Earlier this month, The Economist released an article on “Why economics does not understand business.” The article goes over how some theories in economics don’t thoroughly explain the reality of business. One example is how neoclassical economics states that market firms usually attempt to optimize their earnings. While Nobel Laureate Hebert Simon noted that in the market, “no business could process all the information needed to extract maximum profit.” Thus, driving them to operate under conditions of ‘bounded rationality’ leading to “making decisions that are satisfactory rather than optimal.” It goes on to state that when a “chief economist” is hired, “GDP growth or the policy of the Federal Reserve” and “not for advice on corporate strategy” because of the limitations of economic theory. However, there is a misunderstanding of how economists use their skills for a private company.
While it is right to say that “most of what makes for a flourishing business cannot be captured in a tight theory with a few equations,” economics isn’t as simplistic as learning how to calculate price elasticity in an introductory economics class. Economics encompasses many subfields of analytical research that include behavioral economics and econometrics. They also all differ and connect with different research fields. These specified subfields could apply in the private sector.
Months ago, The Economist reported how tech companies, notably Lyft and Amazon, were “increasingly turning to economics for insights into how to solve business problems—from pricing and product development to strategy.” The hiring is primarily due to economists having “a good grasp of statistics, as well as a knack for understanding how incentives affect human behavior.” Other than the incentive of great pay provided, economists work these types of jobs because of the “ample data.” As University of Chicago professor Richard Thaler described it, to study human behavior’s economic activity, economists need to “take the data seriously” to answer the “empirical question” behind it. Thus, this methodology can apply to several business questions.
In the tech sector, Lyft hired economists to calculate how much riders value their waiting time in dollars. With the information provided, they found a better way to price their services to attract customers by also factoring in the customers’ patience for the Lyft driver to arrive. While today at Amazon, they employ them to “develop techniques that apply econometrics to large data sets, address quantitative problems, and contribute to the design of automated systems around the company.” So, economists do provide consulting for corporations. Even other various types of tech industries, particularly video game development, do similarly. The Valve Corporation, a video game developer and distribution company, request them to examine the “nuanced social institutions and economic phenomena that emerge from in-game virtual economies” and “how tastes are evolving on Steam, Valve's game distribution platform.” On Steam, various games have their system of trade for in-game items between players. For instance, Team Fortress 2 has virtual commodities (for example, hats for the game’s characters) being bought and sold by people who play the game.
Overall, economics has valuable quantitative methods that can be applied to businesses in spite of its lack of developed theory. Of course, there still isn’t a simple formula to having a successful enterprise, and economic concepts aren’t always precise. Though, it shouldn’t mean economics is almost entirely useless when the tech sector needs economists to consult with.