THE AUSTRIAN: How did you first become acquainted with Austrian economics and the Mises Institute?
ROBERT LUDDY: I was first introduced to Austrian economics by Dr. Bill Peterson, a student of Ludwig von Mises. We met when he was the Lundy Chair of the Philosophy of Business at Campbell University. Dr. Bill and I became lifelong friends and I was honored to learn under his mentorship until his death in 2012. Over the years, we attended Mises University with my two children as well as many Mises conferences.
MI: How did your “Austrian” education with writers like Peterson and Mises differ from your formal education in college?
RL: I studied Keynesian economics in college and it was worthless. As a business owner, Austrian economics makes perfect sense to me because it’s free market.
MI: Has there been anything specific to Austrian economics that you think has been more useful than other schools of thought in economics?
RL: Austrian economists are truthful and provide real solutions that can be easily understood by most people. Austrians have a perfect understanding of how a free market works and why the competition of the free market produces excellent companies. They understand that competition breeds excellence and the absence of competition produces the inefficiencies of government and large bureaucracies (e.g., public education).
MI: You have said that understanding certain economic concepts like opportunity cost has been important in your decision-making as an entrepreneur. How has this helped you?
RL: Yes, we use a wide range of concepts including comparative advantage, opportunity cost, no free lunch, profits are a reward for efficiency, transaction costs, Say’s Law, and creative destruction, to name a few. I always encourage new entrepreneurs to learn fundamental Austrian principles if they wish to succeed.
You mentioned opportunity cost — this helps us determine how we deploy our time and our resources. CaptiveAire’s return on investment capital is the highest in the HVAC industry due to our product design, manufacturing process, material utilization, and efficiency. For example, in 1983, we bought a Darley hydraulic press break for our factory. The machine was revolutionary and reduced die changes, maximizing efficiency. I was very happy with it but it still required 2 die changes, which wasted time. After purchasing, I went to the manufacturer and requested a machine that didn’t need any tooling changes. A year later I got it, years ahead of the industry and resulting in major efficiency savings.
MI: Having worked in your field for more than one business cycle, how has the boom-bust cycle impacted your business and your employees, and how has your knowledge of Austrian economics helped you gain insight into the process?
RL: The boom-bust cycle is challenging for manufacturers. In our early years, the 1981 recession was very difficult. Same with 2008. In 40 years of business, 2008 was the only year we ever downsized — we cut operating G&A by 20%. To combat changing conditions, we have built our system to be very resilient, which is enormously helpful. For example, a percentage of every employee’s salary includes a monthly bonus that is based on profits and individual performance. Bonuses aren’t guaranteed, so if we don’t make a profit, we don’t pay bonuses. Another example is that our manufacturing plants can reduce production time from 5 days to 4 days if needed. This moves labor to a more valuable time. (E.g., all plants take a week off at Christmas during low production time. This is mandatory PDO, meaning that we have more man hours available for production during high demand time in other parts of the year.)
We have been able to grow sales in virtually every lean year except for 2008. We make sure that we are financially prepared to weather the worst recessions by having no debt, maintaining cash reserves, and not overextending the business even in good times. We also make sure that we test theories and look at things objectively and logically before putting them into practice. You have to be well-grounded in truth and have a good logical and analytical process to make good decisions.
Robert Luddy is the founder and owner of CaptiveAire, a manufacturer of kitchen ventilation systems.
