Can you manage a country like you manage a company?
Can you manage a country like you manage a company? The issue raised by Mr. Erdoğan recently is in my opinion a very interesting framework for debate and one that is not alien to economics. Hearing the statement, I remembered an article by Nobel laureate economist Prof. Paul Krugman published in the Harvard Business Review. The article was published in 1996 in the journal and once again issued as a leaflet in 2009 under the Harvard Business Review Classics series. The 1996 article of Paul Krugman was titled “A country is not a company,” and it explained the qualitative difference between designing the economic policy of a country and setting the growth strategy of a company. It was a neat piece of work. Let me go step by step:
A CEO who has had success after success for a company can give a country wings for sure. Why not? A successful CEO can be a successful statesperson. There are examples of this anyway. But first and foremost, a successful CEO would realize right away that managing a country requires entirely different skills than managing a company, in my humble opinion. This is the first point.
So what is it that distinguishes the management of a country from that of a company? Here we have to make a distinction between designing the economic policy of a country and devising the growth strategy of a company. In setting a strategy for the company, the company manager focuses exclusively on the industry that the company operates in. Designing the economic policy of a country, on the other hand, implies taking into consideration several industries at the same time. You can’t manage a country without seeing the bigger picture or making sense of the wider dynamics. What is right for a single company is not necessarily right for the entire country.
For instance, finding a partner to your company from abroad to set up a new factory is a good job. It brings success. Can we then, thinking that a country should be run like a company, reach a policy conclusion such as “Foreign capital inflows are good and should be boosted right away?” Yes. Would that be right? No. Now imagine that everyone finds a foreign partner and starts investment at home right away. What happens to the balances of the country, then? They will be disrupted. The foreign trade deficit will grow. The country will face excess demand, whereas supply won’t be able to adapt right away. Why? Because in order to set up those factories, you need imported inputs. If you are in a fluctuating exchange rate regime, the rapid jump in foreign direct investments prompts an appreciation in the currency that may then hit your exports. All industries where imported goods play an important role in production will be hurt by such a development. What else? If you are in a fixed exchange rate regime, the rapid increase in foreign direct investments will boost inflation. Everyone would suffer. The conclusion is the same for each option: What is right for a single company is not right for a country.
People accustomed to contemplating a partial balance will find it difficult to perceive the whole dynamics. This is precisely why there is a qualitative difference between being a good CEO and a good statesperson in terms of the skills set involved. This is why a country is not a company. If you try to run a country like you do a company, you run into a capacity constraint somewhere every day. This is the second point.
Just as there is a natural balance in life, there is a balance in the economy. Economic policy design is carried out by taking into consideration the entirety of the economic action. This is the reason why master Keynes says “… though no one will believe it, economics is a technical and difficult subject.” Keynes wrote the sentence in his “The Great Slump of 1930” article, which appeared in the 1963 book titled Essays in Persuasion. When prices hit rock bottom due to a demand gap in the 1930s, the recommendation by CEOs to politicians was to constrain supply to boost prices. Remember Ayn Rand’s book Atlas Shrugged? That was the same era. This recommendation of the CEOs was a consequence of the supply-demand curve analysis as you know it. But that analysis with the supply-demand curves is a partial analysis in the first place. But in the eyes of CEOs, shutting down factories and clamping production as prices dwindled in a deflationary environment appeared to be a remedy for the malady. Keynes, for his part, tried to explain to the politicians accompanied by the CEOs that the issue was not partial supply, but aggregate demand. He tried to convince everyone to look at the bigger picture. Hence the persuasion effort in Essays in Persuasion was one aimed for successful CEOs, whose skills set didn’t allow them to see the bigger picture. What is right for a single company is not always right for an entire country.
Designing the economic policy of a country and devising the growth strategy of a country are qualitatively different. Economic policy design requires seeing the bigger picture. But could the country-company analogy be considered merely from the perspective of management efficacy? Yes. Then, in that case, could a country be run like a company? Why not? Let me elaborate on that in another article.
