 You know, you never know what sorts of criteria people will use to evaluate different activities or outcomes. That's part of Austrian-style subjectivism, right? But this gentleman in the front was just telling me that he said, of all the lectures he heard yesterday, he liked mine the best because it had the shortest title, just a one-word title. And he said, and look what you've got today. I mean, I don't have enough room on the page to write this title down. So now I'm giving the worst lecture that he's heard today. He reminded me of a time I was reviewing my teaching evaluations. You know, at the end of every semester at my university, like most, we hand out evaluation forms for the students. They get to describe their experiences in the class and rate their professor. And one student said of me, he said, of all the professors I've ever had, he is by far the loudest. And I thought, well, you know, there are worse things that a student could have said. Some of the old-timers may remember the movie Spinal Tap, which was about England's loudest band. So I'm Mises Yu's loudest professor. So this is the last slot of the day in the middle of the week. So you're all probably getting a little bit, starting to get a little bit groggy, perhaps. So I'm going to try to be loud and hold your attention this afternoon. One of the reasons that I enjoy this particular topic, applications of Austrian economics to business and management, is because there's a little bit of a misconception among some people that Austrian economics is not a very practical subject because Austrian economists emphasize theory and abstract reasoning. And because they tend to be somewhat skeptical of some mainstream empirical research and social science, therefore, it's sometimes assumed, well, Austrians are only interested in abstract theory, and their work doesn't have much to do with day-to-day practical subjects in the economy or whatever. I certainly want to challenge that view. In my opinion, Austrian economics is an extremely practical subject, especially in regards to the business world, commercial activity, entrepreneurship, management, and so forth. And just as an aside, I mean, I've given versions of these talks on these and related subjects to many practitioner groups over the years, to groups of entrepreneurs and business executives, managers, financiers, and so forth, and they usually agree with my assessment. They're typically impressed with how useful Austrian insights can be to their work. And those who did undergraduate studies or even took an MBA where they studied a lot of standard economics often say, well, this is really different from the economics I learned at the university, which was not at all useful to actual business decision-making, what the Austrians are saying really is helpful to me. And so I hope to convince you by the end of this next 45 minutes that Austrian economics is practical and to give you some examples, some applications to talk about some specific areas where Austrian economics is very useful. Why would I claim that Austrian economics is a practical subject? And on what basis could I make such a claim? Well, as we've seen in the last three days, Austrians employ what some of us have called a causal realistic approach to price formation. So in contrast to neoclassical microeconomic models and macroeconomic models, which emphasize simultaneous determination of different magnitudes using equilibrium modeling, Austrians following Menger, emphasize that all economic phenomena, including or especially the prices that emerge in markets, are the result of deliberate, purposeful human action. They're the result of people's beliefs, their expectations, their actions, and the results of those actions. That's the causal aspect. The realistic aspect is that Austrians are interested in explaining actual prices. If you go around the corner to the little convenience store and you pay a buck 25 for one of these, you give up $1.25, you get one of these in return. We're interested in explaining in terms of marginal utility, in terms of the relative scarcities of different stocks of goods that are available for sale in Auburn, Alabama on this very day, why the price is $1.25 and not $1.50 or 75 cents. We are not concerned with constructing abstract models of hypothetical prices that could exist under certain conditions, like the perfectly competitive price, the pure monopoly price, and a standard sort of I.O. model, the long run price. We're not interested in those. We're interested in real prices, real firms, real profits and losses. We don't construct a model of the representative firm and then try to generalize that into some explanation of the market. No, we're interested in cause and effect. We want to offer causal explanations for real economic phenomena. You know, other characteristics of Austrian approaches that practical people, business people, entrepreneurs, financiers, and so on, find very useful include the Austrian's emphasis on firm and resource heterogeneity, right? Real firms are not identical because firms are established by, operated by, coordinated by, changed by real human actors with subjective beliefs and preferences, acting in a world of uncertainty, making