1
PRELIMINARIES
 ME & JOE & WEALTH CREATION
CURIOUS & OPTIMISTIC
BENEFICIARIES VICTIMS & STUDENTS
COMPLEXITY CHANGE CONFLICT SCARCITY = APPARENT CHAOS ?
but things are NOT RANDOM there are PATTERNS !
WHY is the JOINT STOCK COMPANY so successful at WEALTH
CREATION ??
JSC
CURIOUS
there are many ways of ORGANISING activities
why are some COMPANIES more successful than others?
why are some MANAGERS more successful than others?
can we LEARN from & IMITATE successful organisations?
OPTIMISTIC
the JSC is SURPRISINGLY successful
success is not random there is a PATTERN
take a DIFFERENT look at an old institution
unusual insights emerge & lead to a better UNDERSTANDING
BENEFICIARY
LEARNING, INNOVATION and ASPIRING trying to understand the JSC
WEALTH is important more CHOICES seem to result in less infant mortality
VICTIM
wealth creation isn’t easy WHO is tying our shoe laces together?
who is to blame for this CONSPIRACY?
STUDENT
what is going on??
NB. THERE’S NO USER MANUAL !
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2
SCOPE
 from LEARNING & INNOVATION to WEALTH with the JSC
AGE OLD PROBLEMS
COMPLEXITY CHANGE CONFLICT SCARCITY
ECONOMIC REALITIES
SPECIALISATION SCALE SCIENCE SYNERGY
IMITATION INVENTION INVESTMENT
=
LEARNING & INNOVATION
ESSENTIAL CO-OPERATION
SELF HELP - FAMILIES - PARTNERSHIPS - CHURCHES - CLUBS SOCIETIES - VOLUNTARY GROUPS - PUBLIC AGENCIES or
PRIVATE COMPANIES
????
Providing more CHOICES and more SYNERGIES
for MASLOW’S INDIVIDUAL ASPIRATIONS SURVIVAL SECURITY FRIENDSHIP INDIVIDUALITY ESTEEM
FULL POTENTIAL
JSC
from
LEARNING &
INNOVATION
to
NB. BAFFLING DIVERSITY !
WEALTH
CREATION
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3
ISSUE
 CO-OPERATING with STRANGERS
CO-OPERATION? HOW? WHO DECIDES?
?
EVOLUTION or PLANNED DESIGN
CUSTOMER CHOICE or EXPERT REGULATION
ENTREPRENEURS or BUREAUCRATS
HEURISTICS or ALGORITHMS
CO-OPERATION or COERCION
????
MARKETS ?
or
PLANNED DESIGN ?
TWO OPPOSING WORLD VIEWS
FOCUS on the -
JSC
the JSC is an EVOLVED INSTITUTION enabling STRANGERS to
CO-OPERATE in the LEARNING & INNOVATION process
ADVANTAGES for ALL FOLK in the LONG TERM EFFICIENT low cost
EFFECTIVE customer benefits
MORAL lawful activity
POTENT better than competitive alternatives
the JSC is also ROBUST !!
NB. BOTTOM UP EVOLUTION OR TOP DOWN DESIGN !
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THEME
 ROBUST INSTITUTIONS EVOLVE
TOLERANT of IGNORANCE
IMMUNE from TREACHERY
How do we organise co-operation?
KNOWLEDGE
IGNORANCE
LEGAL
UTOPIAN
CONTRACTS
BLISS
?
NAÏVE
TRUST
TREACHERY
CO-OPERATION
‘We are ignorant of what it is we do not know,
even though we know more than we can ever say’
John Gray
‘From the bowels of Christ, I beseech you,
think that you may be mistaken’
Oliver Cromwell
‘Organisations based on trust and good intentions are very fragile &
easily invaded & exploited by opportunistic agents’
Oliver Williamson
‘Evolutionarily stable strategies are stable because they are immune
from treachery’
Richard Dawkins
NB. AUTOMATIC RESPONSE TO PARASITES & PREDATORS !
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SOURCES
 KINDRED SPIRITS
just a few GUIDES & MENTORS
CREATIVE ACCOUNTANCY
Kaplan, Pollard, Chandler
BUSINESS STRATEGY
Kirzner, Porter, Stacey
MARKETING PRACTICE
Lever, Hardy, Levitt
TECHNOLOGY MANAGEMENT
Rosenberg, Nelson, Ganguly
ECONOMIC THEORY
Smith, Ricardo, Solow, Romer
PUBLIC CHOICE POLITICS
Buchanan, Becker, Rubin
PHILOSOPHY & HISTORY OF SCIENCE Popper, Kuhn, Wilson
ORGANISATION STRUCTURES
MacGregor, Akoff, Senge
COMPLEX SYSTEMS
Checkland, Ormerod, Holland
EVOLUTIONARY PROCESSES
Dawkins, Axelrod, Dennett
HISTORICAL EVIDENCE
Braudel, McNeill, Hicks
ECONOMIC ANALYSIS
Metcalfe, Wolf, Williamson
CONTROL THEORY
Ashby, Cziko, Rothschild
NATURE of PROFIT
Hayek, Baumol, Fukuyama
SAFEGUARD of COMPETITION
Friedman, Kirzner, North
INDIVIDUALITY of REALITY
Kant, Maslow, Pinker
MAGIC of PROPERTY
Coase, McGregor, Romer
COMMON LAW
Posner, De Soto, Ridley
CULTURE
Nozick, Novak, Diamond
NB. A DWARF ON THE SHOULDERS OF GIANTS !
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STRUCTURE
 MODELS PROBLEMS REALITIES & UNDERSTANDING
TOPICS
WEALTH
MACHINE
JSC
HOW IT WORKS - THE CASH FLOW MODEL
 BUSINESS ACCOUNTS
 BUSINESS STRATEGY
 MARKETING
 TECHNOLOGY
AGE OLD PROBLEMS  COMPLEXITY
 CHANGE
 CONFLICT
 SCARCITY
RELEVANT SOURCES 



COMPLEX SYSTEMS
EVOLUTIONARY PROCESSES
HISTORICAL EVIDENCE
ECONOMIC REALITIES
ECONOMIC ANALYSIS  SATISFICING
 SUPPLY & DEMAND
 COMPARATIVE ADVANTAGE
 TOTAL FACTOR PRODUCTIVITY
 ENDOGENOUS GROWTH
WHY IT WORKS - THE CONTROL MODEL
 NATURE of PROFIT
 SAFEGUARD of COMPETITION
 INDIVIDUALITY of REALITY
 MAGIC of PROPERTY
NB. ILLUMINATING REALITY !
