Economics: A field with no useful advice for business managers
Want to know where many of the worst management theories of the past few decades have come from? Economics — a field that has no bearing on the subject, which doesn’t stop many economists from bearing down on it.
Expertise leads to overreach. Some who have it think it qualifies them to hold opinions about other fields in which they have none.
There was Dr. Robert Shockley, co-inventor of the transistor, who thought his opinion about the relationship between IQ and race was worth listening to, entertainers who think their celebrity makes their opinions about foreign policy worthy of our time and attention, and, (this week’s topic) economists, too many of whom consider their thoughts about business management to be worth sharing.
The problem in four steps:
- Economists study the behavior of markets.
- To understand markets, economists make a simplifying assumption — that humans act to “maximize utility” — to optimize transactions for personal gain.
- Most economists, most of the time, use money as a proxy for utility (the economists’ term for “what people value”).
- They then force-fit a marketplace perspective onto every phenomenon in human interactions in order to prescribe how we all ought to go about our lives.
Step four is where the trouble starts. Here’s a non-business example: Most of us value friendship. And yet, creating a “friendship marketplace” doesn’t work — renting another person’s time and attention doesn’t make them your friend. (For more on this and related topics, read Michael Sandel’s “How Markets Crowd Out Morals,” Boston Review, May/June edition, and thanks to long-time correspondent Leo Heska for bringing it to our attention.)
When it comes to business …
Economic theory started to encroach on what we laughingly call “management science” during the Japanese invasion of the mid-1970s. That’s when Toyotas and Datsuns turned out to cost less and hold up better than anything GM, Ford and Chrysler were selling, and buying televisions from Sony and Panasonic provided better value than RCA or Zenith.
Prior to that, business leaders understood that paychecks were what they exchanged for an employee’s effort — “An honest day’s work for an honest day’s pay” — but that they received an employee’s loyalty in exchange for a different coinage.
And so, employers redefined the employer/employee relationship as nothing more than a marketplace, and employee loyalty became a quaint hold-over of a simpler time. It wasn’t that employers didn’t want employee loyalty after that. It’s that they became blind to the coinage needed to get it, namely, their own loyalty toward their employees.
Who but an economist … someone who considers a giving a gift to be a less-efficient alternative to handing over an appropriately calculated wad of cash … could make a mistake like that?
It was at about the same time that boards of directors decided they had to bribe their CEOs to do their jobs, at an ever-increasing level of bribery (you’ll find charts and graphs in “Historical Trends in Executive Compensation, 1936-2005,” Carola Frydman and Raven E. Saks, January 18, 2007).
Is it actually bribery? That depends on your perspective.
Mine is that there really is an employment marketplace, which means that to fill any position, a company has to be willing to pay what the market will bear … or, must offer enough intangible benefits to compensate for the money they aren’t able to offer, remembering that money isn’t utility, it’s a proxy for utility.
Compensation is what companies provide in order to get the right people to work there instead of somewhere else. Using it to change someone’s behavior? That’s a bribe (“Something, such as money or a favor, offered or given to a person in a position of trust to influence that person’s views or conduct,” from The Free Dictionary).
Unless you’re an economist, in which case money is the sole driver of human behavior.
Then there’s the asset view of the enterprise. Prior to the takeover of management by economists, business managers figured they were responsible for running a successful business — one that out-competed other companies that sold similar goods and services.
But no longer. For the most part, business management now tries to maximize “shareholder value,” for which market capitalization is an appropriate metric. Business management became responsible for what a company can be sold for, not for what it does.
This would be just fine were it not for a nice little irony: The path to maximizing a company’s asset value is to ignore it.
The companies that are worth the most aren’t the ones that try to move the price of a share of stock in the right direction. They’re the ones where everyone focuses on selling great products and taking care of customers. That’s everyone. Including the IT staff.
Which means that as an IT leader, part of your job is helping everyone in IT connect the dots that separate their jobs from the company’s products and customers.
Not “internal customers.” The company’s customers.