errors sometimes, revising their beliefs and actions, et cetera. Resources are not identical. There's no such thing. I mean, you've heard Roger Garrison talk about, you know, mainstream macroeconomics, you know, the big capital K, right? I mean, we can generalize. It's not only that we say, well, capital goods are heterogeneous and have multiple specificities and can be employed in alternative uses with varying degrees of productivity and so forth, rather than K. But we do the same thing for labor. We do the same thing for entrepreneurship. We do the same thing for land, for any productive resource, right? Resources have heterogeneous characteristics and the value of economic resources, the place of particular resources in the structure of production is determined subjectively through interpretation by real human actors, entrepreneurs and other market participants. We talked a little bit yesterday about the marginal productivity theory. I'll mention some more about that today. You know, what is a business firm? Well, a firm consists of a bundle of heterogeneous, valuable, productive resources and how those resources are combined, how the resource value is interpreted by entrepreneurs and so forth. That's the focus of the Austrian theory of the firm. Those of you who have taken an undergraduate micro course at a mainstream university have seen the theory of the firm, you know, presented as, you know, the average cost curve and the marginal cost curve and marginal revenue curve and, you know, finding some equilibrium value. Okay, that is not a useful theory of the firm to anybody, as we'll see a little bit later. You know, I'm particularly interested in entrepreneurship and economic calculation, right, human actors in the real world as opposed to neoclassical economic models, you know, have to face uncertainties. They have to form judgments about potential future results as we discussed yesterday. Resources have to be owned, right. Ownership in this context refers to, you know, sort of residual control or the ultimate responsibility for deciding how resources will be used in situations that are not, you know, obvious or not previously specified in some kind of contract. Ownership is almost completely absent from neoclassical economic theories of firms and markets and entrepreneurs, right. But anybody operating the real world knows that ownership brings with it responsibility, certain responsibilities that non-owners do not possess. You know, Austrians seek to integrate their treatment of financial markets into their treatment of the general, you know, sort of the general economic system, right. The finance is not a separate discipline that has nothing to do with the real economy. No, financial markets are where entrepreneurs, financiers, financial market entrepreneurs are exercising judgment about the value of particular investments in entrepreneurs and firms and so forth. And that's critical to the operation of a market system. So, you know, this is just to give you the flavor of some of the things that Austrians are interested in, things that Austrians think are important, things that Austrians talk about that are extremely useful and relevant to practical people. And I'll just mention, walk you through some examples in the time that we have remaining. Let's speak for just a moment about cost, right. So, you know, the standard approach that you get in the mainstream textbooks treats, you know, costs as exogenous to the decision maker. The decision maker, you know, the manager of the firm and standard micro, you know, just sort of wakes up one morning and, oh my gosh, there's the average cost curve and the marginal cost curve and the marginal revenue curve. You know, I got a busy day today. I need to do some calculus, right. I've got equate marginal cost and marginal revenue and it takes me several days. You know, the whole thing is kind of silly. And of course, if you're good at math and you're presented with the curves, you know, it might only take you a few seconds to find the equilibrium, maybe a few minutes if it involves taking some difficult derivatives or whatever. But I mean, of course, this is just sort of laughable if you went to a CEO or a middle manager or, you know, entrepreneur and said, hey, show me your cost curves. I'll optimize for you, right. I mean, it's just not very useful. Of course, the emphasis in mainstream theories is always on explicit costs, costs that you can write down and are given to you in numbers, implicit costs, opportunity costs are sometimes neglected. And the idea is that costs are sort of the drivers of firm behavior. The manager wakes up, is presented with some cost curves, then does something, you know, acts in the abstract by choosing quantity or choosing price or whatever. And, you know, then the day's over, right. So entrepreneurs, decision makers, managers, you know, they're only driving anything. I read to you that quote yesterday from Mises about entrepreneurs being the driving force of the market economy. You know, business decision makers in standard microeconomics are extremely passive. They're not the drivers of anything. They just sort of wake up and solve math problems, OK. Austrians, of course, treat