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THE JOINT STOCK COMPANY
 CO-OPERATIVE VENTURES
PARTICIPATION & CONTRIBUTION
CORPORATE
WEALTH
PROFIT !
JSC !
ENTREPRENEURS with
IDEAS
INVESTORS with
CAPITAL
INVESTMENT
ENCOURAGED
 Limited liability
 Stakes can be cashed
 Anyone can join
INNOVATION
REWARDED
 Finance available
DRIVEN by PROFIT
OWNED by SHAREHOLDERS
and CONTRACTS
NB.
PROFIT FROM PLEASING CUSTOMERS !
for SUPPLIERS
for EMPLOYEES
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THE WEALTH MACHINE
 CIRCULATING RESOURCES picking up PROFIT each cycle
DYNAMIC EBB & FLOW of OPPORTUNITIES
SOURCES of FINANCE
OWNERS
LOANS
DEBTORS
CASH
CASH
POOL
CREDITORS
COSTS
FIXED ASSETS
MATERIALS
DEPRECIATION
VARIABLE
FIXED
DIRECT
INDIRECT
DISTRIBUTION
FACTORY
SALE !
STOCKS
FINANCIAL ITEMS
PROFIT
TAX
DIVIDENDS
RETAINED PROFITS
NB. THE MAGIC ROUNDABOUT !
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THE BUSINESS ACCOUNTS
 IDENTIFYING FLOWS
MEASURE or MIRAGE?
CASH
RESOURCES IN
CUSTOMERS
SUPPLIERS
EMPLOYEES
SALES
ASSETS
WEALTH OUT
Dynamic fluctuating ebb & flow of resources
WHY MEASURE?
 EFFICIENCY & WEALTH
PAST PERFORMANCE
 SOLVENCY & HEALTH
CURRENT POSITION
 LIQUIDITY & RISK
FUTURE PROSPECTS
THREE REPORTS
 PROFIT & LOSS ACCOUNT
 BALANCE SHEET
 CASH FLOW STATEMENT
HOW MUCH PROFIT not CASH?
SPENT on CAPITAL or REVENUE?
WHERE IS IT GOING?
DIFFICULTIES
 Income fluctuates
 Assets must be
 Costs must be
 Uncertain future
TIMING is not consistent
VALUED and there are no market prices
ALLOCATED and there are no invoices
ESTIMATES are never ‘correct’
PRINCIPLES
 CONSISTENCY
 PRUDENCE
 ACCRUAL
 GOING CONCERN
for comparison
for safety
for timing
for clarity
but the ACCOUNTS tell only HALF THE STORY with focus on  COSTS
but not QUALITY / SERVICE / SKILLS
 YESTERDAY
but not TOMORROW
 COSTS of DOING
but not COST of ALTERNATIVES
 RULES
but not LEARNING / INNOVATION
NB. CAVEAT EMPTOR !
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THE PROFIT & LOSS ACCOUNT
 PROFIT or CASH?
TIMING ISSUES
INCOME
EXPENDITURE
when EARNED
when the deal is struck
not when the cash flow in
when INCURRED
when committed
not when the cash flows out
the day to day transactions of the wealth machine involving a SURRENDER
and a GAIN of a benefit culminating in the PROFIT & LOSS ACCOUNT
CREDITORS
COSTS
DEPRECIATION
MATERIALS
VARIABLE
FIXED
DIRECT
INDIRECT
CASH
SALES &
DEBTORS
DISTRIBUTION
STOCKS
SALE !
FINANCIAL ITEMS
PROFIT
INCOME
TAX
DIVIDENDS
RETAINED PROFITS
COMING IN
EXPENDITURE
GOING OUT
BALANCING across the SALE !
NB. BUY NOW PAY LATER !
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THE BALANCE SHEET
 CAPITAL or REVENUE?
VALUATION ISSUES
ASSETS
what we have of VALUE
FIXED for generating income
CURRENT for funding stocks, debtors and cash
LIABILITIES
what we OWE
to pay never
= EQUITY
to pay long term = DEBT RESERVES
to pay next year = LOANS
to pay this year
= creditors dividends tax
a snapshot of the balance culminating in the BALANCE SHEET
BALANCING across OWNERSHIP !
OWE
OWN
OWNERS EQUITY
DEBT
CASH
DEBTORS
& prepayments
FIXED ASSETS
- DEPRECIATION
CREDITORS
& accruals
SALE !
STOCKS
DEFERRED INCOME
PROVISIONS
FINANCIAL ITEMS
GOODWILL
PROFIT
TAX
DIVIDENDS
RETAINED PROFITS
NB. WHO PAYS HOW MUCH WHEN ?
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THE CASH FLOW STATEMENT
 STREAMS POOLS & LEAKS
REAL ISSUES
when push comes to shove
MARGIN & SPEED minus INVESTMENT = NET CASH FLOW
with a little help from INVESTORS and BANKERS
PROFIT is good but NO CASH NO BUSINESS !!
BALANCING across the CASH POOL !
SOURCES of FINANCE
OWNERS
LOANS
CASH
SALES &
DEBTORS
DRIPPING IN !
CASH
CREDITORS
FIXED ASSETS
COSTS
VARIABLE
FIXED
DIRECT
INDIRECT
LEAKING OUT !
MATERIALS
DISTRIBUTION
SALE !
STOCKS
FINANCIAL ITEMS
TAX
DIVIDENDS
NB. YOU CAN’T EAT PROMISES !
