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 isnt easy WHO is tying our shoe laces together? who is to blame for this CONSPIRACY? STUDENT what is going on??
NB. THERES NO USER MANUAL !

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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 MASLOWS INDIVIDUAL ASPIRATIONS SURVIVAL SECURITY FRIENDSHIP INDIVIDUALITY ESTEEM FULL POTENTIAL

JSC
from

LEARNING & INNOVATION

to

WEALTH CREATION

NB. BAFFLING DIVERSITY !

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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? LEGAL UTOPIAN BLISS

KNOWLEDGE

CONTR ACTS

IGNORANCE

?
TREACHERY
John Gray

NAVE TRUST

CO-OPERATION

We are ignorant of what it is we do not know, even though we know more than we can ever say 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 BUSINESS STRATEGY MARKETING PRACTICE TECHNOLOGY MANAGEMENT ECONOMIC THEORY PUBLIC CHOICE POLITICS

Kaplan, Pollard, Chandler Kirzner, Porter, Stacey Lever, Hardy, Levitt Rosenberg, Nelson, Ganguly Smith, Ricardo, Solow, Romer Buchanan, Becker, Rubin Popper, Kuhn, Wilson MacGregor, Akoff, Senge Checkland, Ormerod, Holland Dawkins, Axelrod, Dennett Braudel, McNeill, Hicks Metcalfe, Wolf, Williamson Ashby, Cziko, Rothschild Hayek, Baumol, Fukuyama Friedman, Kirzner, North Kant, Maslow, Pinker Coase, McGregor, Romer Posner, De Soto, Ridley Nozick, Novak, Diamond

PHILOSOPHY & HISTORY OF SCIENCE ORGANISATION STRUCTURES COMPLEX SYSTEMS EVOLUTIONARY PROCESSES HISTORICAL EVIDENCE ECONOMIC ANALYSIS CONTROL THEORY NATURE of PROFIT SAFEGUARD of COMPETITION INDIVIDUALITY of REALITY MAGIC of PROPERTY COMMON LAW CULTURE

NB. A DWARF ON THE SHOULDERS OF GIANTS !

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STRUCTURE
MODELS PROBLEMS REALITIES & UNDERSTANDING TOPICS

JSC

WEALTH MACHINE

HOW IT WORKS - THE CASH FLOW MODEL BUSINESS ACCOUNTS BUSINESS STRATEGY MARKETING TECHNOLOGY AGE OLD PROBLEMS COMPLEXITY CHANGE CONFLICT SCARCITY 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 RELEVANT SOURCES COMPLEX SYSTEMS EVOLUTIONARY PROCESSES HISTORICAL EVIDENCE ECONOMIC REALITIES

NB. ILLUMINATING REALITY !

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THE JOINT STOCK COMPANY

CO-OPERATIVE VENTURES PARTICIPATION & CONTRIBUTION

UE AL RS GV ME IN S TO DD A CU for

CORP ORAT E WEAL PR TH OFI

T!

INVESTORS with
CAPITAL

JS C!

ENTREPRENEURS with
IDEAS

INVESTMENT ENCOURAGED
s Limited liability s Stakes can be cashed s Anyone can join

INNOVATION REWARDED
s Finance available

DRIVEN by PROFIT OWNED by SHAREHOLDERS

and CONTRACTS
NB. PROFIT FROM PLEASING CUSTOMERS !

for SUPPLIERS for EMPLOYEES jpb

THE WEALTH MACHINE

CIRCULATING RESOURCES picking up PROFIT each cycle DYNAMIC EBB & FLOW of OPPORTUNITIES

SOURCES of FINANCE OWNERS LOANS

CAS H POO L
COSTS

DEBTORS CASH

CREDITORS FIXED ASSETS MATERIALS DEPRECIATION

VARIABLE FIXED DIRECT INDIRECT

DISTRIBUTION

FACTORY STOCKS

SALE !

FINANCIAL ITEMS

PR OF IT

TAX DIVIDENDS RETAINED PROFITS

NB. THE MAGIC ROUNDABOUT !

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THE BUSINESS ACCOUNTS

IDENTIFYING FLOWS MEASURE or MIRAGE?