cost in a fundamentally different way. Costs are endogenous to the market system. What do I mean by that? Well, of course, the correct notion of cost in any context is opportunity cost, right. The value of the goods or services that you don't get when you engage in one course of action over another. It turns out there's some excellent work on opportunity cost, not only by Austrian economists, but by, you know, some people that might be considered fellow travelers, although they haven't always been considered this way. James Buchanan, for example, but also Ronald Coase. One of James Buchanan's best books is a book that he published in the late 60s, 1968, I think, called Cost in Choice, which is a very Austrian-style, subjectivist treatment of cost. Ronald Coase, no Austrian and not really a friend to the Austrians. How many of you have been in a Walter Block lecture so far where he blasts Ronald Coase as the Great Satan or whatever? I don't actually agree with Walter on that, but Coase was not friendly to the Austrians in general. But Coase wrote a series of articles in the 1920s on cost accounting, where he explains that no, the right way for accountants to think about cost is in terms of values foregone, i.e., opportunity costs, rather than simply explicit monetary costs. Costs are prices. What do I mean by that? The cost to the entrepreneur to produce a marginal bottle of water, right, where do we get that? Well, how much does the entrepreneur have to pay for the plastic and for the labor and for the actual water itself and the use of the machines and for marketing and transportation and so forth? Right, well, what are those costs? What's the cost of labor? Well, that's the wage or salary you pay to your employees. Well, where is that wage or salary determined? Well, in the labor market, right? There's a market in which supply and demand interact and the price of a particular type of labor used in a particular way on the margin, right, is determined by the intersection of labor, supply, and demand. In other words, the costs from the entrepreneur's perspective are simply the outcomes or the prices that emerge from factor markets. And once you realize this, you say, well, the entrepreneur can hardly be a passive participant who is simply presented with prices because who are the demanders of factors in factor markets, right? Who demands labor in the labor market? Yeah, businesses, firms, entrepreneurs, who demands the use of capital goods, who demands raw materials and so forth. Well, it's firms, entrepreneurs, business people. They are the demand side of the factor market. So what we, from the firm's point of view, we treat as costs, right, are simply the prices that are paid by the firms for goods and services, intermediate goods and services that they use. So the entrepreneur, typically in the typical case, has some control over the prices that are paid. It may be only a small amount of control that the individual entrepreneur can exercise if I'm buying plumbing supplies for my plumbing firm and I'm buying them from Home Depot or Lowe's, right? Home Depot is probably not adjusting the price very much in response to my individual demands. So they might, if I buy in a large enough quantity, if I have a contractor relationship, I might get a discount based on what I pay. And of course, if I'm a large buyer, if I'm IBM, if I'm Walmart buying from a wholesaler, you can be darn sure that Walmart has a huge influence on the price that is paid. But not only this, I mean, people sometimes say, well, okay, sure, if you're a big firm and a big buyer, you have, quote unquote, monopsony power, you can drive the price up and down, but the little guy can't do that, right? The small firm just has to take the prices as given from these, whatever comes out of wholesale markets where there are big suppliers and so forth. But remember, even the small entrepreneur has a choice among alternative production methods, right? If the price for little pieces of pipe or whatever at Home Depot are too high, I have the choice to source my pipes from some other vendor, to use a different kind of pipe, to use a different technology, or even to get out of plumbing altogether, right? So it's not the case that the prices for my inputs are given to me and are fixed. I can choose, right? I can choose what inputs I want, how much I want to buy, whether I wanna buy them at all, whether I wanna go into an alternative line of business or whatever. So costs are not the determinant of what firms do, right? Costs are themselves prices that emerge in factor markets. Costs emerge as part of the larger market system. I mentioned this, you know, Coase's articles on cost accounting, Buchanan's book and so forth. I just wanna just emphasize, I sort of hinted at this a little bit yesterday. And I think Salerno also discussed it in his lecture on calculation and socialism, right? That if you think about it, I mean, this is sort of an unsexy way to describe Mises' great contribution in the socialist calculation debate. But Mises' work on socialism, Mises' 1920 essay, his 1922 book, I mean, these are really works on cost accounting, okay? Mises' treatment of socialism is really an exercise in cost accounting. Why? I