Six ways — selected from many — that businesspeople can derive more insightful knowledge and perspective from Austrian economics than from traditional Business School teaching.
Key Takeaways & Actionable Insights
Austrians believe in business as an uplifting human endeavor, focused on how people as producers can best help people as customers to do well, feel better, and thrive. To do so, entrepreneurs cultivate their power of empathy: to understand others, feel what they feel, and understand their hopes and dreams. Entrepreneurs utilize this understanding to cultivate new ideas, design new solutions, and present new value propositions for customers’ consideration. It’s the human project.
When business schools approach business building as an engineering problem, to design and run an assembly of operating machinery — whether physical or digital – at maximum levels of efficiency, and to manage via mathematical models embedded in spreadsheets and software, they occlude the human factor.
Emotion and subjectivity are important elements of human decision-making, both for producers and customers. Data and so-called rationality are important, but how people feel, how they perceive, how they interact, and how they subjectively weigh up options are dominant in shaping decisions. Austrians understand this, especially in the subjective imagination entrepreneurs apply to future customers and their potential preferences. No data or predictive models can reproduce this capability.
Austrian economics always starts analysis at the individual level. Every economic phenomenon can be traced back to one buyer exchanging with one seller. What are the motivations and incentives and processes that promote the completion of the exchange? What are the barriers that might prevent it? Can the resulting knowledge be applied in more instances, and even at scale?
Austrians are not atomists. We understand — more deeply, perhaps, than the minds behind the business school disciplines — interconnection, community, and the interaction of individual beliefs, values, and preferences. It is the study of these interactions that lies at the core of the Austrian approach to business. Groups and segments are abstractions — only individuals decide, choose, and act.
And today, technology is moving in our direction, enabling more fine-grained action to reach individual customers with tailored value propositions.
Professor Peter Klein has been, and continues to be, a leader in unwrapping the role of entrepreneurial imagination in the dynamism of business. He emphasizes that humans are fundamentally creative actors, and that entrepreneurs apply imagination to create new possibilities, new solutions, and new combinations of resources the world has never before seen. Opportunities are not “out there” to be discovered. They’re imagined by the entrepreneur.
Yes, there can be planning, e.g. in the choices between alternative patterns of resource allocation. But even these are subjective, based on individual entrepreneurial assessments. There can be projection of trends, although empathy with future customers is a counterweight to projection. Overall, imagination dominates.
As Peter Klein also teaches, entrepreneurship is characterized by acting to reap the rewards inherent in imagined possibility. This action orientation makes the Austrian approach to business much more realistic and straightforward than the business schools’ insistence on the mysteries and opacity of strategy.
Austrian entrepreneurs form their own beliefs, act on them, and gather the results. The results are a feedback mechanism, energizing the entrepreneur to make adjustments and try again. Business is very straightforward. The Austrian action-orientation to business is empowering and inspiring.
A Role for Theory
Professor Klein told the story of his first foray into executive education. He was nervous about presenting Austrian economic theory to experienced and successful business people. He quickly learned that theory is what business needs and what traditional business instruction lacks. Managers often know everything about their industry, but do not always have theoretical perspective, or frameworks to help them see the forest and not just the trees. Without a theory, all they have is a mess of data.
Theory provides a path to interpretation. That’s what’s so valuable about Austrian economics: it emphasizes theory. One example we discussed for business was pricing theory. Austrian economics provides a pathway for entrepreneurs to map out how pricing for specific goods and services emerges via the interplay of customer preferences and context with entrepreneurs’ value propositions. The price that is right for an exchange can be discovered by following this pathway.
But the entrepreneur still needs to combine the theory with action and experience: set the price for an offering, and test the customer’s willingness to pay in the context of all their alternatives and their previous experiences. Theory provides an invaluable generalized assistance with understanding of the customer’s ultimate decision, but can’t predict the contingencies of the moment and of the individual’s idiosyncratic personal situation. With Austrian theory, an entrepreneur is more likely to get pricing “right” (via theory) but not every time (that’s experience).