RESOURCES IN SUPPLIERS EMPLOYEES

CASH

CUSTOMERS

SALES ASSETS WEALTH OUT

Dynamic fluctuating ebb & flow of resources WHY MEASURE? s EFFICIENCY & WEALTH PAST PERFORMANCE s SOLVENCY & HEALTH CURRENT POSITION s LIQUIDITY & RISK FUTURE PROSPECTS THREE REPORTS s PROFIT & LOSS ACCOUNT s BALANCE SHEET s CASH FLOW STATEMENT DIFFICULTIES s Income fluctuates s Assets must be s Costs must be s Uncertain future PRINCIPLES s CONSISTENCY s PRUDENCE s ACCRUAL s GOING CONCERN

HOW MUCH PROFIT not CASH? SPENT on CAPITAL or REVENUE? WHERE IS IT GOING?

TIMING is not consistent VALUED and there are no market prices ALLOCATED and there are no invoices ESTIMATES are never correct for comparison for safety for timing for clarity

but the ACCOUNTS tell only HALF THE STORY with focus on s COSTS but not QUALITY / SERVICE / SKILLS s YESTERDAY but not TOMORROW s COSTS of DOING but not COST of ALTERNATIVES s 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

10

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 VARIABLE FIXED DIRECT INDIRECT

MATERIALS

CASH SALES & DEBTORS

STOCKS

DISTRIBUTION

SALE !
FINANCIAL ITEMS

TAX DIVIDENDS RETAINED PROFITS

PR OF IT
EXPENDITURE GOING OUT

INCOME COMING IN

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

11

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

CAS H FIXED ASSETS - DEPRECIATION

DEBTORS & prepayments

CREDITORS & accruals

STOCKS FINANCIAL ITEMS GOODWILL

SALE !

DEFERRED INCOME PROVISIONS

TAX DIVIDENDS RETAINED PROFITS

NB. WHO PAYS HOW MUCH WHEN ?

PR OF IT

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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 !!

12

BALANCING across the CASH POOL !

SOURCES of FINANCE OWNERS LOANS

CASH SALES & DEBTORS

DRIPPING IN !

CAS H
CREDITORS

COSTS VARIABLE FIXED DIRECT INDIRECT

LEAKING OUT !

FIXED ASSETS MATERIALS

DISTRIBUTION

SALE ! STOCKS
FINANCIAL ITEMS TAX DIVIDENDS
NB. YOU CANT EAT PROMISES !

PR OF IT
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BUSINESS STRATEGY
DISCOVERING MARGIN & SPEED SHAPING CURVES REVENUE ss MARGIN PROFIT COSTS SPEED

13

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 COSTS HIGHER VOLUME = LOWER VOLUME ?? = LOWER QUALITY = LOWER PRICES ?? = LOWER COSTS = LOWER PRICES ??

NB. JUGGLING WITH COMPLEXITY !

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PRICES
SPECIALISATION & MARKET POSITION NICHE EXPERTISE WHAT DO WE DO BETTER THAN OUR COMPETITORS ?

14

MARKET NICHE?
but ....... RISK of MARKETING MYOPIA? YESTERDAYS PRODUCT?

CONSIDER or

BROAD MARKET?
but ...... RISK to EXCELLENCE? JACK of all TRADES MASTER of NONE?

How to SECURE

HIGHER PRICES ?

&

ADVANTAGE LEADERSHIP VOLUME PROFIT

CONSIDER SUBSTITUTES ? IMITATION ? CUSTOMER LOYALTY ? SUPPLIERS ?

SUPPORT SERVICES ?

SPECIAL ISE !! INNOVAT E !!

DISTRIBUTION ? 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

15

PARADOX s Hawthorn effect s

INDIRECTS relentless increase & restructuring time VARIETY s complex intermittent simple continuous time number of varieties LEARNING CURVE s

bureaucracy

attention - effort - focus COMPLEXITY s % waste

PARETO s vital few

COST REDUCTION -

frequency

cumulative volume

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
star

16

volume

cow

decline

growth development
problem dog

local / national / international / global

Profit Costs critical critical divest? milk? acquisition? relaunch? drive down the learning curve?

Technology critical innovate? find the niche? market research?

Capacity critical invest? advertise? promote?

