We are entering an entrepreneurial age. Colleges and universities are teaching entrepreneurship, professors are researching it, and children’s books are being written about it. Policy-makers are appreciating it as a better way out of poverty than welfare. Large companies are striving to be more entrepreneurial. More and more young people are creating new entrepreneurial business models, utilizing easily accessible infrastructure from Google and AWS. Entrepreneurship is the zeitgeist.
In a recent article at entrepreneur.com, Per Bylund, who teaches entrepreneurship at Oklahoma State University, suggested that every entrepreneur should become familiar with Austrian economics. What is that? It’s the method of economics that recognizes entrepreneurship as the driver of prosperity and provides the design blueprint for the system that best unleashes potential economic growth for everyone to enjoy.
Austrian economics is an unfortunate brand name. It reflects the origins of the tradition in the University of Vienna, but that’s a long way in the past. A better brand name would be entrepreneurial economics. However, we’re unlikely to be successful with that re-branding, so we won’t attempt it for now.
More important than the brand name are the knowledge, insights, and business tools that Austrian economics can deliver. Austrian economics is on-trend for business in the digital age.
Management Science Is Moving In The Direction Of Austrian Economics
in an essay titled The Logic Of Entrepreneurship, Mohammad Keyhani of the Haskayne School Of Business points out that traditional business school teaching of strategic management is based on the old economics, usually called neo-classical. This is an economics of mathematical models, with no sense of humanity. It studies non-existent states referred to as equilibrium, where theoretical competitive structures can be analyzed to identify whether any firms have an “advantage”.
The new management science is replacing mathematical modeling with human modeling: how do people act to create value for each other? This is not math, although it can be simulated in computers by giving virtual economic actors human values and projecting the outcomes. The new entrepreneurial business thinking draws from Austrian economics: human, creative, and focused on value creation. The entire business discipline is moving in this direction, replacing the concept of management with the concept of entrepreneurship.
In an earlier paper, the researchers Stephen Vargo and Robert Lusch were among the first to suggest that entrepreneurship should be elevated over management in business school. Management is a product of the now-past industrial age, tending to give us large bureaucratic firms driven by efficiency (avoiding waste) than effectiveness (creating new value), and emphasizing control in existing markets rather than the exploration of new ones. It’s time to abandon this whole way of thinking and organizing. Entrepreneurship gives us innovation, new value, and progress.
Austrian Economics Is Systems Thinking.
The newest advances of science in all fields are products of, or related to, systems thinking. This is true for economics, and Austrian economics has been called a type or branch of systems thinking. Brian Arthur of the Santa Fe Institute, the epicenter of the study of complex adaptive systems, developed the concept of Complexity Economics. The economy, industries, firms, and economic institutions are complex systems. They can’t be managed. there are too many elements, interactions, combinations, creative initiatives, and emergent outcomes for anyone to manage. He has documented the antecedents of this new economics, in which he includes the research work and theories of prominent Austrian economists F.A. Hayek and Ludwig von Mises, and the Austrian school in general.
Core Principles Of Austrian Economics Are Recognized In The Mainstream
The first principle of Austrian economics for entrepreneurs cited in Per Bylund’s article is consumer sovereignty. This term refers to the insight that the consumer or customer is the ultimate determinant of what is produced, what is profitable, what sells well and what doesn’t. The mechanism is buying or not buying. This simple insight explains why Google is the dominant search engine, why Amazon drives so relentlessly towards greater convenience, and why the conversion away from fossil fuels is not going as fast as the government wants.
Yet major corporations and their management teams have been utterly confused about this simple principle. They talk about shareholder value and stakeholder value and put them in conflict with customer value. Leading business writer Steve Denning is one of the leading edge commentators who is setting things straight and asserting that top management must change their fundamental assumptions and take the Austrian approach to the primacy of the customer.
Human Action And Human Values
Rather than the algebraic symbolism of the mathematical models that make up mainstream economics, Austrian economics deals with human action and human values. What do people do and why? How do they feel their lives can be made better, and how do they identify and choose the best means to attain that goal? Austrian insights into the human values that drive human behavior and collaboration can be applied in multiple areas. Business management is one of them. The old mental is summed up by Derek and Laura Cabrera in their management book Flock Not Clock as Plan, Command, Control, and Utilize. In this traditional view, management produces rigid plans, which they communicate through the hierarchical organization with the command to the lower levels to follow, aided by control mechanisms such as process flow charts, and look upon the workforce as a resource to be utilized. The Cabreras offer a more human alternative that revolves around the sharing of a beloved vision and understandable mission in everyone’s mind, building the capacity for everyone to help execute the shared mission, and the learning loops from the market to continually improve. This is human values in action.
Diana Jones has captured this principle in her term Leadership Levers. The levers for management to generate high performance from an organization are not plans and commands and control mechanisms, but relationships, emotion, and empathy. These are the same elements that Austrian economics studies to understand systems like the economy, industries, firms, and customer groups. Empathy, for example, is identified as the number one skill of the entrepreneur, a tool to understand what customers want. Value is understood as an emotion, a feeling about whether an experience was valuable or not. And the relationship between producer and customer is a collaboration, a way to co-create those valuable experiences. Jones’ levers are Austrian levers.
An Ascendant Future
All these instances suggest a future in which more and more practitioners in more and more fields take inspiration from or draw ideas from Austrian economics and incorporate its principles into their thinking. As we say: Think Better, Think Austrian.