PRELIMINARIES 1

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 ! jpb

 SCOPE 2
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 WEALTH
to
CREATION

NB. BAFFLING DIVERSITY ! jpb

 ISSUE 3
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

????
or PLANNED DESIGN ?
MARKETS ?

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 ! jpb

 THEME 4
ROBUST INSTITUTIONS EVOLVE

TOLERANT of IGNORANCE
IMMUNE from TREACHERY

How do we organise co-operation?

LEGAL
UTOPIAN
KNOWLEDGE CONTR
BLISS
ACTS

IGNORANCE
? 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 ! jpb

 SOURCES 5
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 ! jpb

 STRUCTURE 6
MODELS PROBLEMS REALITIES & UNDERSTANDING

TOPICS

JSC WEALTH
MACHINE

HOW IT WORKS - THE CASH FLOW MODEL

 BUSINESS ACCOUNTS
 BUSINESS STRATEGY
 MARKETING
 TECHNOLOGY

AGE OLD PROBLEMS - RELEVANT SOURCES -

 COMPLEXITY  COMPLEX SYSTEMS

 CHANGE  EVOLUTIONARY PROCESSES
 CONFLICT  HISTORICAL EVIDENCE
 SCARCITY  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 ! jpb

 THE JOINT STOCK COMPANY 7
CO-OPERATIVE VENTURES

PARTICIPATION & CONTRIBUTION

CORP
ORAT
E
WEAL
PR
TH OFI
E T!
A LU
G V E RS
M
D DIN S TO
A
for
CU

JS ENTREPRENEURS with

INVESTORS with
C! IDEAS

CAPITAL
INNOVATION
INVESTMENT REWARDED
ENCOURAGED ■ Finance available

■ Limited liability
■ Stakes can be cashed
■ Anyone can join
DRIVEN by PROFIT

OWNED by SHAREHOLDERS

and CONTRACTS for SUPPLIERS

for EMPLOYEES

NB. PROFIT FROM PLEASING CUSTOMERS ! jpb

 THE WEALTH MACHINE 8
CIRCULATING RESOURCES picking up PROFIT each cycle

DYNAMIC EBB & FLOW of OPPORTUNITIES

SOURCES of FINANCE
OWNERS
LOANS CAS DEBTORS
CASH
H
POO
L
CREDITOR
S COST
S
FIXED ASSETS
VARIABLE
FIXED
MATERIALS DIRECT
DEPRECIATION INDIRECT

DISTRIBUTIO
N

FACTORY
SALE !
STOCKS

FINANCIAL ITEMS PR
OF
IT
TAX
DIVIDENDS
RETAINED PROFITS

NB. THE MAGIC ROUNDABOUT ! jpb

 THE BUSINESS ACCOUNTS 9
IDENTIFYING FLOWS

MEASURE or MIRAGE?

CUSTOMERS
RESOURCES IN CASH
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 HOW MUCH PROFIT not CASH?
■ BALANCE SHEET SPENT on CAPITAL or REVENUE?
■ CASH FLOW STATEMENT WHERE IS IT GOING?

DIFFICULTIES
■ Income fluctuates TIMING is not consistent
■ Assets must be VALUED and there are no market prices
■ Costs must be ALLOCATED and there are no invoices
■ Uncertain future ESTIMATES are never ‘correct’

PRINCIPLES
■ CONSISTENCY for comparison
■ PRUDENCE for safety
■ ACCRUAL for timing
■ GOING CONCERN 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 ! jpb

 THE PROFIT & LOSS ACCOUNT 10
PROFIT or CASH?

TIMING ISSUES

INCOME when EARNED

when the deal is struck
not when the cash flow in
EXPENDITURE 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

CREDITOR COST
S S
VARIABLE
DEPRECIATION FIXED
MATERIALS DIRECT CASH
INDIRECT SALES &
DEBTORS

DISTRIBUTIO
STOCKS N

SALE !
FINANCIAL ITEMS
PR
OF
TAX IT INCOME
DIVIDENDS COMING IN
RETAINED PROFITS
EXPENDITURE
GOING OUT

BALANCING across the SALE !

NB. BUY NOW PAY LATER ! jpb

 THE BALANCE SHEET 11
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

DEBTORS
OWNERS EQUITY CAS & prepayments
DEBT H

FIXED ASSETS
CREDITOR - DEPRECIATION
S
& accruals
SALE !
STOCKS

FINANCIAL ITEMS
DEFERRED INCOME GOODWILL
PROVISIONS
PR
OF
TAX
IT
DIVIDENDS
RETAINED
PROFITS
NB. WHO PAYS HOW MUCH WHEN ? jpb
 THE CASH FLOW STATEMENT 12
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 CASH DRIPPING IN !

OWNERS SALES &
LOANS DEBTORS

CAS
H
COST
CREDITOR S LEAKING OUT !
S VARIABLE
FIXED
DIRECT
INDIRECT
FIXED ASSETS
MATERIALS

DISTRIBUTIO
N

SALE !
STOCKS

FINANCIAL ITEMS PR
OF
TAX
DIVIDENDS
IT
NB. YOU CAN’T EAT PROMISES ! jpb
 BUSINESS STRATEGY 13
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 = LOWER PRICES ??

