2018-02-23 18:58:03 +00:00
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---
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created_at: '2016-11-05T16:57:29.000Z'
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title: A Country Is Not a Company (1996)
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url: https://hbr.org/1996/01/a-country-is-not-a-company&cm_sp=Article-_-Links-_-Top%20of%20Page%20Recirculation
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author: seanalltogether
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points: 67
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story_text:
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comment_text:
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num_comments: 23
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parent_id:
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created_at_i: 1478365049
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- story
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- author_seanalltogether
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- story_12880598
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objectID: '12880598'
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---
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2018-03-03 09:35:28 +00:00
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![JAN15\_22](/resources/images/article_assets/1996/01/JAN15_22.jpg)
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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Carlo Giambarresi
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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College students who plan to go into business often major in economics,
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but few believe that they will end up using what they hear in the
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lecture hall. Those students understand a fundamental truth: What they
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learn in economics courses won’t help them run a business.
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2018-02-23 18:19:40 +00:00
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2018-03-03 09:35:28 +00:00
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The converse is also true: What people learn from running a business
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won’t help them formulate economic policy. A country is not a big
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corporation. The habits of mind that make a great business leader are
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not, in general, those that make a great economic analyst; an executive
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who has made $1 billion is rarely the right person to turn to for advice
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about a $6 trillion economy.
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Why should that be pointed out? After all, neither businesspeople nor
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economists are usually very good poets, but so what? Yet many people
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(not least successful business executives themselves) believe that
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someone who has made a personal fortune will know how to make an entire
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nation more prosperous. In fact, his or her advice is often disastrously
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misguided.
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Many people believe that someone who has made a personal fortune will
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know how to make an entire nation more prosperous.
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I am not claiming that business-people are stupid or that economists are
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particularly smart. On the contrary, if the 100 top U.S. business
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executives got together with the 100 leading economists, the least
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impressive of the former group would probably outshine the most
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impressive of the latter. My point is that the style of thinking
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necessary for economic analysis is very different from that which leads
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to success in business. By understanding that difference, we can begin
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to understand what it means to do good economic analysis and perhaps
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even help some businesspeople become the great economists they surely
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have the intellect to be.
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Let me begin with two examples of economic issues that I have found
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business executives generally do not understand: first, the relationship
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between exports and job creation, and, second, the relationship between
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foreign investment and trade balances. Both issues involve international
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trade, partly because it is the area I know best but also because it is
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an area in which businesspeople seem particularly inclined to make false
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analogies between countries and corporations.
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## Exports and Jobs
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Business executives consistently misunderstand two things about the
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relationship between international trade and domestic job creation.
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First, since most U.S. business-people support free trade, they
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generally agree that expanded world trade is good for world employment.
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Specifically, they believe that free trade agreements such as the
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recently concluded General Agreement on Tariffs and Trade are good
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largely because they mean more jobs around the world. Second,
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businesspeople tend to believe that countries compete for those jobs.
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The more the United States exports, the thinking goes, the more people
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we will employ, and the more we import, the fewer jobs will be
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available. According to that view, the United States must not only have
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free trade but also be sufficiently competitive to get a large
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proportion of the jobs that free trade creates.
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Do those propositions sound reasonable? Of course they do. This sort of
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rhetoric dominated the last U.S. presidential election and will likely
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be heard again in the upcoming race. However, economists in general do
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not believe that free trade creates more jobs worldwide (or that its
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benefits should be measured in terms of job creation) or that countries
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that are highly successful exporters will have lower unemployment than
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those that run trade deficits.
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Why don’t economists subscribe to what sounds like common sense to
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businesspeople? The idea that free trade means more global jobs seems
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obvious: More trade means more exports and therefore more export-related
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jobs. But there is a problem with that argument. Because one country’s
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exports are another country’s imports, every dollar of export sales is,
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as a matter of sheer mathematical necessity, matched by a dollar of
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spending shifted from some country’s domestic goods to imports. Unless
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there is some reason to think that free trade will increase total world
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spending—which is not a necessary outcome—overall world demand will not
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change.
