{"id":1706,"date":"2016-03-29T09:19:02","date_gmt":"2016-03-29T08:19:02","guid":{"rendered":"https:\/\/blog.iese.edu\/economics\/?p=1706"},"modified":"2016-03-29T10:35:27","modified_gmt":"2016-03-29T09:35:27","slug":"ceos-running-for-president-countries-are-not-companies","status":"publish","type":"post","link":"https:\/\/blog.iese.edu\/economics\/2016\/03\/29\/ceos-running-for-president-countries-are-not-companies\/","title":{"rendered":"CEOs Running for President: Countries Are Not Companies"},"content":{"rendered":"<p><strong>Donald Trump&#8217;s victories in the primary process make him the frontrunner for the republican nomination<\/strong>. He often brags about his business success, his net worth, along with his <strong>negotiating and leadership skills<\/strong>. <a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1706%2F&text=Clearly+Trump%3Fs+strategy+is+trying+to+that+his+business+experience+makes+him+the+most+qualified+candidate+to+be+president+');\" title=\"Tweet This!\">Clearly Trump\u2019s strategy is trying to that his business experience makes him the most qualified candidate to be president <span class=\"non-dashicons\"> <\/span><\/a>.<\/p>\n<p>Moreover, he uses <strong>his business way of thinking to analyze economic problems<\/strong>. Consequently,<a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1706%2F&text=Trump%A0sees+countries+as+being+big+corporations+that+compete+against+each+other+');\" title=\"Tweet This!\">Trump\u00a0sees countries as being big corporations that compete against each other <span class=\"non-dashicons\"> <\/span><\/a>. For him the US is a mega-Coca-Cola and China is a mega-Pepsi-Cola.<\/p>\n<figure id=\"attachment_1715\" aria-describedby=\"caption-attachment-1715\" style=\"width: 744px\" class=\"wp-caption aligncenter\"><a href=\"https:\/\/en.wikipedia.org\/wiki\/Donald_Trump#\/media\/File:Donald_Trump_by_Gage_Skidmore_3.jpg\" rel=\"attachment wp-att-1715\"><img loading=\"lazy\" decoding=\"async\" class=\"size-full wp-image-1715\" src=\"https:\/\/blog.iese.edu\/economics\/files\/2016\/03\/Could-be-CEOs-good-presidents-fo-United-States.jpg\" alt=\"Donald Trump: Could be CEOs good presidents for United States\" width=\"744\" height=\"445\" srcset=\"https:\/\/blog.iese.edu\/economics\/files\/2016\/03\/Could-be-CEOs-good-presidents-fo-United-States.jpg 744w, https:\/\/blog.iese.edu\/economics\/files\/2016\/03\/Could-be-CEOs-good-presidents-fo-United-States-300x179.jpg 300w, https:\/\/blog.iese.edu\/economics\/files\/2016\/03\/Could-be-CEOs-good-presidents-fo-United-States-500x299.jpg 500w\" sizes=\"auto, (max-width: 744px) 100vw, 744px\" \/><\/a><figcaption id=\"caption-attachment-1715\" class=\"wp-caption-text\">Trump speaking at the 2015 Conservative Political Action Conference (CPAC). Picture: Gage Skidmore<\/figcaption><\/figure>\n<p><strong>But nations are not companies: they don\u2019t compete with each other<\/strong>. <strong>Countries trade with each other<\/strong>. And <strong>the central argument of economics<\/strong>, dating back to Adam Smith, <strong>is that voluntary trade is a positive sum game<\/strong> &#8211;meaning that those who win do not do it at the costs of others.<\/p>\n<p><strong>So does Trump\u2019s success in the business world give him the requirements needed to be president of the United States? The answer is quite clearly no<\/strong>. The idea that business people know what the economy needs is just wrong.<\/p>\n<blockquote>\n<hr \/>\n<h2><strong>Economic policy requires a very different kind of thinking from\u00a0that of appropriate for company strategy<\/strong><\/h2>\n<hr \/>\n<\/blockquote>\n<p>Years ago, <strong>Paul Krugman<\/strong> wrote an article titled \u201cA Country is Not a Company.\u201d He <strong>argued that economic policy requires a very different kind of thinking from that of\u00a0company strategy<\/strong>, giving two reasons why this is the case.<\/p>\n<ul>\n<li><strong>Companies are open systems<\/strong>. They are able to both sell their production to other people and draw in resources from outside. In contrast, <strong>countries are mostly closed systems<\/strong>. They mainly sell to themselves and have to make the most of the labor, land and the capital they have.<\/li>\n<li><strong>Companies are top-down organizations in which people do what they\u2019re told<\/strong>. <strong>Market economies are free-for-alls, in which the job of policy is largely to provide incentives to do things<\/strong>.<\/li>\n<\/ul>\n<p>This second point recognizes <strong>the differences between unplanned \u2013 spontaneous \u2013 orders<\/strong> (such as languages and market economies) <strong>and planned organizations<\/strong> (such as business firms and armed forces). Spontaneous orders are the result of human action, but not of human design.<\/p>\n<h2><strong>Who Is in Charge of Food Distribution in New York?<\/strong><\/h2>\n<p>The economy, even though many think it has to be consciously directed, is a spontaneous order. <strong>Nobody is in charge of food distribution for New York or Barcelona, and yet those cities are still fed every day<\/strong>. <strong>There is no overarching central plan or &#8220;Big Brother&#8221; who guides and coordinates millions of individual choices, actions and plans<\/strong> into the larger outcome of the economy.<\/p>\n<p><strong>How is it then, that coordination is achieved?