Thursday, July 6, 2017

Will the Understanding of Austrian School Economics Make You a Better Businessman?

The best short answer is "no."

I occasionally see commenters that link an understanding of Austrian school economics with being a better businessman, this is aan incorrect perspective---with minor qualifications.

Economics is the study of individual action including the action of businessmen. However, this does not mean that, generally, an understanding of action will cause a businessman to make better business decisions.

The best way to understand this is to think of a medical doctor who understands quite well the mechanics involved in jumping high. Many NBA basketball players are very skilled in jumping high but they are unlikely to have a deep knowledge of the science behind their ability to jump high. Indeed, beyond some limited exceptions, the scientific understanding of why they are able to jump so high is going to be of limited use to them in actually jumping high and a doctor's knowledge of why people can jump high is not going to make him a high jumper.

In the field of economics, students of sound economics understand time-preference, value scales, marginal revenue product, etc., and students would be able to point to how these mechanisms are used by a businessman but a businessman needs to know nothing about the technical economic definitions and have a technical understanding of these terms to be a better businessman.

More significantly, the understanding of these terms by an individual does not necessarily mean the individual will be a profitable entrepreneur.

As Israel Krizner has taught us, entrepreneurship is about alertness. This is not taught and can not be taught in economics class.

That said, there are certain qualifications to what I have written above. If a person is not aware of the concept of entrepreneurship than an introduction to the concept may put an individual on the road to becoming cognizant of the opportunities available through entrepreneurial alertness. It may make him more aware of such opportunities but economic study will not, in general, be valuable in highlighting specific entrepreneurial opportunities.

If an individual wants to get a sense for how entrepreneurs gain their insights, he should go work for the best entrepreneur he can get a job with, rather than studying economics.

The one additional qualification to the initial statement is that because we live in a world where central banks manipulate the money supply an understanding of the business cycle, which is taught in sound economics courses, can help an entrepreneur in understanding how great and sudden shifts in the capital structure may occur and how they might impact his business ventures.



  1. Yes, if Austrian economics significantly helped one in business there would be many more wealthy business owners supporting Austrian institutions and Silicon Valley wouldn't be full of left liberals such as Mark Zuckerberg.

  2. Generally this seems true. Most pure theories are too abstract to be of much use in the granularity of individual business transactions.

    But I feel like there must be some other examples where AE could provide some meaningful insights. Like wouldn't there be some value in, for example, understanding the socialist calculation problem when considering vertical integration?

  3. While Israel Kirzner's theory of entrepreneurs revolves around "alertness" to existing profit opportunities, I find more compelling Peter Klein's theory of the entrepreneur as an uncertainty-bearing, asset-owning individual who profits from risking his personal capital in making speculative judgments as to the future. I do think there is great value in reading Klein's work on this, but agree that knowing this theory is a far cry from actually risking your own capital based on your views of the future.

    1. Like I said, if you think entrepreneurial theories are going to help you in business, you are going in the wrong direction. Especially if you think like Klein does that you need to have to be an "asset-owning individual" to be an entrepreneur. So if you don't own assets, you can't be an entrepreneur?

      What away to view the world.

    2. How can you profit from an opportunity without deploying resources you own? Even if there is an obvious arbitrage opportunity in the market, you have to assume some risk -- counterparty, regulatory, mechanical, etc. -- in the organization and exchange of assets.

      Moreover, Kirzner's theory is very present-oriented; to re-phrase your question, Robert, if there aren't any obvious profit opportunities then you can't be an entrepreneur? I think one of Klein's insights is that even in an actual or perceived equilibrium there could still be entrepreneurial action, if someone forecasts that things will change and he positions himself and his resources to take advantage of that future state of affairs.

      Indeed this is where being aware of this theory could be practically helpful. If one is stuck observing the present only and can't see any obvious arbitrage then one may give up; but if one considers that the future will be different from the present, and that this is where one should look for ways to take risk in organizing resources, then one may still move forward as an entrepreneur.