PROFIT
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BUSINESS STRATEGY
 DISCOVERING MARGIN & SPEED
SHAPING CURVES
SPEED
REVENUE
££’ss
PROFIT
MARGIN
COSTS
PRICE
VOLUME
what BUSINESS STRATEGY delivers the MAXIMUM PROFIT ?
where does MC = MR ?
the curves are not ‘KNOWN’ or ‘FIXED’ they depend on : PRICING POLICY
- INNOVATION, COMPETITION, QUALITY,
SERVICE, PRODUCT DIFFERENTIATION
 COST STRUCTURE - SPECIALISATION, SCALE, SCIENCE,
INVESTMENT & QUALITY of INPUTS
 SALES VOLUME
- ADVERTISING, PROMOTION, DISTRIBUTION
COMPLEX, DYNAMIC & INTERACTIVE SYSTEMS
CONTINUALLY EXPERIMENT to DISCOVER PROFIT  HIGHER PRICES
= LOWER VOLUME ??
 LOWER COSTS
= LOWER QUALITY = LOWER PRICES ??
 HIGHER VOLUME
= LOWER COSTS
NB. JUGGLING WITH COMPLEXITY !
= LOWER PRICES ??
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PRICES
 SPECIALISATION & MARKET POSITION
NICHE EXPERTISE
WHAT DO WE DO BETTER THAN OUR COMPETITORS ?
CONSIDER
MARKET NICHE?
or
BROAD MARKET?
but .......
but ......
RISK of MARKETING MYOPIA?
RISK to EXCELLENCE?
YESTERDAYS PRODUCT?
JACK of all TRADES
MASTER of NONE?
How to SECURE
&
HIGHER PRICES ?
ADVANTAGE
CONSIDER -
LEADERSHIP
 SUBSTITUTES ?
VOLUME
 IMITATION ?
PROFIT
 CUSTOMER LOYALTY ?
 SUPPLIERS ?
 SUPPORT SERVICES ?
 DISTRIBUTION ?
SPECIALISE !!
INNOVATE !!
 REGULATION ?
ACQUISITION of SKILLS
FOCUSED EXPERTISE
SKILLS FULLY UTILISED
DIVISION of LABOUR
NB. PRACTISE MAKES PERFECT !
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COSTS
 SPECIALISATION & COST BEHAVIOUR
COMPLEXITY COSTS
INDIRECTS
PARADOX
££’s
££’s
‘Hawthorn’
effect
relentless
increase
bureaucracy
& restructuring
time
attention - effort - focus
COMPLEXITY
VARIETY
££’s
££’s
complex
intermittent
% waste
simple
continuous
number of varieties
time
PARETO
LEARNING CURVE
££’s
££’s
vital few
frequency
cumulative volume
COST REDUCTION SIMPLICITY - SCIENCE - INNOVATION - INVESTMENT - DESIGN AUTOMATION - SIZE REDUCTION - SEPARATION - RESTRUCTURING RIGHT FIRST TIME etc etc
NB. KEEP IT SIMPLE STUPID !
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VOLUME
 SPECIALISATION & SCALE ECONOMIES
GLOBAL MARKETS
maturity
volume
cow
decline
star
growth
development
problem
dog
local / national / international / global
Technology
critical innovate?
find the niche?
market research?
Capacity
critical invest?
advertise?
promote?
Profit
Costs
critical critical divest?
milk?
acquisition?
relaunch?
drive down the learning curve?
COMPETITIVE ADVANTAGE from SPECIALISED NICHE and SCALE
 LEARNING EFFECTS of SKILL ACQUISITION
 LEARNING EFFECTS of SKILL UTILISATION
 SPREAD of FIXED COSTS over more units
 PURCHASING POWER for MATERIALS, SERVICES & FINANCE
 LOWER CAPACITY COSTS COSTS =
AREA
OUTPUT =
VOLUME
 AFFORDABLE LUMPS of INVESTMENT & RISK
 MORE OPPORTUNITIES for
in house facilities
vertical integration
long production runs
automation/mechanisation
process flow
skills training
NB. THE BIGGER THE BETTER !
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MARKETING TASKS
 CUSTOMER VALUE & MARKET RESEARCH
CHOICES
COMPETITION?
COMPETITORS are
PACE SETTERS
NOT WINNERS!
CUSTOMER VALUE
PRICE?
INNOVATION
SPECIALISATION
SERVICE?
COSTS
QUALITY?
DECISION
VOLUME
 PERFORMANCE
 PRESENTATION
 PACKAGING
RESPONSIVENESS
 CONSISTENCY
 COURTESY
 CHOICE
 AVAILABILITY
 ADVERTISING
 RELIABILITY
 EFFICIENCY of DISTRIBUTION CHANNELS
MARKET RESEARCH  INFORMATION to reduce risk (about yesterday?)
 REAL BEHAVIOUR (not saying but doing)
 JUDGEMENT CRITERIA (technical specification?)
 MATCHING customer & product
 TESTING (not subterfuge and intrigue)
 BEWARE of ‘me toos’ (competitors do market research)
 NB the best info comes from your existing customers !
OR real products at real prices against real competition in real markets !!??
NB. THE CUSTOMER IS KING !
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QUALITY
 BRAND POSITION & ADVERTISING
PRODUCT DIFFERENTIATION
QUALITY
VALUE
BEST CHANCE
 PREMIUM
MORE VOLUME BUT
TOTAL REVENUE ?
GOOD QUALITY AT A PREMIUM
BUT WILL THEY PAY THE PRICE ?
 MARKET NORM
ALWAYS RISKY
 ECONOMY
STANDARD QUALITY
AT A DISCOUNT
BUT IS IT JUST A COMMODITY ?
NEVER
PRICE (NOT COST)
ADVERTISING for  VOLUME - persuade to try
 MARKET SHARE - technical innovation - better than competitors
 MARKET GROWTH - a bundle of new promises - better than prior art
ACTIONS =
CHECK CUSTOMERS - IMPROVE QUALITY
PUSH PRICES - CHECK COMPETITION
saturation
advertising
spend
effective spend
££
voice unheard in the market place
volume
NB. VALUE FOR MONEY !
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COMPETITIVE ADVANTAGE
 BRAND LEADERSHIP & ALTERNATIVES
CHOICES for CUSTOMERS
them
Quality
Service
oh dear !
Price
index
us
we’re ahead !
steady improvement ?!
DYNAMIC COMPETITIVE MARKETS
 CONTINUOUS improvement needed to progress
 NEW OPPORTUNITIES are always opening up
performance is RELATIVE & CHANGING
A CONTROL SYSTEM !
COMPETITORS SET POINT
CUSTOMER
DECISIONS
INVESTMENT
RESPONSE
TESTS
NB. FIRST PAST THE POST !