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Moreover, beyond this indisputable point of arithmetic lies the question
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of what limits the overall number of jobs available. Is it simply a
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matter of insufficient demand for goods? Surely not, except in the very
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short run. It is, after all, easy to increase demand. The Federal
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Reserve can print as much money as it likes, and it has repeatedly
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demonstrated its ability to create an economic boom when it wants to.
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Why, then, doesn’t the Fed try to keep the economy booming all the time?
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Because it believes, with good reason, that if it were to do so—if it
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were to create too many jobs—the result would be unacceptable and
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accelerating inflation. In other words, the constraint on the number of
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jobs in the United States is not the U.S. economy’s ability to generate
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demand, from exports or any other source, but the level of unemployment
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that the Fed thinks the economy needs in order to keep inflation under
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control.
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That is not an abstract point. During 1994, the Fed raised interest
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rates seven times and made no secret of the fact that it was doing so to
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cool off an economic boom that it feared would create too many jobs,
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overheat the economy, and lead to inflation. Consider what that implies
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for the effect of trade on employment. Suppose that the U.S. economy
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were to experience an export surge. Suppose, for example, that the
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United States agreed to drop its objections to slave labor if China
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agreed to buy $200 billion worth of U.S. goods. What would the Fed do?
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It would offset the expansionary effect of the exports by raising
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interest rates; thus any increase in export-related jobs would be more
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or less matched by a loss of jobs in interest-rate-sensitive sectors of
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the economy, such as construction. Conversely, the Fed would surely
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respond to an import surge by lowering interest rates, so the direct
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loss of jobs to import competition would be roughly matched by an
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increased number of jobs elsewhere.
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Even if we ignore the point that free trade always increases world
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imports by exactly as much as it increases world exports, there is still
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no reason to expect free trade to increase U.S. employment, nor should
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we expect any other trade policy, such as export promotion, to increase
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the total number of jobs in our economy. When the U.S. secretary of
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commerce returns from a trip abroad with billions of dollars in new
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orders for U.S. companies, he may or may not be instrumental in creating
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thousands of export-related jobs. If he is, he is also instrumental in
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destroying a roughly equal number of jobs elsewhere in the economy. The
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ability of the U.S. economy to increase exports or roll back imports has
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essentially nothing to do with its success in creating jobs.
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Needless to say, this argument does not sit well with business
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audiences. (When I argued on one business panel that the North American
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Free Trade Agreement would have no effect, positive or negative, on the
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total number of jobs in the United States, one of my fellow panelists—a
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NAFTA supporter—reacted with rage: “It’s comments like that that explain
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why people hate economists\!”) The job gains from increased exports or
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losses from import competition are tangible: You can actually see the
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people making the goods that foreigners buy, the workers whose factories
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were closed in the face of import competition. The other effects that
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economists talk about seem abstract. And yet if you accept the idea that
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the Fed has both a jobs target and the means to achieve it, you must
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conclude that changes in exports and imports have little effect on
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overall employment.
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## Investment and the Trade Balance
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Our second example, the relationship between foreign investment and
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trade balances, is equally troubling to businesspeople. Suppose that
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hundreds of multinational companies decide that a country is an ideal
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manufacturing site and start pouring billions of dollars a year into the
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country to build new plants. What happens to the country’s trade
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balance? Business executives, almost without exception, believe that the
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country will start to run trade surpluses. They are generally
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unconvinced by the economist’s answer that such a country will
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necessarily run large trade deficits.
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It’s easy to see where the business-people’s answer comes from. They
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think of their own companies and ask what would happen if capacity in
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their industries suddenly expanded. Clearly their companies would import
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less and export more. If the same story is played out in many
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industries, surely this would mean a shift toward a trade surplus for
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the economy as a whole.
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The economist knows that just the opposite is true. Why? Because the
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balance of trade is part of the balance of payments, and the overall
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balance of payments of any country—the difference between its total
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sales to foreigners and its purchases from foreigners—must always be
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zero.1 Of course, a country can run a trade deficit or surplus. That is,
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it can buy more goods from foreigners than it sells or vice versa. But
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that imbalance must always be matched by a corresponding imbalance in
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the capital account. A country that runs a trade deficit must be selling
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foreigners more assets than it buys; a country that runs a surplus must
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be a net investor abroad. When the United States buys Japanese
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automobiles, it must be selling something in return; it might be Boeing
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jets, but it could also be Rockefeller Center or, for that matter,
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Treasury bills. That is not just an opinion that economists hold; it is
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an unavoidable accounting truism.