mean, you guys know this, Mises' central argument, right? Is that under socialism, where the state owns all of the factors of production, there are no markets for productive inputs because there's no private property in these inputs. There are no factor markets, therefore no prices emerging from actual real factor markets. Therefore decision makers do not have access to information on costs to determine what is the least costly or the most efficient way to build a railroad or to produce automobiles or to set up a gulag or whatever it is that the central planners wanna do, right? They cannot be economically efficient even if they want to because they lack the information on relative scarcities of goods and services. They lack information on the alternative values of resources that they would use to satisfy their own ends because they don't have market prices for factors, i.e. they don't have actual market costs, okay? Remember Mises says, I mean, of course, there's all sorts of additional problems with central planning. Of course, you have the gulags and the shooting people as they climb over the wall and all that. But I mean, remember Mises points out, even if you abstract away from, you know, Hayek's knowledge problem, I mean, Mises doesn't put it explicitly that way, but even if you assume that the dictator knows what should be produced, right? Even if the dictator's goal is simply to satisfy his own personal preferences, it's impossible for the dictator to do so efficiently without prices and markets for intermediate goods. In other words, the socialist dictator cannot perform cost accounting in a correct way. I mean, of course, you can sort of fake it. You can use play money essentially, you know, fake prices, arbitrary prices, computer generated prices, simulated prices and so forth for inputs. So you have pretend costs, fake costs, but that's not economically efficient in Mises sense, okay? One of Mises' least read books, but in my opinion, one of his most important books is a little book that he published in the mid 1940s called Bureaucracy. If you haven't read Bureaucracy before, I would urge you to take a look at it. It's short, it's easy to read, you can give a copy of Bureaucracy to your grandmother, whereas if you dropped human action on grandma's lap, you might, you know, get a different response, negative response. You know, in a sense, the book is, I think Mises and his publisher did not do a good job marketing the book. I mean, it's ostensibly about Bureaucracy, which makes it sound like a kind of a political science topic, but it's really about business management and it's about the things we're talking about right now. In fact, Mises has a wonderful summary of his calculation argument in Bureaucracy. In my opinion, it's a much clearer and more straightforward summary of Mises' argument than the version that Mises himself presents in the book on socialism and even in human action. He's these great little passages where he talks about under capitalism, the factors of production in, through their prices, which emerge on private factor markets, are calling out to the entrepreneur their values in this activity relative to some other activity. And he says, you know, under socialism, I'm paraphrasing, under socialism, the factors of production are mute. You know, I have this sort of image of my mind of, you know, the entrepreneur walking through Home Depot or whatever and all the little plumbing parts are shouting out, you know, hey, use me, don't use me, use me for this, use him for that. And you know, of course, under socialism, it's silence. Anyway, I mean, that works for me, but maybe it doesn't work for you, but. Mises has an important section of this little book where he distinguishes what he calls profit management and bureaucratic management. And so Mises defines bureaucracy in a very specific way, not in the general sense in which people use that word. Most people call something, when they call something bureaucratic, they mean big, slow, unresponsive, multi-layered or whatever. Mises has a very precise definition of a bureaucracy. Mises says, a bureaucracy is an organization that produces goods and services that are not themselves bought and sold on markets. Right, so a bureaucracy produces some output that is consumed by somebody, but people are either compelled to consume it, police services, right? Or it's simply given away to people without being in exchange for money. In other words, a bureaucracy is an organization that does not have a profit and loss statement, okay? And therefore, according to Mises, Mises doesn't say these organizations are illegitimate. Remember, Mises was sort of a minimal state, classical liberal. He thought the police force was legitimate, the court system was legitimate per se. Army is legitimate. Of course, he had a lot of criticism of how those things were operated in his time. But Mises says, the thing with the police force, not that he shouldn't have one, according to Mises, but you can't run it like a business. I was getting nervous when we have some successful business person, Trump, obviously, running for president. I mean, I haven't heard Trump say this as much as some other people who've