Basic Economics and Basic Business

One of my favorite lines is from Professor Paul Magelli.  He said, “If you don’t make a profit, it’s not a business it’s a hobby.”  Another friend, Jeff Minch, who writes at The Musings of The Big Red Car will tell people, “You didn’t invent sex.” which is basically saying even though you are doing something new and revolutionary the business principles that have been with us for generations sustain.

This is totally true for companies doing ICOs and blockchain.  A lot of them seem like hobbies to me.  Some aren’t.  We will see what the future brings and I am hopeful about it knowing full well there will be a lot of failures.  An aside, the Bitcoin market lost $150B in value over the past few weeks.  Heck, if you had the guts to sell 10 futures on the first day of trading you would be up $500k today.  I think entrepreneurs are too pre-occupied with the price fluctuation in tokens.  Instead, they just need to keep their head down and build a great business.  The rest will take care of itself.  Just like traditional startups.

Classical microeconomic principles are even more reinforced in a decentralized blockchain system.  One of the most compelling things about it is the ability to apply Coase Theorem in real time with a market price adjudicating.  That will change decision making.  I think it would pay for any entrepreneur to really understand the Coase Theorem.  Reading his seminal paper about The Nature of the Firm should be required reading.  It bears repeating, the first classes you take at MBA school at Chicago Booth are accounting and microeconomics.  There is a method to their madness.  Uh, they teach it from the classical perspective as well unlike other schools.

If you want to listen to a podcast that explains it, here is a link to one.  Here is the description:  Duke University’s Mike Munger talks about why firms exist. If prices and markets work so well (and they do) in steering economic resources, then why does so much economic activity take place within organizations that use command-and-control, top-down, centralized structures called firms? Within a firm, most of the goods and services that the workers use are given away rather than allocated by prices–computer services, legal services and almost everything else is not handed out by competition but by fiat, decided by a boss. A firm, the lynchpin of capitalism, is run like something akin to a centrally planned economy. Munger’s answer is a fascinating look at the often unseen costs of making various types of economic decisions. The result is a set of fascinating insights into why firms exist and why they do what they do.

I think blockchain and tokens will have a lot of effects on the operations of large multinational corporations and increase the profitability and competitiveness of large companies.  They should take a lot of variance out of decisions that were previously made by centrally planned organizational structures.  Costs that are unseen can be priced.  Blockchain will also change power structures inside companies.  It might even drive more pay to the edges of the network.

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