COMPETITIVE ADVANTAGE from SPECIALISED NICHE and SCALE s LEARNING EFFECTS of SKILL ACQUISITION s LEARNING EFFECTS of SKILL UTILISATION s SPREAD of FIXED COSTS over more units s PURCHASING POWER for MATERIALS, SERVICES & FINANCE s LOWER CAPACITY COSTS COSTS = AREA OUTPUT = VOLUME s AFFORDABLE LUMPS of INVESTMENT & RISK s 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

17

COMPETITION?

COMPETITORS are PACE SETTERS NOT WINNERS!

PRICE?

CUSTOMER VALUE DECISION

QUALITY?

SPECIALISATION COSTS VOLUME RESPONSIVENESS s COURTESY s AVAILABILITY s RELIABILITY

INNOVATION

SERVICE?

s PERFORMANCE s PRESENTATION s PACKAGING s CONSISTENCY s CHOICE s ADVERTISING

s EFFICIENCY of DISTRIBUTION CHANNELS

MARKET RESEARCH s INFORMATION to reduce risk (about yesterday?) s REAL BEHAVIOUR (not saying but doing) s JUDGEMENT CRITERIA (technical specification?) s MATCHING customer & product s TESTING (not subterfuge and intrigue) s BEWARE of me toos (competitors do market research) s 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

18

QUALITY VALUE
BEST CHANCE

s PREMIUM
MORE VOLUME BUT TOTAL REVENUE ? GOOD QUALITY AT A PREMIUM BUT WILL THEY PAY THE PRICE ?

s MARKET NORM
ALWAYS RISKY

s ECONOMY
STANDARD QUALITY AT A DISCOUNT BUT IS IT JUST A COMMODITY ?

NEVER

PRICE (NOT COST)

ADVERTISING for s VOLUME - persuade to try s MARKET SHARE - technical innovation - better than competitors s MARKET GROWTH - a bundle of new promises - better than prior art ACTIONS = CHECK CUSTOMERS - IMPROVE QUALITY PUSH PRICES - CHECK COMPETITION
advertising spend voice unheard in the market place volume
NB. VALUE FOR MONEY !

saturation effective spend

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COMPETITIVE ADVANTAGE
BRAND LEADERSHIP & ALTERNATIVES CHOICES for CUSTOMERS
them

19

Quality Service Price index

oh dear ! us were ahead ! steady improvement ?!

DYNAMIC COMPETITIVE MARKETS s CONTINUOUS improvement needed to progress s NEW OPPORTUNITIES are always opening up performance is RELATIVE & CHANGING A CONTROL SYSTEM !

COMPETITORS SET POINT CUSTOMER DECISIONS INVESTMENT RESPONSE

PRICE QUALITY SERVICE INFO WINNERS

TESTS

MARKETS

NB. FIRST PAST THE POST !

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SERVICE
BRAND LOYALTY & REPEAT PURCHASES EXISTING CUSTOMERS are VALUABLE ASSETS ENCOURAGING LOYALTY s COURTESY COMMUNICATION UNDERSTANDING HELP with a SMILE FAST ON TIME WHEN WANTED PREDICTABLE FLEXIBLE

20

s AVAILABILITY

s RELIABILITY

EFFICIENCY of DISTRIBUTION CHANNELS QUALITY = FUNCTIONAL BOND SERVICE = SOCIAL BOND LOYAL CUSTOMERS s FREE ADVERTISING s NO GO AREA for COMPETITORS s SPEND MORE s LOW RISK THE LOYALTY DISCOUNT
diminishing returns 5% 4% 3% 2% 1% 0 loyal customers
NB. RESPOND !

they dont like the product !

small discounts big incentives

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TECHNOLOGY
APPLICATION of SCIENCE TECHNOLOGICAL & ORGANISATIONAL KNOW HOW

21

SCIENTIFIC METHOD
s OBSERVATION s MATHEMATICAL THEORY s TESTABLE HYPOTHESES s EXPERIMENTAL VALIDATION s PEER REVIEW no one can claim superior access to wisdom but the process of science and its application as technology is the best bet

KNOW HOW = SURVIVAL VALUE GROWTH OPPORTUNITIES

SCALE GLOBALISATION !

SPECIALISATION

TECHNOLOGICAL INNOVATION !

s MASSIVE REVOLUTION IN MICRO ELECTRONICS s SYNERGY of BRAINS & MICRO CHIPS s SPEED & DYNAMICS s BARRIERS DISAPPEAR

KNOW HOW -

LEARNING and INNOVATING in the

s PRODUCTS s PRODUCTION s PEOPLE

R&D FACTORIES HUMAN CAPITAL

JSC

NB. MORE & MORE FROM LESS & LESS !

