Three Realms of Business Elements

No matter what kind of business one tries to build or maintain, each business is made up from different elements. Each element is contributing somthing to the overall solution the business provides to its customers and users. These elements can come from three very different realms and each realm brings specific characteristics to its elements. So, let's take a closer look at this claim.

The three realms to be distinguished are:

1. The realm of physical reality formed from atoms and energy
2. The realm of actors whose behavior is formed by neural and social networks
3. The virtual realm of abstract concepts, data and algorithms

Why is it important to distinguish between these three realms? Because the elements that make up business concepts have characteristic properties and specific, stable behaviors depending on the realm they belong to. These characteristic properties and behaviors ensure that the initially conceivable infinite diversity leads in practice to the emergence of concrete structures with much less diversity than one might suspect. In addition, these properties lead to the fact, that a business can be systematically analyzed even though it might not yet exist. Since the behavior of elements is governed by the realm they come from, their behavior is also specific and stable. It is even possible (within limits) to predict how the structures built from the elements will evolve.

A business concept always contains elements from all three realms. However, concrete business concepts usually have a focus on one or two realms and each business concept has its own specific structure. The individual concepts can be differentiated on this basis and their behavior and probable success can be predicted.

Strictly speaking, the distinction between these three realms is not new. In philosophy, the distinction between three realms or three worlds has been known since antiquity. In modern times, Karl Popper also postulated the existence of three worlds, as he called them, in his work “Objective Cognition” published in the 1960's. His three worlds are very similar to the three realms. For him, the first world was the “objective world”, which largely corresponds to the “physical world” used here, which is subject to objective and measurable scientific rules. Popper's second world is the “subjective world”. However, the subjective view is a direct consequence of the associative network structures of neuronal and social networks that are the elements in the second realm. Popper's world three is the world of “ideas and logic”. Here, too, there is a strong similarity to the virtual realm of abstract concepts, data and algorithms.  Abstract concepts and data together form Popper's “ideas” and algorithms are nothing more than sequences of logical steps. The standard view in economics is completely different: there exists no systematic differentiation between the realms. Just as classical economics and its models have so far ignored the situations of increasing marginal utility and path dependencies, there is also no systematic differentiation between the realms. While it has been recognized that human behaviors differ and do not fit neoclassical assumptions, there has been little effort to integrate the conflicting theoretical approaches.

The three realms differ in their properties

So what exactly are these differences between the realms and what are the “elements” for each realm?

• The elements of the first realm are “tangible” objects made from atoms and energy.
• The elements of the actor realm (second realm) are acting persons constituted from and governed by the individual neural networks of their brains and the social networks formed by persons, e.g. families, organizations.
• The elements of the virtual realm are abstract concepts and ideas as well as data and algorithms.
  Money also forms elements of the virtual realm, as it is a special “type” of data. Legal constructs such as “property” or legal entities, such as corporations, also belong to this realm as abstract concepts.

For practical purposes it makes sense to differentiate elements further in different groups which can be best understood by thinking about different layers within a realm. For example, in the first realm of physics it makes sense to differentiate elements forming the power grid vs. transportation networks, vs. gas grid infrastructure etc. However, for the time being let's just focus on the differences between realms. We will dig deeper into the additional concept of layers within realms at the end of this article as well as in a forthcoming additional article.

The elements of a specific realm are formed by specific underlying structures which are a major cause of the unique behavior of elements in each realm. Moreover each of these structures employs its specific way of "calculating" its interactions within these structures. So, let's have a closer look at that:

In the 1st realm, the realm of physics, the basic structures are ultimately the world of the atoms, molecules built from atoms as well as energy. The laws of physics apply here and their dominant calculation principle is analogous. In practice, of course, it makes no sense to look at individual atoms or molecules. Instead, in most cases it is sufficient to consider the larger structures formed from them, which then represent elements in the sense of the business focused approach taken here. A person's body is therefore an “element” in the physical realm just like any other object. If you consider people and tangible objects or items, then their calculation principle is characterized by whole numbers, because there are no half people or half chairs, etc.

In the 2nd realm, the actor realm, the basic structures consist of individual acting subjects, defined by their individually shaped neural networks, or of social networks formed from subjects. Each subject, person or network is unique. The computing principle used to process information at the actor level is therefore associative/neuronal and takes place in massive parallelism.

