Entrepreneurship: rationality and human action

Within the context of the market, entrepreneurship consists in seeking monetary profit. In the broader context, entrepreneurship consists of seeking psychic profit. As we define action as consisting of an agent’s attempt to influence the future toward a state of the world he prefers. In acting humans attempt to mold the world to their liking. Action is inherently entrepreneurial.

Every actor is not equally skillful. Some are better than others at generating end states that they prefer. It is these men and women that we tend to think of as entrepreneurs. We often use the word leader in our society. Those of great fame tend to include market entrepreneurs and CEOs and politicians. Market entrepreneurs earn profit by organizing the production and sale of goods and services. These are positive sum transaction for all involved so long as no negative externalities are generated from their activity. Market entrepreneurship is inherently value creating when markets are subject to rule of law. Political entrepreneurship creates value for those players involved, but often generate negative externalities. Political systems that employ the use of force – i.e., the state – tend to engage in zero sum transactions. Revenue in politics arises from transfers that are enabled by the use of force. We call these taxes. If you fail to pay taxes, the political system will continue to inflict pain upon you in the form of imprisonment and further fines.

You may be surprised to learn that some market entrepreneurs have spearheaded one of the most successful genres of literature: the self-help book. Writers like Zig Ziglar and Dale Carnegie did not begin their career as professional writers and speakers. They learned the art of social organization by working in sales and rising through the ranks of their respective companies. Dale Carnegie went on to write the now famous How to Win Friends and Influence People and Zig Ziglar left behind a legacy having written books like See You at the Top and Selling 101. One author, Og Mandino, overcame great hardship and poor lifestyle. He had at one point in his sales career suffered from alcoholism and even considered suicide. But he became transformed from the reading of self-help books, development in his own faith, and the transformation of his mind. Og Mandino’s The Choice tells the story of a man who, supported by his family, chooses to be an author and abandon a successful career. He faces much hardship along the way, but persists to follow his desire. He eventually succeeds.

All of these works are permeated with optimism. They represent a different way of seeing the world. One does not simply live to survive. These authors believe that men and women are themselves authors of their own lives. They believe that humans embody a design suited for prosperity. These men evidence an instance of rationality that breeds success in the realization of one’s ends.

Defining rationality
When we speak of rationality, we mean that there is a logic that governs action. Rationality is lately a term of abuse. Some use the term to refer to action that they prefer. Irrational action, on the other hand, is action that one does not understand or simply disagree with. This framing is incorrect.

Rationality requires three things. Logical structure (a model), data, and ends. We will refer to the logical structure as a model or map. Science, for example, provides us models, but no end toward which these models should be used. When we speak of a positive science, such as economics, we mean to say that we are attempting to model the social world in an objective manner. It is possible, and often is the case, that the model guiding one’s decisions and actions is skewed by the ends of the actor. We often see this in the development of ideologies and other beliefs that arise as a convenient explanation of an individual or groups belief. Consider the recent outcry against executive action by the American left, which was largely silent when president Barack Obama employed the same means to implement policy.

In your day to day life, rationality need not be especially abstract. Your model of your mother or your brother does not need to be generalized to anyone else. If you do generalize, you more than likely are not conscious of such generalization. If you meet a man Robert and come to find that he reminds you of your brother, you probably do not identify that, in fact, you borrow a bit from the model of your brother in your interaction with him. In psychology, we see a reference to this with Jungian archetypes. (It is no coincidence that Jung was in the Viennese milieu. He used a form of categorical analysis that, while particular to his system, shares general features with that of Ludwig von Mises.) You need not treat these as ineffable, but as a child it is reasonable to think that you see the world in only two categories: mother and not mother. As you observe more data through experience, this model of the social world expands. You come to understand that you have a father and likely derive further social concepts from these to early archetypes. Those do not handle you with the love of the mother or the tenderness of the father are placed in a category of people who are not appreciated by you. You cry at their touch or voice.

It would hardly be accurate to see the wincing of a baby at the hands of an unknown woman as irrational. Given her model of the world, which is literally infantile, the baby acts rationally. As with all human action, the baby acts with the end of feeling comfort and to remove felt uneasiness. The baby’s response is to avoid something whose outcome she believes to be not beneficial to her. The baby responds to data that does not fit into the category of mother or father. The unfamiliar is regarded with discomfort and even fear.

Artificial intelligence and rationality
Self-help authors suggest a change in the perception of the reader is necessary. Dale Carnegie (1937) divides his book into four sections: “Fundamental Techniques of Handling People”, “Ways to Make People Like You”, “How to Win People to Your Way of Thinking”, and “How to Change People Without Giving Offense”. In each of these sections, there is embedded a belief that one can change the pattern of his or her actions. Robert Kiyosaki, author of Rich Dad, Poor Dad, presents to ways of viewing and interacting with the world which are personified by the two fathers in his story. These authors and others like them understand that personal transformation lies in a change in perspective. It requires a change in mindset, the interface through which one interacts with the world. Interaction with the world requires understanding of it (Dweck 2006; Simon 1996).

