One of the most frustrating things about studying Economics is that has no conception of entrepreneurship because in a competitive economy all available opportunities for supernormal profit have already been captured (or so say the Economics textbooks). Furthermore, as per classical economic theory, if any firm is generating a rate of return above its cost of capital for an extended period of time, it must be because it has strategic assets or brands or other advantages that its rivals don’t have. The thought that the said firm might have a superior entrepreneur at the helm does not fit into the conception of conventional Economics. And yet, as this article points out, “As economist Joseph Schumpeter argued, entrepreneurs are the lifeblood of the dynamic market economy. They are in the business of creating disequilibrium. They engage in “creative destruction.” The new that they create displaces the old and makes us better off. The market economy without entrepreneurship would be static, barren, and boring.”
Thankfully, one group of Economists disagreed with the consensus and created a new school of thought around a century and a half ago: “So-called Austrian economics, which was founded by scholars at the University of Vienna 150 years ago (hence the name), is an alternative approach to understanding the economy that embraces entrepreneurship and even sees it as the driving force of the market. To “Austrians,” as the followers of this tradition call themselves, the market is best understood as a process that is never in general equilibrium.
With entrepreneurship at the core, Austrians only reluctantly use mathematical modeling and statistical analysis….Instead, their focus is on value creation, uncertainty, and how producers constantly adjust and attempt to meet changing consumer preferences.”
For entrepreneurs like us and for the many entrepreneurs who are our clients, there are four useful insights from the Austrian school of economics:
- The consumer is the main focus of the entrepreneur. “Not only is the customer king, but all production aims to ultimately satisfy consumers in some sense by providing them with value. This value is entirely up to the consumer. Entrepreneurs can only provide the means, typically a good or a service, that help consumers become better off. Sometimes this requires educating the customer so that they understand the value of the product. And, typically, the value lies in their complete experience, not just what you sell.”
- The price of the product is not set by the free market (as conventional Economists contends). Instead “With value being in the eyes (and experience) of the consumer, the price they are asked to pay must be (much) lower. The entrepreneur’s job is to figure out at what price their product is attractive, and then choose a cost structure that allows for profit. In other words, the price is a guess based on what value consumers see in the product. The only choice is cost: how to produce at costs below the selling price and, ultimately, whether to produce.”
- The entrepreneur’s central role is to understand tomorrow and take an informed bet on it. “Leading Austrian economist Ludwig von Mises noted in his tome Human Action that “the ultimate source from which entrepreneurial profit and loss are derived is the uncertainty of the future constellation of demand and supply.” What that means is individual entrepreneurs choose costs in the present to produce a product that must be sold in the near or distant future, whatever the market situation might be. That’s the uncertainty borne by the entrepreneur.”
- Monopolies can be good and an entrepreneur should seek to become a “good monopolist” In standard economics models, competition is about offering the same or nearly the same goods competing on price. This is a terrible strategy for entrepreneurs, whose superpower is to facilitate value. Therefore, Austrians think of competition differenlty: It is about figuring out how to provide the best value experience possible. This often involves thinking out of the box and trying something new. Every innovation is by definition a new, unique offering and therefore also a monopoly. What benefits consumers most is entrepreneurs who aim to be good monopolists.”
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