The beauty of Austrian economics is that it can understand the joy of an individual successfully making a sale as well as the computation of GDP, and the despair of losing a job as well as the calculation of the unemployment level in the economy. This is subjectivism: the understanding that the things that matter are subjectively determined by individuals and their interactions with others. The outcomes may be observed and aggregated but that doesn’t change what’s important to people.
Such an understanding should change how we think about the economy. The purpose of the economy is not to produce GDP, but to produce well-being. That’s a feeling, not a number. It can’t be quantified or expressed in dollars. The state of the economy is how people feel about their economic and personal well-being. It’s possible that some kind of a directional indicator could be produced by a survey – asking people how they feel and monitoring the trend (feeling better or feeling worse). The University Of Michigan Index of Consumer Sentiment attempts to do exactly that, and may be our best indicator of economic conditions.
There are broad implications of the subjective approach – let’s call it the people-first approach – to economics
Mathematical economics is all wrong. In the twentieth century, the study of economics was hijacked by mathematics. The route to getting an economics Ph.D. or any kind of a degree, the route to formulating economic policy, and the route to managing businesses were all mathematicized. Mathematical laws of cause-and-effect were conceived as applying to human economic interactions. If an equation could be solved, then we could understand the underlying economic issue and take appropriate economic action. This whole approach omits the human element. There’s no equation for well-being.
Economic policy making is all wrong. Economic policy making aims at economic outcomes to be achieved through top-down planning. It’s government intervention in the economic interactions of individuals. Whether it’s taxation or tariffs on trade, or industrial policy (which industries government favors and those it restricts), or anti-trust, or money supply, or income redistribution, or government spending of any kind, it’s all directed at numerically-defined goals using input equations to predict numerical outcomes. That there is even a category of behavior designated as economic policy is a horrible distortion of the reality of the sources of economic well-being.
Our concepts of business management are all wrong. When commentators and the business media aim to assess companies’ performance, or their quality, or their merit, it’s always couched in mathematical terms, whether that’s stock price trends or revenue growth or profits. When CEO’s and executives and managers talk about their achievements, it’s also demonstrated through numbers. It’s rare to hear a CEO talk about the feelings of their customers. Yet it’s those feelings that should be the drivers of corporate behavior and the logic of corporate decision-making.
All of these errors involve goals. We set goals, we aim at goals, we measure whether we met, exceeded or fell short of goals, and by how much. These are all mathematical calculations, numerically enumerated. There’s no subjectiveness or well-being. This kind of calculation has its place in science, which has the extrinsic perspective of trying to understand and predict the material world we live in. We look for scientific laws to explain what has happened in the past and predict future happenings. But this kind of scientific method is inapplicable to the individual, personal, emotional, illogical interactions of humans in their economic dealings with each other. if a shopper feels that a store has an attractive price for potatoes but refuses to shop there again when the checkout clerk is rude, the outcome can’t be modeled. Will the shopper pay the price for potatoes and tolerate the rudeness? Or pay more for potatoes elsewhere, where the level of friendliness and politeness is higher? Will they tell all their friends about the rude service and aim to persuade many more people to change their shopping habits? Will they change their mind at a later date and return to the first store to shop because they eventually decide that low price overcomes rudeness at the checkout? None of this can be modeled and mathematicized.
The solution is to substitute benefits for goals, and to aim at delivering those benefits rather than numerical outcomes. Value is a subjective experience for users, and the idea of benefits is to facilitate that experience by describing the betterment available from accepting a value proposition – feel more chic in new fashions, enjoy speed and safety and green credentials driving a Tesla, make your business operations more efficient and effective using new software, take new confidence in your organizational design with this sound consulting advice. Businesses are better advised to aim at delivering the right benefits rather than aiming at revenue or unit sales goals or returns on investment. These results will be outcomes, but they shouldn’t be goals.
If businesses were benefit-focused, they’d concentrate on knowing their customers as well as possible, on understanding those customers’ needs and wants and preferences. They’d aim at facilitating well-being in individual lives and therefore in the economy.