New to Me

• Tweet

• Tweet

Paul Krugman’s classic article, A Country is Not a Company, in which he argues that the skill sets needed to run businesses and analyze (or run) economies are quite distinct.  Among the distinctions he draws:

• Businesspeople tend not to understand “balance of payments” accounting, and particularly the notion that our trade balance must be offset by our capital account (and changes in reserves).  In business, it’s generally a good thing to see capital coming in the door, but that’s not necessarily the case when it comes to national economies.  In particular, Krugman argues, exports aren’t linked to job growth.  Why?
• Because economies are largely closed systems – in which job gains in one industry are offset by losses in others. (By contrast, businesses tend to be more open systems.)
• Businesses often aim to expand extremely rapidly.  By contrast, the Federal Reserve recognizes the risks of an overheated economy and the inflation that results; as such, uses interest rate changes in an attempt to keep unemployment levels relatively steady.  This point is particularly interesting.  If it is indeed the case that the Fed has a “jobs target,” and if it’s the case that jobs targets are good and necessary elements in macroeconomic policymaking, how should we think about political rhetoric about the need to create new jobs?
• Businesses thrive through innovation and strategy.  By contrast, Krugman argues, national economies function best when they are run according to a general set of principles.  Broadly speaking, once those principles are in place, the government does best when it keeps its distance from the operation of particular corporations or industries.   Krugman thinks that that’s what businesspeople are for.
• Complexity.  The US economy is at least several orders of magnitude of more complicated than even the largest companies.  What’s more, it isn’t united around any particular principles, core competencies, or interest areas, nor is it ‘managed’ in anything like a corporate fashion.
• Feedback functions differently in open and closed systems.  To paraphrase Krugman, if your company has two product lines and one of them explodes, you don’t necessarily need to worry about the other suffering.  In a closed economy, (like that of a nation) tradeoffs between industries are more the norm.  What’s more, economic indicators that may not matter much from the perspective of an individual company – like the relationships between hiring and average wages or foreign investment and exchange rates – take on critical importance at the level of the national economy.

Looking forward to tracking down Krugman’s interlocutors and putting some of these claims to the test.