MARKETS
PRICE
QUALITY
SERVICE
INFO
WINNERS
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SERVICE
 BRAND LOYALTY & REPEAT PURCHASES
EXISTING CUSTOMERS are VALUABLE ASSETS
ENCOURAGING LOYALTY
 COURTESY
COMMUNICATION
UNDERSTANDING
HELP with a SMILE
 AVAILABILITY
FAST
ON TIME
WHEN WANTED
 RELIABILITY
PREDICTABLE
FLEXIBLE
EFFICIENCY of DISTRIBUTION CHANNELS
QUALITY = FUNCTIONAL BOND
SERVICE = SOCIAL BOND
LOYAL CUSTOMERS
 FREE ADVERTISING
 NO GO AREA for COMPETITORS
 SPEND MORE
 LOW RISK
THE LOYALTY DISCOUNT
diminishing returns
they don’t like the product !
5%
4%
3%
2%
1%
small discounts
big incentives
0
loyal customers
NB. RESPOND !
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TECHNOLOGY
 APPLICATION of SCIENCE
TECHNOLOGICAL & ORGANISATIONAL ‘KNOW HOW’
SCIENTIFIC METHOD
 OBSERVATION
 MATHEMATICAL THEORY
 TESTABLE HYPOTHESES
 EXPERIMENTAL VALIDATION
 PEER REVIEW
no one can claim superior access to wisdom but the process of science and
it’s application as technology is the best bet
‘KNOW HOW’ = ‘SURVIVAL VALUE’
GROWTH OPPORTUNITIES –
SCALE –
GLOBALISATION !
SPECIALISATION –
TECHNOLOGICAL
INNOVATION !
 MASSIVE REVOLUTION IN MICRO ELECTRONICS
 SYNERGY of BRAINS & MICRO CHIPS
 SPEED & DYNAMICS
 BARRIERS DISAPPEAR
‘KNOW HOW’ -
LEARNING and INNOVATING in the
 PRODUCTS
 PRODUCTION
 PEOPLE
NB. MORE & MORE FROM LESS & LESS !
JSC
R&D
FACTORIES
HUMAN CAPITAL
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PRODUCTS
 R&D & INNOVATION
‘KNOW HOW’ = LEARNING & INNOVATING
TECHNOLOGY is ‘KNOW HOW’ and is exploited throughout the process
from INVENTION to APPLICATION  INVENTION
 MARKET RESEARCH
 DEVELOPMENT
 TEST MARKET
 ADVERTISING
 PRODUCTION
 DISTRIBUTION
 SALES
INNOVATION FUNNEL
MANY
MANY
PROJECTS COMPETE
IDEAS
for SCARCE RESOURCES
BUZZ
& MOST FAIL
SELECT FEW
REACH the MARKET
AROUND
from RESEARCH
NB. A BETTER MOUSE TRAP !
thru DEVELOPMENT
to MARKET
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PRODUCTION
 FACTORIES & CONTINUOUS FLOW for SALE
‘KNOW HOW’ = DESIGN & OPERATING METHOD
A COMPLEX INTERACTIVE LOGISTICAL SYSTEM
PROCUREMENT
OPERATIONS
DISTRIBUTION
SAL
E!
STORE
STORE
PRE-PROCESS
STORE
MACHINES SUB ASSEMBLY ASSEMBLY/PACKING
INFORMATION
SERVICES
ENERGY
LABOUR
FIXED ASSETS
MATERIALS
 CONVERSION PROCESSES
 ADDING VALUE for CUSTOMERS
 MAXIMISING SALES REVENUE
ORGANISING COMPLEXITY
 SIMPLIFY
 MANAGE
 SELF CONTROL
INFORMATION
SEPARATE
DOWNSIZE
REDESIGN
AUTOMATE
CULTURE
CHARISMA
CRISIS
HYPE
GOALS
DECISIONS
NB. CONTINUOUS IMPROVEMENT !!
MOTIVATE
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PEOPLE
 HUMAN CAPITAL & PATTERNS in the BRAIN
‘KNOW HOW’ = CREATIVE LEARNING
 BRAINS make MODELS
 MODELS are tested in REALITY
 DOCKING of PROBLEMS & SOLUTIONS
PROBLEM
BETTER MODEL
LEARNING
BEST OPTION
AVAILABLE AT
THE TIME
EVIDENCE
OF
OUTCOMES
INNOVATIVE
UNDERSTANDING
CREATIVE
INNOVATIVE
EXPERIMENT
TWIN LOOPS - in the BRAIN - in REALITY
 BEST OPTION from
PAST EXPERIENCE
 BETTER OPTION from FUTURE EXPERIMENT
LEARNING
INNOVATION
INVESTING in PEOPLE
 SPECIALISED SKILLS ACCOMPLISHMENTS & APTITUDES
 EDUCATION EDUCATION EDUCATION
 EXPERIENCE been there seen it done it bought the T-shirt
 SELF CONFIDENCE for experiments & failures
 FLEXIBILITY
MOBILITY
RISK THRESHOLD
HEALTH
STRENGTH
ENERGY
NB. PERSONAL PORTFOLIOS OF SPECIALIZED SKILLS !
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COMPLEXITY
 UNLIKELY TRUTH & WHO KNOWS?
the PROBLEM of SCIENCE - - HEURISTICS or ALGORITHMS?
SCIENCE is solving increasingly intricate puzzles, success is awesome &
intoxicating but scientific KNOWLEDGE is no longer about CAUSE &
EFFECT because : INFINITE REGRESSION to the ULTIMATE CAUSE of CAUSE
 INNOVATION is about HITHERTO UNCONNECTED IDEAS
 INACCURACY of MEASUREMENT LEADS to UNKNOWN EFFECTS
 INTERACTION means CAUSES can’t be ISOLATED
 DECISIONS themselves CHANGE the EFFECT
 FEEDBACK results in EFFECTS becoming CAUSES
 EMERGENT PROPERTIES of SYSTEMS don’t have CAUSES
COMPLEXITY EXPLODES the necessary computer would be
the size of the universe itself !
THE
PRODUCTIVITY
MORE MEASUREMENT & INSTRUCTIONS
= HIGHER COST & LOWER VALUE!
