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Economics: A field with no useful advice for business managers

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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.

By Bob Lewis | July 23, 2012
Topics: Business Ethics, Industry Commentary, Leadership, Organizational Effectiveness | 15 Comments »

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:

  1. Economists study the behavior of markets.
  2. To understand markets, economists make a simplifying assumption — that humans act to “maximize utility” — to optimize transactions for personal gain.
  3. Most economists, most of the time, use money as a proxy for utility (the economists’ term for “what people value”).
  4. 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.


15 comments on “Economics: A field with no useful advice for business managers

  1. Have that kind of an attitude in the wrong company and they make your position go away. They “don’t understand you”, and you are not needed. Then you get watch from the outside as they focus on the wrong things and slowly forget that IT is not just people doing technology, but people delivering to the customers; all of them.

  2. Hi Bob,

    Yes, I think you were a little hard on the economists. Robert Reich, for example, has talked a lot about just these issues. Many many years ago, when I was in school, I spent a long time looking at the economics of Mongol society, and there was no money in sight! The problem isn’t so much the simplifying assumptions that economists make, but rather the simplifying assumptions that journalists and CEOs make about economics. Most CEOs have simplistic (and I use the word deliberately) view of economics.

    -Allen

  3. I’m reminded of the old wag’s remark that the Nobel Prize is given for fact (Physics, Chemistry, Medicine) and fiction (Literature, Peace — and Economics).

  4. Kevin Morgan on said:

    Bob,

    To answer the question in your email – “I was pretty hard on economists this week. What do you think – was I on target, or unfairly scapegoating the economics profession?”, I think it’s both.

    For instance, your “renting friends” example: No, people won’t be satisfied with “rented” friends. But they will pay a certain amount of money – or relinquish a certain amount of privacy – to both offload the chore of keeping up with friends onto social media, for instance – letting Facebook handle the details of aggregating updated info about your friends instead of you having to call each of them regularly to find out what’s going on. I remember in the “glory days” of AOL how many people had entire networks of “friends” they’d never met in person; they were, in essence, paying by the hour to have access to a group of like-minded people in a chat room.

    In other words: it may be very hard, sometimes, to put a dollar amount on how much someone “values” a particular aspect of his life, but that doesn’t mean the concept is flawed, merely that we don’t have (and probably can’t obtain) enough information to make that judgment.

    That said, I think the change in view about the “asset value of the enterprise” has more to do with the shift from privately held businesses to publicly traded ones. Private businesses, by design, have a profitability motive that trumps all – you make money for the owners by producing goods or services that sell for enough to generate a profit. Your six points of value apply, because in each case, those factors control whether the company can make enough to provide the owners with a reasonable income.

    Publicly traded companies, by contrast, don’t have to worry about that. They know their “owners” will change, regularly, between now and next year, with each new group of owners only interested in one thing: is this stock going to be worth more or less than I’m paying now? As you put it, “Business management became responsible for what a company can be sold for, not for what it does” – not because of economists, but because the “owner” has no intention of keeping the company for any long period of time. He wants s jump in the sales price, timed so that he can get out when the getting’s good.

  5. I suspect that few economists have the power to directly guide the business managers in their actions and values. If the business managers choose to hire (or otherwise be influence by) poor advisers, then I fault the business (or even IT) managers.

    I’m reminded of a very old cartoon where the consultant says to his client “oh no, you did exactly what I told you to do!”

    • Rand Fazar on said:

      I agree with your points, but disagree with how to work with them. As a programmer/Designer/Help desk/etc/etc I have seen many of these things be used or misused, many times. The solution that I project as working is the same that I believe the government needs, to wit, find the smallest thing that can be changed and make a positive improvement. Now we hear Da Gov talking about ending things such as Social Security, the military, etc. It only takes a moment to see that the big step sells to the masses but destroys more then it improves.
      If you will look at the entire set of blocks you can find one that can be removed with the loss of the tower. Too bad not enough people will try that.
      Thanks for your input to this retired brain….

  6. John Campbell on said:

    You’re not too hard on economists, but economics is merely one field of study among many infected with the same or similar strains, which are embedded in our culture, even to an extent in the arts and engineering. Our notice and concern is proportional to their levels of influence relative to the others. Lawyers? Sports and entertainment? Journalists? are you equally hard on all of them? The professions and the practitioners? We have various crises of values, and we are all complicit.

    • Depends. Lawyers yes, when they become members of legislatures and then, with no expertise in the subject, pass laws that define “business processes” for government agencies. Sports and entertainment? Yes, in this article, in fact. Journalists? They’re rarely in a position to overreach their expertise.

      And overreaching one’s expertise was the topic. Just my opinion: That isn’t a matter of values. It’s a matter of hubris.

  7. James Brink on said:

    Hi, Bob. I have always considered you a moral philosopher working as a business consultant and a jounalist, just as Paul Krugman is a moral philosopher working as an economist and a journalist. I read you and Paul Krugman and Charles Ferguson “Predator Nation”, “Inside Job” and Matt Taibbi “Griftopia” for some of the same reasons. On the other side is Milton Friedman, whose economic preachments had some blood-curdling consequences, richly detailed in Naomi Klein’s “Shock Doctrine”.
    Keep up the good work.
    Regards, Jim

    • Thanks for an astonishing compliment. Nonetheless, I have to decline it, on the grounds that if I just criticized economists, celebrities, and Dr. Shockley for overreaching their expertise, I’d better not commit the same crime.

      How about “moral ponderer”?

  8. Bob, regarding economists, you are spot on.

  9. Rand Fazar on said:

    Please arrange my answer above to be with the general replys, not just to John Blair.

  10. David Mott on said:

    “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.”

    Happiness works the same way: If you pursue it, you lose it.

  11. K A B on said:

    Always bear in mind that economists were invented to make weather forecasters look good.

  12. If every person acted on the fact that money is the sole driver of human behaviour; Public TV, public radio, and most arts organizaitons would not exist. The fact that they don’t do well says that many people do, the fact that they do at all says that it isn’t universal.

    That’s one of the problems with many economists – they argue that all people are naturally greedy out of one side of their mouth while not putting greed into their equations when looking at the causes of bubbles. I’m of the feeling that bubbles start when the effects of the greedy start to overcome the rational in any given market.

    I’m not sure that economic theories caused the shift in the relationship between employer and employee – but they gave the bad apples in the business world a plausible justification to do what they were going to do anyway and others followed suit because they could see the logic and felt they had no choice but to follow suit. This happens all too often.

    To address another comment above: just like any other profession with a bad reputation, you will always find examples of ones that rise to the top – IMHO, in economics; Reich is one, Dubner is another.

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my photoBob Lewis is a senior management consultant with Dell Services. He has published these columns once a week in one form or another since 1996.

Disclaimer: All opinions, statements, representations, allegations, images (if published) and anything else that appears here is the sole responsibility of the author. Dell has and had nothing to do with it, other than saying it's okay to continue publishing KJR.

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