In the 3rd realm,  the virtual realm, the basic structures are abstract concepts and bits & bytes. The dominant computing principle is digital and at least (so far) sequential at its core - despite various efforts at parallelization, as GPU matrix calculations are also ultimately sequential. The computing principles of abstract concepts are logical operations.

These fundamental distinctions give rise to different characteristics per realm, which ensure very specific, characteristic behaviors that are of decisive importance in the development of business concepts. These different characteristics can be illustrated using various criteria:

1. Copyability of elements and structures: In the realm of the actors, an exact copy is simply impossible. It is possible to approximate a copy and to achieve a functional copy to a large extent. But the imprints that a person's nervous system and brain acquire in the course of their life on the basis of their personal experiences, i.e. the associative network structure that actually exists in each individual's brain, is inevitably unique for each person. Since this is true for each individual, it is also necessarily true for social networks and organizations, since they are made up of specific distinguished individuals. By the way, the whole business concept of franchising is essentially aimed at achieving this near-perfect copy in order to multiply a small business concept that is or has been successful in one place to new locations. The virtual level is very different. Here, a perfect copy is possible – extremely quickly and almost free of charge. If this is not to be the case, considerable efforts must be made to prevent copying in the long run. In the physical world, perfect copying is possible to a limited extent. Whether it can be achieved ultimately depends on the time and resources invested. In principle, the larger, more extensive, and more complicated the structure to be copied, the more difficult it is to achieve a perfect copy. In the case of large industrial plants, practice shows that it is almost impossible. Plant manufacturers and process industry companies can tell you a thing or two about this.
2. If we look at the energy required for changes within the various levels, there are also clear differences. In the realm of physics, the energy required is considerable, especially if structures are to be changed and not just used. On the other hand, the energy required here can be measured and even determined in advance. In the realm of the actors, the energy required is relatively high. Acquiring new knowledge, i.e. learning, is nothing other than a structural change in the associative, neuronal network of our brain. We learn by forming new synapseses between the various neurons in our brain. Everyone can say from their own experience that this usually requires a noticeable amount of energy. Moreover, the exact energy required for changes aka learning per person can neither be measured nor determined in advance. However, this will always be different for each individual and will vary depending on the context. The third virtual realm is different. Here, the energy required for changes is extremely low, at least for data in a computer or storage device. However, if algorithms are to be changed, it is significantly higher.
3. As a result of the copyability and the energy required for change, the time required for change also varies greatly from realm to realm. In the actor realm, changes take quite a long time in relation to an individual actor. This applies in particular to the development of structures, i.e. the acquisition of new knowledge, and even more so to a change in the behavior of a specific actor. In principle, the same applies to social networks. However, the overall growth rate can be significantly accelerated for certain periods of time by a massive parallelism induced by the simultaneous growth efforts of the members of the social network. Once established and consolidated, social networks are usually very stable and only decay slowly.
   
   In the virtual realm, the time it takes to use data is extremely short, especially compared to the other realms. A data signal is sent from A to B at the speed of light, and the processing of data in modern processors, while much slower than pure transmission, is still dramatically faster than the learning speed of human beings. However, structural changes, i.e. the creation of new algorithms, also take much longer. . 
   
   The time it takes for changes to occur at the physical realm varies greatly between layers. ( While state changes in the power grid propagate at nearly the speed of light, there are clear limits to the speed at which goods can be transported. At the physical realm, structural changes are also much slower than their use. Again, however, the possible and average durations of changes in the 1st realm can be predicted quite accurately.
4. The scalability of a business describes the possibilities of increasing its capacity and size in order to ultimately generate more sales and earnings. Scalability therefore describes growth behavior. It is one of the most important questions when evaluating a business concept. The significant differences between the realms in terms of copyability as well as the energy and time required for change mean that scalability also differs considerably between the realms.
   