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So what happens when a country attracts a lot of foreign investment?
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With the inflow of capital, foreigners are acquiring more assets in that
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country than the country’s residents are acquiring abroad. But that
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means, as a matter of sheer accounting, that the country’s imports must,
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at the same time, exceed its exports. A country that attracts large
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capital inflows will necessarily run a trade deficit.
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A country that attracts a lot of foreign investment will necessarily run
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a trade deficit.
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But that is just accounting. How does it happen in practice? When
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companies build plants, they will purchase some imported equipment. The
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investment inflow may spark a domestic boom, which leads to surging
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import demand. If the country has a floating exchange rate, the
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investment inflow may drive up the currency’s value; if the country’s
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exchange rate is fixed, the result may be inflation. Either scenario
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will tend to price the country’s goods out of export markets and
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increase its imports. Whatever the channel, the outcome for the trade
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balance is not in doubt: Capital inflows must lead to trade deficits.
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Consider, for example, Mexico’s recent history. During the 1980s, nobody
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would invest in Mexico and the country ran a trade surplus. After 1989,
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foreign investment poured in amid new optimism about Mexico’s prospects.
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Some of that money was spent on imported equipment for Mexico’s new
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factories. The rest fueled a domestic boom, which sucked in imports and
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caused the peso to become increasingly overvalued. That, in turn,
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discouraged exports and prompted many Mexican consumers to purchase
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imported goods. The result: Massive capital inflows were matched by
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equally massive trade deficits.
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Then came the peso crisis of December 1994. Once again, investors were
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trying to get out of Mexico, not in, and the scenario ran in reverse. A
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slumping economy reduced the demand for imports, as did a newly devalued
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peso. Meanwhile, Mexican exports surged, helped by a weak currency. As
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any economist could have predicted, the collapse of foreign investment
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in Mexico has been matched by an equal and opposite move of Mexican
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trade into surplus.
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But like the proposition that expanded exports do not mean more
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employment, the necessary conclusion that countries attracting foreign
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investment typically run trade deficits sits poorly with business
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audiences. The specific ways in which foreign investment might worsen
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the trade balance seem questionable to them. Will investors really spend
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that much on imported equipment? How do we know that the currency will
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appreciate or that, if it does, exports will decrease and imports will
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increase? At the root of the businessperson’s skepticism is the failure
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to understand the force of the accounting, which says that an inflow of
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capital must—not might—be accompanied by a trade deficit.
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In each of the above examples, there is no question that the economists
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are right and the business-people are wrong. But why do the arguments
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that economists find compelling seem deeply implausible and even
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counterintuitive to businesspeople?
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There are two answers to that question. The shallow answer is that the
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experiences of business life do not generally teach practitioners to
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look for the principles that underlie economists’ arguments. The deeper
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answer is that the kinds of feedback that typically arise in an
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individual business are both weaker than and different from the kinds of
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feedback that typically arise in the economy as a whole. Let me analyze
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each of these answers in turn.
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## The Parable of the Paralyzed Centipede
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Every once in a while, a highly successful businessperson writes a book
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about what he or she has learned. Some of these books are memoirs: They
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tell the story of a career through anecdotes. Others are ambitious
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efforts to describe the principles on which the great person’s success
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was based.
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Almost without exception, the first kind of book is far more successful
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than the second, not only in terms of sales but also in terms of its
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reception among serious thinkers. Why? Because a corporate leader
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succeeds not by developing a general theory of the corporation but by
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finding the particular product strategies or organizational innovations
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that work. There have been some business greats who have attempted to
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codify what they know, but such attempts have almost always been
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disappointing. George Soros’s book told readers very little about how to
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be another George Soros; and many people have pointed out that Warren
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Buffett does not, in practice, invest the Warren Buffett Way. After all,
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a financial wizard makes a fortune not by enunciating general principles
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of financial markets but by perceiving particular, highly specific
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opportunities a bit faster than anyone else.
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A corporate leader succeeds by finding the right strategies, not by
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developing a theory of the corporation.