PARADOX
the REALITY of MANAGEMENT is HEURISTIC : BUILD on past success
 CHOOSE the best option at the time
 DO DEALS for mutual advantage
 EXPERIMENT to discover improvements
 TIT FOR TAT to protect investment
 LEARN from experience
PATTERNS EMERGE
IT IS NOT RANDOM !!
NB. EFFECTS ARE THE CAUSE !
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COMPLEX SYSTEMS
 NON LINEARITY & ITERATION
'KNOW HOW’ EMERGES
ORDER & FEEDBACK
EMERGENT PATTERN
unexpected
FEEDBACK
FEEDBACK
LOCAL
ACTIVITY
simple rules of
behaviour
UNINTENDED CONSEQUENCES
UNEXPECTED RESPONSES
from SIMPLICITY to COMPLEXITY SCIENCE has solved the MYSTERY
but left the WONDER of UNLIKELY TRUTH ...
… we look for GOD in the wrong place he is not the ‘DESIGNER’ but the
EMERGENT ORDER in COMPLEX EVOLVING SYSTEMS on the edge of
chaos
 CREATIVE DIVERSITY not STANDARDISATION
 UNOCCUPIED NICHES not STRUGGLE
 ACQUIRED IMMUNITY not TREACHERY
 CO-OPERATION not EXPLOITATION
 CHOICE not COMPETITION
CO-OPERATION EMERGES
from LOCAL ACTIVITY in the JSC !
NB. SERENDIPITY !
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CHANGE
 FLEXIBILITY & WHO RESPONDS?
the PROBLEM of STRUCTURE - - ENTREPRENEURS or BUREAUCRATS?
SALE !!
QUALITY & PROFIT are NOT ALTERNATIVES.
PROFIT ONLY comes from SATISFIED CUSTOMERS.
BUREAUCRATIC REGULATION : inhibits INNOVATION as change & flexibility are reduced
 drives CAPITAL & investment overseas or underground
 diverts resources from CUSTOMERS to the ‘rules’
 incurs COSTS of quangos, red tape & small print
 provides CARTELS ‘legal’ protection from competition
 replaces CAVEAT EMPTOR with a false sense of security
 separates RESPONSIBILITY from control
 confronts the innocent instead of THE GUILTY
 presents opportunities for BRIBERY, CORRUPTION & COVER UP
 encourages INTERVENTIONIST instincts & delusions of control & hinders
CO-OPERATION & local KNOWLEDGE
REGULATION is no substitute for entrepreneurial action & risk as suppliers
have much more to loose from antagonised customers than from malleable
inspectors
ENTREPRENEURS DISCOVER a BETTER WAY !
NB. ENTANGLED IN RED TAPE !
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EVOLUTIONARY PROCESSES
 CONTINUOUS COPY VARY SELECT
EVOLUTIONARY STABLE STRATEGIES EMERGE
MAXIMUM VALUE MINIMUM RESOURCES
SURVIVAL
the EDGE of CHAOS
EFFICIENCY
= CREATION = the EMERGENCE of ORDER !
STAGNATION
CHAOS
EXTINCTION
EXTINCTION
MUTATION RATE
1 - SELF REPLICATION
2 - RANDOM MUTATIONS
3 - DEVELOPMENT
4 - NATURAL SELECTION
= dna inexorable repetition
= opportunities to progress
= influences in the environment
= effects on the gene frequency
ECONOMIC REALITIES = SPECIALISATION, SCALE, SYNERGY,
SCIENCE, IMITATION, INVENTION, INVESTMENT
2 + 2 = 5 ECONOMIC SYNERGIES SURVIVE
ALTERNATIVE STRATEGIES DIE OUT
ENVIRONMENTAL DEVELOPMENT & DIFFERENTIAL SURVIVAL
SPONTANEOUS CO-OPERATION
DISCOVERY & IMMUNITY
SPECIALISATION & NICHES
TRIAL & ERROR
DIVERSITY & REPLICATION
NB. WASTE NOT WANT NOT !
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29
CONFLICT
 CUSTOMER WISHES & WHO CHOOSES?
the PROBLEM of POLITICS - - CO-OPERATION or COERCION?
DIFFERENT people at DIFFERENT times have DIFFERENT perspectives
from DIFFERENT inheritances DIFFERENT experiences & DIFFERENT
circumstances ...
COERCION to resolve conflict results in power being concentrated in ELITE
DICTATORSHIPS –
BISHOPS PRINCES GENERALS or MAJORITIES
 INEFFICIENT
 market information & control are absent
 INEFFECTIVE
 KNOWLEDGE for decisions is incomplete
technical detail
innovative alternatives
Joe’s wishes
unintended consequences
 IMMORAL
 majorities DICTATE their perspective to minorities
 interest groups are BRIBED in return for support
 bequests from tax leads to CORRUPTION
 VULNERABILITY from dependency on others
 ALIENATION from remote decisions
 DEMORALISATION from unfulfilled expectations
 HELPLESSNESS as one ‘dictator’ succeeds another
 IMPOTENT
CAPITAL MOBILITY DEFEATS IMPOSED CONTROL
the benefits of ECONOMIC CO-OPERATION exploit wealth creating
realities within robust institutions where everyone participates & contributes
without harm to others.
RESULTING in CONFLICT RESOLUTION as more
PARTICIPATION & CONTRIBUTION
produce more WEALTH, INCOME & COMPASSION for more PEOPLE
in MASS MARKETS
NB. IT’S THE ECONOMY STUPID !
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HISTORICAL EVIDENCE
30
 STATISTICAL UNIFORMITIES
FREEDOM & DEMOCRACY EMERGES
Why did it the jsc evolve when it did where it and why not elsewhere? Why
Western Europe? Why 1500 AD?
