Three Economics Truths for Entrepreneurs

Entrepreneurship is about creating a product or service for the benefit and good of others. Since business is about relationships and people, it's important for every entrepreneur to know and understand how to best serve people.

Knowing marketing, accounting, product development, and every other aspect of the business is important and necessary, but oftentimes the subject of economics gets thrown to the wayside and forgotten.

This is a major folly because economics is about human behavior, incentives, and the allocation of resources, all of which are important for every entrepreneur to know.

Therefore, every entrepreneur should commit to memory the following three economic truths. By doing so, you will take your business to the next level, serve your customers more effectively, and increase profits like never before. 

#1 Economics is not Finance.

The common misunderstanding that I hear all the time is that economics is about making money. This is not true. Other misnomers include how to invest, how to get rich, and how to bank. Being a good businessman does not make you a good economics

Yes, economics may cover each of these topics to an extent, but that's not what economics is about. 

The textbook definition of economics and said by economist Thomas Sowell is, "the allocation of scare resources which have alternate uses." 

This basically means that there is a lot of stuff that can be used for many different purposes, but it's limited, so people have to decide what to make and what not to make. Really, it's that simple.

Now, where economics becomes confusing and daunting is when you begin to dive into economic systems, how that works, what effects it has on the economy, and the other big topics you read about. But at it's core, economics is about how stuff gets divvied out.

Entrepreneurs inherently understand this because they have limited money, limited resources, and limited demand, but their task is to increase each.

Knowing the background and foundation of this conundrum is beneficial.

#2 Economics Greatly Affects Public Policy.

It is amazing for me to see how many good entrepreneurs support bad policies that harm their customers, employees, industry, and marketplace. 

I first saw this when I worked at Fidelity Investments right after graduate school. At the time, Fidelity Investments was the largest 401(k) provider in the country, with more than $3 trillion in assets. This is massive amounts of money.

During this time there were also the Occupy Wall Street Protests, people protesting against the greed and evil of Wall Street. This included people protesting at the local Fidelity Investment branches in the California Bay Area, one of which I worked at for my job. 

What I found interesting is that I was hardly rich, in fact, I was just out of grad school and flat broke. But, there were protesters outside and to them, I looked evil because I wore a suit and tie to work. Don't mind that the tie was a hand-me-down from a retired businessman and the suit was purchased on-sale from Men's Warehouse. 

What was even more interesting were the comments I heard from my coworkers. The majority were in favor of the protesters and supported their cause, "Wall Street is evil!" I'm over here like, "guys, we work for Wall Street." But the protestors couldn't connect the dots. They didn't see that their direct support of the protesters and the related policies would hurt our industry, make our jobs more difficult, increase the amount of paperwork we already had to do, and create additional barriers to entry that would actually hurt minorities and females from entering the financial world.

There was a massive cognitive dissonance.

The same thing happens all of the time with a million other public policy issues. Too often, good entrepreneurs who are creating wonderful small businesses vote in favor of destructive things like:

  • Minimum wage laws.
  • Consumer protection.
  • Protectionism of an industry.
  • Choosing winners and losers.
  • Tariffs.
  • More regulation.
  • Public-private partnerships.
  • Subsidies.

Each one of the things listed above increases the cost of doing business.

This means it's harder to start a business, those costs get passed onto the customer, and the entrepreneur is less able to provide his product or service.

An important note should also be made about subsidies and public-private partnerships.

Any time the risk of failure is mitigated or hidden from the entrepreneur, this distorts the business model, the marketplace, and increases the amount of bad ideas. It also creates an uneven playing field for those who can't get the government protection, usually hurting women and minorities most, unfortunately.

When the government takes the risk, that risk gets passed onto citizens in the form of taxes, bailouts, and failed companies. BUT, when the entrepreneur is forced to take the full risk (and reward!) of the company, you see better, healthier companies.

Economics is About Human Behavior.

Adam Smith is known as the Father of Economics and penned his famous book, The Wealth of Nations, in 1776. What most people don't know is that before Adam Smith wrote his important text on economics, he was first and foremost a moral philosopher. 

The lesser-known book he wrote prior is called, The Theory of Moral Sentiments. The entire book was dedicated to understanding and exploring the concepts of conscience, moral judgment, virtue, and the greater good.

Therefore, it's massively important for every entrepreneur to understand that economics is about human behavior and every action, product, or service should be in line with right and just behavior. The idea of moral actions that benefit others, mutually beneficial transactions that are not coerced, and the concept of services to others should be at the fingertips of every entrepreneur in the world.

What also gets left out oftentimes is the notion that the world is not perfect and never will be. People are not perfect either and as such, we should not expect perfection. Instead, entrepreneurs are forced to deal with the reality we live in and to deliver our products and services within that reality.

When considering business decisions, you should always keep top of mind the following three questions, coined from Hoover Institution's Thomas Sowell:

#1 At what cost?

#2 Compared to what?

#3 What hard evidence do you have?

Every entrepreneur should ask these questions to himself often and understand there is no perfect decision, only some decisions that are better than other decisions. But as entrepreneurs, we ought to accept this reality and note how we can best influence human behavior to purchase our products or service. Economics helps you understand that.

How Do I Learn Economics?

You don't need to attend school again to get a good grasp of economics. But, here is a very short list of where to start so you can build a good foundation of economics knowledge:

  1. Watch the, Fear the Boom and Bust Cycle- this is a rap video made by economics and it is hilarious, but historically accurate. This will help you love economics.
  2. Read, Basic Economics by Thomas Sowell- this book is easy to read, has no confusing charts and graphs, and will give you a wonderful introduction with historical context to understand economics.
  3. Next, go through, Economics in 1 Lesson- written by a newspaper editor, this book is short, simple, and covers the big topics in economics.
  4. Diversify your reading. Read both the Wall Street Journal and the New York Times. Watch CNN and Fox News. When you come across an issue, read both sides of the issue.
  5. Remember, there are always trade-offs. No solution is perfect.

By understanding economics, you will gain insight into human behavior, which will allow you to better serve your customers and your company.

The entrepreneur who chooses not to understand economics will commit follies and impede the growth of his company. You are different though, you have what it takes to connect with people on a deeper level, serve them, and deliver a wonderful product or service that will make their life better.