Wednesday, September 26, 2012

Economics For Entrepreneurs

A Professor of Entrepreneurial Studies thinks microeconomics should be inflicted on would-be business leaders (excerpt):

More Dismal Science for Would-Be Entrepreneurs
By Scott Shane

Teaching entrepreneurship is a growth business for U.S. business schools. The number of the nation’s undergraduate entrepreneurship programs grew 15.3 percent from 2007 to 2011, while the number of master’s programs increased 19.1 percent, according to the Association to Advance Collegiate Schools of Business.

Much of the curriculum in these programs focuses on evaluating one’s entrepreneurial potential, understanding the process of starting a business, writing business plans and financial statements, and raising money. While providing this information helps many students, my experience as an educator and investor has convinced me that entrepreneurship programs would do well to expose their students to more microeconomics.

Before you recoil in horror at the notion of inflicting more of the dismal science on business students thinking of starting their own companies, please hear me out. Many company founders make mistakes that they could have avoided had they known more economics. Since I don’t have the space to discuss everything that a microeconomics class has to offer would-be entrepreneurs, I will limit myself to four big questions commonly asked by prospective entrepreneurs that microeconomics answers…

Confession time: at university, I hated doing micro with a passion. It’s probably the most mathematically demanding of all the economics sub-disciplines (barring econometrics) and the hardest to mentally conceptualise, at least for me.

At the same time, I fully agree with Professor Shane’s point of view – from a purely practical perspective, its probably the economics discipline that is most relevant to business leaders and managers. Knowing how economies work and interact through trade or the intricacies of monetary policy, are a lot less pertinent on a day-to-day basis than knowing price theory or the theory of the firm. Very few people are going to end up as policy wonks.

The challenge is in matching the theoretical framework of micro with empirical evidence and day-to-day business challenges– no small order. Micro tends towards mathematical elegance and rigour, but the real world is messy and full of contradictions and uncertainties.

Just as an example, price and production optimisation depends crucially on the assumption of maximisation of profits or even revenues. But in the real world, many firms do neither. Information in the world of economic models is usually assumed to be perfect (you know what your demand and supply schedules are), but that’s again not true in real life.

To take an example from the article, its all very fine knowing the impact of price elasticity on demand for your goods or services, but how can you tell if the goods you’re selling are price elastic or not when you cannot observe the impact of price changes before you actually change them?

But be that as it may, if there is an economics course that deserves wider dissemination in business courses, its micro.


  1. Read the column in its entirety and couldn't agree more with the good professor especially his Q and A. Yes, it may be a painful process of attempting to wrestle the messiness of reality into the elegant order of high maths or to fit the empirical elegance onto that unkempt chaos but it would do would be entrepreneurs a world of good to be armed with "exact" (caution, the inverted commas)science on how to navigate the seemingly innocous yet subtly pernicious pitfalls that await them in the real business world.

    Me? time to hit the sack after wrestling with 'em British virgins ;)D

    Thanks for the informative link anyway

    Warrior 231

    1. Warrior, they don't need the "exact" science of it - at this level, all you'll get is basic principles anyway. But they'll be armed with some knowledge to make sense of things e.g. why branding is important (it differentiates products and acts as a signalling device, which provides some degree of monopoly power and thus allows for higher prices and "abnormal" profits).