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Indeed, great business executives often seem to do themselves harm when
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they try to formalize what they do, to write it down as a set of
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principles. They begin to behave as they think they are supposed to,
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whereas their previous success was based on intuition and a willingness
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to innovate. One is reminded of the old joke about the centipede who was
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asked how he managed to coordinate his 100 legs: He started thinking
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about it and could never walk properly again.
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Yet even if a business leader may not be very good at formulating
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general theories or at explaining what he or she does, there are still
|
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|
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those who believe that the businessperson’s ability to spot
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|
|
opportunities and solve problems in his or her own business can be
|
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|
|
applied to the national economy. After all, what the president of the
|
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|
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United States needs from his economic advisers is not learned tracts but
|
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|
|
|
sound advice about what to do next. Why isn’t someone who has shown
|
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|
|
consistently good judgment in running a business likely to give the
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|
|
president good advice about running the country? Because, in short, a
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|
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country is not a large company.
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Many people have trouble grasping the difference in complexity between
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even the largest business and a national economy. The U.S. economy
|
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|
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employs 120 million people, about 200 times as many as General Motors,
|
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|
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the largest employer in the United States. Yet even this 200-to-1 ratio
|
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|
|
vastly understates the difference in complexity between the largest
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|
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business organization and the national economy. A mathematician will
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tell us that the number of potential interactions among a large group of
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|
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people is proportional to the square of their number. Without getting
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too mystical, it is likely that the U.S. economy is in some sense not
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hundreds but tens of thousands of times more complex than the biggest
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|
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corporation.
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Moreover, there is a sense in which even very large corporations are not
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all that diverse. Most corporations are built around a core competence:
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a particular technology or an approach to a particular type of market.
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As a result, even a huge corporation that seems to be in many different
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businesses tends to be unified by a central theme.
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The U.S. economy, in contrast, is the ultimate nightmare conglomerate,
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with tens of thousands of utterly distinct lines of business, unified
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only because they happen to be within the nation’s borders. The
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experience of a successful wheat farmer offers little insight into what
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works in the computer industry, which, in turn, is probably not a very
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good guide to successful strategies for a chain of restaurants.
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The U.S. economy is the ultimate conglomerate, with tens of thousands of
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distinct lines of business.
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How, then, can such a complex entity be managed? A national economy must
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be run on the basis of general principles, not particular strategies.
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|
Consider, for example, the question of tax policy. Responsible
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|
|
governments do not impose taxes targeted at particular individuals or
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|
|
corporations or offer them special tax breaks. In fact, it is rarely a
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good idea for governments even to design tax policy to encourage or
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|
|
discourage particular industries. Instead, a good tax system obeys the
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|
|
broad principles developed by fiscal experts over the years—for example,
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neutrality between alternative investments, low marginal rates, and
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minimal discrimination between current and future consumption.
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Why is that a problem for businesspeople? After all, there are many
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general principles that also underlie the sound management of a
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|
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corporation: consistent accounting, clear lines of responsibility, and
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|
|
so on. But many businesspeople have trouble accepting the relatively
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|
|
hands-off role of a wise economic policy-maker. Business executives must
|
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|
|
|
be proactive. It is hard for someone used to that role to realize how
|
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|
|
much more difficult—and less necessary—this approach is for national
|
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|
|
economic policy.
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Consider, for example, the question of promoting key business areas.
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|
Only an irresponsible CEO would not try to determine which new areas
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|
|
were essential to the company’s future; a CEO who left investment
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|
|
decisions entirely to individual managers running independent profit
|
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|
|
centers would not be doing the job. But should a government decide on a
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|
|
list of key industries and then actively promote them? Quite aside from
|
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|
|
economists’ theoretical arguments against industrial targeting, the
|
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|
|
|
simple fact is that governments have a terrible track record at judging
|
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|
|
which industries are likely to be important. At various times,
|
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|
|
governments have been convinced that steel, nuclear power, synthetic
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|
|
fuels, semiconductor memories, and fifth-generation computers were the
|
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|
|
wave of the future. Of course, businesses make mistakes, too, but they
|
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|
|
|
do not have the extraordinarily low batting average of government
|
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|
|
because great business leaders have a detailed knowledge of and feel for
|
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|
|
their industries that nobody—no matter how smart—can have for a system
|
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|
|
as complex as a national economy.
