Orientation: Augmenting Austrian Entrepreneurial Judgement Theory
Our second paper combining the theories of John Boyd and the Austrian School of Economics
*Note to reader: Hunter Hastings and I authored this paper for the Austrian Economics Research Conference at the Mises Institute, held in March 2023.
Abstract
Austrian Entrepreneurial Judgment theory (EJT) advances continuously as scholars develop more detailed insights and understanding. In multiple works including Organizing Entrepreneurial Judgment: A New Approach to The Firm, N.J. Foss and P. G. Klein have defined entrepreneurial judgment. Entrepreneurial judgment is a dynamic activity whereby entrepreneurs decide and act in response to changing data from the marketplace under conditions of uncertainty. Action is continuous change and there is no tendency towards equilibrium.
Further studies (McMullen, 2015) have added substance to the dynamics of EJT via concepts such as empathic accuracy. Packard and Bylund introduced entrepreneurial intent as a predecessor to judgment in the development of entrepreneurial decisions (Bylund & Packard, 2023). They propose that dynamic judgment be defined and understood as the shifting of one’s intentionality to new ends. It is a change in orientation by which one’s actions are directed.
Their definition of judgment calls for a deeper understanding of orientation. This paper provides a new definition of entrepreneurial orientation via an integration of Mengerian entrepreneurial theory, EJT, the process theory of Ludwig Lachmann and others, Huerta de Soto’s theory of dynamic efficiency, and the decision-making cycle of John Boyd, in which orientation is an interactive process of many-sided implicit cross-referencing projections, empathies, correlations, and rejections. The resulting dynamic process view provides Entrepreneurial Judgment Theory with further strengthening as it advances its primary role in the Austrian understanding of innovation and entrepreneurship driven economic growth.
Introduction
I Austrian entrepreneurship.
From the very beginnings of the Austrian school of economics, entrepreneurship theory was foundational and fundamental. In Principles Of Economics (Menger, 1985), Carl Menger defined entrepreneurship (his terminology was “entrepreneurial activity”) as a process with 4 stages:
(a) Observation: obtaining information about the economic situation;
(b) Economic Calculation—all the various computations that must be made if a production process is to be efficient (provided that it is economic in other respects);
(c) Action: the act of will by which goods of higher order (or goods in general—under conditions of developed commerce, where any economic good can be exchanged for any other) are assigned to a particular production process; and finally
(d) Management: supervision of the execution of the production plan so that it may be carried through as economically as possible.
Menger identified the fundamental importance of entrepreneurial activity in the economic process as “unavoidably necessary in every economic production of goods” (Menger, 1985), alongside resource inputs, capital and labor services.
Menger also included “processes of change” in the entrepreneurial system - including changes in the value of goods in the context of different circumstances - in his Principles Of Economics:
“A process of change involves a beginning and a becoming, and these are only conceivable as processes in time.” (Menger, 1985)
“goods of the same kind and in the same place attain and lose their economic character with changing circumstances.” (Menger, 1985)
Ludwig von Mises famously elevated the role of the entrepreneur to that of “the driving force of the market process” (Mises, Human Action: A Treatise on Economics,Scholar's Edition, 1998). Mises also emphasized the processual nature of entrepreneurship:
"The market is not a place; it is a process, it is how, by selling and buying, by producing and consuming, the individuals contribute to the total workings of society." (Mises, Human Action: A Treatise on Economics,Scholar's Edition, 1998)
The role of the entrepreneur lies in understanding the motivations of customers to achieve greater satisfaction, and the process of recombination of resources in new ways to enable that satisfaction.
“Entrepreneurship is purposive action. The various complementary factors of production cannot come together spontaneously. They need to be combined by the purposive efforts of men aiming at certain ends and motivated by the urge to improve their state of satisfaction.” (Mises, Human Action: A Treatise on Economics,Scholar's Edition, 1998)
Modern interpreters of the Austrian theory of entrepreneurship confirm these fundamentals of process-driven change. Professor Mark Packard in Entrepreneurial Valuation (Packard M. D., 2021) (Foss N. K., 2020) expresses it as follows:
“The role of the entrepreneur in the market process is the pursuit of betterment, of new economic value. It is to try new things and see how we can move from the present state of welfare to a higher one. In other words, entrepreneurs are the engine of economic growth.”
Professors Klein, Foss and McCaffrey in Austrian Perspectives on Entrepreneurship, Strategy, and Organization (Foss N. K., 2020) confirm that “Entrepreneurship plays a central role in Austrian economics” as a theory of processual change. The authors highlight “functional” theories that “view entrepreneurship as a series of actions, or as a process, rather than an outcome like launching a start-up company (Klein, 2008). These theories may be called “functional” or “system-level” because they highlight the entrepreneur’s unique function in the economic system of the market economy.” These theories confirm “the activity-based, processual research trend in entrepreneurship studies”.