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PRODUCTS
R&D & INNOVATION KNOW HOW = LEARNING & INNOVATING

22

TECHNOLOGY is KNOW HOW and is exploited throughout the process from INVENTION to APPLICATION s INVENTION s MARKET RESEARCH s DEVELOPMENT s TEST MARKET s ADVERTISING s PRODUCTION s DISTRIBUTION s SALES

INNOVATION FUNNEL

MANY MANY IDEAS BUZZ AROUND PROJECTS COMPETE for SCARCE RESOURCES & MOST FAIL SELECT FEW REACH the MARKET

from RESEARCH

thru DEVELOPMENT

to MARKET

NB. A BETTER MOUSE TRAP !

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PRODUCTION
FACTORIES & CONTINUOUS FLOW for SALE KNOW HOW = DESIGN & OPERATING METHOD

23

PROCUREMENT

OPERATIONS

DISTRIBUTION

STORE PRE-PROCESS

STORE

STORE MACHINES SUB ASSEMBLY ASSEMBLY/PACKING

SU PP L

IE RS

S COST TS & INPU

INFORMATION SERVICES ENERGY LABOUR FIXED ASSETS MATERIALS

CONVERSION PROCESSES S! S ADDING VALUE for CUSTOMERS NE IVE S MAXIMISING SALES REVENUE ON SP RE ORGANISING COMPLEXITY
SIMPLIFY SEPARATE REDESIGN MANAGE CULTURE CRISIS SELF CONTROL GOALS DECISIONS DOWNSIZE AUTOMATE CHARISMA HYPE INFORMATION MOTIVATE

CU S

SALE!

NB. CONTINUOUS IMPROVEMENT !!

TO

A COMPLEX INTERACTIVE LOGISTICAL SYSTEM

M ER S

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PEOPLE
HUMAN CAPITAL & PATTERNS in the BRAIN KNOW HOW = CREATIVE LEARNING s BRAINS make MODELS s MODELS are tested in REALITY s DOCKING of PROBLEMS & SOLUTIONS

24

PROBLEM

BETTER MODEL

BEST OPTION AVAILABLE AT THE TIME

LEARNING INNOVATIVE UNDERSTANDING

EVIDENCE OF OUTCOMES

CREATIVE INNOVATIVE EXPERIMENT

TWIN LOOPS - in the BRAIN - in REALITY s BEST OPTION from PAST EXPERIENCE s BETTER OPTION from FUTURE EXPERIMENT

LEARNING INNOVATION

INVESTING in PEOPLE s SPECIALISED SKILLS ACCOMPLISHMENTS & APTITUDES s EDUCATION EDUCATION EDUCATION s EXPERIENCE been there seen it done it bought the T-shirt s SELF CONFIDENCE for experiments & failures s 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?

25

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 cant be ISOLATED DECISIONS themselves CHANGE the EFFECT FEEDBACK results in EFFECTS becoming CAUSES EMERGENT PROPERTIES of SYSTEMS dont have CAUSES COMPLEXITY EXPLODES the necessary computer would be the size of the universe itself ! THE PRODUCTIVITY 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 !

MORE MEASUREMENT & INSTRUCTIONS = HIGHER COST & LOWER VALUE!

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COMPLEX SYSTEMS
NON LINEARITY & ITERATION

26

'KNOW HOW EMERGES ORDER & FEEDBACK

EMERGENT PATTERN unexpected FEEDB ACK FEEDB ACK

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?
ERS TOM CUS

27

THE W HEEL FELL OFF

SALE !!

QUALITY & PROFIT are NOT ALTERNATIVES. PROFIT ONLY comes from SATISFIED CUSTOMERS. BUREAUCRATIC REGULATION :s inhibits INNOVATION as change & flexibility are reduced s drives CAPITAL & investment overseas or underground s diverts resources from CUSTOMERS to the rules s incurs COSTS of quangos, red tape & small print s provides CARTELS legal protection from competition s replaces CAVEAT EMPTOR with a false sense of security s separates RESPONSIBILITY from control s confronts the innocent instead of THE GUILTY s presents opportunities for BRIBERY, CORRUPTION & COVER UP s 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

28

SURVIVAL EFFICIENCY

the EDGE of CHAOS = 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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CONFLICT
CUSTOMER WISHES & WHO CHOOSES? the PROBLEM of POLITICS - - CO-OPERATION or COERCION?

