Monday, December 12, 2011

Businessmen Do Not Necessarily Understand the Economy

Last night in the Republican debate, Mitt Romney argued that, contra Newt Gingrich, he had spent time in the private sector and, therefore, he understood how the economy works. While I will hardly defend the knowledge of economics held by a historian who spent most of his life in government, the fact that Mitt Romney ran a business does not mean that he understands economics. Indeed, the proclamations of people such as Warren Buffet and Bill Gates on economics proves business people do not necessarily understand how the economy works.

How does this make sense, that someone who can successfully run a business can, nevertheless, be generally ignorant of how an economy works?

The knowledge needed to run an organization such as a firm -- or a government -- is not the same as that needed to understand an ateleological scale-free self-organizing network process. For one, organizations are teleological and have hierarchical network structure. They are designed orders. This may allow a business person to run a government agency -- another teleological, hierarchical, designed organization -- but it hardly argues that they are uniquely positioned to understand the economy qua economy. It is likely they know what business people would like to happen, but what business people would like to happen is good for their businesses, but not necessarily for the economy per se. This argues that Mitt Romney would be good for crony capitalism or mercantilism, but not necessarily for the spontaneous order economy.

The problem is that the skills needed to know how to run a good organization are not the same skills needed to understand how an economy works, including what to do (or not to do) to ensure one has a long-term healthy economy. Contrariwise, one who understands the working of an economy is not necessarily in the position to run the government organization -- which includes, of course, knowing what it can and cannot do, what it should and should not do.

This can be solved if one were to get a politician who is able to run an organization and also has the wisdom to understand that he does not understand how the economy works, and hires good economists as advisors to make up for that shortcoming. But note that knowing one is ignorant requires wisdom (is wisdom, according to Socrates), and there are few who are both arrogant enough to run for office and humble enough to admit ignorance. Things are worse yet if you have someone who has been in business, because they are even more certain they understand how the economy works.
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