We have the wrong intuitions about the #economy: we tend to assume that it is about #engineering rather than #entrepreneurship. This is fundamentally mistaken. Economists typically make that same mistake, and therefore focus their modeling on the wrong thing. If it is about
engineering, then it is about efficiency, technology, and resources. But it is not. It is about value. Production efficiency, technology, and resources are a first concern only when firms are competing head-on selling commodities, where every business produces goods that are,
from the point of view of consumers, indistinguishable (think gasoline). But this is hardly ever the case in the dynamic market process; it applies practically only to the final stages of an industry's life cycle: maturity and decline. For this type of head-on competition, in
which change has all but ceased, what matters is cost so that one can compete by lower prices. But the important (and interesting) stages of the life cycle are what precedes this type of maintenance economics: the innovation, entrepreneurship, and novelty that facilitates new
value for consumers. By focusing on only maintenance, we tend to conclude that small businesses cannot compete with large. Very often this is a conclusion propped up by reference to economies of scale or innovation. But both are rather irrelevant because they focus on production
technology for an existing good, not what good should be produced and the value it offers to consumers. Economies of scale keep average production cost down, but tells us nothing about the value of the output. Frankly put, it hardly ever matters if large incumbent firms can keep
production cost low if entrepreneurs can introduce new goods of higher value. Consumers make their purchasing decisions based on what they find valuable. A good *loses* its previous value, in the eyes of consumers, when new goods are introduced: horse carriages after the
automobile, flip phones after the iPhone, etc. What use is high efficiency in production of horse carriages or flip phones when consumers choose different products? Value trumps cost, and new (and greater) value replaces old. If one overlooks the value aspect, and therefore what
makes a good a good in consumers' eyes, one overlooks the primary function and process of the market economy. Production technology, after all, only matters if one has figured out how to produce a good that consumers value. And it is of secondary concern: after value, cost must
be lower than the price charged in order to earn a profit. But a low cost means nothing unless the good produced is of (sufficient) value to the consumer. By focusing on the engineering of production, we fundamentally misunderstand the market. As a result, we think of production
capacity as a strength. But a high capacity is more often indicative of a soon-disrupted industry than of actual 'muscle'. In fact, firms with high production capacity are among the most vulnerable: they have invested enormous amounts into specific capital that requires continued
sales to be paid off. All it takes to topple such a huge corporation is one innovation with greater value to attract customers, who then lose interest in the 'older' good. Also as a result, we erroneously conclude that the process overall can be planned and even made better if
centralized and top-down. But this is based on the assumption that entrepreneurship can be excluded, and therefore assumes--and even requires--a static, stagnant economy. Otherwise it makes no sense to focus primarily on per-item production cost. Virtually all that is important
to understand the market economy is in what precedes the gas-station commodity competition that we find in industries in maintenance mode or decline. It's the entrepreneurs' imagination and aim to facilitate value that create our tomorrows; what comes after the great weeding out
of ideas and attempts, determined by consumers exercising their sovereign choices to buy/not buy, is the 'maintenance mode economy' that we can observe and measure--and that we can model. But it is the outcome of the actual process, not the process itself.