INDIVIDUALISM - INDEPENDENCE - TOLERANCE - PLURALISM
ADVANTAGES of HISTORICAL EVIDENCE  REALITY from the PAST
 AWAY from the EMOTIONAL PREJUDICE of the moment
But LESSONS  IDEAS have invariably been proved WRONG
 IDEAS have invariably been IMPOSED upon poor joe
 DETECTIVE WORK is necessary to reveal a golden thread of BOTTOM
UP DISCOVERY & ACCUMULATION of SURVIVAL SYNERGIES as Joe &
his mates respond to TOP DOWN IMPOSITION by BISHOPS PRINCES
GENERAL & MAJORITIES
MORALITY & LAW = obligation & trust = harms & hards in the warp & weft
of society common law evolved
CULTURE & RELIGION = learning across generations = centuries of
experience
 breaking the grip of established AUTHORITY
 opening up DIVERSITY and choice
 encouraging CO-OPERATIVE INSTITUTIONS
 establishing SCIENTIFIC METHOD
 REWARDING successful innovation directly
 ENABLING economic growth by a generally accepted system of tort law,
free trade and innovative technology
 DEFENDING created wealth from predators and parasites
NB. PATTERNS FROM THE PAST !
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31
SCARCITY
 QUARTS & PINT POTS & WHO BENEFITS?
the PROBLEM of ECONOMICS - - CUSTOMERS or EXPERTS?
HOW MUCH? WHO PAYS? WHO BENEFITS?
there’s not enough to go round!
everyone wants different things!
for all goodies someone somewhere has to pay & pay again to maintain!
The difficulty is finding willing payers? Ask the tax man!
Everyone is his own willing expert!
 SPENDING is easy but FINANCING is difficult
 spending OTHER PEOPLE’S MONEY is even easier
 income is what SOMEONE IS WILLING TO PAY. if your costs are not
covered - no deal.
 CUSTOMERS WON’T PAY for inefficiency ineffectiveness immorality or
impotence
 ‘KNOW HOW’ is more valuable than ‘resources’
 PRICE increase = lower OUTPUT & INVESTMENT
throughout history a shortage of willing payers has resulted in BISHOPS,
PRINCES, GENERALS & MAJORITIES succumbing to violence
SATISFIED CUSTOMERS ARE THE ONLY WILLING PAYERS!
NB. THERE’S NO FREE LUNCH !
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32
ECONOMIC REALITIES
 SURVIVAL BEHAVIOUR
SUCCESSFUL BEHAVIOUR EMERGES
CO-OPERATION EMERGES
2+2=5
relentlessly seeking the BEST PERCEIVED SURVIVAL VALUE in
excess of the UNAVOIDABLE COSTS available at the TIME
GAME THEORY TIT for TAT
TRANSPARENT
GENEROUS
PEACEFUL
FORGIVING
‘nice’ , clear & simple strategy
never wins at the expense of others
only retaliates if provoked
reverts to co-operation after retaliation
‘THE KEY TO DOING WELL LIES NOT IN OVERCOMING OTHERS BUT
IN ELICITING THEIR CO-OPERATION NO CENTRAL AUTHORITY IS
NEEDED, RECIPROCITY IS SELF POLICING’ - AXELROD.
COLONISE
ideas & successful strategy spread in
populations
LEARNING
experience from successful cultures over
generations
INNOVATION
generating & testing new ideas
 NO PRESCRIPTION because different people are at different positions at
different times
 NO EQUILIBRIUM just dynamic discovery & accumulation by
evolutionary trial & error
NB. PLAY THE GAMES !
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ECONOMIC ANALYSIS
33
 ADMITTING IGNORANCE
CO-OPERATIVE SYNERGIES EMERGE
ANALYSING CHOICE
ANALYTICAL TOOLS for UNDERSTANDING
ALL HUMAN BEHAVIOUR
 SCIENTIFIC
 ORGANISATIONAL
 POLITICAL
 ECONOMIC
 SUPPLY & DEMAND
 COMPARATIVE ADVANTAGE
 TOTAL FACTOR PRODUCTIVITY
ECONOMICS is a DISCOVERY and ACCUMULATION process
in our ignorance we are forced to choose to survive –
Herbert Simon – ‘we encounter many branches in the maze of life’s path,
we follow now the left fork, now the right. The metaphor of the garden of
forking paths is irresistible to anyone who has devoted their scientific
career to understanding human choice'?
Herbert Simon -
SATISFICING
Adam Smith -
SUPPLY & DEMAND
David Ricardo -
COMPARATIVE ADVANTAGE
Robert Solow -
TOTAL FACTOR PRODUCTIVITY
Paul Romer -
ENDOGENOUS GROWTH
NB. THE BLIND WATCHMAKER !
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SATISFICING
34
 INDIVIDUAL CUSTOMER & INVESTOR CHOICE
MACHO MANAGERS think they ‘GET a GRIP’’ by
PURPOSEFUL PLANNED DESIGN
but REALITY is DIFFERENT
CONSUMER & INVESTOR CHOICES involve individual decision making
behaviour based on HERBERT SIMON'S 'satisficing'  BUILDING on proven inherited success, imitate success, there is
no better place to start, don't reinvent the wheel
 freely CHOOSING between options available at the time and the
place, unhindered by 'rent seeking' Bishops, Princes, Generals or
majorities
 EXPERIMENTING to generate diversity and increase the chances
of discovering new tricks
 CO-OPERATING with others to discover better tricks from
synergies which are not available to individuals
 RETALIATING against the inevitable parasites and predators to
defend and accumulate benefits
 LEARNING from the successful outcomes of differential survival
and starting again
HERBERT SIMON again - 'We encounter many branches in the
LABYRINTH of life’s path, we follow now the left fork, now the right. The
metaphor of the garden of forking paths is irresistible to anyone who has
devoted their scientific career to understanding human choice'
NB. A GARDEN OF FORKING PATHS !
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35
SUPPLY & DEMAND
 MARGINAL UTILITY & OPPORTUNITY COST
COSTS & PRICES
DEMAND
PRICE
MARGINAL UTILITY
GLUTS
QUEUES
SUPPLY
OPPORTUNITY COST
PRICE TOO HIGH
- LOW DEMAND
OVER SUPPLY
PRICE TOO LOW
- EXCESS DEMAND
INADEQUATE SUPPLY
QUANTITY
PRICE in a free COMPETITIVE MARKET with CHOICE provides
INFORMATION for decisions
AUTOMATIC SAFEGUARDS are built in as PRICES are necessary for
proper CHOICES
everyone takes DECISIONS after negotiating their ‘BEST VALUE’ from
MARGINAL PRODUCTIVITY
firms RESPOND by searching for the best OPPORTUNITY COST
 CUSTOMERS must be willing to purchase
 SUPPLIERS must be happy to deliver
 EMPLOYEES WORK
 BANKS LEND
DECENTRALISED decisions & dispersed wealth result in effective &
efficient ALLOCATION as more people PARTICIPATE as they choose &
innovate for satisfaction & profit
NB. INNOCENT SIGNALS !
