Saturday, April 28, 2012

Why CEOs shouldn't run countries - or the world

Apr 25, 2012
by Simon Kuper

Just before the United States invaded Iraq in 2003, I was debating the matter with a friend, a multi-millionaire entrepreneur.

"Of course we should invade," he said. "The Middle East can't get any worse, so if you change something, it's bound to get better."

I don't know what surprised me more: The weirdness of his argument or his certainty in expressing it. He was suffering from what I now know as the "CEO fallacy": The belief that if you have run a successful company, you can run a country.

Mr Mitt Romney's campaign for US President rests on the CEO fallacy. As he says: "Other people in this race have debated about the economy ... but I've actually been in it."

The CEO fallacy is a fallacy. To quote Mr Larry Summers, former adviser to President Barack Obama, now professor at Harvard's Kennedy School: "The idea that you can extrapolate from the one-business level to the national economy seems to me a profound confusion."

The CEO fallacy goes like this: Successful business people ran tight ships and made money. We, the country, want to run a tight ship and make money. Business types know how and so they should rule.

It's why early admirers of Mr George W Bush's administration called it "the CEO presidency". The UK government wouldn't have let a professor of mediaeval literature review the oil sector, but it got Mr John Browne, former head of BP, to review British higher education.

In the CEO fallacy, the chief executive typically presents a selective biography in which he pulled himself up by the bootstraps in a perfectly free market, something more people could do if only "government would get out of the way".

The CEO fallacy is relatively new. For centuries, soldiers and clergymen ran states.

Perhaps the shift began in 1974, when an obscure gathering of business types in Davos, the European Management Forum, first invited some politicians. Gradually, in the Reagan-Thatcher era, business became redefined as "the real world". Davos is now where CEOs tell politicians how to run the world.

But the politicians should be careful. A company isn't like an economy. Mr Stefan Szymanski, my economics guru at the University of Michigan, says: "Most economists would be pretty adamant that that is a poor analogy."

The analogy fails for many reasons but, above all, running an economy - let alone a country - is of a different order of complexity to running a firm. A CEO typically only has one target: To make a profit. A President has many targets.

Complexity researcher Vince Darley adds: "Running most companies, you are trying to do one thing extremely well. You've got one main product or one main customer base. An economy is much more intricate. You're looking to do hundreds of things, some of them conflicting."

Mr Darley notes that when businesses attempt multiple things, they often fail. That's why conglomerates went out of fashion. Many companies cannot even survive small changes in their one niche.

When Mr Romney ran companies, he cut costs. But as Mr Summers notes, that doesn't work for whole economies. If one firm cuts costs, it benefits. If all firms cut costs, the economy shrinks and nobody benefits.

Could CEOs make governments more efficient? Mr Darley replies: "Companies try to get the best deal, the best bang for the buck, but that's not really what being a President is about. He's the strategic force. Those efficiency skills would be great to have in the middle management of the federal bureaucracy."

Indeed, when successful peanut farmer Jimmy Carter brought his skills to the presidency, he ended up a feared micro-manager who even supervised the schedule for the White House tennis court.

The CEO fallacy is related to the "money fallacy": The notion that life is a race to make money and that rich people, therefore, possess special wisdom.

This was nicely expressed in an argument tossed around during Occupy Wall Street: People with time to protest must be losers whose views didn't matter.

The money fallacy has recently propelled various Goldman Sachs alumni to high public office, from Mr Mario Monti in Italy to Mr Mario Draghi at the European Central Bank and Mr Jon Corzine, the former New Jersey Governor. The collapse of Mr Corzine's MF Global Fund couldn't dent the money fallacy, just as the CEO fallacy has outlived former Prime Minister Silvio Berlusconi's reign in Italy.

In fact, both fallacies have become more popular as voters tire of professional politicians. Oddly, Mr Romney does have relevant experience for the presidency: He was a respected Governor of Massachusetts. But he cannot mention that because he introduced universal healthcare there. Still, given popular confusion, the CEO fallacy might carry him all the way. The Financial Times Limited

Simon Kuper is a columnist with the FT.

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