Daily Archives: August 15, 2012

An Austrian theory of cooking … or a cooking metaphor for Austrian entrepreneurial theory

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Lynne Kiesling

As a fellow cook, food lover, and economist who incorporates Austrian entrepreneurial theory into my work, I love Mike’s post commemorating Julia Child’s birthday today. Let’s push it even further.

One way to create value in cooking is through new combinations of what Mike calls “raw elements”. We can think of three categories of raw elements in cooking: ingredients, cooking techniques or the producer’s “interpretation”, and taste or the consumer’s “interpretation”. The combination of these yields the “useful product”, a dish.  These categories lend themselves to Menger’s taxonomy of higher-order and lower-order goods; physical ingredients are goods of the highest order (I would also put in here the capital goods and fuel used in cooking, with which an Austrian capital theorist might quibble, but I’m simplifying here), which a cook combines and a consumer eats, thereby enabling both cook and consumer to benefit from the value creation.

The first important point in this cooking-economics connection is fundamental to economics: the subjective nature of value. The consumer’s interpretation-perception-assessment of the dish is the most clearly subjective element of this dynamic process. Much of value rests in the perception of the ultimate consumer. But there are some subjective aspects of the producer-cook’s interpretation too; that’s where opportunity cost comes in on the supply side. The cook perceives at that moment, in that context, what she thinks is the best use of the raw elements that she is combining to create the dish (ingredients, her time and skill, capital), based on her perception of the alternate uses of these elements. That’s inherently subjective.

The second important point that Mike raises is the entrepreneurship one. Value creation from cooking doesn’t just come from doing the same thing over and over, adding more cooks and more stoves to increase scale (OK, there’s some value in that, but diminishing returns). The cook who explores novel combinations of the raw elements (garlic-artichoke foam from a CO2 canister atop a sous-vide cooked and seared-finished halibut steak, anyone?) is an entrepreneur. The essence of creative cooking, and creative economic activity, is curiosity and experimentation, and those are the essential ingredients in entrepreneurship. This entrepreneurial activity is grounded in some fundamentals, such as the physical chemistry of how ingredients and temperature interact, the ratios in which ingredients generally combine to yield pleasing results, the basic cooking skills, and the physical and neurological reality of our taste system. But the entrepreneur experiments with those fundamentals and pushes their boundaries, using the heterogeneous raw elements and searching out opportunities for “profit” from doing so.

Which brings us to the third important point in my Austrian theory of cooking/cooking as a metaphor for Austrian entrepreneurship. A system that will yield the most valuable and pleasing combinations of entrepreneurial economic or cooking activities will have low entry barriers (anyone can try to cook!) and a robust feedback-based system of error correction. Low entry barriers facilitate creativity in discovering new useful products from the raw elements, as well as enabling new value creation when some of those raw elements change. Error correction, whether a “yuck, that’s gross!” at home or a lack of profits due to low repeat business at a restaurant, is most effective and valuable when there are feedback loops that can inform the cook-producer about the value that the consumer did or did not get from the dish.

Both cooking and economic activity are inherently purposeful, creative, and entrepreneurial, and are better when done in an environment that combines low entry barriers and robust error correction.

And today’s front page Google splash celebrates Julia too. Happy birthday Julia, and thanks for the inspiration.

An Invisible Hook Q&A, and other items of interest

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Michael Giberson

At the Freakonomics blog, a Q&A with Peter Leeson about his book The Invisible Hook. Here is the first exchange:

Q.The Invisible Hook is more than just a clever title. How is it different from Adam Smith‘s invisible hand?

A. In Adam Smith, the idea is that each individual pursuing his own self-interest is led, as if by an invisible hand, to promote the interest of society. The idea of the invisible hook is that pirates, though they’re criminals, are still driven by their self-interest. So they were driven to build systems of government and social structures that allowed them to better pursue their criminal ends. They’re connected, but the big difference is that, for Adam Smith, self-interest results in cooperation that generates wealth and makes other people better off. For pirates, self-interest results in cooperation that destroys wealth by allowing pirates to plunder more effectively.

The Q&A provides an excellent short introduction to the book. The book itself is highly recommended (my MBA class will be reading a portion of it).

Also at Freakonomics, “The birth of the ‘Chicken Offset’.” If you’d like a little more philosophical provocation with your fried chicken, consider Will Wilkinson’s “Feathers Flying: Conscientious consumption and culture war” at The Economist.

Elsewhere around the web:

Economic theories as recipes

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Michael Giberson

Today marks the 100th anniversary of the birth of Julia Child, and surprisingly, it was a blog post on economic theorizing reminded me of the famous cookbook author this morning. I’m sure it wasn’t quite the metaphor Rajiv Sethi had in mind when he posted “On Prices, Narratives, and Market Efficiency,” but the article suggested to me that just maybe economic theories are a bit like recipes.

Sethi’s article reacts to John Kay’s response to Robert Lucas’s article addressing the Queen of England’s question: Why had economists failed to predict the financial crisis? More directly, Sethi explores the issue of how economists should change the way they work in order to better understand economic fluctuations. Sethi likes Kay’s formulation, of prices as the “product of a clash between competing narratives,” and he ties it usefully to some existing theorizing by Michael Harrison and David Kreps on speculators with heterogeneous beliefs.

The idea [from Harrison and Kreps] that prices are “obtained through market aggregation of diverse investor assessments” is not too far from Kay’s more rhetorically powerful claim that they are “the product of a clash between competing narratives”.  What Harrison and Kreps do not consider is how diverse investor assessments change over time, since beliefs about transition probabilities are exogenously given in their analysis. But Kay’s formulation suggests how progress on this front might be made.

Kay suggests that more than just deductive logic will be needed to understand the variety of conflicting narratives and how they change; Sethi, while agreeing, adds that deductive reasoning could be pushed still further.

The economic theories as recipes metaphor suggests that economics is just a way to get from a bundle of raw elements, different kinds of data and interpretations, to a more useful product. Unsettling in such a metaphor is that recipes are many and diverse, and unifying principles appear to be hard to find. There is no general theory of cooking that will tell us the one best way to combine a given set of raw materials into the perfect finished product. It depends on what you want to produce, and what the tools are at hand.

Perhaps too there is no one best way to analyze a given set of observations into the perfect slice of economic understanding; perhaps there is no general theory of economics. This is not Sethi’s argument, and it is not even my own settled view. Yet if the economy itself is always open to entrepreneurial insight, which is one way to say we are never at a point in the economy where improvement is impossible, then economics itself is similarly always open to insight and improvement.