I've always been interested in the economy, business, incentives, and such things -- and how they work.

I am presently building LiveAPI—a super-convenient tool to transform your code repositories into beautiful API docs in minutes.

As I work on my product, I've also been sharpening my perspectives on economic matters by reading Adam Smith's works. See my previous posts for a record of my efforts.

What Taleb Said About Trial and Error

In this post, I will try to explore a point that has troubled me often as a founder.

When I talk to most people, their focus is on earning money.

But as a founder, while I do respect what money represents—knowledge, the right attitudes, a great team, excellent ideas, commitment, consistency, and other types of wealth—I've never been obsessed with the number itself.

I always believed that the bank balance is a trailing indicator of one's civilizational value.

So when I read this quote by Taleb about how the free market mechanism encourages trial and error, I was immediately set on a journey of contemplation.

The Age-Old Problem of Fulfilling the Needs and Wants of a Populace

The central problem a nation needs to solve is:

"How do we allocate people and resources to activities so that the needs and wants of the populace are best met?"

Prosperity is the power of a populace to fulfill its own wants and needs.

"The Economy" is a solution to the problem of fulfilling the needs and wants of a populace.

One thing that stands out in the way most people think about economic matters is the emphasis on incentives and the underlying conditions that support trade. Scholars such as Adam Smith and Marx firmly bet on incentives.

Both rewards and punishments have been known to have high effectiveness in shaping states and organizations.

If you look deep into the history of administration, going back to 3000 BC China, you see legalists espousing the value of incentives. They talked about the two handles: rewarding activities you want to promote and punishing activities you do not.

These were top-down mechanisms to direct activities across a larger population.

With Marx, we see a similar theory being propounded—the idea that scholarly and scientific elites can allocate resources and people in the most effective way to fulfill the needs and wants of the populace.

Different scholars have different approaches to solving similar questions. There are differences in time, place, scale, and context, of course—but all these scholars grapple with one common objective: finding effective means of fulfilling the needs and wants of a population.

The majority of these solutions use the allure of a reward (incentive) and, sometimes, the fear of punishment to encourage or discourage activities. The problem with incentives is that they severely restrict individual freedom; there is a hint of oppression when strong incentives are applied, especially when, for example, one's livelihood is in question. Often, "choice" is illusory in these cases.

The Power of Initiative and Passion: Startup Fuel

The free market provides a new solution to an old problem:

"What's the best mechanism to deploy people and organize activities to fulfill the needs and wants of the population?"

The free market tends to trigger a few individuals to take initiatives, often seemingly risky ones.

It says: "There is a huge potential reward. You can experiment vigorously in an area of your passion and interest, and this could lead to a big reward (monetary, social, etc.)."

The potential reward is an attractor. But for the prime movers, it is not only the monetary allure that is powerful—it is the opportunity to play in fields of their interest.

The free market doesn't trigger every individual. It triggers people with initiative, those hankering to operate in an area of their passion and choice, to actually do it.

Entrepreneurs Deliver Fuel, Organizations Provide Stability

Essentially, the entrepreneur's idiosyncrasies are used as the "startup fuel" for a rocket launch.

The entrepreneur may go through many trials and thus many errors. Many may fail, but not all. Some wins are to be had, and that's when an organizational structure evolves around the initiative.

I'm reminded of an apt quote by Alan Kay, where he differentiates the nature of risks taken by researchers and businesspeople:

What is the difference between a Turing machine and the modern computer? It's the same as that between Hillary's ascent of Everest and the establishment of a Hilton hotel on its peak.

The organization brings in the non-entrepreneurs, the employees—people who usually do not have the drive or the risk-taking hunger of the entrepreneur.

But they have another suitable quality: the ability to adapt to all sorts of jobs with well-defined scope for steady paychecks. These people are more driven by incentive.

Within the organization, the incentive rules.

But in a free market economy, the real innovation and drive happen outside the organization. They happen through the risk-taking entrepreneur—someone willing to risk it all through rigorous trial and error.