The value of being negative
The practical role of economics is mostly negative. The upside belongs to the entrepreneur, innovator, promoter, and arbitrageur. I’m not entirely sure how to categorize actual individuals who lead and/or own businesses, but certainly one person can wear more than one of those hats.
The term “manager” is its own category and is primarily negative. The owner/leader would charge the manager with making sure their “will is done” and to correct or report any actions or outcomes that deviate from the leader’s vision.
In smaller firms add “manager” to the many hats the owner wears and at best it becomes management by example rather than by rule and policy.
Managers by definition don’t lead, they oversee execution and report to leaders. The role is highly technical, specific, and often benefits from extended formal training. It is not creative, however.
So: economics and its cousin finance—what’s the actual difference other than formalistic or legal definitions? I understand the former to be largely questions of a firm’s place in the economic order, and the latter to be primarily about the firm itself. This fits under the rubric of management in the sense of setting parameters and watching for trouble. As such it’s not creative, and not a source of actual economic gain.
In Risk, Uncertain, and Profit Frank Knight differentiates mere actuarial gains (risk) or rents on money (interest) from actual gain from profit, which for him arises from uncertainty. It is entirely the province of entrepreneurial action that generates true gains; all else is capital rents and risk premiums.
Back to me and economics/finance. My coldhearted view is that an entrepreneur who needs a consultant to help with innovation is in fact no entrepreneur. Maybe they’re a skilled manager in search of a boss. Either the person who leads has ideas for the future, which means ideas for continuing to serve their customers, or they are caretakers of a business in decline or in search of a new owner who may bring new ideas.
There’s nothing wrong innately with being the caretaker/manager-owner. I’ve helped such people through planning to shepherd their resources, avoid the wrong bets, and essentially glide their firms to some soft landing like an auction or sale, and for them a nice retirement. In this life most of us are lucky to be one-hit wonders and sooner or later the entrepreneur morphs into caretaker or finds someone to fulfil that role for them.
It falls to the economics/finance specialist to not maximize profit but 1) avoid non-recoverable mistakes, 2) optimize the timing of growth/investment decisions, and 3) help the entrepreneur clear obstacles from their own profit-maximization, which means, their own remedies for uncertainty.
I could talk at great length about the first two, but to an extent they’re self-explanatory. The third though…
Sr. speaks a length about just such things, repeatedly, in his podcast. I will speak from experience: entrepreneurs over time can be hampered in pursuing what they think is truly important (and remunerative) by misperceptions, often fueled or confirmed by various experts in their orbit, of what’s necessary, risky, or urgent.
Hence, on the heels of a degree of success and some experience, the pressure arises that will marginalize their own goals for the sake of following some form of “best practices.” Here’s a simple example, a perennial favorite of mine: “drive out the costs.” Short term and simplistic numerical analysis show that this will win, and the logic goes, if you keep winning the short term, darned if you don’t wind up with a long-term win too.
What really happens is you get measurable short-term gains and over time, imperceptibly at first, gut the structure behind the façade, and casual observers and insiders alike are surprised when it collapses suddenly after so many years of apparent success.
In truth: cut costs = gut product and development = compromise the future. Long-term economic analysis is the means of reinforcing the entrepreneur’s true path, of securing support in the near term because they seem to be sub-optimizing their earnings right now for gains later. It’s the economist’s most positive role to demonstrate in advance that this is not ungrounded “pie-in-the-sky” thinking, but in fact, demonstrably prudent finance.