Rich-Businessman-Lighting-Cigar-With-100-Dollar-Bill-ShutterstockMichael Bloomberg and Donald Trump are both businessmen, both are politicians, and both are billionaires. Obviously, then, they must know a lot about economics, right?

Not necessarily. As Don Boudreaux — a man who does know a lot about economics — correctly points out, success at business does not imply knowledge of economics:

Knowing how to run a business is not the same thing as knowing economics.  To assume that the two domains of knowledge and expertise are the same is an error equivalent to assuming that a successful NASCAR driver is thereby an expert automotive engineer.  Of course, it’s possible for a successful NASCAR driver to know something about automotive engineering, just as it’s possible for a successful business person to know something about economics.  But success at each of the former tasks (driving a race car and managing a business) is not the same thing as, and requires very little familiarity with, the latter domains of knowledge (automotive engineering and economics).

Strong evidence – indeed, virtual proof – that knowing how to run a business successfully does not imply knowledge of economics is supplied by the great economics-policy differences that separate successful business people.  Charles Koch, for example, is a far more successful business person than is Donald Trump, yet Mr. Koch’s understanding of economics differs markedly from Mr. Trump’s.  If success at business were a sufficient indicator of deep and expert knowledge of economics, it would be nearly impossible to explain the deep differences that separate Mr. Koch’s professed understanding of economics from Mr. Trump’s professed understanding of economics.

I would go even further than Boudreaux and say that being a successful businessperson doesn’t even mean that a person knows much about business. Of course there are some business people who, if they had to start over from scratch, could become successful again. But many more — perhaps even the majority — achieved their status because they relied on variables, ranging from ideal market conditions to just plain dumb luck, that cannot be replicated.

This is also why businesspeople rarely make effective politicians: they tend to overestimate their knowledge of macroeconomics and end up falling for dumb economic policies (e.g., trade protectionism).

Americans seem to recognize this “successful businessperson fallacy” almost intuitively. Yet every election a distressingly large percent of the populace endorse a wealthy businessperson for president, thinking the billionaire will be able to “fix the economy.” But the U.S. economy is not like a business and cannot be run like one. The major difference, as Christine Harbin writes, is that government is a monopoly and businesses operate in a market:

Because businesses face more competitive pressure than government, they have an incentive to innovate their products, improve their services, drive down prices, become more efficient, etc. Government doesn’t experience this kind of competitive pressure because it is the sole provider of its services, so it does not have an incentive to do those things. Government can afford to deliver sub-par service because it prohibits other firms from entering the market.

Another reason, Harbin notes, is that businesspeople make decisions differently than elected officials:

Leaders made decisions differently in businesses and in government. Decisions are made by consensus in a representational democracy like the United States. In a business, the power to make decisions tends to be more centralized. Decisions are made by a select number of individuals, by polling all of the employees.

Participants also make decisions differently. In a market, individuals always get to decide what they pay for, whereas in a democracy, they have to go along with whatever the majority wants.

When evaluating a businessperson turned candidate, ask them, “Do you think running a business is anything like running the government?” Unless they answer, “No, they’re not even close” then keep looking — because that’s a person who doesn’t know much about either business or governance.

Banking, Justice, and the Common Good

Banking, Justice, and the Common Good

Banking, like any other lawful commercial activity, involves people forming relationships. These relationships are normally with different objectives in mind, but nonetheless they are the fruit of lasting associations formed between one or more individuals.

Buy Kindle Version

Buy ePub / PDF Version

  • Matt Obenhaus

    Thinking about this from another angle is the fallacy that one type of Executive experience equates to the other type of Executive experience. For all of the anti-establishment detractors out there, there is something to be said for someone that has worked within the vastly complex set of institutions that comprise the U.S. Government, particularly the nuances and separation of powers that are crafted between the executive, legislative, and judicial branches of government as well as the federal and state governments and how to work effectively within that is a far cry different than sitting atop a business of mostly obsequious followers. An imperfect analogy is to believe that just because someone runs a successful small county hospital they should be trusted to take over General Electric. Even that analogy is imperfect because while it may capture the stupendous increase in the complexity and size the new CEO will face within this leap, it can’t adequately capture the tremendously different culture and way of getting things done, in which tribal knowledge can be of incalculable value.