It is possible to go very far as an economist without knowing anything much about business. Especially small business.
A great example is that of Drs. Card and Krueger, whose much acclaimed and cited early ‘90s study of minimum wages, which claimed that higher minimum wages did not reduce employment, resulted in their very successful careers.
The fatal flaws in the study should have be obvious to anyone with small business experience, but evidently few economists were in that category. The study was effectively a before-and-after comparison between certain fast food restaurants in two adjacent states (NJ-PA), one of which raised minimum wages quite a bit while the other left them unchanged.
Their definitions of “before” and “after” were both ridiculous. There was more than a two year gap between when the bill raising wages was passed and when it took effect, yet the employment level of fast food restaurants was only checked one month before the required wage increase. Did they really think that franchise owners, many of whose life savings were in their restaurant and with two years to prepare, would have done nothing to protect themselves from sharply higher labor costs until after the law took effect? Changing operating procedures to minimize labor expense was probably underway long before wages went up. Jobs lost before the "before" didn't count as lost jobs.
Their “after” involved checking the number of employees about eight months after the wage increase went into effect. What Card/Krueger failed to notice is that most franchises sign multi-year leases personally guaranteed by the owner. A restaurant could be losing money after the wage increase, but it would cost the owner even more to shut it down until the lease was up, which could easily be after the “after,” since the owner would still have to pay the rent whether the business operated or not. Businesses shut after the "after" didn't count as lost jobs.
There were many other flaws indicating that the authors knew little about business. See the appendix of my book Economics Reimagined: Nature, Progress & Living Standards in which I dissect the study.
May I adjust the focus for a moment to consider not-for-profit orgs, specifically, selective colleges?
Economists (Michael Rothschild and Lawrence White) introduced the idea that *customers are inputs* at selective colleges. Students are buying a peer group. Admissions officers are "composing a class" on paper -- a conceit that students-as-inputs are complements to one another -- but the target interaction and integration are hard to engineer in reality.
The business strategies are puzzling insofar as there is little product differentiation. Branding is important for marketing, but selective colleges are mostly alike. Similar curricula (with a few niche exceptions). A semester abroad. Total institution (residential campus with communal residence and meals, athletics, clubs). Four years. Very similar sticker prices (even for out-of-state students at flagship public universities) despite vast variance in endowments. Similar price discrimination (patterns of financial aid). True, there are notable differences in org size (large public universities vs small liberal-arts colleges).
Are business models (supply) similar across colleges because that is what students want (demand)? Are the prevalent similarities driven by accreditation regs? Are they a side-effect of the peculiar institution, tenure? Or etc?
I will be grateful for any insights Arnold or readers might have.
PS: Re: "the corporate soap opera." There is an old saw: Fights in academe are vicious because the stakes are low.
"In 1776, Adam Smith began his great book The Wealth of Nations with some observations from a visit to a pin factory. That may have been the last time that an economics professor actually visited a factory. "
I learned later that Smith had not actually visited the pin factory; he had read another description of the place.
I am, in general, suspicious of academics' models for the world. Whether we're talking about economists' understanding of business or some other group of academics' views about how something other than business works, all too often I come away thinking they are non-smart smart people: people whose model for how the world works is too abstract, theoretical, and, well, facile to confer anything like a substantive understanding of the question at hand.
This observation, by the way, falls apart, for the most part, when it is put to the hard sciences: physicists, chemists, and mathematicians likely have a better model for how the world works than do other academics.
I whole heartedly affirm this essay. The actuality of how corporations actually work is far, far different from how most people, including economists imagine it. Of course government and non-profits are similar but worse, since they can degrade even further before dying off. Yet large businesses are amazingly schizophrenic, among other things. For me, it really drives home the magnitude of governmental favoritism towards larger firms, intentional or not, through regulation and other favors that such large organizations persist as much as they do.
‘Capitalist’ is a very bad term for being in business. Commerce is a matter of discovery, assembling and managing factors of production and covering risk. This can often be done with relatively little capital or, indeed, using other people’s.
Doing these things at scale using requires some level of bureaucracy. Though franchising arrangements seek to minimise such administration.
There is very much a tension between what suits bureaucracy and the functions of commerce. So, you get strategising within, as well as between, firms.
Strategising by beings that are self-consciousness, normative, rationalising and often self-deceptive. That are status-concerned satisficers. Hard to model. Rational optimisers, much easier to model.
I’m not an economist. I've worked in small, medium and massive technology companies, finally started my own tiny company a decade ago. Definitely happy to compete with big companies, but I wouldn’t be if I was in a heavily regulated sector. Everything that Arnold said in the article resonates with me.