Most people do not appreciate that they do not interact directly with reality. The Viennese scholars in the late 18th and early 19th century referred to this as verstehen: interpretation. Scientists seek to create an objective model of the world (Hayek 1943; Hayek 1955). Scientific knowledge abstracts away from unnecessary features and observe only those elements that we believe to be impinge on the phenomena being studied. Human understanding is the knowledge of the acting agent, whether scientific or lay. Action is guided by the logic of one’s model of the world (Johnson-Laird 1980). We attempt to refine our understanding such that we may interact with an environment coherently (Gigerenzer 2008). The usefulness of one’s understanding is reflected by the success of action generated by that knowledge. Fitter knowledge will tend to allow acting men and women to achieve their ends that promote survival more efficiently (Hodgson and Knudsen 2010; Alchian 1950).

Knowledge is thus a means to action. Personal knowledge identifies aspects of the world as they relate to one’s place in it. A woman born in Harrisburg, Pennsylvania and remained there for the entirety of her life will likely have little reason to learn Tok Pisin, a language spoken in Papua New Guinea. If she is a receptionist dental office, she will probably lack the knowledge necessary to repair and maintain a Mercedes Benz S500. Unless one finds value in learning some subject for its own sake, a person’s knowledge will reflect the needs that arise in her life. Our lives are embedded in our models of and interactions with the world.

This embeddedness includes beliefs about one’s capabilities and ethical or moral valuations and obligations that constrain action (Granovetter 1985).  These are often bound up in a grand narrative whose feature reinforce these fundamental beliefs. In a similar manner, one's narrative includes beliefs about ability that also embed themselves in action. A woman who is tormented by self-doubt will be unable to act confidently. She tells herself stories that validate her belief that the world can in no way offer her the things that her heart desires. A man who is prideful will have a difficult time integrating new information that discounts his high self-evaluation into his knowledge. All action is guided by logic contained in the acting agent’s knowledge set. Over time this logic becomes ingrained in habits.

The structure of artificial intelligence can help inform our understanding of this aspect of human action. Artificial intelligence relies on classifier systems. These are programs that sense and evaluate an environment, using information present in it to classify or rank potential strategies and parameter values governing those strategies. Action guiding elements that receive the highest ranking are chosen by a classifier system. The classifier system represents one interface by which an acting agent interacts with its environment. It guides the choosing of a strategy which is itself an interface that enables a particular mode of action in the environment. In the same way, a user of a computer program can only interact with the program in ways enabled by the program itself. A basic word processor cannot be used as a calculator, neither can a calculator be used to compose an essay. One program lacks the categories and functions necessary to enable the features provided by the other. Agents with artificial intelligence can only interact with the environment in a manner that is enabled by their programming.[1] They require the ability to sense particular phenomena in their environment and the categories necessary to interpret this information. A lack of information from the environment or the perceptive framework required for behavior that conforms to context will inhibit agent functioning.

The structure implied by the narrative with which a person identifies governs her perception and guides her response to the environment. In economics, we postulate that agents act as to attain a state that she most prefers. She cannot do this directly. She requires structure in the form of a rule. You may think of this as a strategy.

We can begin to understand how rules affect our behavior by thinking about wardrobe choice in regards to the weather. In choosing what clothes to wear for the day, a person may follow the following set of rules concerning the expected high temperature (degrees Fahrenheit) for the day:

If expected high temperature ≥ 70: wear shirt with short sleeves
If expected high temperature < 70: wear shirt with long sleeves
If expected high temperature < 60: wear a sweater and shirt with long sleeves
If expected high temperature < 40: wear a coat, sweater, and shirt with long sleeves

Rules like these serve as guide rails for action. They make decisions making less burdensome for the choosing agent. If I follow these rules and the high tomorrow is 65, I will wear long sleeves. If it is 35, I will wear long sleeves, a sweater, and a coat. I choose to obey this rule set, an observer can surmise that feeling cold brings me substantial disutility. An observer may be able to surmise the rules followed by an agent on average by analyzing past agent action in light of conditions.

A person must choose a higher level rule that facilitates her choosing of a lower level rule. Just as a classifier system selects the rule governing action according to some ranking identified by the system, so too the human agent must choose higher level rules that guide the selection of lower level rules. Examples of such rules include moral and ethical systems, though not all rules are equally functional. One has no option but to select such a system or at least choose to accept the system that is provided her. Free will exists at this level of choosing. No rule system can itself do the ultimate choosing (Carroll 1895). One may choose to defer the ultimate choosing of action to a passion (Blackburn 1995). Such an embrace of a particular form of ends selection is itself a choice. Free will and the power for personal transformation that it enables exists most radically at this level. Action that results from the rule structure that manifests from this high level decision becomes embedded in habit over time. Thus our action evidences our beliefs. Our works evidence who we are to those who cannot know in detail what we believe.

[1] It is often the case that the results potentiated by a particular program are not fully knowable beforehand.

Rationality - A description of a system guided by logic. Such a system includes a model of elements believed to be significant to guiding action and a means to ranking potential action in light of the state of the environment as identified by the model. The system for ranking ends must itself be chosen.

Mental Model - The protypical model that acting men and women use to interpret and interact with their environment.

Embeddedness - A description of social capital where knowledge held in a system is contained within the relationships and interlocking mental models of agents. This knowledge is inseparable from interaction, and is thus embedded in the social system.