II The dynamic tradition in Austrian Economics
Neo-classical economics is a body of theory based on statics. Concepts such as equilibrium, maximizing, optimizing, Pareto efficiency, the production frontier, and the use of algebraic symbols for mathematical reasoning all reveal static assumptions and reasoning, including, for example, the fixed nature of resources.
The Austrian tradition is known precisely for the emphasis it places on the dynamic conception of the market and market processes; what Ludwig von Mises called “the ceaseless flux of human affairs”. (Mises, Human Action: A Treatise on Economics,Scholar's Edition, 1998)
Jesus Huerta de Soto, in The Theory Of Dynamic Efficiency (Huerta de Soto, 2009) expounds this alternative, dynamic view of economic activity: the entrepreneurial capacity to creatively seek and discover new resources and continually shift the production possibilities curve. Entrepreneurship is the human ability to recognize opportunities for profit and to act accordingly to take advantage of them.
The new resources that entrepreneurs create are knowledge resources: new information that is subjective, practical, i.e., created through action, diffuse, and tacit. The entrepreneur creates this information and transmits it, thereby exerting a coordinating effect.
Ludwig Lachmann applies dynamic theory to capital:
“The theory of capital is a dynamic theory……because the changes in use which these durable capital goods undergo during their lifetime reflect the acquisition and transmission of knowledge” (Lachmann, 1986).
“Capital regrouping has to be treated as a dynamic phenomenon similar to the processes which give rise to it.” (Lachmann, 1986)
Murray Rothbard in Man Economy and State (Rothbard, 1993) refers to the entrepreneur as “an adjuster of the discrepancies of the market toward greater satisfaction of the desires of the consumers”, often via innovation, dealing with the “dynamic problems of a changing economy”.
III The need for process theory
Austrian economists’ embrace of process includes process theory. Mises talks of entrepreneurs who “buy where and when they deem prices too low, and they sell where and when they deem prices too high”, in other words there is an operating system for entrepreneurship that can be observed.
“The market process is coherent and indivisible. It is an indissoluble intertwinement of actions and reactions, of moves and countermoves. But the insufficiency of our mental abilities enjoins upon us the necessity of dividing it into parts and analyzing these parts separately….(but this is merely) an imaginary makeshift of our minds.” (Mises, Human Action: A Treatise on Economics,Scholar's Edition, 1998)
The parts can’t even be thought of as existing outside the structure of which they are elements.
Today, we would use the term complexity in the context of complex adaptive systems theory to communicate Mises’ thought. The whole is different than merely the sum of its parts.
In the same vein, De Soto emphasizes that the coordinating effect of entrepreneurship is unbroken and never-ending. An individual, a company, an institution or an entire economic system will be more dynamically efficient the more it fuels the process of entrepreneurial creativity and coordination. The perspective is that every person possesses an innate creative capacity enabling the perception and discovery of new profit opportunities that arise in the environment. Resources are never given, but, instead, both ends and means are continuously devised ex novo by entrepreneurs who always wish to reach new objectives that they discover to be of value.
This process theory results in a uniquely Austrian perspective in which ends, means and resources are never “given” but continually created from nothing as a result of entrepreneurial action. Ludwig Lachmann refers to “an Austrian theory of the market process” (Lachmann, 1986), a process that has no determinate outcome, because entrepreneurs continually adjust their plans based on their own changing expectations. Time cannot elapse without knowledge changing. Processes can be inter-market, intra-market, or macroeconomic.
IV. John Boyd's orientation, reorientation and mismatches.
Let us now introduce the concept of orientation in order to understand its augmentation of Austrian entrepreneurial theory. We shall define orientation, discuss its primary theorist and his scientific and philosophical influences, describe and distinguish its multivalent characteristics, and its centrality to human decision making, action, and learning.
Orientation is defined as “an interactive process of many-sided implicit cross-referencing projections, empathies, correlations, and rejections that is shaped by and shapes the interplay of genetic heritage, cultural tradition, previous experiences, and unfolding circumstances.” (Boyd & Hammond (Editor), 2018) Orientation enables humans to sense external events through observations, process them in order to assign them meaning and intent, formulate hypotheses in the form of decisions, test those decisions via actions, and learn via feedback loops, continuously as time advances. A particular type of observation, what Boyd calls “mismatches,” can be subjectively identified and fed forward into subsequent decisions and actions to address them.
