Something that I have learned from a career in business and economics is that they are very different vocations, requiring different sets of skills.

Not many people have achieved mastery in both. Some understanding of economics helps in running a business, but it is not a core skill set. Similarly, what people learn from running a business doesn't help a great deal in formulating economic policy. Roderick Deane, who has been both chairman of Telecom and the State Services Commission and in the first part of his career was an expert in monetary policy, is a rare example of a person who is highly qualified in both fields.

Business expertise is about the ability to run a firm. This requires, among other things, entrepreneurship, team management, and financial proficiency. In contrast, economic skills cannot be mastered ‘at the coal face', but must be studied and practised over a long period of time.

Running an economy well requires getting the framework right. The economy is far too complex to be centrally planned. Economic management has to focus on creating a sound general environment, not particular strategies.

Even the most diversified company is unified in some way. Corporations are based upon a core section of the market, or a general range of products and services. Good business executives are extremely focused and knowledgeable about one or a few markets. A chief executive has ultimate control, and can direct the resources of the business. It would take a superhuman feat to plan and run an entire economy. The failure of centrally planned economies tells us it cannot be done.

It is true that there are some things in common between the two areas. For example, incentives matter in both a company and an economy. A good businessperson tries to structure incentives in their firm well. For example, pay will be structured to encourage staff to excel and increase productivity. Likewise, a good economic manager will try to get incentives right – but the tools this person has to work with are things like good laws, sound property rights, and an efficient tax system.

A company is not a country. American economist Paul Krugman got it right when he pointed out that “economics and business are not the same subject, and mastery of one does not ensure comprehension, let alone mastery, of the other. A successful business leader is no more likely to be an expert on economics than on military strategy.”

The cross-over is at a more limited level – business people may well have skills that are useful in running a military unit or a public hospital, and can advise or help governments with these tasks.

Business people who try to carry over what they have learned in business to running an economy often get it wrong. Consider the Knowledge Wave conferences and the Growth and Innovation Advisory Board, which have contributed little of significance to the national debate.

The reason for this failure is that business skills are hands-on, but hands-on interventionist policies do not work for an economy. Entrepreneurship is all about finding new ideas for profitable investment, and the best entrepreneurs create wealth for themselves, their organisations and the economy. Conversely, governments have an abysmal track record at ‘picking winners' and judging which industries will be important to the economy. Policy makers and politicians typically do not have business skills. The ‘Think Big' schemes are an obvious example of what happens when politicians attempt to think and act as though they are running businesses.

As Krugman has pointed out, the best economic management almost always consists of setting up a good framework, and then leaving entrepreneurs to get on with the job, as free from regulations and red tape as possible. He says, “this doesn't make sense to businesspeople, whose instinct is, as Ross Perot put it, to ‘lift up the hood and get to work on the engine'.”

Economics is in places a difficult and technical subject. Business people should recognise their limitations in advising on economic matters. Typically, they do. Instead of pretending to be experts themselves, they support representative organisations with expertise in economics and policy. This is how the business sector tries to make a professional and constructive contribution to national affairs. Today's business organisations mainly seek to help governments and opposition parties to find ways of improving the overall environment for businesses, rather than advocating on behalf of policies that would assist one company over another.

What we should ask is that both the advisers from business, and those receiving the advice, have a proper sense of what business success does and does not teach about economic policy. The views of politicians about business, and those of businesspeople about economics and policy, should be tested against those who are experts in their fields.

For more information, contact:

Roger Kerr
Executive Director
Ph: 04 499 0790
Email: rkerr@nzbr.org.nz

David Young
Communications Manager
Ph: 04 499 0790
Email: dyoung@nzbr.org.nz

Web: www.nzbr.org.nz