NB. JUGGLING WITH COMPLEXITY ! jpb

 PRICES 14
SPECIALISATION & MARKET POSITION

NICHE EXPERTISE

WHAT DO WE DO BETTER THAN OUR COMPETITORS ?

CONSIDER
MARKET or BROAD
NICHE? 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 ?
SPECIAL  DISTRIBUTION ?
ISE !!  REGULATION ?
INNOVAT

E !!

ACQUISITION of SKILLS
FOCUSED EXPERTISE
SKILLS FULLY UTILISED
DIVISION of LABOUR
NB. PRACTISE MAKES PERFECT ! jpb
 COSTS 15
SPECIALISATION & COST BEHAVIOUR

COMPLEXITY COSTS

PARADOX INDIRECTS
££’s ££’s relentless
‘Hawthorn
’ effect increase

bureaucracy
& restructuring

attention - effort - focus time

COMPLEXITY VARIETY

££’s ££’s
complex
% waste intermittent

simple
continuous
time number of varieties

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 ! jpb
 VOLUME 16
SPECIALISATION & SCALE ECONOMIES

GLOBAL MARKETS

volume maturity cow

decline

star
growth

development
problem dog

local / national / international / global

Profit
Costs critical -
Capacity critical - divest?
Technology critical - milk? acquisition?
critical - invest? relaunch?
innovate? advertise? drive down the learning curve?
find the niche? promote?
market research?

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 ! jpb

 MARKETING TASKS 17
CUSTOMER VALUE & MARKET RESEARCH

CHOICES

COMPETITORS are
COMPETITION?
PACE SETTERS
NOT WINNERS!

CUSTOMER VALUE
PRICE? DECISION
QUALITY?

INNOVATION
SPECIALISATION
■ PERFORMANCE
COSTS SERVICE?
■ PRESENTATION
VOLUME
■ 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 ! jpb
 QUALITY 18
BRAND POSITION & ADVERTISING

PRODUCT DIFFERENTIATION

QUALITY
VALUE BEST CHANCE
■ PREMIUM

MORE VOLUME BUT

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

■ MARKET NORM

ALWAYS RISKY

■ ECONOMY
STANDARD QUALITY NEVER
AT A DISCOUNT
BUT IS IT JUST A COMMODITY ?

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 ! jpb

 COMPETITIVE ADVANTAGE 19
BRAND LEADERSHIP & ALTERNATIVES

CHOICES for CUSTOMERS

them
Quality
Service
Price oh dear !
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 PRICE
INVESTMENT QUALITY
RESPONSE SERVICE
INFO

TESTS MARKETS WINNERS

NB. FIRST PAST THE POST ! jpb

 SERVICE 20
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
5% they don’t like the product !
4%
3%
small discounts
2%
big incentives
1%
0
loyal customers

NB. RESPOND ! jpb

 TECHNOLOGY 21
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 R&D
JSC
■ PRODUCTION FACTORIES
■ PEOPLE HUMAN CAPITAL

NB. MORE & MORE FROM LESS & LESS ! jpb

 PRODUCTS 22
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
SELECT FEW
IDEAS for SCARCE RESOURCES
REACH the MARKET
BUZZ & MOST FAIL

AROUND

from RESEARCH thru DEVELOPMENT to MARKET

NB. A BETTER MOUSE TRAP ! jpb

 PRODUCTION 23
FACTORIES & CONTINUOUS FLOW for SALE

‘KNOW HOW’ = DESIGN & OPERATING METHOD

S
ER
M
A COMPLEX INTERACTIVE LOGISTICAL SYSTEM

TO
S
CU
PROCUREMENT OPERATIONS DISTRIBUTION

SALE!

STORE STORE STORE

PRE-PROCESS MACHINES SUB ASSEMBLY ASSEMBLY/PACKING
RS
IE
PL
P
SU

S
COST
TS &
INPU
INFORMATION
SERVICES
ENERGY
LABOUR
FIXED ASSETS
MATERIALS

!  CONVERSION PROCESSES
E SS
EN  ADDING VALUE for CUSTOMERS
I V
NS  MAXIMISING SALES REVENUE
S PO
R E
ORGANISING COMPLEXITY
 SIMPLIFY SEPARATE DOWNSIZE
REDESIGN AUTOMATE

 MANAGE CULTURE CHARISMA

CRISIS HYPE

 SELF CONTROL GOALS INFORMATION

DECISIONS MOTIVATE

NB. CONTINUOUS IMPROVEMENT !! jpb

 PEOPLE 24
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 INNOVATIVE
THE TIME UNDERSTANDING

EVIDENCE CREATIVE
OF INNOVATIVE
OUTCOMES EXPERIMENT

TWIN LOOPS - in the BRAIN - in REALITY

■ BEST OPTION from PAST EXPERIENCE LEARNING
■ BETTER OPTION from FUTURE EXPERIMENT 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 ! jpb

 COMPLEXITY 25
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 MORE MEASUREMENT & INSTRUCTIONS

PRODUCTIVITY = 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 ! jpb

 COMPLEX SYSTEMS 26
NON LINEARITY & ITERATION

'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 ! jpb

 CHANGE 27
FLEXIBILITY & WHO RESPONDS?
thePROBLEM of STRUCTURE - - -
ENTREPRENEURS or BUREAUCRATS?