|
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|
|
|
|
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|
Still, the idea that the best economic management almost always consists
|
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|
|
of setting up a good framework and then leaving it alone doesn’t make
|
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|
|
|
sense to businesspeople, whose instinct is, as Ross Perot put it, to
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|
“lift up the hood and get to work on the engine.”
|
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|
|
|
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|
|
|
|
## Going Back to School
|
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|
|
|
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|
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|
|
In the scientific world, the syndrome known as “great man’s disease”
|
|
|
|
|
happens when a famous researcher in one field develops strong opinions
|
|
|
|
|
about another field that he or she does not understand, such as a
|
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|
|
|
chemist who decides that he is an expert in medicine or a physicist who
|
|
|
|
|
decides that he is an expert in cognitive science. The same syndrome is
|
|
|
|
|
apparent in some business leaders who have been promoted to economic
|
|
|
|
|
advisers: They have trouble accepting that they must go back to school
|
|
|
|
|
before they can make pronouncements in a new field.
|
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|
|
|
|
|
|
|
The general principles on which an economy must be run are different—not
|
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|
|
harder to understand, but different—from those that apply to a business.
|
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|
|
|
An executive who is thoroughly comfortable with business accounting does
|
|
|
|
|
not automatically know how to read national income accounts, which
|
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|
|
|
measure different things and use different concepts. Personnel
|
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|
|
|
management and labor law are not the same thing; neither are corporate
|
|
|
|
|
financial control and monetary policy. A business leader who wants to
|
|
|
|
|
become an economic manager or expert must learn a new vocabulary and set
|
|
|
|
|
of concepts, some of them unavoidably mathematical.
|
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|
|
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|
|
That is hard for a business leader, especially one who has been very
|
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|
|
|
successful, to accept. Imagine a person who has mastered the
|
|
|
|
|
complexities of a huge industry, who has run a multibillion-dollar
|
|
|
|
|
enterprise. Is such a person, whose advice on economic policy may well
|
|
|
|
|
be sought, likely to respond by deciding to spend time reviewing the
|
|
|
|
|
kind of material that is covered in freshman economics courses? Or is he
|
|
|
|
|
or she more likely to assume that business experience is more than
|
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|
|
|
enough and that the unfamiliar words and concepts economists use are
|
|
|
|
|
nothing but pretentious jargon?
|
|
|
|
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|
|
Will a business leader want to review material taught in freshman
|
|
|
|
|
economics courses?
|
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|
|
|
|
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|
|
Of course, in spite of the examples I gave earlier, many readers may
|
|
|
|
|
still believe that the second response is the more sensible one. Why
|
|
|
|
|
does economic analysis require different concepts, a completely
|
|
|
|
|
different way of thinking, than running a business? To answer that
|
|
|
|
|
question, I must turn to the deeper difference between good business
|
|
|
|
|
thinking and good economic analysis.
|
|
|
|
|
|
|
|
|
|
The fundamental difference between business strategy and economic
|
|
|
|
|
analysis is this: Even the largest business is a very open system;
|
|
|
|
|
despite growing world trade, the U.S. economy is largely a closed
|
|
|
|
|
system. Businesspeople are not used to thinking about closed systems;
|
|
|
|
|
economists are.
|
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|
|
|
|
|
|
|
|
Even the largest business is a very open system; a national economy is a
|
|
|
|
|
closed system.
|
|
|
|
|
|
|
|
|
|
Let me offer some noneconomic examples to illustrate the difference
|
|
|
|
|
between closed and open systems. Consider solid waste. Every year, the
|
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|
|
|
average American generates about half a ton of solid waste that cannot
|
|
|
|
|
be recycled or burned. What happens to it? In many communities, it is
|
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|
|
|
sent somewhere else. My town requires that every resident subscribe to a
|
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|
|
private disposal service but provides no landfill site; the disposal
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|
|
service pays a fee to some other community for the right to dump our
|
|
|
|
|
garbage. This means that the garbage pickup fees are higher than they
|
|
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|
|
would be if the town set aside a landfill site, but the town government
|
|
|
|
|
has made that choice: It is willing to pay so that it won’t have an
|
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|
|
|
unsightly dump within its borders.
