Economics For Entrepreneurs
Yousif Almoayyed: How Austrian Economics Can Make You a Better Businessperson
Yousif Almoayyed runs a concrete business based in Bahrain, part of a family conglomerate of businesses. It’s a complex business, requiring the procurement of raw materials both locally and imported, the manufacture of products to exacting standards, the provision of on-time and efficient service and deliveries, relationship management, and cash flow management. The business involves high-cost capital goods and careful economic calculation of the revenue flows from those capital goods in an environment of fluctuating costs and market prices.
His university education was in engineering: math and computer science. He declined the opportunity for a business degree in order to learn on-the-job. Part of his self-directed business education was the reading and thoughtful analysis of Austrian Economics texts, and the practiced application of the principles gleaned from non-stop reading.
By reading Austrian Economics texts and thinking about how to apply the learning, It’s possible to develop an “economic way” of seeing and thinking. Yousif’s reading plan was eclectic and broad-ranging. He first discovered Irwin Schiff’s How An Economy Grows And Why It Doesn’t. Then he found Bastiat, and heard Ron Paul mention Austrian Economics, so he signed up for Mises University, which he listened to in his car via iTunesU. Since then he’s read all the great texts, many downloaded free from Mises.org. His reading gave him principles, economic logic, and clarity and precision in vocabulary.
Looking through an economic lens results in a better understanding of people, their goals and motivations and the purpose of their actions. Now it is possible to look at people and understand why they do what they do. Economics teaches empathy — putting yourself in other people’s shoes to understand their motivations and therefore their actions. This analysis applies to customers, colleagues and employees. Yousif declared himself “surprised and shocked” at why he had not been taught this before.
For entrepreneurs, the core of economics is subjective value. Many people use the term “value” mistakenly and imprecisely. They equate money prices with value. But Austrians do not make this mistake, and by analyzing the subjective value preferences of customers and employees, it is possible to be more effective at motivating. To a customer, on-time delivery and operational efficiency have a value that can be reflected in higher price or longer cash flows through relationship strengthening. To an employee, convenient parking and recognition for extra effort can have more value than a pay raise. Your tennis coach tells you, “Keep your eye on the ball”. In business, it’s “Keep your eye on each individual’s subjective value preferences”.
Austrian economics provides a uniquely helpful perspective on pricing. Pricing is a particularly challenging subject for entrepreneurs. The Austrian perspective recognizes that, at any given moment, price is a kind of average of what many involved actors think it should be, i.e. it’s subjective. Some think it should be higher, some lower; some think it’s going to drop, some think it’s going to go up. At a point on time, all the actors settle on a number. Austrian economics teaches you to observe what all the actors are doing or hoping to do in the market at the time, and to analyze what’s motivating them. Many things influence price actors — including the supply and demand for the product or service, but also the supply and demand of money — but always in the specific market of your local set of exchanges and local actors.
Prices tell the truth. A lot of people won’t accept market prices. They deny the truth. If prices contradict what’s in the news, the news is fake. If a building owner fails to lower the rental prices of apartments because he things that would be going too low, and the building becomes one-third unoccupied, it is the prices that are telling the building owner the truth.
In Austrian economics, prices determine costs. The entrepreneur has some discretion to manage costs, but must meet the market price. Entrepreneurs must meet the market price in order to sell, and find ways of keeping costs below that level to make a profit. The entrepreneur can have some influence over costs e.g. via negotiating contracts based on volume, or speculating, or finding new suppliers.
Importantly, if market prices change, the entrepreneur’s cost must change. Subsequently, it’s important to understand that accounts look instantly different. What you did in the past is no longer an accurate indication of what you can do today. You can’t repeat old arrangements when future prices change. Prices change the way your accounts look in the past, present and future.
As a consequence, traditional accounting is mostly useless for entrepreneurs. Accountants do not really measure anything, at least not accurately. Many of their numbers are aggregated figures, or averages over arbitrary periods of time like quarters or months. Accounting takes something inherently dynamic and simplifies it and puts it into numbers for purposes of stewardship over capital. Accounts were originally simplified snapshots for owners who look periodically at what their managers are doing. Entrepreneurs who are actually running a business need to understand what is going on dynamically under the numbers. We need economics to understand “underneath the numbers”. Austrians are very careful with assumptions, and are sensitive to the many assumptions in accounting.
For example, asset prices may fluctuate. They are accounted for via straight line depreciation, which is calculated for deduction from income tax, and therefore is not necessarily accurate regarding the real world.
Austrians examine the ends of the people who devised the accounting systems.
Knowledge of Austrian Economics is the foundation for confidence and decisiveness. An entrepreneur can never have complete data or complete information. Austrian economics enables the entrepreneur to make confident decisions under these conditions of uncertainty. That’s because the Austrian lens focuses not on data but on more qualitative understanding. Austrian entrepreneurs utilize the principle of distributed knowledge from F.A. Hayek. Talk to salespeople. Talk to cab drivers. Observe behaviors. Derive indications. If those indications are pointing in a certain direction, reach a conclusion. Confidence, of course, comes from being right. So keep practicing the formation of entrepreneurial judgments. Call things before all the information is in. Review the outcome based on results. If there is contradictory information, don’t be hasty. Economics helps you build a picture of what all these indicators mean.
Yousif mentions accounting as a field where Austrian Economics gives entrepreneurs a different perspective. See Thomas C. Taylor’s Accounting In The Austrian Tradition, as well as his interview on mises.org.
For a general view of Austrian Economics for Business, you might like this lecture video by Peter Klein.