Think better, think Austrian is the mantra we have adopted for our Economics For Business project. Economics is a way of thinking. It’s conceptual, and its concepts can help businesses to make better decisions. The most important business decisions are those that pertain to the generation of value for customers, since that is the purpose of the firm. We talk with economist Dr. Per Bylund about exactly how the Austrian way of thinking helps businesspeople in every role to think better, and the business benefits that ensue.
Key takeaways and Actionable Insights.
“Think Better, Think Austrian” means starting from first principles.
Businesses are concerned with behavior — with action. The most important behavior is that of customers . Do they buy, or do they not buy?
The Austrian economics framework places people, and the effort to understand what they are trying to do, in the center of its analysis. First principles in Austrian economics teach us that people act to improve their circumstances—to somehow make things better for themselves. We recognize that people have a purpose in mind, and they make choices that lead them to attaining what they want or need.
It is from this first principle that business owners and entrepreneurs can work backwards to understand the motivations behind the actions of our prospective customers. We can ask why. And we should.
Thinking backwards reveals new understanding.
If customers act in a way we don’t understand, or differently from the way we expect them to act, or hope they will act, we can work backwards from what we’ve learned without judgment and instead exercise empathy. They might do something “crazy” — like using a product in a very unexpected way, or buying a competitive product that we know to be “inferior” in some sense. We know that their action made sense to them, and that they believed they would be better off compared to alternative choices or actions. Working backwards from this understanding enables us to deduce their motivation, and what value they were seeking. We can learn from their “crazy” action and rethink our offering. We can choose to take their feedback, even if it doesn’t make sense to us, and offer them an alternative.
Thinking better requires a relationship with the customer.
Successful business owners and entrepreneurs must develop a deep enough relationship with their customers to understand how they think, how they feel, and how they perceive things. Additionally, we must learn the context in which they are making their choices—there’s no such thing as a non-contextual choice. Per Bylund makes this clear when he explains that ice cream in summer is a different product choice than ice cream in winter, and clothes for business wear at the office are a different choice than clothes for working from home. Consider this: Whom does the consumer believe is observing and judging them and what standards are being applied? Those are important contextual factors to be taken into account.
The Austrian thinker considers all these influences on the customer and uses them to build and nurture relationships
We know that the ultimate purpose for customer action is the relief of some unease.
How do consumers and customers decide what they want to spend their money on? Rather than asking ourselves what people want to buy, we can ask ourselves what decisions people make in pursuit of better circumstances. They start from a position of dissatisfaction. They feel unhappy, or disappointed, or feel let down or lacking in some way. Contented people don’t act. People whose every comfort has been seen to, and who lack nothing—people who aren’t experiencing any unease—don’t buy. Discontented people do. This never-fully-satisfied feeling of discontent on the part of the customer is the universal resource for the entrepreneur. It is never exhausted because people are never fully content or fully satisfied in all of their many needs.
Customers use this heuristic to calculate potential value, even though they likely have no idea they are doing it. They think, to what degree do I expect my choice to relieve my discontent? Satisfaction is achieved not so much via the benefit that products and services promise, but via the burdens that are taken away: less work, less difficulty, less effort, less cost to get to a feeling of less discontent or less fear or less concern or less stress.
Often, of course, customers’ concerns are social. How do others see me, how do I appear to them, how do I compare to others in appearance or competence or achievement? The relief of unease is always subjective and often the subjectivity comes in the form of the customer comparing themselves to others, or to their own assessment of others’ judgment of them.
The entrepreneur listens carefully to what customers say, and observes their actual behavior, then uses empathy to understand what process the customer is using to define their unease and ways to relieve it.
“Think Better, Think Austrian” How-To Guide (PDF): Download PDF
“Per Bylund on Opportunity Costs”: Listen To Episode 7