<\/strong> What is the social institution that coordinates the choices and actions of so many people, each with different slices of knowledge and information? The answer is the market system, that is, <strong>thousands of markets where millions of voluntary exchanges take place daily<\/strong>. This spontaneous order is <strong>based on the respect to both private property rights and freedom of contract<\/strong>.<\/p>\n<p><strong>Firms are different from markets<\/strong>. Firms are designed and planned organizations. As Ronald Coase explained over 80 years ago, firms exist because going to the market all the time can impose heavy transaction costs. You need to hire workers, negotiate prices and enforce contracts, to name but three time-consuming activities. Firms rely on conscious power, based on long-term contracts, when market-based arrangements are too bothersome.<\/p>\n<blockquote>\n<hr \/>\n<h2><strong>Many people think the president runs the economy. Consequently, they tend to give too much credit to whichever clever person is standing nearby at the right moment<\/strong><\/h2>\n<hr \/>\n<\/blockquote>\n<p><strong>Managers develop skills based on setting, communicating and implementing strategies that increase firms\u2019 profitability<\/strong> and improve the working environment. These policies are then handed down to employees, who work to accomplish the goals. Good managers are those who can lead and effectively take charge, assign tasks to teams or employees and establish solid deadlines.<\/p>\n<p><strong><a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1706%2F&text=These+management+skills+are+useful+in+simple+organizations%2C+like+firms%2C+but+they+are+not+very+effective+in+complex+systems+');\" title=\"Tweet This!\">These management skills are useful in simple organizations, like firms, but they are not very effective in complex systems <span class=\"non-dashicons\"> <\/span><\/a> like markets<\/strong>. Markets are NOT top-down organizations. <strong>The global economy has so many variables that even if a president were to try and take charge of the economy, he simply couldn&#8217;t<\/strong>. His policies do have some effect, but he actually runs very little.Nevertheless, <strong>many people think the president runs the economy<\/strong>. Consequently, they tend to give too much credit to whichever clever person is standing nearby at the right moment. Individuals, political parties and big companies can make a difference of course. But if there is one dominant misconception about the world, it is that we go around assuming it is much more of a planned place than it is.<\/p>\n<blockquote>\n<hr \/>\n<h2><strong>There is no doubt that a smart CEO could excel at being president.\u00a0The risk, though, is that CEOs tend to think they can manage the economy as they do with their companies<\/strong><\/h2>\n<hr \/>\n<\/blockquote>\n<p>I\u2019m not suggesting that business people cannot be outstanding presidents. <strong>There is no doubt that a smart CEO could excel at being president<\/strong>. <strong>The risk, though, is that CEOs tend to think they can manage the economy as they do with their companies<\/strong>. As Hayek put it: \u201cThe curious task of economics is to demonstrate to men how little they really know about what they imagine they can design\u201d.<\/p>\n<p>My aim is to stress that <strong>the economic way of thinking is very different from the business way of thinking<\/strong>. MBA students quickly understand that economics courses won\u2019t help them run businesses. The opposite also holds: <strong><a class=\"inline-twitter-link inline-tweet-click\" href=\"#\" onclick=\"inline_tweet_sharer_open_win('https:\\\/\\\/twitter.com\\\/intent\\\/tweet?url=https%3A%2F%2Fblog.iese.edu%2Feconomics%2Fwp-json%2Fwp%2Fv2%2Fposts%2F1706%2F&text=Knowledge+on+how+to+run+businesses+is+a+futile+expertise+for+economic+analysis+');\" title=\"Tweet This!\">knowledge on how to run businesses is a futile expertise for economic analysis <span class=\"non-dashicons\"> <\/span><\/a><\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Donald Trump victories in the primary process make him the frontrunner for the republican nomination. He often brags about his business success, his net worth, and his negotiating and leadership skills. Clearly Trump\u2019s strategy is trying to that his business experience makes him the most qualified to be president. Moreover, he uses his business way of thinking to analyze economic problems.<\/p>\n","protected":false},"author":880,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[156,1433],"tags":[58105,90102,90827,90142],"class_list":["post-1706","post","type-post","status-publish","format-standard","hentry","category-economy","category-united-states","tag-ceos","tag-donald-trump","tag-economy","tag-u-s-elections","megacategoria-mc-economics"],"acf":[],"aioseo_notices":[],"_links":{"self":[{"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/posts\/1706","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/users\/880"}],"replies":[{"embeddable":true,"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/comments?post=1706"}],"version-history":[{"count":8,"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/posts\/1706\/revisions"}],"predecessor-version":[{"id":1719,"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/posts\/1706\/revisions\/1719"}],"wp:attachment":[{"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/media?parent=1706"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/categories?post=1706"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/blog.iese.edu\/economics\/wp-json\/wp\/v2\/tags?post=1706"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}