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Austrian Economics for Managers

  • Austrian Economics for Managers
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06/20/2014Peter G. Klein

Business people — and business school students — often view economics as a dry, technical subject with little relevance to business practice. One could easily get that impression from studying neoclassical economics at most business schools! But economics, as understood especially by the Austrian school, has important implications for managers, investors, and entrepreneurs. The Austrians’ thorough analysis of purposeful human action and their causal, realistic approach to prices and markets contains valuable insights not only for students, citizens, and policymakers, but for business professionals as well.

This course offers a brief overview of managerial and organizational economics from an Austrian perspective. Unlike the typical case-based business-school course, it is primary theoretical, though the discussion is filled with real-world illustrations and applications. The focus is how to use Austrian economic analysis to frame, analyze, and solve business problems. As we’ll see, the Austrian approach to value, price and exchange, the notion of resources as heterogeneous and subjectively perceived, the concept of competition as rivalry, and the Austrian understanding of the entrepreneur all provide critical insights on how successful firms deal with customers and suppliers, interact with competitors, attract and retain employees, grow and restructure, and organize and govern themselves.

Traditional courses in managerial economics have limited value. They embrace the artificial abstractions of neoclassical economics (for example, treating the business firm as a single decision maker that buys inputs in markets at prices determined by the impersonal forces of demand and supply, transforms the least-cost combination of those inputs into an output in accordance with a given production function, and given the demand curve for the output, produces the profit maximizing amount of output). This approach underlies neoclassical models of markets and prices, but is basically useless for people managing actual firms. Instead, we need a causal, realistic framework that starts from individual choice and builds to demand, capital and production, entrepreneurship and change, and industry structure. The firm is viewed not as a production function, but a team of individuals trying to coordinate their behavior to create and capture economic value. This includes issues of managing information flows, motivating people, deciding how to fund the firm’s activities, whether to make inputs or buy from outside suppliers, how to react to competitors’ behavior, and so on.

This course begins with an overview of Austrian-style price theory and an introduction to core concepts about valuation, marginal analysis, pricing, resources, production, and competition. We’ll then cover details of demand and the consumer, production and cost, firm boundaries, organizational design, and more.

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