I’ve wondered for a long time what happens to economic models if there’s a more complex (realistic) model of individual companies. Perhaps it’s impossible to model. Is that why macro models do so badly with predictions (of the future)?
I’m on a plane to spend a week at corporate HQ dealing with Corporate Soap Opera’s.
It seems to me that the talent to break through such issues is worth more then any technical skill (thought technical skill can sometimes help understanding disputes).
Economists and business people see the world from opposite angles: for business people, all is about increase profits and grab additional market share. Economists underscore how competition limit profits and divide market share.
Equilibrium thinking is not very good when your work is to break the stalemate and win.
I would go a step further and say mainstream "economics" is all wrong and is just propaganda invented by the banks to make them richer. Economics is not a proper science, it is mostly fiction.
As I can attest, having never been in the corporate world, Corporate Soap Opera is virtually universal. Trying to explain it in an academic discipline, it is best captured by Organizational Theory. It is the most cynical of disciplines. A great example is the story of Khrushchev and the ICBMs. He wanted ICBMs to counter-balance the US force so he lays a few billion rubles on the Air Force and tells them to build ICBMs. A few years later, what they have is IRBMs because every Soviet general knows that the real enemy is Germany and IRBMs are just fine for that. Khrushchev rants, raves, and threatens to send people to the Gulag but relents and provides more rubles. A few more years and he gets more IRBMs. Giving up, he establishes the Strategic Rocket forces as a separate branch of the Soviet military whose only mission is ICBMs.
Corporate Soap Opera -- certainly a great phrase for what really happens in business, especially in promotions for Director/ Division Heads / VP, as well as the less frequent but more looked at CEO.
Arnold's memory of a lousy supervisor is so often experienced by those who do an insufficient amount of bootlicking (/brownnosing/ butt kissing ...). On the other hand, almost all big companies have a huge amount of production in the Cash Cow segment, so there is a lot scope for status/ promotion optimization over long term profit maximization, including short term maximizing.
Not mentioned here is what most managers facing a decision want to know, when faced with options, perhaps 3: If I do 1, what will happen? If I do 2, what will happen? If I do 3, what will happen? Predictions are really really hard, especially about the future.
And then there's the frequent reality that some A*hole in power treats some people lousy, but gets good results. Often far better than a prior guy who treated others better, but got less good results. This applies to business and politics and most orgs.
Lots of businessmen don't understand "business" -- but do understand how to get customers to pay for what they're selling, and they're far more focused on making their particular company successful, and making more money personally, than in knowing more about business in general.
As someone who went to business school, I have the opposite intuition. I’ve learned much more from institutional economics and books like Managerial Dilemmas than from management frameworks taught in business school. It’s true that working in a real business is a necessity but most people working in businesses seem to lack the tools to grasp the underlying mechanics of corporate drama , most of which are about getting g stuck in bad equilibria in prisoners dilemmas
I have taught management/organizational behavior/industrial-organizational psychology for over thirty years. I’m definitely over simplifying here, but what I think what holds back economics is the cult of ceteris paribus. Economists wave away all of the individual differences and variability that to my mind make studying organizations interesting. All else ain’t ever equal. But, boy, the equations sure are elegant.
For example, in a class of eighty students the average on one of my exams may be 79, but since each question was worth 2.5 points, no one received a 79. However we treat the “class” as some uniform blob with a score of 79.
Additionally, I’m amused by the gosh-wow reverence in which behavioral economics is now held. To my mind it’s simply the stuff my field has been studying for over one hundred years—and being looked down upon by economists with their fancy equations for just as long.
Arnold, I think, begins to capture this with his concept of Corporate Soap Opera, but that is the essence of organizations: humans and human interaction. Maybe some discussion of the differences between micro and macro economics would be helpful—to me at least. Our different fields most likely use “micro” and “macro” differently. OB’s focus is behavior at the micro level (i.e., individual, dyad, small group), while I believe Arnold’s focus is macroeconomics and that’s the lens through which he views things; does microeconomics do a better job of capturing CSO? Waving away individual differences may help develop some big picture understanding, but the devil is in the details.
I think those of us on the business side would benefit from a better grounding in economics, but some (many?) economists would benefit from some exposure to the messy reality of businesses and CSO.
Milton Friedman observed the following about economists giving investment advice. It applied as well to economists giving business advice:
"Asking economists for investment advice is like asking a physicist to fix a broken toilet. Not their field, though sort of related."
