Austrian Economics Applied to Business Management

Economics Economics Questions
21

You said something totally different from what I said.

The point is that accounting practices count inventory as having value as an asset on the balance sheet. Actually it is a loss! They could have been using that production time to produce something that could be sold right now.

I find it hard to believe but many manufacturing companies really do produce goods that end up in inventory and have a backlog of orders they don’t fill.

I don’t see how my point relates to what you said.

But with TOC you don’t have this situation. There is way less surplus because you’re producing to meet demand.

22

@Flic,

I argued for using BF Skinners Behaviorism as basis for Austrian Economics. You booed me.

Now you advocate Skinner and ABC techniques.

LOL[:D].

Thomas Gilbert (engineer) - Wikipedia

(1926 – 1994) was a psychologist who is often known as the founder of the field of human performance technology, also known as Human Performance Technology

Dr. Gilbert trained under the behavioral psychologist B.F.Skinner at Harvard University.

Gilbert applied this model to the world of work and school by observing that Performance is a function of an interaction between a person’s Behavior and his/her Environment (P = B x E) and then defining the elements of the ABC model within each of these two domains. He called the resulting model the Performance Engineering Model, and used it to identify opportunities to systematically develop the managerially controllable systems and other factors in the work and school environments which support employee/student performance. These improvements sometimes resulted in dramatic increases in performance.

Dr. Gilbert developed the Behavior and Environment registers of the model outlined above with the basic framework of the Skinnerian operant behavioral model. This framework = Discriminative Stimulus → Response → Reinforcing or Aversive Stimulus (= SD → R → S+/-).

This paradigm can be summarized as the ABC theory: Antecedents lead to Behaviors which, in turn, lead to Consequences. The nature of these consequenses effect the probability of future expressions of this behavior. In other words, behaviors are prompted by stimuli which then result in responses which are, in turn, followed by reinforcing or aversive consequences. The reward or punishment value of these consequences, that is, increases or decreases the probability of future repetition of this behavior.

Conjointly using these two models (P = B x E to create a top and bottom register; and the ABC model to create three columns across each of the two B and E rows) Gilbert identified six variables which he believed were necessary to improve human performance: information, resources, incentives, knowledge, capacity, and motives. Gilbert believed that it was absence of performance support at work, not an individual’s lack of knowledge or skill, that was the greatest barrier to exemplary performance. Therefore, he believed it was most necessary to focus on variables in the work environment before addressing an individual’s variables.

23

Stop conflating.

24

I beg to differ. Applying Austrian methods to accounting would be silly (for lack of a better word). That would require revaluing every asset as frequently as possible. In our days of commuter technology one could be reasonably expected to revaluate every asset on a daily basis. Now, what good could such balance sheets do? None at all.

Let’s apply this line of thought to inventories, as a special case. First of all, inventories can easily be justified. Perhaps the firm expects a major increase in costs tomorrow, and produces more today, or perhaps inventories are just the unavoidable result of fluctuations in demand. If cases of companies with orders to fill and still hanging on inventories like the one you mentioned are widespread, that is, I agree, a massive waste. But otherwise inventories have a purpose.

Now, I fully agree that inventories are inherently zero-valued, as by their mere piling up it is clear that no one wanted to buy them. But this doesn’t mean that no one will want to buy them next month, the next week, or possibly tomorrow! So, applying true value would require such inventories to be written of today and reappear tomorrow when sold? How can this even be registered? Would you advice such a method?

And all this arises due to a misunderstanding of the goal of accounting. It isn’t supposed to show the value of a company, for that changes on a daily basis and, strictly speaking, can’t even be quantified. It is just supposed to show, in a simple-to-grasp format, a list of assets (treated to a common denominator for simplicity: money prices) as well as the history of the firm: what it started with, how did it expand, what structure of production it had in year X and so on. It is no manager’s tool, it’s a creditor’s tool. So, applying subjective value principles to balance sheets would be countering the very goal of such statements. Would you agree?

The manager has no use of balance sheets, only of profit and loss statements. Here, inventories are treated as they should: they are calculated as expenses (the cost of production) but not as revenues, for they haven’t been sold yet. So inventories show up as net loses, just as prudence would require. But TOC changes nothing here, for every sane-of-mind manager does this. Thus, it ads no “subjective value” where there is none.

So, I still find it hard to see how does TOC introduce Austrian principles into management. If I overlooked something I’d be glad if you could help me see deeper into this matter.

25

Merlin,

TOCs point is what you just said about accounting

You both agree 100%. I wouldn’t be surprised if a TOC person once used those exact words about accounting.

What I keep trying to tell you is that in the real world actual firms, and I know this sounds nuts, use accounting as a manager’s tool. TOC recommends using instead management accounting and then they show you how to translate it in to accounting for your creditors (bank and tax man.)

Then there are lots of insane managers as defined by you. Fortunately they can be helped.

TOC believes that their practice of management accounting can help managers make decisions. They have good evidence not everyone follows best practice, and instead uses historical accounting which is backwards looking and a creditors tool to make decisions. Read The Measurement Nightmare if you don’t believe me.

Commonly firms calculate the ‘cost’ of production in historical terms. The cost includes a portion of the sunk costs. However that doesn’t help a manager make a decision. The manager wants to know the marginal cost of production in order to determine the marginal profit. The manager can then prioritize high profit production. However in the real world people often use the historical cost and make penny wise and pound foolish decisions. (TOC talks about how to best manage inventory to keep inventory minimized and profits maximized.)

If we believe that the price and profit and loss system helps coordinate actors, we have to ask how it can be best applied within the firm. I do think there is evidence it can and should be done. I’m not pretending I have the answers and that TOC is Austrian. But TOC does appear congruent with Austrian practice.

(I just thought of another congruency - In econ there are scarce resources which need to economized and best utilized. The constraint in TOC is the scarcest resource relative to all firm resources - it of course needs to be economized and best utilized.)

26

My mistake than, we agree. If we account for such scarcely logic practices TOC does indeed seem Austrian. Thank you for the interesting discussion.

27

I learned a lot too and it helped me think things through.