For once I agree with Paul Krugman, who writes: “success in business does not seem to convey any special insight into economic policy.” Unfortunately, everything in his latest column save that single sentence is completely wrong. What Krugman means is that Ben Bernanke, Janet Yellen, Mervyn King, Mario Draghi, and the other academic Keynesian policymakers were right about quantitative easing, bailouts, subsidies, etc. as they bravely “navigated their way through a once-in-three-generations economic crisis” (which, of course, their previous policies had nothing to do with). In doing so, they overcame resistance from various (unnamed) businesspeople who thought that massive monetary and fiscal stimulus, bank and industry bailouts, and general suppression of market mechanisms might not be the best idea ever. The Keynesian professors, Krugman reports, “had the courage to defy all those tycoons demanding that they stop printing money.” Well, that all worked out great, didn’t it?
OK, even a stopped clock is right twice a day. Krugman is correct that success in entrepreneurship does not make one a good economist (see, for Exhibits A, B, and C, George Soros, Warren Buffett, and Boone Pickens). Moreover, skilled economists may be exceptionally poor entrepreneurs. Krugman understands the differences between economic and entrepreneurial thinking in terms of the sophomoric Keynesian idea of the “fallacy of composition” — e.g., an entrepreneur thinks he should cut his expenditures in response to falling demand for his product, but if all entrepreneurs do this, then total spending will fall, the economy will go into recession, and the entrepreneur’s profits will fall, etc. The Keynesian economist thinks that, contra Adam Smith, what is folly in the conduct of a single household is just right for the economy as a whole.
The truth is quite different: economic analysis and entrepreneurial action are fundamentally different activities, requiring different skills. Economics involves abstract, deductive reasoning, the ability to trace out long-run consequences, a view of the whole as well as the parts. Entrepreneurship, as Mises consistently emphasized, is about anticipating future market conditions, something that economic theory does not provide.
In fact both the economists and the businessmen are fully aware of the uncertainty of the future. The businessmen realize that the economists do not dispense any reliable information about things to come and that all that they provide is interpretation of statistical data referring to the past. For the capitalists and entrepreneurs the economists’ opinions about the future count only as questionable conjectures. . . . Business forecasting fails in the vain attempts to make the uncertainty of the future disappear and to deprive entrepreneurship of its inherently speculative character (Human Action, Scholars Edition, p. 868).
As Rothbard put it, “Contrary to the pretensions of many economists, [the economist] is of little aid to the businessman. He cannot forecast future consumer demands and future costs as well as the businessman. . . . The entrepreneur is where he is precisely because of his superior forecasting ability on the market.” The economist, by contrast, excels at “long chains of praxeological reasoning,” needed for instance to analyze the effects of government intervention in the economy. “The consumer’s decision to purchase butter and the entrepreneur’s decision about entering into the butter business do not require praxeological reasoning, but rather insight into the concrete data. The judging and evaluation of a governmental act (e.g., an income tax), however, require long chains of praxeological reasoning” (Man, Economy, and State, Scholars Edition, pp. 1358-39).
Hence the economist and the entrepreneur specialize in different activities. Skill in one domain does not translate into skill in the other — not because entrepreneurs are narrow and provincial, compared to Keynesian professors — but because they deal with real-world, future market conditions, not the general principles understood by (good) economists.