been like Trump in the past. You know what I'm saying? The government should be run like a business. Right, if you put me in charge of the business, put me in charge of the government, I'm gonna make it work because I ran a, I was a CEO of a company and I made that work, okay? I mean, the problem with this, according to Mises, is that these are fundamentally different kinds of organizations. Why? The objective of the CEO is to maximize profit. Okay? By reducing costs and raising prices if possible and becoming more efficient and so forth. What guys like Trump mean when they say that is, I'll make the government more efficient. But the proper response to that is, how would you know? How do you know if the police force is efficient or not? Well, I mean, is it net income? Well, I mean, you know, the local police department here in Auburn, Alabama could say, well, we need to increase our net income. So we're gonna start issuing more tickets, more speeding tickets, more parking tickets, higher fines, we need to increase our revenues so we have more, you know, net income after we pay our costs. Or we need to reduce the salaries or wages that we pay to police officers and so forth. You know, Mises points out that private organizations that do buy and sell their outputs on the market, you know, can be managed in a fairly decentralized way. He talks about large corporations that have subsidiaries and subunits. You know, the CEO of a Fortune 500 company can say to the head of a particular operating unit or subsidiary, say, look, I'm not gonna tell you exactly how to run your business. I'm just gonna look at, you know, the bottom line that's coming out of your subsidiary. And if you're earning a lot of, you know, profit or net income, I'm going to give you more capital, I'm gonna reward you, you can expand and so forth. If you're not profitable or you have low net income, I'm gonna fire you or contract your business or whatever. Kind of like what capital markets do for the firm itself. Okay? The police can't be operated that way. You can't say to the local beat cop, yeah, we're not gonna tell you how to do your job. You go out there and figure it out. Just bring home the bacon, right? We'll judge you on how much revenue you bring in for the police. You know, you can see the obvious sort of incentive difficulties with that. According to Mises, you know, the way to manage the police department is with very strongly enforced formal rules and procedures. Basically, you tell the police officer, this is what you do in this situation, this is what you do in that situation, you don't give them a lot of latitude to make their own decisions on the fly. Those of you, if you've ever seen a, any one of a thousand Hollywood police movies, crime dramas or TV dramas, there's always a scene where the hero, the hero cop has had this confrontation with the boss, the lieutenant, the lieutenant's yelling at the Bruce Willis character or whatever. McClain, you never do things by the book. Why do you always do things your own way? He's like, well, what is this book? What's the book he's talking about? You know, at IBM, the supervisor doesn't say to the subordinate, you know, why aren't you doing things by the book? You don't say to the traveling salesman, why aren't you doing things by the book? You say, how much sales revenue do you have? Okay, you figure out how to do it. I want to see, you know, show me the money. For, if under a bureaucracy, for a bureaucracy, according to Mises, you tell them exactly what to do because there is no way to evaluate their performance in monetary terms because they're not offering their stuff for sale where consumers can vote with their dollars to patronize or not to patronize. Okay, so my point is, according to Mises, the economic calculation argument has an implication for how you manage large organizations. Okay, it has implications for the limits to the size of the firm. It has many implications for practical management as well as being a, you know, sort of argument about why socialism doesn't work. There's an interesting article by Thomas Taylor in the Quarterly Journal of Austrian Economics in 2000 on Austrian, I forget the exact title, it's something like current developments in cost accounting from an Austrian perspective, which I would urge you to look at, those of you who are interested in accounting. Now I spoke yesterday about entrepreneurship, right, to remind you, in sort of a long run equilibrium state, we can imagine factors of production being paid, prices equal to their discounted marginal, revenue products, capitalists earn an interest reward, an interest as a reward for foregoing consumption, paying for factors today and realizing revenues tomorrow. Entrepreneurs can earn sort of an implicit wage but there are no profits and losses, right? But in the real world, right, on a day-to-day basis, entrepreneurs do earn profits or losses, right, based on the quality of their judgments about the future, they're based on their ability to anticipate future prices, future market conditions and so forth. So the unique role of the entrepreneur is to arrange the factors of production, right, under conditions of uncertainty in the pursuit of profit and, you