HomeWhy every entrepreneur should study the Austrian School of Economics

Why every entrepreneur should study the Austrian School of Economics

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Over 50 years ago, an economist William Baumol He noted that economics was a theory of economics that left no room for entrepreneurship. Economic models were, simply put, “lack of entrepreneurs.” Today’s economy is no better. In fact, it is arguably worse. Focuses on economic forces unknown in formal models. Modern economics is largely a theory of equilibrium and efficient outcomes. But it is not market theory.

As the economist Joseph Schumpeter has argued, entrepreneurs are the lifeblood of a dynamic market economy. They work in the field of creativity disEquilibrium. They engage in “creative destruction”. The new they make supersedes the old and makes us better off. A market economy without entrepreneurship would be stagnant, barren, and boring.

So what can entrepreneurs learn from economics? It doesn’t include a great deal. At least not from the highly mathematical modeling that is taught in middle and graduate level courses today. But there are other schools of thought that recognize the importance of the entrepreneur.

Austrian School of Economics

What’s called Austrian EconomyFounded by researchers at the University of Vienna 150 years ago (hence the name), is an alternative approach to understanding economics that embraces entrepreneurship and even sees it as the driving force of the market. For the “Austrians,” as the followers of this tradition call themselves, the market is best understood as a process that never takes place in general equilibrium.

With entrepreneurship at the core, Austrians only reluctantly use mathematical modeling and statistical analysis. After all, if the economy is a dynamic process of entrepreneurship and innovation, then what is the use of mathematical equations? Instead, their focus is on value creation, uncertainty, and how producers are constantly adapting and trying to meet changing consumer preferences.

Austrian economics is a more realistic economic theory than equilibrium models. For this reason, it is also more beneficial to entrepreneurs.

Entrepreneur Economics

Few entrepreneurs have heard of or studied Austrian economics. But my experience is that most entrepreneurs are Austrians without even knowing it. They have learned from experience how the economy works and have developed intuition. Their gut feeling, sometimes referred to as a judgment of entrepreneurship, is an tacit understanding of economics as a market process and what this means for entrepreneurship.

Here are four insights from Austrian economics that are part of this entrepreneurial intuition:

1. Consumer supremacy

Not only the customer is king, but all production is ultimately aimed at satisfying consumers in some sense by providing them with value. This value is entirely up to the consumer. Entrepreneurs can only provide the means, usually a good or service, that help consumers become better off. Sometimes this requires educating the customer so that they understand the value of the product. And the value usually lies in their entire experience, not just what you’re selling.

Related: How to think like a successful entrepreneur

2. The value determines the price and costs are the choice

With the value in the eyes (and experience) of the consumer, the price they are asked to pay should be (a lot) less. The task of the entrepreneur is to find out the price at which their product is attractive, and then choose a cost structure that allows profit. In other words, the price is a guess based on the value that consumers see in the product. The only option is cost: how to produce at costs below the selling price and, in the end, whether to produce.

Related: How to Become an Entrepreneur That Doesn’t Think About the Costs

3. Entrepreneurship is the creation of tomorrow

Leading Austrian Economist Ludwig von Mises noted in his folder humanitarian work that “the ultimate source from which entrepreneurship profit and loss is derived is uncertainty about the future constellation of demand and supply.” What this means is that individual entrepreneurs choose costs in the present to produce a product that should be sold in the near or far future, whatever the market situation. This is the uncertainty that a businessman carries.

4. Strive to be a good monopolist

In econometric models, competition is about offering roughly the same or competing goods for price. This is an awesome strategy for entrepreneurs who superpower It is the facilitation of value. Therefore, Austrians think the competition is different: it’s about figuring out how to offer the best value experience possible. This often involves thinking outside the box and trying something new. Each innovation is by definition a unique new offering, and therefore it is also a monopoly. What benefits consumers the most are entrepreneurs who aim to Be a good monopoly.

Related: Entrepreneurs should aim to be good monopolies

Econometrics has turned its back and developed models that exclude entrepreneurship. As Joseph Schumpeter, who studied the Austrian tradition, said, a market economy without entrepreneurship is a lot like village Without the Danish Prince.” Indeed, entrepreneurs are the main characters in the drama that is the economy. Economic theory that recognizes this not only leads to a better explanation of economics – it is also a useful framework for entrepreneurs.