“Mismatches” are defined as discrepancies or inconsistencies between what is anticipated conceptually when describing observations and what is actually observed. (Boyd J. , 1976) Put another way, mismatches emerge when there is a recognized disparity between what was anticipated versus what is actually observed. In that “everything is in a state of ceaseless flux,” (Mises, The Ultimate Foundation of Economic Science: An Essay On Method, 2006), the anticipation of mismatches is a critical component of orientation. If the Universe, world, markets, etc. were linear, static and symmetrical, then there would be no need to anticipate mismatches. Since the Universe, world, markets, etc. are nonlinear, dynamic and asymmetrical, the need to anticipate mismatches is imperative.
Additionally, orientation is where and how humans filter data and information in order to transform it into knowledge and understanding; that can in turn be decided and acted upon within their respective environments. Orientation continues to cross-reference as time advances, continuously making new observations, new decisions, and new actions, all based on new observations via feedback loops. With the continuous flow of information acquired in their environment via these feedback loops, individuals strive to make new observations, adjust, or augment their orientation (aka “reorient”), in order to make new decisions and actions towards their goal.
Orientation is the source of judgment; and is the source of intent that drives decision-making, action. It frames the mental models of the decisions and actions we take in order to learn and adapt in our respective environments.
The concept of orientation comes from an American strategic theorist named John Boyd. Boyd discovered a theory of learning and understanding that is rooted in making effective decisions, and taking rapid action, in order to learn what adjustments are required in order to survive on one’s own terms, maintain a competitive advantage, or, as Boyd said: “…improve their capacity for independent action.” (Boyd J. , 1976)
In 1976 he discussed these ideas and published a somewhat brief, but dense, academic paper entitled “Destruction and Creation.” In this work Boyd identified his core concept, orientation. Boyd’s aim for this paper was:
“To understand how the mind evolves an interior mental orientation…that permit individuals and groups to cope with changing external conditions.” (Spinney, 2020)
For Boyd the central questions were: How and why does our mental state (orientation) evolve in a constant state of change, uncertainty, and ambiguity? How and why do we make decisions? What must an individual, or a group of individuals do in order to “improve their capacity for independent action?” (Boyd J. , 1976)
Boyd answers the first question by stating that in order to “cope with our environment we develop mental patterns or concepts of meaning.” (Boyd J. , 1976) Essentially, we process observations within our environment in order to make sense and meaning of it via models and patterns that “we destroy and create.” (Boyd J. , 1976) As environments and situations continuously change, we must keep these “mental patterns and concepts of meaning” (Boyd J. , 1976) updated to the perceived unfolding reality that occurs through time. The idea is that with constant change comes the unending need to update our perceptions and understanding in order to keep them matched to reality so that we may survive, maintain relevance, operate from a position of advantage, etc.
As to the second question, the “biological imperative creates purposive behavior….to survive on our own terms.” (Spinney, 2020) By continuously scanning for and identifying mismatches, and reconciling them with our understanding of the environment, we uncover opportunities to create advantages for ourselves, via independent action. (Boyd J. , 1976)
And for the third question, Boyd describes two ways in which one can “develop and manipulate mental concepts (orientation) to represent observed reality…” (Boyd J. , 1976) They are deductive and inductive reasoning, via analysis and synthesis respectively. On the one hand we engage our environment with deductive reasoning. We analyze in order to break down a comprehensive whole into specific component parts. On the other hand, we employ inductive reasoning. We synthesize said parts into something novel that did not previously exist. (Spinney, 2020) Boyd suggests that the combination of deductive thinking, via analysis, must be complemented with inductive thinking, synthesis. In other words, as we scan our environment and identify mismatches, we must be able to break down wholes into their component parts via analysis, and in turn recombine these parts into something novel that did not previously exist, via synthesis. (Boyd J. , 1976)
Boyd, trained in both economics and industrial engineering, relied heavily on three scientific principles to support his theory. They were, briefly:
Incompleteness―As explained by Gödel’s Incompleteness Theorem, basically saying “that any consistent system…is incomplete. In other words, there are true statements that cannot be deduced from the postulates that make up the system.” (Spinney, 2020)
Indeterminacy ―As explained by Heisenberg’s Indeterminacy Principle, basically saying that one can “not simultaneously fix or determine precisely the velocity and position of a particle or body.” (Spinney, 2020)
Entropy – As explained by the Second Law of Thermodynamics, basically stating that “all observed natural processes generate entropy.” (Spinney, 2020)
Given the constancy of these three principles, we come to understand that orientation must continuously be updated and revised to adjust to dynamic change in our environment.
With the concept of orientation now defined, and with a grounding in its epistemology, we will now look at what are arguably John Boyd’s most well-known, yet widely misunderstood, contributions: OODA, the process of how orientation functions.
V. Integrating Boyd's theory into Austrian dynamic entrepreneurial judgment.
OODA is an acronym for observe, orient, decide, and act. It is the iterative function of one’s orientation, how it processes observations, formulates hypotheses that manifest into decisions, and tests those decisions via action, and immediately cycling back to the beginning via a feedback loop.