know, in the attempt to avoid loss, is not quite the same thing as innovation as emphasized by Schumpeter, not quite the same thing as discovery as emphasized by Kirchner, implies ownership of resources and judgment in the use of those resources. So it follows that there are a lot of things that are commonly misunderstood as profit but are not really profit, okay? So it follows from an Austrian understanding of entrepreneurship and markets that, okay, first of all, profit is not interest. Profit and interest are distinct praxeological categories even though they both are often manifest as cash in the business owner's pocket, okay? So, you know, if you own a company and your accountant gives you your annual tax return or you're looking at your net income statement and he's got, okay, we have, I got $5,000 left over, that's money that goes in my pocket. Ooh, I made a big profit. Yeah, I mean, from the point of view of economic theory that $5,000 may or may not be economic profit, right? Some component of it is an interest return if you, depending on how much you paid Exante for your factors and the length of time between those payments and when you realized receipts and depending on the opportunity cost of investing those funds elsewhere, right? Some of that net income on the accounting, in an accounting sense is implicit interest, right? Some of it is the business owner's implicit wage and then some of it is entrepreneurial profit or loss. Again, these are not numbers that come out of the income statement. This is something that must be imputed or inferred by the decision maker, you know, by using these, by using economic theory, right? But a firm, you could have a positive number, you could be in the black as a firm, but not really earning economic profit, right? You could simply be earning your opportunity wage and no more. You could simply be earning an interest return and no more or some combination of those, but actually be earning an entrepreneurial loss or having a very small entrepreneurial profit. You know, and this is something that, those of you who have studied, if you know that there's some accounting profit and economic profit, you already know what I'm talking about. Profit is not an automatic return to capital. Attention, Thomas Piketty, right? I mean, Tomas Piketty, you know, it's not, people think that, well, profit is what you get when you own stuff. And so if you own productive capital, financial capital, machines, whatever, you just kick back and let the profit roll in. Okay? I mean, you know, Frank Knight made a, you know, caused a lot of sort of confusion here. You know, talking about capital is like a plant, you know, like a little tree or something. You know, if you plant it, it grows. So capital just tends to grow, you know, almost like biological reasons or something and you automatically get some fruit every year. Yeah, you got to water it and you got to put some fertilizer in. But just if you have that little seed or the little, you know, lemon tree, it just automatically generates a flow of lemons. And that's, you know, so you get profit just for owning capital. Well, of course, if you think about how markets operate, you realize, nope, the mere ownership of productive resources does not guarantee any income whatsoever because you can deploy them in activities that do not produce goods and services that consumers want to buy. Okay, I mean, just look at, I don't know. I mean, I don't think Auburn has a lot of abandoned buildings but, you know, go to Detroit or any number of other cities around the world and look at abandoned buildings and say, well, somebody owns that nice building. Why are, where's the profit? Okay, I don't have any profit because that building is not in productive use in the economy. You know, nor is profit a sort of, you know, markup over costs. And this is a, you know, unfortunately, a lot of sort of, you know, MBA textbooks seem to sort of imply, oh, well, if you own a business, right, you know, you choose what you're gonna do and you add up all the costs and you add 10% and that's how much, you know, that's how much you sell it for. Yeah, well, of course, I mean, I can add any markup I want over my out of pocket expenses to produce something but it doesn't mean somebody's gonna buy it, right? Some of this maybe is a confusion between sort of, you know, sticker price and market price. Yeah, I mean, I can put whatever sticker price I want on the thing based on whatever markup I want over the cost that were not given to me, remember, but I chose, right? But that doesn't mean anyone will buy it at that price. The market price has determined completely independently from what my costs were and what markup rate I chose, right? It's determined by consumer preference. Okay, a couple more things. Let me say a little bit about business strategy. I mean, how many of you taken a course in business strategy? Some of you have. It's a popular topic in business schools. There's tons of books, you know, if you go to Barnes & Noble or you stop at the bookshop at the airport on your way back home from Mises U, there's tons of books on strategy and some of them are more academic and some of them are like, you know, Dr. Seuss on