"Corporate soap opera" now has a home in my vocabulary.
It is possible to go very far as an economist without knowing anything much about business. Especially small business.
A great example is that of Drs. Card and Krueger, whose much acclaimed and cited early ‘90s study of minimum wages, which claimed that higher minimum wages did not reduce employment, resulted in their very successful careers.
The fatal flaws in the study should have be obvious to anyone with small business experience, but evidently few economists were in that category. The study was effectively a before-and-after comparison between certain fast food restaurants in two adjacent states (NJ-PA), one of which raised minimum wages quite a bit while the other left them unchanged.
Their definitions of “before” and “after” were both ridiculous. There was more than a two year gap between when the bill raising wages was passed and when it took effect, yet the employment level of fast food restaurants was only checked one month before the required wage increase. Did they really think that franchise owners, many of whose life savings were in their restaurant and with two years to prepare, would have done nothing to protect themselves from sharply higher labor costs until after the law took effect? Changing operating procedures to minimize labor expense was probably underway long before wages went up. Jobs lost before the "before" didn't count as lost jobs.
Their “after” involved checking the number of employees about eight months after the wage increase went into effect. What Card/Krueger failed to notice is that most franchises sign multi-year leases personally guaranteed by the owner. A restaurant could be losing money after the wage increase, but it would cost the owner even more to shut it down until the lease was up, which could easily be after the “after,” since the owner would still have to pay the rent whether the business operated or not. Businesses shut after the "after" didn't count as lost jobs.
There were many other flaws indicating that the authors knew little about business. See the appendix of my book Economics Reimagined: Nature, Progress & Living Standards in which I dissect the study.
May I adjust the focus for a moment to consider not-for-profit orgs, specifically, selective colleges?
Economists (Michael Rothschild and Lawrence White) introduced the idea that *customers are inputs* at selective colleges. Students are buying a peer group. Admissions officers are "composing a class" on paper -- a conceit that students-as-inputs are complements to one another -- but the target interaction and integration are hard to engineer in reality.
The business strategies are puzzling insofar as there is little product differentiation. Branding is important for marketing, but selective colleges are mostly alike. Similar curricula (with a few niche exceptions). A semester abroad. Total institution (residential campus with communal residence and meals, athletics, clubs). Four years. Very similar sticker prices (even for out-of-state students at flagship public universities) despite vast variance in endowments. Similar price discrimination (patterns of financial aid). True, there are notable differences in org size (large public universities vs small liberal-arts colleges).
Are business models (supply) similar across colleges because that is what students want (demand)? Are the prevalent similarities driven by accreditation regs? Are they a side-effect of the peculiar institution, tenure? Or etc?
I will be grateful for any insights Arnold or readers might have.
PS: Re: "the corporate soap opera." There is an old saw: Fights in academe are vicious because the stakes are low.
In my econ book for business leaders, I began:
"In 1776, Adam Smith began his great book The Wealth of Nations with some observations from a visit to a pin factory. That may have been the last time that an economics professor actually visited a factory. "
I learned later that Smith had not actually visited the pin factory; he had read another description of the place.
I am, in general, suspicious of academics' models for the world. Whether we're talking about economists' understanding of business or some other group of academics' views about how something other than business works, all too often I come away thinking they are non-smart smart people: people whose model for how the world works is too abstract, theoretical, and, well, facile to confer anything like a substantive understanding of the question at hand.
This observation, by the way, falls apart, for the most part, when it is put to the hard sciences: physicists, chemists, and mathematicians likely have a better model for how the world works than do other academics.
I whole heartedly affirm this essay. The actuality of how corporations actually work is far, far different from how most people, including economists imagine it. Of course government and non-profits are similar but worse, since they can degrade even further before dying off. Yet large businesses are amazingly schizophrenic, among other things. For me, it really drives home the magnitude of governmental favoritism towards larger firms, intentional or not, through regulation and other favors that such large organizations persist as much as they do.
‘Capitalist’ is a very bad term for being in business. Commerce is a matter of discovery, assembling and managing factors of production and covering risk. This can often be done with relatively little capital or, indeed, using other people’s.
Doing these things at scale using requires some level of bureaucracy. Though franchising arrangements seek to minimise such administration.
There is very much a tension between what suits bureaucracy and the functions of commerce. So, you get strategising within, as well as between, firms.
Strategising by beings that are self-consciousness, normative, rationalising and often self-deceptive. That are status-concerned satisficers. Hard to model. Rational optimisers, much easier to model.