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COMPARATIVE ADVANTAGE
36
 SPECIALISATION AGAIN
No NOT ABSOLUTE
but COMPARATIVE ADVANTAGE
DAVID RICARDO explained comparative advantage and emphasised the
mutual benefits for everyone from specialisation and free trade but the
concept is troublingly counterintuitive –
Nobel laureate Paul Samuelson – 'thousands of important and intelligent men
have never been able to grasp it or believe it even after it was explained to
them' ...
The Open University - ‘The principles of comparative advantage and gains
from trade are the most important results in the whole of economics. They
apply at national, and also individual level. It maybe that a doctor is better
than a farmer both at practising medicine and growing potatoes. It does not
follow that the doctor should do both. If each specialises in the activity in
which they have comparative advantage and engage in trade they are both
better off than if each tries to be self sufficient’.
KEY POINTS –
 EVERYONE has different OPPORTUNITY COSTS and a comparative
advantage in something
 EVERYONE benefits from SPECIALISATION and trade even when the
gifted are better at all activities
 the principle explains TRADE advantages at INDIVIDUAL and national
level, with money or barter
 specialisation and trade will EVOLVE because extra 'VALUE' is created, it
does not require understanding or the intervention of the specialists
 REAL WAGES are determined by the value of output
 PRICES are determined by supply & demand
 PRICES & EXCHANGE RATES don’t determine trade, they result from
trade, they are measurements of opportunity costs
NB. GUNS or BUTTER !
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37
TOTAL FACTOR PRODUCTIVITY
 MEASURING IGNORANCE
PRODUCTION FUNCTION
OUTPUT
O2
change due to technology
2000
Ok
change due to capital
O1
1950
k1
k2
CAPITAL per LABOUR unit
In 1957 Robert Solow used 'growth accounting' mathematics to analyse
historical GDP data and identified the overwhelming importance of a
residual, ‘total factor productivity’, in securing growth and NOT the Neoclassical endogenous input variables capital (resources) and labour (effort).
Solow defined ‘total factor productivity’ as technological innovation, 'know
how‘, understanding and practice.
NB. MONEY IS NOT A PROBLEM !
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ENDOGENOUS GROWTH
38
PRODUCTIVE OUTPUT from ‘KNOW HOW’
MONOPOLISTIC COMPETITION in COMMERCIAL R&D DEPARTMENTS
‘KNOW HOW’ a NON-RIVAL PARTIALLY EXCLUDABLE GOOD
PAUL ROMER and endogenous growth theory lifted some of the gloom of
the ‘dismal science’ by focusing economic analysis on INCREASING
RETURNS and Adam Smith's 'Pin Factory'.
Romer integrated into mainstream economics the growth effects of
TECHNOLOGICAL ‘KNOW HOW’ from specialisation and scale through
education, training, R&D, incentives and coordinating institutions ... and also
the debilitating effects of political collective decisions, protectionism,
regulation and taxation  Enable the growth of HUMAN CAPITAL  Tort Law, Trade, Technology
 education, education, education
 diversity, health, intensive interactions
 Enable MARKET CO-ORDINATION -
 free trade, capital, competition, wages and prices
 establish property rights
 low intervention, tax, inflation
 establish trust for investment and saving
Endogenous growth theory, emerged in the 1980's as mathematical tools
offered opportunities to model the complex non-linear processes of human
behaviour. The failure of Eastern Europe to achieve economic growth was
beginning to be explained as EVOLUTIONARY THEORY was integrated
into economic orthodoxy.
NB. A LEG UP NOT A HAND OUT ! !
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WHY MARKETS ?
39
 CO-OPERATION OBLIGATION & TRUST
COMPLEXITY CHANGE CONFLICT & SCARCITY
IT IS EASY TO SATISFY MAJORITIES IN STABLE SITUATIONS but the market continually responds to individuals with different
preferences, expectations & knowledge, & at the same time
automatically adjusts to change & complexity.
PRINCIPLE FEATURES OF MARKETS decentralised decisions where customers vote using price information about
competing alternatives by a voluntary exchange of private property
ESSENTIAL PREREQUISITES
 rules for the definition exchange & protection of private property
 uninhibited access to customers
 obligation & trust
UNAVOIDABLE CONSEQUENCES
 rising prices to pass on information
 bankruptcies when losers fail to respond
efficiently & effectively
 unemployment following adjustment to change
there’s no such thing as society … only different people at different
time in different places choosing different things
 EDUCATION EDUCATION EDUCATION
 AVERAGE is an ABSTRACTION …. VARIATION is REALITY …
 from GENES to ORGANISMS to CULTURES … PROPERTIES of the
whole EMERGE …
 POPULATION FREQUENCIES CHANGE
Blind generate &test - not design - aspiration endeavour & ingenuity to
discover the best option available at the time - not bishops princes generals
nor majorities - tyranny and oppression is not an ess – crowd trouble
emeges !!
NB. MARKET FORCES !
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40
WHY JOINT STOCK COMPANIES ?
 SELF SUSTAINING GROWTH
TORT TRADE & TECHNOLOGY
OWNERS
HIGH PROFITS
JSC
SUPPLIERS
HIGH PRICES
SECURE CONTRACTS
CUSTOMERS
HIGH WAGES
SECURE JOBS
LOW PRICE
HIGH QUALITY
EMPLOYEES
To resolve the conflicts & make the m/c work the Owners must decide
because of –
 THE NATURE OF PROFIT
 THE SAFEGUARD OF COMPETITION
 THE INDIVIDUALITY OF REALITY
 THE MAGIC OF PROPERTY
-
INFORMATION
CONTROL
PURPOSE
IMMUNITY
MAXIMUM PROFIT - if you don’t the Japanese will !!
There are no customers no suppliers no employees & no share price in a
profitless company!
