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Businesspeople shouldn’t run countries

January 11, 2012

Paul Krugman asks:

…why does anyone believe that success in business qualified someone to make economic policy?

For the fact is that running a business is nothing at all like making macro policy. The key point about macroeconomics is the pervasiveness of feedback loops due to the fact that workers are also consumers. No business sells a large fraction of its output to its own workers; even very small countries sell around two-thirds of their output to themselves, because that much is non-tradable services.

This makes a huge difference. A businessman can slash his workforce in half, produce about the same as before, and be considered a big success; an economy that does the same plunges into depression, and ends up not being able to sell its goods. Nothing in business experience prepares one for the paradox of thrift, or even the inflationary impact of increases in the money supply (which is real when the economy isn’t in a liquidity trap.)

(The paradox of thrift says that during recessions if everyone tries to save more then demand will fall, reducing consumption and economic growth and in turn lowering savings. The liquidity trap is the situation we’re probably in now — where further reductions in interest rates won’t raise economic growth.)

OK, Krugman’s argument is more relevant to the United States Republican party nominations, which seem like an alternate universe in which candidates by the day spew forth increasingly slavish support of business and mounting hatred of tax and the poor. But it applies to other countries too, where politics is seen as a technical discipline in which we ’employ’ ‘experts’ to sort our problems out. Mario Monti’s technocratic Italy is a good example. He’ll probably do a good job of slashing spending because he doesn’t have to bother about his constituency or mandate, but he might not be good for Italy over the long run, and nobody voted for him.

The technocratic view forgets that democratic politics is supposed to be about what people want — schools, sports, the arts, nice lives — it’s not just about further pumping up the economic behemoth. And anyway the apparent technocrats — who mostly seem to have a background in business — aren’t good for everyone. Democracy is a better way of running things over the long term. Politicians who cater to everyone tend to recognise the complexities of the economy and society; that consumers are also producers, or that the poor will revolt if they’re left in the gutter for too long. It might be relatively straightforward to do the sorts of things that help business in the short term, like getting rid of welfare and spending less on schools, but 10 years later you’re left with a shell of a state and a pissed-off population. The examples of democratic success are numerous. Amartya Sen famously argued that  India never had a famine after it threw the Brits out. Dani Rodrik pointed out that in Argentina  fiscal austerity prompted voters to reject the ruling party: “democracy shoved the golden straitjacket aside”.

I also like Krugman’s reference to feedback loops, the pervasiveness of which is one reason why social science is different to natural science. Society, which is what politicians have to deal with, is a self-relating system which is far more complex than a company. It is this reflexivity which requires not narrow expertise from a particular side of the productive system, but a more nuanced, broad-ranging set of views, mandated by the different human beings who participate in that system.

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