OODA illustrates the continuous cycle of observe, orient, decide, and act, or, observation, orientation, decision, and action. In other words, it is how one’s orientation operates in space and time. It explains how one’s orientation deals with the external world (from the outside in), and how it internally shapes observations, decisions, and actions (from the inside out).
Explaining OODA from the outside in, we first observe using our senses, we encounter unfolding circumstances, and we acquire information through interaction with our physical environment. Secondly, observations feed forward into our orientation, where we “orient” and “reorient.” Put another way, we filter our observations in order to interpret and understand our environment. Recall that orientation is made up of our cultural traditions, genetic heritage, ability for learning, our previous experiences, and our ability to analyze and synthesize. This process continues as time moves forward with a decision, defined as a hypothesis, which is in turn tested via action. We receive feedback loops from decisions and actions, whereupon we make a new series of observations, a reorientation, new decisions and actions, and so on.
As they cycle through OODA, the adaptive entrepreneur or team continuously adjusts and revises their orientation in order to make faster decisions and act on them quicker than their competitors. They are also scanning for mismatches, which in turn requite reorientation. In other words, the orientation remains dynamic by being open and flexible, thus allowing rapid adaptation to changing environments where chaos and disorder constantly increase. On the other hand, a static orientation, or one that does not reorient and learn, begins to slow in its decisions and actions. Ultimately, the slowing movement through the OODA cycle will freeze and shatter, no longer able to function, thus it will be defeated by the more adaptive individual or team; or rendered irrelevant or obsolete.
VI Orientation and Entrepreneurial Judgment
The centrality of orientation cannot be overstated for Austrian entrepreneurial theory, especially when we consider how OODA functions from the inside out. Orientation guides and shapes how entrepreneurs observe the environment and unfolding circumstances. For example, a company’s management being oriented toward maintaining value might make different decisions and actions from a competitor's whose orientation is toward creating new value. The differences in culture, heritage, experiences, values, etc., all of which make up their respective orientations, influence how they can view the same set of facts differently.
Orientation is also where intent emerges. As we continuously cross-reference “projections, empathies, correlations, and rejections that (are) shaped by and shapes the interplay of genetic heritage, cultural tradition, previous experiences, and unfolding circumstances,” we manifest strategy. (Boyd & Hammond (Editor), 2018) Boyd redefines entrepreneurial strategy as a “mental tapestry of changing intentions for harmonizing and focusing our efforts as a basis for realizing some aim or purpose in an unfolding and often unforeseen world of many bewildering events and many contending interests.” (Boyd & Hammond (Editor), 2018) The purpose of strategy is to “improve our ability to shape and adapt to unfolding circumstances, so that we…. can survive on our own terms.” (Boyd & Hammond (Editor), 2018)
Additionally, orientation can guide and shape actions to the point where they can be reflexive. An example might be what an entrepreneur does instantly when they encounter a familiar circumstance. The situation has occurred enough to impress upon one’s orientation to act immediately, rather than fully cycling through the entire process of OODA. When the implicit guidance and control exercised by orientation becomes reflexive like this, feedback loops can become inoperative, and learning can stop. The entrepreneur “knows what to do” without further analysis, enabling speed, and compressing time scales for action relative to competitors. This releases energy and focus for the processing of new knowledge.
These two points are critical in understanding the centrality of orientation and the need to continuously update and revise it. A dynamic orientation, that is to say one that is continuously revised and matched to the realities of one’s environment, can accelerate the process of OODA in order to gain a time advantage by identifying mismatches more rapidly. In other words, the more effective entrepreneurs are at orienting, the quicker they can make decisions and actions, empowering them to overcome the challenges and obstacles posed by the constants of change and uncertainty.
In Ludwig von Mises’s statement that “the only source from which an entrepreneur’s profits stem is his ability to anticipate better than other people the future demand of the consumers” (Mises, Human Action: A Treatise on Economics,Scholar's Edition, 1998) we find a bridge to Boyd’s capacity of independent action and the accelerated process of OODA in order to gain an advantage over competitors.
VII Conclusion
In “What Is Entrepreneurial Judgment Anyway” (Bylund & Packard, 2023), Per Bylund and Mark Packard state:
“Building on phenomenology’s concept of intentionality, we propose that judgment be defined and understood as the shifting of one’s intentionality to new ends. It is a change in orientation by which one’s actions are directed. Assigning this definition to entrepreneurship theory, then, we extend and offer clarity to the entrepreneurial judgment literature.”
If judgment is a change in orientation, then entrepreneurial judgment theory (EJT) requires a definition of orientation. We provide such a definition in this paper, using the theorizing of John Boyd and integrating it with the dynamic processual theory of entrepreneurship established by Menger, Mises and Rothbard and extended by Lachmann and Huerta de Soto.
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