A COUNTRY IS NOT A COMPANY -Exploring the thoughts of Paul Krugman

Can he run the economy as well?

Next time you hear that a successful businessman has been promoted to the cabinet. Please consider why that person was chosen, do brilliant businessmen always make great economic advisors for whole countries? Paul Krugman argues that they do not always see the big picture. They are used to situations where they can act very quickly and have a direct command and control of the resources within their enterprises that can make a timely impact. Often they do not need to persuade diverse groupings of the need to take take a particular course of action -- they can act speedily and unilaterally,often without a particular focus on some of the social consequences of their actions. When they enter government, this modus operandi changes and life for them can become more difficult and frustrating. They need to negotiate a much more complex environment and try to cajole and persuade people to do things -- not just command them and sit back waiting for everything to happen.

Krugman argues that businessmen support free trade and also exporting industries because de-facto they believe that they lead to increased employment prospects. However one country's exports are another country's imports. The importing country will shift purchasing away from its own domestically produced goods to imports. Then the domestically produced good industry will suffer at the hands of greater imports. Will the export boom in one country have an adverse effect on employment in the importing country? The answer is probably -- Will there be an increase in jobs globally? Probably there will be a neutral effect on job creation.

Similarly, when multinationals directly invest in a country, the common belief is that the country which has received the investment will have a trade surplus,on the contrary, this is not the case -- an increase in inward investment will lead to a trade deficit on the balance of payments. This is because inward investment will appreciate the currency of the investee country which will lead to weaker export performance and greater imports. If there is a deficit on a country's trade account there will be a surplus in its capital account and vice- versa. The balance of payments as a whole is always zero when a country's capital account is included in the analysis.

Business executives operate intuitively and look for specific opportunities to make a profit, when they write books about their life stories and how they made it, then their books are interesting, but when they try to enunciate a general theory of their own success they are less well received by the populace. A country is vastly more complicated to run than even the biggest company, the economy needs to be run on sound economic principles within a framework -- detailed policy intervention is often unnecessary and even undesirable. In many ways a company is more of an open system than an economy. It may double its sales for example - however taking a wider perspective, within a country if a company doubles its sales other companies have probably had their sales considerably reduced. Something that can work successfully for an individual company, might not work for the economy as a whole. An individual company increasing its savings may not be significant for the economy but if all companies act in this way the results on aggregate demand in the economy might be disastrous. The difference boils down to this -- Businesses are relatively open systems that can act with autonomy and can increase their activities without having much direct impact on themselves, whilst countries are still regarded as closed systems where most change is in essence a zero sum game.

So when you next hear a businessman expounding on the economy make sure he\she knows what they are talking about -- a company or a corner shop are not the same as an economy. Perhaps it would be better to focus on the life story of the businessman where valuable lessons on intuitiveness, creativity,hard work and responsibility can be learned -- Perhaps that is why so many biographies of businessmen and women are sold. Leave the finer points of the dismal science to the dismal scientists.