29

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 s INEFFICIENT s market information & control are absent s INEFFECTIVE s KNOWLEDGE for decisions is incomplete technical detail innovative alternatives Joes wishes unintended consequences s IMMORAL s majorities DICTATE their perspective to minorities s interest groups are BRIBED in return for support s bequests from tax leads to CORRUPTION s VULNERABILITY from dependency on others s ALIENATION from remote decisions s DEMORALISATION from unfulfilled expectations s HELPLESSNESS as one dictator succeeds another s 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. ITS THE ECONOMY STUPID !

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HISTORICAL EVIDENCE
STATISTICAL UNIFORMITIES FREEDOM & DEMOCRACY EMERGES

30

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 s REALITY from the PAST s AWAY from the EMOTIONAL PREJUDICE of the moment But LESSONS s IDEAS have invariably been proved WRONG s IDEAS have invariably been IMPOSED upon poor joe s 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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SCARCITY
QUARTS & PINT POTS & WHO BENEFITS? the PROBLEM of ECONOMICS - - CUSTOMERS or EXPERTS? HOW MUCH? WHO PAYS? WHO BENEFITS? theres not enough to go round! everyone wants different things!

31

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 PEOPLES MONEY is even easier income is what SOMEONE IS WILLING TO PAY. if your costs are not covered - no deal. CUSTOMERS WONT 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. THERES NO FREE LUNCH !

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ECONOMIC REALITIES
SURVIVAL BEHAVIOUR SUCCESSFUL BEHAVIOUR EMERGES CO-OPERATION EMERGES 2+2=5

32

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 LEARNING INNOVATION

ideas & successful strategy spread in populations experience from successful cultures over generations

generating & testing new ideas

s NO PRESCRIPTION because different people are at different positions at different times s NO EQUILIBRIUM just dynamic discovery & accumulation by evolutionary trial & error

NB. PLAY THE GAMES !

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ECONOMIC ANALYSIS
ADMITTING IGNORANCE CO-OPERATIVE SYNERGIES EMERGE ANALYSING CHOICE

33

ANALYTICAL TOOLS for UNDERSTANDING ALL HUMAN BEHAVIOUR

s SCIENTIFIC s ORGANISATIONAL s POLITICAL s ECONOMIC s SUPPLY & DEMAND s COMPARATIVE ADVANTAGE s 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 lifes 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 Adam Smith David Ricardo Robert Solow Paul Romer -

SATISFICING SUPPLY & DEMAND COMPARATIVE ADVANTAGE TOTAL FACTOR PRODUCTIVITY ENDOGENOUS GROWTH

NB. THE BLIND WATCHMAKER !

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SATISFICING
INDIVIDUAL CUSTOMER & INVESTOR CHOICE MACHO MANAGERS think they GET a GRIP by PURPOSEFUL PLANNED DESIGN but REALITY is DIFFERENT

34

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 lifes 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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SUPPLY & DEMAND

MARGINAL UTILITY & OPPORTUNITY COST COSTS & PRICES

35

DEMAND
PRICE MARGINAL UTILITY

SUPPLY
OPPORTUNITY COST PRICE TOO HIGH - LOW DEMAND OVER SUPPLY

GLUTS

QUEUES

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 s CUSTOMERS must be willing to purchase s SUPPLIERS must be happy to deliver s EMPLOYEES WORK s 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
SPECIALISATION AGAIN No NOT ABSOLUTE but COMPARATIVE ADVANTAGE

36

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 dont determine trade, they result from trade, they are measurements of opportunity costs

NB. GUNS or BUTTER !

