The Mises Institute’s Economics for Business seeks to educate budding entrepreneurs in the field of economics. It is a vital service because, as I have argued previously, in order to be a successful entrepreneur, one must think like an Austrian. By its nature of trying to educate new entrepreneurs and managers, its natural competition are business schools everywhere. As a result, it has had a recurring theme of taking on business schools and explaining that the Austrian school of economics offers much more value to the up and coming entrepreneur - and rightfully so. As an MBA student myself I am particularly drawn to these. It is not uncommon that I claim that I’m getting this degree to put those three magic letters on my resume, but my real economics education has come from reading on my own and through incredible organizations like the Mises Institute. As a result, I wanted to take a moment to highlight one of the fallacies I found presented to me as a business school student recently.
The lesson was that there are four levels of responsibilities for any given manager. The lowest and least impressive of which was economic responsibility: the firm must make a profit to serve employees and stakeholders. The highest and most noble of responsibilities for a manager, on the other hand, was that of philanthropic responsibility: “When an entrepreneur founds an organization that strives to create social value rather than simply earn profits.”
This is an egregious misunderstanding of what profits actually are. Business schools will teach you that serving people and creating value is a point separate from earning profits. But it cannot be stressed enough, one cannot earn profits without serving people and creating value. Profits are not earned simply by following some model and engaging in some business school lesson. Profits are made by most adequately creating value for the people. As Ludwig von Mises put it in Human Action
Profits are the driving force of the market economy. The greater the profits, the better the needs of the consumers are supplied. For profits can only be reaped by removing discrepancies between the demands of the consumers and previous state of production activities. He who serves the public best, makes the higher profits.
We are teaching the next generation of managers and entrepreneurs that earning profits and creating value are two contradictory options; that could not be further from the truth. The next generation of managers and entrepreneurs needs to understand that in order to earn a profit they must create value! As Per Bylund explained on the Economics for Business podcast
Business schools are talking about how businesses are positioning with only the market trying to exploit whatever gaps there are, whatever opportunities there are already there, given a consumers’ wants and needs. Whereas what we’re trying to figure out is how to better serve consumers. And these models are, very often, really about pushing your goods out, to as many as possible and beat the competition doing the same thing. So business school models are not really about the discovery of how to serve the consumer better, which could be a completely different product, a completely different way of doing things. Value is about the experience that the consumer expects from your offering and not about beating the competition necessarily.
We must stop teaching this deeply flawed understanding of business and profits. We need programs like Economics for Business to actively hammer home the point that it is in creating value that businesses can earn profits. One can position within the market however they want, one can run as many models as they want, one can do as much math as they want, it is all going to be absolutely worthless without the core requirement for profit: creating value. Until business schools begin to understand this and stop presenting a false dichotomy between profits and value, they will never be able to truly teach entrepreneurs anything.
