The 'Austrian' School of Strategy: A Stock-Taking

0:00In this paper, what I'm looking at is what the Austrian School has to offer in strategic management, specifically. I wouldn't say it fits very well under the headline for this session, New Frontiers, because it has been done before. I think Peter Klein has been working in this area for 40 some years or so. But what I'm doing in this paper is looking at the trends over the past couple of decades. If the Austrian School is actually having more influence, if it's having less influence, or what is going on. So what is strategic management? Just to start with some sort of summary of what that is actually about.

0:47Well, it is a study for how organizations can earn profits in the market. So it is kind of a way of analyzing why firms can earn above normal profits in certain industries. So they study primarily how to use their capabilities in terms of resources in order to make these profits and sustainable profits. So it's really an industrial organization turned on its head, rather than saying that the market is efficient and that's the way it should be and then just talk about how the market works. We look at the specific firm and we use the same reasoning but the other way around, saying how can this firm break out of perfect competition, how can this firm use what it has or acquire more resources and become unique in the sense that they make more profits than everybody else.

1:52So, about 20 years ago, there was an article published that was called the Austrian School of Strategy. Now, I wouldn't say there is such a school, but this particular author, Jacobson, he claimed that a lot of the research going on in strategic management is distinctly Austrian in nature, already in 92. 1992 and that they together can be seen as an Austrian school of strategy. The point he was making was that a lot of Austrian concepts are already used in strategic management and what is missing is using these consciously and contextualize them in an Austrian way that is using the Austrian framework in order to understand them better.

2:40So you have these concepts that are injected in strategic management research but they don't really understand how to use them or how to use them all the way. So they are missing out on the value. So they are not using Austrian economics strategically you could say. So in his paper what he does is he looks at four aspects or four dimensions where he contrasts the Austrian School with neoclassical industrial organization and how that is used in strategic management. Now you look specifically at strategic objective, market conditions, profitability, modeling, and the success factors. What is the nature of the success factors? So in common neoclassical industrial organization, we'll look at competitive forces in the market, it's an equilibrium view.

3:32We look at regularities and so forth and we only look what is measurable. In the Austrian's version of this instead, we would look at entrepreneurial discovery rather than the forces in the market. We would adopt a disequilibrium view. We would focus on the heterogeneity of resources rather than just capital K and capital L. And Austrian's, he said, look into unobservable factors and recognize that they have a real effect. and unobservable factors could be stuff like knowledge and culture and things like that. And of course, it's more important to us than it is to neoclassicals. So in this paper, what I do is I survey the top five journals in management to see what impact or what influence does Austrian economics have according to these four dimensions.

4:26And this is just a listing of those journals and I have no idea why this column is yellow. Hello, I think it's just a way of me subconsciously telling you that I went through a lot of articles. Anyway, these are the top five, generally speaking, the top five journals in management. So I looked at the whole period from Jacobson's article, and it was published in 92, all the way through 2012 last year. And what I did was try to translate these dimensions into concepts and keywords as well as main authors, and Peter, you might want to see that your name is here.

5:20Even though I graduated, I still want to brown-nose my previous advisor a little bit. Anyway, so I use these and the requirement is not simply that an article has to use, for instance, the term heterogeneity because obviously that could mean anything. So they will have to use some sort of combination of keywords or a combination of a keyword and specifically Austrian reference, trying to identify if it's actually Austrian or if it's just used as an Austrian style of concept, right? Now, the findings then, what I find during this period is that there is an upward trend. They seem to be adopting more Austrian concepts.

6:08Of course, we have a bit of an outlier here last year. But even if we leave that out, and this one here with zero in the beginning, even if we leave those out, there are more articles published now using Austrian concepts than there were before. So potentially Jacobson's prediction that strategic management has a lot to gain from using Austrian concepts, potentially he had it right. The problem is that this is a total number of articles, now if we look at the fraction instead, the trend line doesn't look all that good. It's very stable and I think the slope is zero or infinity or whatever you want to call it.

6:55So what I did instead of looking at the total then, because it doesn't tell us much, is break it down into these dimensions and then break it down for each journal to see over time, where are the opportunities for Austrians and where are the Austrians basically. So if we look at per category, where the strategic objectives, the market conditions and so forth, we can see that different journals emphasize different parts of the Austrian style strategic management. So we see, for instance, market conditions, you can see that Cadmum Management Review Review and Strategic Management Journal are pretty strong with eight articles each, whereas generally Administrative Science Quarterly, they don't publish much Austrian stuff at all, so if you want to get published, don't send it there.