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TOTAL FACTOR PRODUCTIVITY

MEASURING IGNORANCE PRODUCTION FUNCTION OUTPUT
O2

37

2000
Ok O1

change due to technology change due to capital

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 Neo-classical 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
PRODUCTIVE OUTPUT from KNOW HOW

38

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 ?
CO-OPERATION OBLIGATION & TRUST COMPLEXITY CHANGE CONFLICT & SCARCITY

39

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 s rules for the definition exchange & protection of private property s uninhibited access to customers s obligation & trust UNAVOIDABLE CONSEQUENCES s rising prices to pass on information s bankruptcies when losers fail to respond efficiently & effectively s unemployment following adjustment to change theres no such thing as society only different people at different time in different places choosing different things

s EDUCATION EDUCATION EDUCATION s AVERAGE is an ABSTRACTION . VARIATION is REALITY s from GENES to ORGANISMS to CULTURES PROPERTIES of the whole EMERGE s 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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WHY JOINT STOCK COMPANIES ?

SELF SUSTAINING GROWTH TORT TRADE & TECHNOLOGY

40

OWNERS
HIGH PROFITS

SUPPLIERS
HIGH PRICES SECURE CONTRACTS

JSC
HIGH WAGES SECURE JOBS

CUSTOMERS
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 dont 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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THE CONTROL MODEL

ADAPTIVE SELF REGULATION AUTOMATIC RESPONSES
WEALTH OUT unknowable outcomes

41

BARGAIN PRICES
- INFORMATION

SENSOR

COMPETING ALTERNATIVES
- DIVERSITY

CONFLICT COMPLEXITY CHANGE

SYS MET

ALGORITHM

CUSTOMER VALUE JUDGEMENTS

- CHOICES
BEST PERCEIVED OPTION AVAILABLE AT THE TIME

ACTUATOR
RESOURCES IN 2nd law costs

OWNERSHIP RESPONSES
- PERSONAL RISK / REWARD PROFILES
SPECIALISATION SCALE SYNERGY SCIENCE IMITATION INVESTMENT INNOVATION

different people, different experiences, different places, different times

NB. HANDS OFF !

SET POINT

SCARCITY

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THE NATURE of PROFIT

INFORMATION DISPERSED & TACIT KNOWLEDGE MULTIPLE ROLE -

42

s MEASURES how much wealth is created maximum value at minimum cost s SIGNALS where to concentrate activities where scarce resources produce most satisfaction s REWARDS innovation investment & risk spur to change & experiment s 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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THE SAFEGUARD of COMPETITION

ALTERNATIVE OPTIONS ACCESS to CHOICE Not REGULATION but AUTOMATIC CHECKS & BALANCES s 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

43

otherwise they choose the alternative s FEEDS PROGRESS MORE DIVERSITY & CHOICE MORE CONSIDERED DECISIONS MORE PROGRESSIVE LEARNING THE BETTER EMERGES OTHERWISE the ALTERNATIVE WINS

COMPETITION between gives and

PRODUCERS CUSTOMERS 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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THE INDIVIDUALITY of REALITY

CONTINUOUS CHOICE CONTINUOUS EVALUATION

44

FULL POTENTIAL

s PURPOSE

M HI AS ER LO AR W CH S Y

ESTEEM INDIVIDUALITY FRIENDSHIP SECURITY

s RESPECT s INITIATIVE s CULTURE s INDEPENDENCE SHELTER s MONEY

FOOD

SEX

EVERYONE has a DIFFERENT POSITION at DIFFERENT TIMES for DIFFERENT REASONS

!! LITY IDUA NDIV I

the cause of all CONFLICT the source of all CREATIVITY

MONEY gives some OPTIONS & INDEPENDENCE but doesnt help with DECISION MAKING CULTURE gives some GUIDANCE but doesnt help with PERSONAL DECISIONS INDIVIDUALITY & INDEPENDENCE are about PERSONAL CHOICES
NB. MY HUMBLE CONTENTION !

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THE MAGIC of PROPERTY

ASPIRATIONS & INCENTIVES IMMUNITY from TREACHERY

45

RESOURCES CONTROLLED by their OWNERS for BENEFIT or SALE tend to be

RVED PRESE

&

CED ENHAN

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 &

T EFFOR

ENT VESTM IN

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

CO-OPERATIVE SYNERGIES EVERYDAY CHOICES GO LEFT or RIGHT?

46

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 cant be predicted they must be discovered IMITATION - copy successful practice theres no better place to start INNOVATION - make a better mouse trap & the world will beat a track to your door INVESTMENT - sacrifice some of todays 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 - heres 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 -

JSC
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NB. NO ONE SAID IT WAS EASY ?