strategy or, you know, sort of silly, silly things. But in the academic literature on strategy, there's some pretty interesting stuff that Austrian economics bears upon. For years, the dominant perspective in the academic and the practitioner literature on strategy was the so-called strategic positioning approach associated with Michael Porter, whose book, Competitive Strategy, is the all-time best-selling book on business strategy. And Porter is a neoclassically trained industrial organization economist who took the standard models of perfect competition, monopoly, oligopoly and so forth and just sort of flipped them on their heads, right, just as if you take an intermediate micro course, they teach you that perfect competition is good and entry barriers are bad because that gives monopoly power to firms and that's bad and you gotta stamp that out. And Porter said, well, if I'm a firm and I wanna make lots of money, then why don't we just say entry barriers are good? It's like, how do I get entry barriers? How do I get monopoly power? How do I stamp out perfect competition and try to get as much market power as I can for myself, right? I mean, if you understand the Austrian critique of the standard approach to market structure, that if you understand the difference between actual competition in the market from an Austrian perspective and perfectly competitive general equilibrium from a neoclassical perspective, then it's easy to see why this Porter's approach is not particularly useful, right? If you believe, as Austrians do, that profits are the result of entrepreneurs being successful at anticipating future prices and market conditions, then having entry barriers does not necessarily help you very much, okay? You can't get a sustained competitive advantage over your rivals from introducing some deviation from the sort of perfectly competitive benchmark. Of course, perfect competition doesn't exist, never has, never will. Perfect competition is not a useful benchmark for thinking about markets. All markets in the real world are imperfectly competitive in that sense. And trying to get some kind of monopoly grant from the state, trying to get a scale advantage or brand name recognition and so forth does not in general lead to any kind of sustained profitability. It might give you some temporary advantage, but it's not the way to earn economic profits over time. Of course, in this positioning approach, the Porter approach, you'll never see the word uncertainty, you'll never see the word entrepreneurship, you'll never hear about heterogeneous capital resources, you'll never hear about actual competition as Austrians understand it. There's another approach that is sometimes called the resource-based or capabilities approach. So say people like Jay Barney, David Teese and others, that I think actually has a lot more promise and is in one sense more compatible with Austrian economics, more congenial to Austrians. Right, it emphasizes that firms that are successful in earning profits tend to be firms that have particularly valuable and maybe unique combinations of resources, productive resources, capital, labor, and so forth. These theories are still a little bit too closely tied to the perfect competition model for my tastes and do not give quite as prominent a role to interpretation and subjectivity as I think they should, but I think these models are worth studying and worth reading. And there's actually a fairly new literature that tries to combine business strategy and entrepreneurship, tries to incorporate concepts from the entrepreneurship field into the study of strategies and I was called strategic entrepreneurship, which I think has some promise too and I've done some work in this area. But one thing I thought I might mention to you guys because I have often been asked this in the past is, well, what about game theory? Right, a lot of the work on strategy uses game theory. How many people have studied game theory before? Yeah, most of you have. We, I mean, we've had some sessions that means as you in the past that were specifically devoted to game theory and there's some good Austrian writing on the pros and cons of game theory. I mean, I'll state my position for the record as being as I am in so many things, a moderate, right? I have a reasonable and moderate balanced position in the sense that I think there are some insights that we can gain from thinking about strategic interaction in the game theoretic sense, but those insights are limited, okay? There's some game theoretic models that I think are completely worthless, but there are some general insights that may actually be beneficial. So for example, or to be more specific, you know, what about the numbers that go in these, you know, go in a game tree or in a normal form game matrix or whatever? Yeah, so let me put it this way. A superficial Austrian critique of, you know, some kind of prisoner's dilemma model would be to say, I can hardly read it. Oh, well, it says here that, you know, if they both cooperate, they each get three utils and if one of them defects, that person gets four utils and there's no such thing as a util, therefore this is worthless. Well, okay, I mean, yeah, I agree that anything