7:50Now looking specifically at the number one journal, Academy Management Review, which fits Austrian reasoning a lot better because that's their theory or conceptual journal rather than publishing empirical stuff. I look at each category for AMR over time. As you can see, for entrepreneurial discovery, there's a negative trend over time, which doesn't make any sense if you read the articles because there's actually more. If you look at the topical line here, there seems to be more entrepreneurial discoveries just that they leave the Austrian references out. So they don't cite Kirzner anymore, they used to, but they don't anymore.

8:38In terms of disequilibrium, this seems to be where Austrians are or should be. This is where the opportunities seem to be, because the trend line is very positive and there are more articles published, as you can see here. The blue and the red are a number of In terms of heterogeneity, it looks like the trend is negative, but the fact is that there was actually only one article published during these twenty years, so we can't really say much. I tried my best to extrapolate, but if you only have one data point, it's really difficult. But the thing is heterogeneity is used a lot in the articles you can see here with, I'm not sure what year this is, but it's 18 articles in that year in only AMR using the heterogeneity concept or heterogeneous resources.

9:38But they do not at all use other Austrian concepts with this concept or cite Austrian authors. They're simply not there, but obviously, it should be possible to talk about this concept and just inject a few Austrian references as well. It should be an opportunity, right? And if we look at success factors, unobservables like knowledge and things like that, it's also a negative trend. Not a lot of articles. As you can see, there are two, so I could extrapolate. But they do talk a lot about knowledge, and they talk about culture, and they do talk about these Austrian concepts, but it's just that Austrian economics is not there.

10:23So it should be very possible to publish something here, even though I would guess that it would be difficult to publish something purely Austrian. So overall the observations from doing this and looking through those 5,000 something articles, it seems that strategic management scholars have adopted a lot of what Austrian economics has to offer, at least using Jacobson's view, but they have not adopted the framework, so they have not followed Jacobson's recommendation that they should be more consciously using Austrian economics, is simply not there at all. There's no connection between the concept and the overall whole or the theory.

11:10And when they use the concepts, they generally do not cite Austrians.

11:18This is all what I said. And one of the problems that I see with this is that it seems like they're talking about the firms, they inject all these concepts that we know very well, But they do not connect this to an overall understanding for the production process or the production structure or what the production is really for. Because they focus on the organization, they focus on its capabilities, they focus on its resources, but they do not talk about the general market at all. They do not make this connection from the micro view of the firm to the macro view of the market as a whole or the market process. This connection is simply not there. So that should be a great opportunity for people like us to publish in this area and stress this point that actually it makes sense to connect this firm or the firm in general to the overall market process and how they interrelate and interact.

12:21So the conclusions, of course, is that there seems to be a lot of opportunities in strategy still, or rather, there should be more opportunities now than before, which seems to be according to Jacobson's sort of prediction or recommendation. It's gonna be a hard sell simply because you have to take out all the Austrian lingo and the Austrian theory and add the Austrian concepts. What is possibly an extra opportunity here is the strategic management, I would say. They don't really have a theory. They don't have, like any economist, even neoclassicals, they have a theoretical framework within which they do their reasoning, right?

13:12Strategic management is, like any management, mainly inductive, and there are plenty of papers where they mix and match different methods that have nothing at all to do with each other, and they still get published. But pointing out that these concepts actually do relate to each other in a certain way and that there is a lot of value in using them together in that way should be a very productive approach, I think. The hard part is, of course, making sure reviewers understand this. So another problem then is that it seems that the Hayekian version of Austrian economics is the big one. Jacobson in his article for 92 adopts a purely Hayekian or Vissarion knowledge problem sort of view of Austrian economics whereas the mundane version or the version most people here would use simply is not there.

14:15There's a lot of talk about knowledge and opportunity discovery. There's a lot less about judgment. and there's, well, barely anything at all on production and things like that. So whether this is a threat or an opportunity, I don't know, we'll have to see, I guess. And entrepreneurship then is pretty much only Kirznerian. There is not much of the Misesian judgmental entrepreneurs we heard about in previous sessions that does not exist, especially if we take Peter Klein out of the picture.