analysis can be done in a pretty qualitative and ordinal way.  Right? You actually don't need numbers to put in the little cells of the prisoner's  dilemma to solve for the Nash equilibrium. You just need it to be the case that  for this player, this payoff is higher than this payoff, and this payoff is higher than this payoff, you just need a series of ordinal relations, and they could be purely  subjective in the minds of the decision makers right now. How useful that is to  analyzing a particular case depends on the circumstances, but simply writing  down a little Prisoner's Dilemma matrix and putting numbers in there to  represent the rank ordering of the players does not violate any misesian  precepts about subjective utility or ordinality and so forth. Now, if you a lot of  things that game theorists will then do, like, you know, try to add up these  numbers over time through repeated plays, or add some risk and then calculate  expected values and so forth, where the cardinality does play a role, and we 

should be wary of doing that right. But the kind of intuitive logic of some of these games, I think, is not on its face, objectionable in any way. In fact, I mean,  sometimes trying to analyze strategic interaction using game theory can help us  kind of think more systematically about, what about the problem at hand? You  know, again, keeping in mind that the whole point of using these kind of models  is to show that there's an interdependence between joint actions and outcomes.  In other words, you know, my sort of well being is not only determined by the  choices that I make and the actions that I take, but also the actions that are that  other people, my competitors, my customers, my my suppliers, others with  whom I interact are also making. Right? Of course, the same thing for you know, for Apple, Apple's profit is not only determined by the entrepreneurial judgment  of Steve Jobs or Tim Cook or whoever, but also by the actions of other  entrepreneurs who are also exercising entrepreneurial judgment. There's an  interdependence of judgment and action that explains the profits and losses that are experienced by different companies, okay, you know. Again, thinking about  the characteristics of these firms, what are their objectives? What are their  capabilities? You know, what's sort of the timing of the interaction? What do  certain people know, and when do they know it? And so forth, you know. And  even Nash equilibrium. Per se, is not objectionable from an Austrian point of  view. Again, as long as we're keeping things at a kind of a conceptual and, you  know, ordinal level, I think using game theory is perfectly fine. Let me. Let me  wrap up with some comments on the theory of the firm before we stop, as I  mentioned before in a lot of economics textbooks, the firm is represented by a  production function. You guys all know what I mean by a production function.  You know, y is equal to f of x1, x2 x3 x4 or however many inputs you have, y is  output. And then you can, you know, you can use calculus on this production  function you could derive costs and so forth. You could, you know, again, any,  any, any business professional is going to look at production functions and cost  curves and just laugh. I mean, it's not like you could hire yourself out as a  consultant after taking a couple of economics classes as your university, and  say, Oh, I'm going to go, I'm going to go to Apple or or Xerox or General Motors  or whatever. And say, hey, if you'll show me your production function, I can do  some math on it. Let me see your cost curves, and I'll tell you how to maximize  profit. Draw this curve. Draw that curve. Here's where they cross, yay. I'm done.  Here's my consulting bill. You know, pay me $10,000 I mean, again, this would  be a call security. This would be a security kind of moment that would throw you  out right away. That analysis is completely useless, you know, to actual  managers, right? Austrians don't view the firm as a as an equation, right? But,  but again, in terms of resources, tangible and intangible, or assets that are  owned by those entrepreneurs who own the firm, right? What is a firm? A firm as a capitalist entrepreneur? Walter block used that term capitalist entrepreneur, or  it could be a team of capitalist entrepreneurs plus the assets that they own, 

right, the alienable assets. In other words, assets that you can buy and sell in  markets. The reputation is not an alienable asset. For example, that's what a  firm is. Firm is a is an entrepreneur or an entrepreneurial team, plus the  resources or assets that are owned by the entrepreneur or entrepreneurs,  ownership conveys authority. Right. You have the right to decide how these  resources will be used in particular contexts. Again, a firm, as in this sense, is  not the same thing as a production function or production process. A firm can  own multiple production processes, multi divisional firm, Multi Product firm, or  actually, a firm could not own any cannot control any production processes on its own, but could contract with other firms to jointly produce different goods and  services. And I have a paper that on firm size that you might find interesting,  published in 1996 using Mises calculation argument to explain the limits to firm  size in terms of sort of the language that we used before. I'll let you check that  out if you're interested. Something else that Austrian economics helps us to see  is it gives us some insights into organizational design. So by organizational  design, I mean things like within a firm or within a company. How are decisions  made? Who has authority to make certain kinds of decisions? How are people  compensated and motivated or incentivized. How is performance evaluated? I  mean, you can already see, for example, an analogy between how decision  authority is assigned and the notion of property rights in a market economy,  right? So I have authority over the property that I own within an organization. If  my boss delegates some decision authority to me, it's kind of like I have property rights. I mean, I don't exactly have property rights because the boss still owns  the building and owns the machines that I'm using and owns the desk at which  I'm sitting, but I have this little realm of authority within which I can kind of make  my own decisions without a lot of oversight. And that, you know, giving me that  sort of pseudo property right gives me incentives, the same way that real  property rights give you incentives to take care of the things that you own, you  can. You can put a Hayekian spin on this and say, well, the decision to  decentralize to delegate decision authority to lower levels of the hierarchy, right  can be explained in terms of tacit knowledge. Hayek's concept of tacit  knowledge, great article on this by. Two non Austrian writers, Michael Jensen  and William Meckling, called specific and general knowledge and organizational  structure is one of my favorite Austrian articles, even though it's not explicitly  Austrian that they do. They do discuss Hayek and they argue that, look, you  know, in a large organization, the people at the top don't have all of the  knowledge that's necessary to make good decisions throughout the  organization, people at lower levels of the hierarchy have knowledge that is  important and useful, and that knowledge may be tacit. They the term they use  is specific, difficult to articulate, difficult to transfer explicitly, up the up the line.  So therefore it makes sense to give decision authority to people who already  have the necessary specific knowledge, in other words, to have sort of a 

flattened hierarchy, or to use their language a Co Location of decision rights and specific knowledge. It's a very Hayekian argument for a particular kind of  organization that's looser and more decentralized. I need to stop I'll just mention  that it's possible to go too far here. Some Austrian economists, I think, have  said, well, we're for the free market. We don't like authority and hierarchy from  the government. Therefore, we don't like authority and hierarchy in the private  sector either. And all firms should be, you know, organized along sort of  principles of the sharing economy, and everybody should be an independent  contractor. We don't need any large companies or or private large private  companies are essentially statist. I don't accept that line of argument at all. I've  got an article you could look at came out two years ago, called Why managers  still matter, arguing that the flattening hierarchy is kind of a myth. But you can  talk about, we can talk about that in the Q and A. So to summarize, Austrian  economics is useful for management. It's different from other kinds of economics in its causal realism, its emphasis on resource heterogeneity, the role it gives to  demand in the consumer and the central position played by the entrepreneur. I  mean, it's qualitative theory. Austrian economic theory is qualitative, but it can be useful to people like forecasters who are engaged in the business of trying to  anticipate quantitative relationships. But ultimately, at the end of the day, right?  Management is not praxeology. Principles that are useful to managers are not  the same thing as you know, Mises apdictically True laws, because ultimately,  management is more of an art than science. But just as you know, the theory of  color is useful to a painter, understanding Austrian economic theory can be very  useful to the manager. Okay, thank you.