Markets are marvelous. They’re the poetry of economics. They are one of the most remarkable technologies humans have ever built. Beautiful businesses develop new markets both outside and inside the firm. We discuss markets with Anthony J. Evans, a business school professor who teaches that all businesspeople must become economists.

Key Takeaways and Actionable Insights

A business economist is an Austrian who looks at the fields of economics and business to see how one is best applied to the other.

Aim to be a good economist and a good business practitioner. Managerial economics is the application of the economic way of thinking and the insights of economics to the managerial task of creating value. It was Shlomo Maital who wrote, “Managers can’t just employ economists, they must become economists”. Anthony Evans follows that direction and teaches his students at ESCP Business School that they’ll be more productive and more capable as businesspeople as a result of learning and applying economics.

Market system economics provides businesses with the best toolkit for success.

Businesses are participants in the market system. Managerial economists study markets in order to find ways for businesses to use market insights, harness market mechanisms and understand the signals and information that markets provide. It’s easy for firms to overestimate their ability to affect the markets in which they are participating, and don’t sometimes they don’t fully understand or properly analyze what market prices are telling them.

Prices are the most important market signals, and they can transmit information about potential futures. They can guide firms on understanding how much value they are creating relative to competitors. They can provide signals about how to increase revenue by moving process higher or lower. They can help businesses understand opportunity costs and transaction costs.

Markets are decentralized experimentation, and if some new experiments by disruptive competitors are commanding purchases from actual buyers today, that may signal more buyers and more transactions in the future especially after prices adjust to higher transaction volumes. Monitoring prices and reading the signals must be a core managerial skill.

Market tests should be applied whenever feasible. Technology can help.

Businesses should run a market test for every question that a market can answer: is this offering or initiative valued, is it preferred, can we put a price on it, will varying the price change the level of demand or acceptance, is the benefit greater than the cost, do some customers prefer a competitive offer? Run a market test — A/B test, pilot program, prototype evaluation, survey with customers, whatever is feasible.

Today’s technology provides tremendous help with low-cost digital testing methods, fast feedback loops, and efficient data processing. In fact, more and more, technology can relieve managers of the task of formulating their own understanding by automating the test procedures and the analytics and recommendations.

Markets can be brought inside the firm to improve business performance.

Markets stimulate innovation, lower costs, and efficiency because customers always want better, cheaper, and faster and competing entrepreneurial firms always want to provide those benefits in the search for profits. The same effects of the market order can be sought inside the firm. What is the market value and the right price for marketing services from the marketing department, or HR services or IT services? What’s the marginal cost versus marginal benefit analysis for one more HR staff member, or the opportunity cost of one more IT system installation versus one more sales campaign? What’s the value of the knowledge flowing through the firm?

These are the kinds of questions that the market order can answer, and managers should always be asking them. Prices can be the metric for all learning.

Market economics can also guide organizational design and processes.

Markets are dynamic and ever changing. Businesses must reflect and emulate this dynamism. Organizational design and structures must be flexible enough to enable dynamism and not erect barriers to change and adaptation. What are the forces that make markets grow and decline, and what are the forces that have this effect on firms? Organization should harness the forces of market growth.

Professor Evans’ suggestion is a constitutional view of the firm. Let simple rules of conduct emerge from a shared sense of vision and mission, codify them, and then let decentralized teams run the experiments that feel constitutionally right to them given their reading of market signals.

Subjective value is immeasurable, but can be gauged in market tests.

The purpose of a firm is to generate subjective value, which is created by customers through their own experiences and co-created by the firms and brands and services that facilitate those experiences. Subjective value is intangible and immeasurable. But exchange value — what customers actually pay in an exchange transaction — can be a proxy in some cases.

Subjective value is a hard concept to grasp for those who have been educated or trained to think of value in objective terms, as something inherent in a product. Professor Evans finds his students, when asked to describe the value of an offering or an idea, instinctively gravitate to the product-based view, citing attributes, features and performance benefits.

Taking the customer perspective is very hard, and perhaps unnatural. The economic point of view is always to put the producer in the shoes of the customer, to take the customer’s view and identify the customer’s mental model for processing information and observation. It’s hard to do, and requires significant cognitive effort. But done well, it’s key to marketing, innovation, product improvement and competitive positioning. Empathically diagnosing subjective value is one of the greatest insights economics can give to business.

Entrepreneurs thrive in markets.

Markets are the place where entrepreneurs ply their skills, and the entrepreneurial role will never diminish. Their imagination of the future and anticipation of future demand – even under conditions of uncertainty – their creativity and their judgment will always be important in the context of dynamic interactions of multiple players, offerings, and institutions within markets. The human factor is the most important.

Entrepreneurship is not an academic matter to be debated for the distinction of different nuances, but a practical matter of working and succeeding in markets. It concerns the identification of a profit opportunity via some kind of new product, service, method, or recombination of capital, and the ability to introduce this novelty into the marketplace, actively making decisions about resource allocation, cost, investment, communications and all the other elements of a business, overcoming obstacles and resolving difficult challenges. It is, as Professor Evans stated it, both ideational and implementational. Ambidextrous.

And the common backdrop for all entrepreneurs and businesses of all kinds is continuous change. In his book Economics: A Complete Guide For Business, Prof Evans states that, “Economic change will disintegrate existing combinations (of capital goods) and force entrepreneurs to find new ones”. This action, which Prof Evans refers to as “recalculation”, is core to the dynamics and agility of entrepreneurs in markets. Recalculation is the creative pulse that provides the energy for generating new capital structures out of old ones.

Austrian economists have always been acutely aware of change as an economic factor. Perhaps the business world is catching up, but Austrians have always been ahead. It’s the perspective that entrepreneurs and businesses can co-ordinate with each other fruitfully in markets where change is so pervasive and so fast that no-one has complete knowledge and yet must be able to act. Austrian economics demonstrates that good outcomes are possible, even in these conditions of bounded knowledge, for everyone participating in the market, so long as entrepreneurs are free to do their work without intervention. It’s a very powerful message.

People in business can be proud of acting as value generators and not feel any imposed need to “give back” or sacrifice themselves to artificially constructed restraints.

Additional Resources

Economics: A Complete Guide For Business by Anthony J. Evans: Buy It On Amazon

AnthonyJEvans.com