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|
|
For an individual town, that choice is feasible. But could every town
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|
|
|
and county in the United States make the same choice? Could we all
|
|
|
|
|
decide to send our garbage somewhere else? Of course not (leaving aside
|
|
|
|
|
the possibility of exporting garbage to the Third World). For the United
|
|
|
|
|
States as a whole, the principle “garbage in, garbage out” applies
|
|
|
|
|
literally. The country can make choices about where to bury its solid
|
|
|
|
|
waste but not about whether to bury it at all. That is, in terms of
|
|
|
|
|
solid waste disposal, the United States is more or less a closed system,
|
|
|
|
|
even though each town is an open system.
|
|
|
|
|
|
|
|
|
|
That’s a fairly obvious example. Here is another, perhaps less obvious
|
|
|
|
|
one. At one point in my life, I was a “park-and-ride” commuter: Every
|
|
|
|
|
morning, I would drive to a large parking garage and then take public
|
|
|
|
|
transportation downtown. Unfortunately, the garage was not large enough.
|
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|
|
It consistently filled up, forcing late commuters to continue driving
|
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|
|
|
all the way to work. I soon learned, however, that I could always find a
|
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|
|
parking space if I arrived by about 8:15.
|
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|
|
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|
|
In this case, each individual commuter constituted an open system: He or
|
|
|
|
|
she could find a parking space by arriving early. But the group of
|
|
|
|
|
commuters as a whole could not do the same. If everyone tried to get a
|
|
|
|
|
space by arriving earlier, the garage would only fill up sooner\!
|
|
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|
|
Commuters as a group constituted a closed system, at least as far as
|
|
|
|
|
parking was concerned.
|
|
|
|
|
|
|
|
|
|
What does this have to do with business versus economics?
|
|
|
|
|
Businesses—even very large corporations—are generally open systems.
|
|
|
|
|
They can, for example, increase employment in all their divisions
|
|
|
|
|
simultaneously; they can increase investment across the board; they can
|
|
|
|
|
seek a higher share of all their markets. Admittedly, the borders of the
|
|
|
|
|
organization are not wide open. A company may find it difficult to
|
|
|
|
|
expand rapidly because it cannot attract suitable workers fast enough or
|
|
|
|
|
because it is unable to raise enough capital. An organization may find
|
|
|
|
|
it even more difficult to contract, because it is reluctant to fire good
|
|
|
|
|
employees. But we find nothing remarkable in a corporation whose market
|
|
|
|
|
share doubles or halves in just a few years.
|
|
|
|
|
|
|
|
|
|
By contrast, a national economy—especially that of a very large country
|
|
|
|
|
like the United States—is a closed system. Could all U.S. companies
|
|
|
|
|
double their market shares over the next ten years?2 Certainly not, no
|
|
|
|
|
matter how much their managements improved. For one thing, in spite of
|
|
|
|
|
growing world trade, more than 70% of U.S. employment and value-added is
|
|
|
|
|
in industries, such as retail trade, that neither export nor face import
|
|
|
|
|
competition. In those industries, one U.S. company can increase its
|
|
|
|
|
market share only at the expense of another.
|
|
|
|
|
|
|
|
|
|
In industries that do enter into world trade, U.S. companies as a group
|
|
|
|
|
can increase their market share, but they must do so by either
|
|
|
|
|
increasing exports or driving down imports. Any increase in their market
|
|
|
|
|
share would therefore mean a move into trade surplus; and, as we have
|
|
|
|
|
already seen, a country that runs a trade surplus is necessarily a
|
|
|
|
|
country that exports capital. A little arithmetic tells us that if the
|
|
|
|
|
average U.S. company were to expand its share of the world market by as
|
|
|
|
|
little as five percentage points, the United States, which is currently
|
|
|
|
|
a net importer of capital from the rest of the world, would have to
|
|
|
|
|
become a net exporter of capital on a scale never before seen. If you
|
|
|
|
|
think this is an implausible scenario, you must also believe that U.S.
|
|
|
|
|
companies cannot increase their combined share of the market by more
|
|
|
|
|
than a percentage point or two, no matter how well run they are.