OWNERSHIP RISK - everyone else has a contract
OWNERSHIP BEHAVIOUR - Is VITAL
OWNERSHIP IDENTITY - is irrelevant
It is not a zero sum game, profit is created, Additional wealth, it is spent or
invested, either way all participants benefit.
OWNERSHIP RESPONSIBILITY is to SEARCH for PROFITABLE
INVESTMENT
the only POWER OWNERS have is NOT to INVEST
NB. BREAKOUT !
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41
THE CONTROL MODEL
 ADAPTIVE SELF REGULATION
AUTOMATIC RESPONSES
WEALTH OUT
unknowable outcomes
BARGAIN PRICES
- INFORMATION
SENSOR
COMPETING
ALTERNATIVES
- DIVERSITY
COMPLEXITY
CHANGE
SET
POINT
SYSTEM
CONFLICT
ALGORITHM
SCARCITY
CUSTOMER
VALUE
JUDGEMENTS
- CHOICES
ACTUATOR
RESOURCES IN
2nd law costs
BEST PERCEIVED
OPTION AVAILABLE
AT THE TIME
OWNERSHIP
RESPONSES
- PERSONAL RISK / REWARD PROFILES
SPECIALISATION
SCALE
SYNERGY
SCIENCE
IMITATION
INVESTMENT
INNOVATION
 different people, different experiences, different places, different
times …
NB. HANDS OFF !
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THE NATURE of PROFIT
42
 INFORMATION
DISPERSED & TACIT KNOWLEDGE
MULTIPLE ROLE  MEASURES how much wealth is created maximum value at minimum
cost
 SIGNALS where to concentrate activities where scarce resources
produce most satisfaction
 REWARDS innovation investment & risk spur to change & experiment
 FACILITATES the ebbs & flows of uncertainty copes with inevitable
losers
INDISPENSABLE in all COMPETITIVE DYNAMIC MARKET SYSTEMS
If information & motivation are to be effective profit must be maximised it
cannot be ‘just’ or ‘fair’
PROFIT is a SURPLUS resulting from WEALTH CREATION it cannot be
an EXPROPRIATION from buyer to seller.
PROFIT is not a part of zero sum games where STEALING is the only
option.
PROFIT in positive sum games becomes a MORAL imperative and
explains why the Bishops after outlawing USURY in 1571 revised their
decision and inlawed it only 50 years later in 1624
NB. UNFAIR & UNJUST !
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43
THE SAFEGUARD of COMPETITION
 ALTERNATIVE OPTIONS
ACCESS to CHOICE
Not REGULATION but AUTOMATIC CHECKS & BALANCES
 CONTROLS EXPLOITATION & CORRUPTION
SUPPLIERS
CUSTOMERS
EMPLOYEES
FINANCIERS
must be happy to deliver
must be happy to purchase
must be happy to work
must be happy to lend
otherwise they choose the alternative
 FEEDS PROGRESS
MORE DIVERSITY & CHOICE
MORE CONSIDERED DECISIONS
MORE PROGRESSIVE LEARNING
THE BETTER EMERGES
OTHERWISE the ALTERNATIVE WINS
COMPETITION between
PRODUCERS
gives
CUSTOMERS
and
EVERYONE
CHOICE
PROGRESSES
INTEREST GROUPS will always try to RIG COMPETITION for
Their own advantage but the best antidote is ANOTHER
COMPETING INTEREST GROUP
NB. LIKE IT OR LUMP IT – VOTE WITH YOUR FEET !
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44
THE INDIVIDUALITY of REALITY
 CONTINUOUS CHOICE
CONTINUOUS EVALUATION
 PURPOSE
FULL POTENTIAL
ESTEEM
INDIVIDUALITY
 RESPECT
 INITIATIVE
 CULTURE
FRIENDSHIP
 INDEPENDENCE
SECURITY
FOOD
SEX
SHELTER
 MONEY
EVERYONE has a DIFFERENT POSITION at DIFFERENT TIMES for
DIFFERENT REASONS
the cause of all CONFLICT
the source of all CREATIVITY
MONEY gives some OPTIONS & INDEPENDENCE
but doesn’t help with DECISION MAKING
CULTURE gives some GUIDANCE
but doesn’t help with PERSONAL DECISIONS
INDIVIDUALITY & INDEPENDENCE are about PERSONAL CHOICES
NB. MY HUMBLE CONTENTION !
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45
THE MAGIC of PROPERTY
 ASPIRATIONS & INCENTIVES
IMMUNITY from TREACHERY
RESOURCES CONTROLLED by their OWNERS for BENEFIT or SALE
tend to be
&
EFFICIENT use of SCARE RESOURCES
REDUCING WASTE & DEPLETION and
CREATING VALUE In excess of COSTS
The NATURAL EVOLUTION of the extended phenotype
BIOLOGY BEHAVIOUR TOOLS PROPERTY
each is an extension of genetic inheritance
each addition is painfully acquired through
&
PRIVATE PROPERTY Is not forced on people if greater benefits are
perceived collective ownership will thrive
OWNERSHIP BEHAVIOUR CREATES WEALTH
OWNERSHIP IDENTITY IS IRRELEVANT
… unfortunately all property becomes a target for parasites and predators
and must be defended if it is to exist …
NB. THE TRAGEDY OF THE COMMONS !
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WEALTH CREATING ACTIVITIES
46
 CO-OPERATIVE SYNERGIES
EVERYDAY CHOICES GO LEFT or RIGHT?
SATISFICING !!
SPECIALISATION - focus education & training to acquire better skills
which can be offered for sale
SCALE - more volume lower cost - drive down the learning curve
SCIENCE - scientific problem solving ‘know how’ is massively &
increasingly available to all
SYNERGY - experiment to find the emergent 2 + 2 = 5 synergies they can’t
be predicted they must be discovered
IMITATION - copy successful practice there’s no better place to start
INNOVATION - make a better mouse trap & the world will beat a track to
your door
INVESTMENT - sacrifice some of today’s pleasurable consumption &
tomorrow will be better
There is no secret economic activities are well understood but organisation
is necessary as the co-operation of strangers is essential - here’s the rub how do we organise the activities of countless SPECIALISING agents on
an ever increasing SCALE with ever more disparate knowledge ??
Co-operations EVOLVES
in ROBUST institutions -
NB. NO ONE SAID IT WAS EASY ?
JSC
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