Is a country like a large corporation?

The same week, President Obama, in campaign mode, touted his administration’s success in the renaissance of Detroit’s General Motors, his agenda to promote exports and jobs, and his tough policy stance toward China and fair trade. Mitt Romney, the Republican presidential candidate, continues to attack Obama’s lack of business experience and his record on the economy. Business executive experience, as a desirable presidential qualification, is on display.

Is experience in running a large corporation a reliable qualification indicator for running a country and its economy? Not necessarily. Why? The short answer is that a country is not a large corporation. A fuller answer requires us to turn to the difference between good business judgement and good economic analysis and policy-making.

Economics and business are not the same subject. The style, mindset and thinking skills for economic analysis and policy-making are very different from those that result in business successes. The mastery of one does not guarantee comprehension, let alone the mastery, of the other. For example, an executive who is thoroughly comfortable with corporate financial control and business accounting does not necessarily know how to read national income accounts or understand monetary or fiscal policy. In addition, personnel management and labour laws are not the same thing.

Many of us have difficulty grasping the difference in complexity between even the largest corporations and a national economy. For example, the US economy employs more than 150 million people, more than 350 times as many as the average top-ten largest employers. And even this ratio underestimates the difference in complexity. 

Mathematicians will tell us that the number of potential interactions among a large group of people is proportional to the square of their number. The economy in contrast to a corporation is the ultimate giant conglomerate, with hundreds of thousands of product lines and services united only by their being within the country’s borders. This complexity means that a national economy has to be run on the basis of general principles and theory. Best economic management almost always consists of creating a market-friendly environment based on sound economic analysis and framework. The idea often does not sit well with businesspeople. 

Most corporations, even very large ones, are built around a core competence – a particular technology or an approach to a particular type of market. Corporate CEOs succeed not by general theory but by finding particular product strategies or organisational innovations that work for their businesses. These successful CEOs are likely to project their particular experiences to a broader and much more complex situation like managing an economy. Successful CEOs have trouble accepting the relatively hands-off role of a wise economic policy-maker.

Another difference between business strategy and economic analysis is that businesspeople are accustomed to thinking about open systems while economists are used to thinking about closed systems and their respective feedback implications. This explains why economists generally see policy, such as “hardcore” industrial policy – picking winning and losing industries – differently from businesspeople. The same goes for exports, jobs, trade deficit, and foreign investment. From a closed (worldwide perspective) system, trade does not create more jobs unless total world spending or overall world demand increases because every dollar of exports is, as sheer arithmetic, matched by a dollar of spending shifted from some country’s domestic goods to imports. Foreign capital flows (investment) reflect trade deficits in the balance of payments accounting, which is a closed system.

In societies like ours, American and Thai, which value and respect business success, political leaders will rightly and inevitably seek advice of business leaders. All we can ask and hope for is that both political leaders – with or without prior business experience – and their advisors appreciate the complexity of running an economy and have a proper sense of what business success does or does not teach about economic policy. Because a country is not a large corporation.

 

Kiertisak Toh is a member of the economics faculty at Radford University, Virginia and a senior fellow at the Centre for International Development, Sanford School of Public Policy, Duke University, Durham, North Carolina. The views expressed here are his own.