04 October 2016

Confusing Business and Economics

After the USSR collapsed, a lot of American business people and economists went to Russia to help. My own impression was that the American business people were of little help because all of their experience came out of the American economy and the American economists were of little help because they could assume American business people.

There are a number of differences between economics and business but one is fairly simple.

A business person is successful if they rise to the top. They don't necessarily have to create anything but they can expand more rapidly or drive costs down by scaling up or whatever. If you are successful it doesn't matter whether your competition or suppliers or employees become wealthy as well or are crushed.

An economic policy is successful only if the community prospers. Not even everyone, necessarily, but certainly the median or average. If wages and wealth for 40 year olds in 2000 is double what they were in 1980, then the economy has done well.

The emphasis is very different.

Business success is for the individual. It's competitive. You want to do well and it's the rare person who can worry about the whole community or even industry and their place in it. You try to win market share. (I know. Some focus on creating markets and market share. That's wonderful but it isn't necessary for business success.) In business, you can succeed in a zero-sum game.

Economic success is for the whole. Good economic policy shows no regard for who ends up on the top or the bottom but instead just measures itself by how much better life is for those on the top and the bottom. Economics is variable sum; some policies create more for most people and some policies only benefit a few.

Which brings me to Trump. He came to fame with the Art of the Deal. What is that? It's an approach to negotiating that will get you more than the other guy. Your business practices leave suppliers short-changed? Force bankers and investors to accept pennies on the dollar for loans? Result in employees losing their jobs? Oh well. The only question is whether or not you got a good deal. Whether you - as the individual - came out ahead.

It's no wonder that Trump puts so much emphasis on trade with China and Mexico and other countries. He likes the idea of getting a better deal. By contrast, he says almost nothing about policies that would actually grow the economy. (Or, more precisely, nothing coherent or credible. For instance, his website has a healthcare plan. What is the plan? To "replace Obamacare with something terrific." That's the plan. In its entirety.)

Business and economics certainly overlap but they are not the same thing. Showing that you can come out on top of the group is not the same as showing that you can make things better for the group.

Today Trump asked of America's trade deficit, "Who negotiates these deals?" suggesting he doesn't understand trade deficits and expect to walk up to the "trade deficit" counter on day one of his presidency to demand a better deal. He's talked about getting the country's debt re-negotiated (as he has with his own debt), suggesting he doesn't understand triggers for international financial crises. No reputable economist has approved of his economic plan and many have claimed it's likely to trigger a recession.

It's perfectly consistent to say that Trump knows how to get rich and would be a disaster for the economy. His failure at economics seems as certain as his success at marketing.

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