|
|
|
|
|
|
|
|
|
|
Businesspeople have trouble with economic analysis because they are
|
|
|
|
|
accustomed to thinking about open systems. To return to our two
|
|
|
|
|
examples, a businessperson looks at the jobs directly created by exports
|
|
|
|
|
and sees those as the most important part of the story. He or she may
|
|
|
|
|
acknowledge that higher employment leads to higher interest rates, but
|
|
|
|
|
this seems an iffy, marginal concern. What the economist sees, however,
|
|
|
|
|
is that employment is a closed system: Workers who gain jobs from
|
|
|
|
|
increased exports, like park-and-ride commuters who secure parking
|
|
|
|
|
spaces by arriving at the garage early, must gain those positions at
|
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|
|
|
someone else’s expense.
|
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|
|
|
|
|
|
|
|
And what about the effect of foreign investment on the trade balance?
|
|
|
|
|
Again, the business executive looks at the direct effects of investment
|
|
|
|
|
on competition in a particular industry; the effects of capital flows on
|
|
|
|
|
exchange rates, prices, and so on do not seem particularly reliable or
|
|
|
|
|
important. The economist knows, however, that the balance of payments is
|
|
|
|
|
a closed system: The inflow of capital is always matched by the trade
|
|
|
|
|
deficit, so any increase in that inflow must lead to an increase in that
|
|
|
|
|
deficit.
|
|
|
|
|
|
|
|
|
|
## Feedbacks in Business and Economics
|
|
|
|
|
|
|
|
|
|
Another way of looking at the difference between companies and economies
|
|
|
|
|
may help explain why great business executives are often wrong about
|
|
|
|
|
economics and why certain economic ideas are more popular with
|
|
|
|
|
businesspeople than others: Open systems like companies typically
|
|
|
|
|
experience a different kind of feedback than closed systems like
|
|
|
|
|
economies.
|
|
|
|
|
|
|
|
|
|
This concept is best explained by hypothetical example. Imagine a
|
|
|
|
|
company that has two main lines of business: widgets and gizmos. Suppose
|
|
|
|
|
that this company experiences unexpected growth in its sales of widgets.
|
|
|
|
|
How will that growth affect the sales of the company as a whole? Will
|
|
|
|
|
increased widget sales end up helping or hurting the gizmo business? The
|
|
|
|
|
answer in many cases will be that there is not much effect either way.
|
|
|
|
|
The widget division will simply hire more workers, the company will
|
|
|
|
|
raise more capital, and that will be that.
|
|
|
|
|
|
|
|
|
|
The story does not necessarily end here, of course. Expanded widget
|
|
|
|
|
sales could either help or hurt the gizmo business in several ways. On
|
|
|
|
|
one hand, a profitable widget business could help provide the cash flow
|
|
|
|
|
that finances expansion in gizmos; or the experience gained from success
|
|
|
|
|
in widgets may be transferable to gizmos; or the growth of the company
|
|
|
|
|
may allow R\&D efforts that benefit both divisions. On the other hand,
|
|
|
|
|
rapid expansion may strain the company’s resources, so that the growth
|
|
|
|
|
of widgets may come to some extent at the gizmo division’s expense. But
|
|
|
|
|
such indirect effects of the growth of one part of the company on the
|
|
|
|
|
success of the other are both ambiguous in principle and hard to judge
|
|
|
|
|
in practice; feedbacks among different lines of business, whether they
|
|
|
|
|
involve synergy or competition for resources, are often elusive.
|
|
|
|
|
|
|
|
|
|
By contrast, consider a national economy that finds one of its major
|
|
|
|
|
exports growing rapidly. If that industry increases employment, it will
|
|
|
|
|
typically do so at the expense of other industries. If the country does
|
|
|
|
|
not at the same time reduce its inflows of capital, the increase in one
|
|
|
|
|
export must be matched by a reduction in other exports or by an increase
|
|
|
|
|
in imports because of the balance of payments accounting discussed
|
|
|
|
|
earlier. That is, there will most likely be strong negative feedbacks
|
|
|
|
|
from the growth of that export to employment and exports in other
|
|
|
|
|
industries. Indeed, those negative feedbacks will ordinarily be so
|
|
|
|
|
strong that they will more or less completely eliminate any improvements
|
|
|
|
|
in overall employment or the trade balance. Why? Because employment and
|
|
|
|
|
the balance of payments are closed systems.
