Yesterday, the Market-Based Management Institute was delighted to host Professor Pete Boettke from George Mason University. Pete spoke to my evening Sustainable Economic Development class at Wichita State and was his usual jovial and animated self. Aside from his obviously erroneous assertion that Red Dawn is “a bad movie,” Pete presented an otherwise flawless and excellent account of not only the failures of Soviet-style socialism but the equally import tale of how the fall of communism was hardly replaced with anything resembling free-market capitalism.
While I learned much from Pete’s talk, I was happy to hear him simplify much that was already familiar. For example, Pete stressed that if the students should take anything from his lecture it should be the three P’s and the three I’s. The three P’s are property, price, and profit/loss. These three things are the foundations of prosperity, because they allow for the three I’s – incentives, information, and innovation.
While the three P’s are well know to us in society, they are often missing from within the firm. For example, employees often lack any sense of ownership in their jobs. They are expected to do as they are told and only those at the top “own” any authority or decision rights. Secondly, price signals are usually alien to the internal workings of the firm. Employees often conduct activities or consume internal goods with no idea what they cost the firm or contribute to the bottom line. Lastly, while profit is often misunderstood, it simply describes the spread between the value society places on the finished good as compared to the resources used to make it. Losses indicate that resources are being wasted and better uses need to be employed, while the wasteful activity is discontinued.
Employees need to know how they contribute to the firm’s profit and loss, so that they can devote their time accordingly, cut out unwittingly wasteful behavior, and ensure that the firm’s resources are devoted to their most value-added uses. Simply put, the things that make countries prosperous can also work for the firm. Whether you are new to Market-Based Management or an old pro, it certainty couldn’t hurt to take a look for the three P’s in your business, because you might find that your problems dwell wherever the three P’s are not at home.
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