   Businesses that rely on change in the actor realm are generally difficult to scale. This is due to the impossibility of copying actors, as well as the energy and time required to make changes in this realm - changes in behavior and the acquisition of new knowledge or the team integration and training of new employees. In contrast, business concepts that focus on the virtual realm can be scaled extremely easily and quickly if the structural foundations have been created correctly from the outset. Business concepts that are primarily physical in nature, such as those that focus on the actual production of physical goods or their transportation, are typically more difficult to scale. However, this depends on the specific case and the extent to which scaling requires additional structural changes. Within existing structures, scaling at the physical level can be easy and fast. However, if structures need to be changed, e.g. a new factory needs to be built, then it usually takes a very long time. However, this question can be answered very clearly in advance and can therefore be planned for.

Assigning Schools of Thought to realms

Interestingly, the focus of scientific disciplines can also be very clearly assigned to the different realms. The physical realm is the domain of the natural sciences and engineering. The second realm is the domain of neuroscience, psychology, and sociology. The virtual realm includes computer science, mathematics, and information theory. Philosophy and metaphysics also focus on the virtual level.

From the perspective of philosophy, the three realms correspond to Eduard Popper's three worlds {E. Popper Objective Cognition, 1968} as already discussed above. The realm of physics corresponds to his “World 1”, the objective world according to Popper. The realm of the actors corresponds to Popper's “World 2”, the subjective world, and the virtual realm to his “World 3”, which Popper describes as the world of “ideas and logic”.

It becomes much more difficult when trying to categorize economics into the three realms. Since economists tend to "wildly" mix different concepts of reality, a clear classification is only possible to a limited extent. What is possible, however, is to classify individual trends within economics and key concepts.

Classical economics, based on the concepts of Adam Smith, Keynes and Friedmann, is firmly anchored in the physical realm. Diminishing marginal utility is an effect that inevitably occurs in classical physical production with a defined limited capacity. All the unrealistic assumptions of classical economics in Homo Oeconomicus, such as "complete information", ultimately serve only to exclude the "difficulties" arising from the other levels and thus to provide supposedly "mathematically precise" answers to self-imposed theoretical questions. However, these idealized questions have relatively little to do with reality.

The "Increasing Returns Economics" developed by W. Brian Arthur is essentially anchored in the third realm. The arbitrary copyability, the low energy expenditure for changes and the extremely high speed of change ensure that there are hardly any costs that increase with size in this realm. Business concepts with key elements on the virtual realm are therefore subject to different laws in their development than business concepts that are primarily based on the physical realm. This does not exclude the possibility that such effects of increasing marginal utility also exist on other realm. They just do not play a clearly dominant role there.

The second realm of actors is clearly the domain of behavioral and institutional economics, with D. Kahnemann and O. Williamson as outstanding representatives of these fields of research. Thaler also belongs to this group of important representatives of behavioral economics on the second realm due to his high practical influence, e.g. on politics. With regard to the two main economic principles of decreasing or increasing marginal benefits or marginal costs, however, no clear classification is possible at this realm. In social networks, communication processes lead to sharply increasing marginal benefits for larger networks compared to smaller ones. At the same time, time constraints and the limited capacity of individual actors to absorb new information alone result in a large number of constraints that lead to falling marginal benefits or rising marginal costs. An analysis of which of these effects dominates can therefore lead to very different results, which in turn can have an extreme influence on the success or failure of business concepts.

If you look at the different management areas in companies, the corresponding management tasks take place mainly within specific realms. Production, supply chain management or logistics, and the provision of services for a physical product are firmly anchored in the physical realm. Sales, advertising, communication and human resources focus on the actors and the communication between them. Finance, accounting, controlling and IT live in the 3rd virtual realm and are therefore the furthest removed from the real physical world of tangible products.

 In summary, business concepts are always composed of elements from all three realms. However, how a business concept evolves and the challenges it faces during development can be better understood and predicted based on differentiating between the specific characteristics of the realm.

As an additional thought: Strictly speaking, it also makes sense to subdivide the realms into layers, because within a realm there are elements that form substructures with each other. Each layer functions according to their own rules. Elements within a layer can only interact with other similar elements in a layer specific way and across layers only via very specific interfaces. This results in specific evaluations for the subset of elements and their own "time behavior". Because of these characteristic properties, it makes sense to group them together, which we call "layers". On the physical realm, for example, different energy systems such as the electricity grid or a heating network form such "layers". The various transportation systems, such as rail and road, also form their own "layers" in this sense.