that relies on utils is pretty much worthless, right? But of course, you can do a lot of, you can do some game theory without using cardinal utility, right? In fact, you can write down a prisoner's dilemma game with strictly ordinal relationships among the payoffs, right? To get the standard answer, how many people know the prisoner's dilemma game? You know, to get sort of the standard answer, you just need this payoff to be greater than this payoff and this payoff to be greater than this payoff from the point of view of the actor. You don't have to use numbers. You don't need cardinal utility. I used to give that as an exam question in some of my classes. You know, I just said alpha, beta, gamma, delta. Tell me what has to be true about the values of alpha, beta, delta, gamma to get for it to be the case that in the one-shot game, you would always defect and it's not that hard. You just have to write down some inequalities. Same thing with coordination games, you know, battle of the sexes game. You don't necessarily need numbers. Now, there are some versions of these games that only work when you do have cardinal numbers. Certain kinds of repeated games where you have to add up the payoffs over time and, you know, discount them. Certain games of imperfect information where you have to have estimates of the probabilities and then you multiply by the values of the outcomes and so forth. Yeah, I mean, if you're doing that, then yeah, you're really engaged in some kind of exercise that is thoroughly divorced from actual economic behavior. But it doesn't follow from that that the kind of logic of the prisoner's dilemma, for example, or the logic of a chicken game or a battle of the sexes game is incompatible with praxeology. I don't think that's the case. Now, so how useful does that make these models? Well, that's up for debate. I mean, it depends on what you're doing and I think there are some situations where using prisoner's dilemma logic may help us to understand what firms are doing as they interact with each other and so forth. Yeah, I mean, if nothing else, trying to analyze a situation of strategic interdependence, you know, by thinking about, you know, who are the players? What are their characteristics? How are their actions interdependent and so forth may clarify your thinking on a specific business problem. Okay, about out of time. I've done a lot of my own research on the theory of the firm so I won't waste your time now by talking about it but simply urge you to waste your time later by reading some of my articles. What I and others have tried to do is challenge the textbook notion of the firm as some sort of production function, right? And think instead about the firm as ownership of assets. And one thing that I've had fun with lately is dealing with some, there's some sort of Austrian inspired critiques of the corporation. There are people, you know, Kevin Carson, Roderick Long and so forth who say that corporations are per se illegitimate because they receive artificial state privilege. I think that argument is actually not correct for reasons we can discuss later. I also think it's not correct that in a free society, in a free market, all firms would be very flat, non-hierarchical, everything would be sort of peer to peer. We wouldn't have big companies with bosses and middle managers and workers. I think that's also incorrect. You know, voluntary hierarchy and authority are perfectly compatible with sort of free society. I have a recent article in Sloan Management Review that sort of misleadingly titled why managers still matter, but it's really about the myth of the flattening hierarchy or the flattening firm challenging theoretically and anecdotally the idea that the age of the old hierarchical corporation is over and that all firms need to be lean and flat and decentralized and so forth. Okay, just to summarize, you know, Austrian economics is useful for management, for business more generally. It's different from other kinds of economics in ways that are practical and useful. It's causal realism. It's emphasis on heterogeneous resources. The role that it gives to the consumer opens up this sort of a whole, there's a whole field of demand side strategy which is very Austrian in its spirit. The role that it gives to the entrepreneur and so forth. So, you know, but I just want to emphasize that, you know, while the theorems that we derive from praxeology are qualitative, those theories can be very useful for doing quantitative analysis, doing economic history as Bob Higgs and, you know, Murray Rothbard and many other people have done, right? Even doing forecasting, which is not a praxeological activity itself but it's sort of a kind of entrepreneurship having a correct knowledge of economic theory that we derive from praxeology makes us, you know, helps us in trying to do provide quantitative estimates of the future. You know, of course, management per se is different from economic science. Management is an art. It's an entrepreneurial activity. It's not a, it's not formal logic the way praxeology is but I think there's a, you know, closely compatible relationship between good economic science and good management practice. So thanks a lot.