|
|
|
|
|
|
|
|
|
|
In the open-system world of business, feedbacks are often weak and
|
|
|
|
|
almost always uncertain. In the closed-system world of economics,
|
|
|
|
|
feedbacks are often very strong and very certain. But that is not the
|
|
|
|
|
whole difference. The feedbacks in the business world are often
|
|
|
|
|
positive; those in the world of economic policy are usually, though not
|
|
|
|
|
always, negative.
|
|
|
|
|
|
|
|
|
|
Again, compare the effects of an expanding line of business in a
|
|
|
|
|
corporation and in a national economy. Success in one line of business,
|
|
|
|
|
which expands the company’s financial, technological, or marketing base,
|
|
|
|
|
often helps a company expand in other lines. That is, a company that
|
|
|
|
|
does well in one area may end up hiring more people in other areas. But
|
|
|
|
|
an economy that produces and sells many goods will normally find
|
|
|
|
|
negative feedbacks among economic sectors: Expansion of one industry
|
|
|
|
|
pulls resources of capital and labor away from other industries.
|
|
|
|
|
|
|
|
|
|
There are, in fact, examples of positive feedbacks in economics. They
|
|
|
|
|
are often evident within a particular industry or group of related
|
|
|
|
|
industries, especially if those industries are geographically
|
|
|
|
|
concentrated. For example, the emergence of London as a financial center
|
|
|
|
|
and of Hollywood as an entertainment center are clearly cases of
|
|
|
|
|
positive feedback at work. However, such examples are usually limited to
|
|
|
|
|
particular regions or industries; at the level of the national economy,
|
|
|
|
|
negative feedback generally prevails. The reason should be obvious: An
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individual region or industry is a far more open system than the economy
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of the United States as a whole, let alone the world economy. An
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individual industry or group of industries can attract workers from
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other sectors of the economy; so if an individual industry does well,
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employment may increase not only in that industry but also in related
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industries, which may further reinforce the success of the first
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industry, and so on. Thus if one looks at a particular industrial
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complex, one may well see positive feedback at work. But for the economy
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as a whole, those localized positive feedbacks must be more than matched
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by negative feedbacks elsewhere. Extra resources pulled into any one
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industry or cluster of industries must come from somewhere, which means
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from other industries.
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Businesspeople are not accustomed to or comfortable with the idea of a
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system in which there are strong negative feedbacks. In particular, they
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are not at all comfortable with the way in which effects that seem weak
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and uncertain from the point of view of an individual company or
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industry—such as the effect of reduced hiring on average wages or of
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increased foreign investment on the exchange rate—become crucially
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important when one adds up the impact of policies on the national
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economy as a whole.
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## What’s a President to Do?
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In a society that respects business success, political leaders will
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inevitably—and rightly—seek the advice of business leaders on many
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issues, particularly those that involve money. All we can ask is that
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both the advisers and the advisees have a proper sense of what business
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success does and does not teach about economic policy.
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In 1930, as the world slid into depression, John Maynard Keynes called
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for a massive monetary expansion to alleviate the crisis and pleaded for
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a policy based on economic analysis rather than on the advice of bankers
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committed to the gold standard or manufacturers who wanted to raise
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prices by restricting output. “For—though no one will believe
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it—economics is a technical and difficult subject.”3 Had his advice
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been followed, the worst ravages of the Depression might have been
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avoided.
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Keynes was right: Economics is a difficult and technical subject. It is
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no harder to be a good economist than it is to be a good business
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executive. (In fact, it is probably easier, because the competition is
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less intense.) However, economics and business are not the same subject,
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and mastery of one does not ensure comprehension, let alone mastery, of
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the other. A successful business leader is no more likely to be an
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expert on economics than on military strategy.
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The next time you hear business-people propounding their views about the
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economy, ask yourself, Have they taken the time to study this subject?
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Have they read what the experts write? If not, never mind how successful
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they have been in business. Ignore them, because they probably have no
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idea what they are talking about.
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A version of this article appeared in the [January–February
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1996](/archive-toc/3961) issue of Harvard Business Review.
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