I’m not an economist. I've worked in small, medium and massive technology companies, finally started my own tiny company a decade ago. Definitely happy to compete with big companies, but I wouldn’t be if I was in a heavily regulated sector. Everything that Arnold said in the article resonates with me.
I’ve wondered for a long time what happens to economic models if there’s a more complex (realistic) model of individual companies. Perhaps it’s impossible to model. Is that why macro models do so badly with predictions (of the future)?
I’m on a plane to spend a week at corporate HQ dealing with Corporate Soap Opera’s.
It seems to me that the talent to break through such issues is worth more then any technical skill (thought technical skill can sometimes help understanding disputes).
Economists and business people see the world from opposite angles: for business people, all is about increase profits and grab additional market share. Economists underscore how competition limit profits and divide market share.
Equilibrium thinking is not very good when your work is to break the stalemate and win.
Business is opportunistic, economics is systemic.
I would go a step further and say mainstream "economics" is all wrong and is just propaganda invented by the banks to make them richer. Economics is not a proper science, it is mostly fiction.
More here; https://truthaddict.substack.com/p/mainstream-economics-is-now-100-propaganda
As I can attest, having never been in the corporate world, Corporate Soap Opera is virtually universal. Trying to explain it in an academic discipline, it is best captured by Organizational Theory. It is the most cynical of disciplines. A great example is the story of Khrushchev and the ICBMs. He wanted ICBMs to counter-balance the US force so he lays a few billion rubles on the Air Force and tells them to build ICBMs. A few years later, what they have is IRBMs because every Soviet general knows that the real enemy is Germany and IRBMs are just fine for that. Khrushchev rants, raves, and threatens to send people to the Gulag but relents and provides more rubles. A few more years and he gets more IRBMs. Giving up, he establishes the Strategic Rocket forces as a separate branch of the Soviet military whose only mission is ICBMs.
Corporate Soap Opera -- certainly a great phrase for what really happens in business, especially in promotions for Director/ Division Heads / VP, as well as the less frequent but more looked at CEO.
Arnold's memory of a lousy supervisor is so often experienced by those who do an insufficient amount of bootlicking (/brownnosing/ butt kissing ...). On the other hand, almost all big companies have a huge amount of production in the Cash Cow segment, so there is a lot scope for status/ promotion optimization over long term profit maximization, including short term maximizing.
Not mentioned here is what most managers facing a decision want to know, when faced with options, perhaps 3: If I do 1, what will happen? If I do 2, what will happen? If I do 3, what will happen? Predictions are really really hard, especially about the future.
And then there's the frequent reality that some A*hole in power treats some people lousy, but gets good results. Often far better than a prior guy who treated others better, but got less good results. This applies to business and politics and most orgs.
Lots of businessmen don't understand "business" -- but do understand how to get customers to pay for what they're selling, and they're far more focused on making their particular company successful, and making more money personally, than in knowing more about business in general.
As someone who went to business school, I have the opposite intuition. I’ve learned much more from institutional economics and books like Managerial Dilemmas than from management frameworks taught in business school. It’s true that working in a real business is a necessity but most people working in businesses seem to lack the tools to grasp the underlying mechanics of corporate drama , most of which are about getting g stuck in bad equilibria in prisoners dilemmas
I have taught management/organizational behavior/industrial-organizational psychology for over thirty years. I’m definitely over simplifying here, but what I think what holds back economics is the cult of ceteris paribus. Economists wave away all of the individual differences and variability that to my mind make studying organizations interesting. All else ain’t ever equal. But, boy, the equations sure are elegant.
For example, in a class of eighty students the average on one of my exams may be 79, but since each question was worth 2.5 points, no one received a 79. However we treat the “class” as some uniform blob with a score of 79.
Additionally, I’m amused by the gosh-wow reverence in which behavioral economics is now held. To my mind it’s simply the stuff my field has been studying for over one hundred years—and being looked down upon by economists with their fancy equations for just as long.
Arnold, I think, begins to capture this with his concept of Corporate Soap Opera, but that is the essence of organizations: humans and human interaction. Maybe some discussion of the differences between micro and macro economics would be helpful—to me at least. Our different fields most likely use “micro” and “macro” differently. OB’s focus is behavior at the micro level (i.e., individual, dyad, small group), while I believe Arnold’s focus is macroeconomics and that’s the lens through which he views things; does microeconomics do a better job of capturing CSO? Waving away individual differences may help develop some big picture understanding, but the devil is in the details.
I think those of us on the business side would benefit from a better grounding in economics, but some (many?) economists would benefit from some exposure to the messy reality of businesses and CSO.