Here’s a tip to help you be a better thinker, entrepreneur, and change agent: read some economics.
Economics is the most valuable social science for an entrepreneur to understand. I don’t mean finance, accounting, banking, or investing. Those are specific applications of some economic tools and insights. Economics itself is not about money or policy. It is a set of tools that help us understand people’s actions, and the kind of institutions that emerge from the complex web of individual actions.
Economic thinking allows you to see the unseen. Armed with it, you can see…
1) Beyond good and evil
It’s easy to divide everything and everyone into the categories “good” and “evil”. It may be satisfying in some ways, but it’s hardly useful in navigating the world, understand people, or making better decisions. Economic thinking helps you move beyond this simplistic paradigm by assuming rational self-interest, whether or not you agree with the specific aims. Suddenly people and organizations become less sinister and unpredictable. It trains you to look especially at odd or unlikely behavior and try to understand reasons for it non-judgmentally.
If you want to start or run a company, this is indispensable. If every deal that falls apart or email that is not returned makes you assume your business partner or customer is a bad person, you’re not going to survive long and you certainly won’t make friends.
2) Beyond intentions
It’s easy and cheap to have good intentions. Everyone wants less poverty, pollution, and conflict in society. Everyone wants happy customers and employees in business. Without economic understanding, it’s very hard to know the difference between good intentions and good results. Many people mistakenly assume minimum wage laws will help low skilled workers. They have good intentions but don’t understand the causal relationships. Many people assume raising prices during a crisis hurts customers in need and wish to end such practices, not understanding that far fewer people will have access to goods and services if price controls are in place.
If you run a business you may put in place well-meaning policies, but if you don’t understand the real-world effects you jeopardize the entire operation. Good PR can only get you so far.
3) Beyond words
The most dangerous thing an entrepreneur can do is listen to potential customers. Everyone will say the product you’re about to create is cool. That’s a lot different than them actually buying it.
Stated preferences – what people say – are essentially free. I can fill out a survey saying I love ice cream and bear no cost for that opinion. Revealed preferences – what people do – have costs. Economics is concerned with the latter, which is why it’s so valuable to entrepreneurs. In the real world everything is scarce, therefore every decision has trade-offs. You have to forgo something to get something else.
Relying on the words of potential customers, media pundits, investors, or marketing experts when they face no trade-offs is a dangerous business. There have been plenty of businesses that everyone loves in theory but nobody frequents in practice, when their time, money, and other opportunities must be forgone. Economic thinking helps you better interpret peoples behavior and better understand what they actually value, not just what they say they like.
So then, jump right in!