OM ERS
C U ST

SALE !!
THE W
HEEL
FELL
OFF

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 ! jpb

 EVOLUTIONARY PROCESSES 28
CO
CONT
NINUOU
TIN
UOUSSCOPYYVA
COP VR
AY
RYSE
SL
EECTT
LEC
EVOLUTIONARYSTABLESTRATEGIES EM ERGE
M AXIM UM VALUE MINIM UM RESO URCES

SURVIVAL
the EDGE of CHAOS
EFFICIENCY
= CREATION = the EMERGENCE of ORDER !

STAGNATION CHAOS

EXTINCTION
EXTINCTION

MUTATION RATE

1 - SELF REPLICATION = dna inexorable repetition

2 - RANDOM MUTATIONS = opportunities to progress
3 - DEVELOPMENT = influences in the environment
4 - NATURAL SELECTION = 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 ! jpb

 CONFLICT 29
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 ! jpb

 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 ! jpb

 SCARCITY 31
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 ! jpb

 ECONOMIC REALITIES 32
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 ‘nice’ , clear & simple strategy
GENEROUS never wins at the expense of others
PEACEFUL only retaliates if provoked
FORGIVING 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 ! jpb

 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 ! jpb

 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 ! jpb

 SUPPLY & DEMAND 35
MARGINAL UTILITY & OPPORTUNITY COST

COSTS & PRICES

DEMAND SUPPLY
PRICE MARGINAL UTILITY OPPORTUNITY COST

PRICE TOO HIGH

- LOW DEMAND
GLUTS OVER SUPPLY

PRICE TOO LOW

QUEUES - 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 ! jpb

 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 ! jpb

 TOTAL FACTOR PRODUCTIVITY 37
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 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 ! jpb

 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 ! ! jpb

 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 ! jpb

 WHY JOINT STOCK COMPANIES ? 40
SELF SUSTAINING GROWTH

TORT TRADE & TECHNOLOGY

OWNERS
HIGH PROFITS

SUPPLIERS JSC CUSTOMERS

HIGH PRICES LOW PRICE
SECURE CONTRACTS HIGH QUALITY
HIGH WAGES
SECURE JOBS

EMPLOYEES
To resolve the conflicts & make the m/c work the Owners must decide
because of –

 THE NATURE OF PROFIT - INFORMATION

 THE SAFEGUARD OF COMPETITION - CONTROL
 THE INDIVIDUALITY OF REALITY - PURPOSE
 THE MAGIC OF PROPERTY - 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 ! jpb
 THE CONTROL MODEL 41
ADAPTIVE SELF REGULATION

AUTOMATIC RESPONSES

WEALTH OUT BARGAIN PRICES

unknowable outcomes
- INFORMATION

SENSOR
COMPETING
ALTERNATIVES
- DIVERSITY

SCARCITY

POINT
SET
ALGORITHM
CONFLICT
SYS
MET

COMPLEXITY CUSTOMER
VALUE
CHANGE 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 ! jpb

 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 ! jpb

 THE SAFEGUARD of COMPETITION 43
ALTERNATIVE OPTIONS

ACCESS to CHOICE

Not REGULATION but AUTOMATIC CHECKS & BALANCES

■ CONTROLS EXPLOITATION & CORRUPTION

SUPPLIERS must be happy to deliver

CUSTOMERS must be happy to purchase
EMPLOYEES must be happy to work
FINANCIERS 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 CHOICE

and EVERYONE 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 ! jpb

 THE INDIVIDUALITY of REALITY 44
CONTINUOUS CHOICE

CONTINUOUS EVALUATION

FULL POTENTIAL ■ PURPOSE

■ RESPECT
C ’S

ESTEEM
HY
AR W
ER LO
HI AS

INDIVIDUALITY ■ INITIATIVE
M

FRIENDSHIP ■ CULTURE

SECURITY ■ INDEPENDENCE

FOOD SEX SHELTER ■ MONEY

EVERYONE has a DIFFERENT POSITION at DIFFERENT TIMES for

DIFFERENT REASONS

!! the cause of all CONFLICT

ITY
VID UA L
INDI 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 ! jpb
 THE MAGIC of PROPERTY 45
ASPIRATIONS & INCENTIVES

IMMUNITY from TREACHERY

RESOURCES CONTROLLED by their OWNERS for BENEFIT or SALE

tend to be

R VE D C ED
PRESE & 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

&
EFFOR
T
V E ST MENT
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 ! jpb
 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 - JSC
NB. NO ONE SAID IT WAS EASY ? jpb