On the depressingly low level of economic thought

Corporate organisations are “stupid” in that they don’t learn very effectively (pdf) and in most cases, improvements to productivity and new innovations tend to come from new firms entering the marketplace with new ideas, not incumbents making incremental improvements.

To what extent this is true will vary by sector: in the UK during the 1980s, 90% of all productivity improvements (pdf) in manufacturing came from firms exiting and entering the marketplace. One look at the cut-throat history of the tech market suggests it is probably in a similar ballpark.


Improvements in productivity
is the same statement as the society getting richer. And entry and exit is how this happens.

Another strategy is to tackle the problem from the other end – reduce the need for firms to go bust in a market, and so in turn reducing the frequency of crashes. Achieving this would have the added benefit of reducing the other associated costs of a bust for involved labour and capital, as well as consumers.

Therefore we should deliberately limit exit and thus hamstring entry so as to make sure that the society cannot get richer.

Facepalm.

9 thoughts on “On the depressingly low level of economic thought”

  1. Pretty typical of the schizophrenia of the Left. They have this major problem of simulaneously despising “big” business but then formulating economic ideologies dependent on it. They hate the evil monopoly capitalist factory owner, but can’t live without him, because if they do bring his oligopoly to an end, the jobs go with it.

  2. Erm, bankruptcy leads to sale of assets of the firm – if there is value surely it is bought and then run more efficiently? the fact that someone puts effort into building a following on twitter and if twitter did disappear and no one could be bothered to buy it, that is just how it is, it isnt economically viable. It’s a bit like investing heavily in learning Yugoslav economics back in the 70s*, yes you invested a lot of time, but it turned out to be bollox.

    * This really happened, loads of people thought it was a good idea at the time

  3. I hired a computer programmer recently at about £400/day for 2 months.

    He’s a very talented individual. I asked him how many companies he had worked for over the last 2 years and how many of them had been successful. “About 10. Yours is the only one that looks like it might actually make some money and keep going.”

    It’s widely accepted in the high tech world of software development that most businesses will fail. Success is the exception.

  4. A sizeable percentage (maybe most) of all businesses fail. Some because the people running them are not capable enough others for a vast number of different reasons (govt thieving and meddling being major causes also). That is life.

  5. ” in most cases, improvements to productivity and new innovations tend to come from new firms entering the marketplace with new ideas, not incumbents making incremental improvements.”
    Tell that to Johnson & Johnson, Roche and GSK.

  6. “90% of all productivity improvements … came from firms exiting and entering the marketplace”

    Which is precisely why we shouldn’t have monolithic State provision of services such as education and healthcare.

  7. I wonder how much of the blame for the apparently dismal rate of improvement in existing players was due to unions fighting tooth and nail against any changes.

  8. Richard #6

    The counter argument is that there is greater equity that is worth sacrificing greater efficiency. It is possible to imagine that a state voucher system might improve the average but increase the tail of poor performances. I’m not personally convinced of this – since the tail is already pretty dreadful, and there is substantial producer capture (eg idiot teachers unions). But it is a valid argument.

    Rob#7

    Not just unions, but also management and government. Also sometimes its difficult because incumbents have invested too heavily in a given way of doing business. And sometimes the analytical tools are wrong –

    http://www.ascendcfo.com/pdfFiles/HBR-How%20Financial%20Tools%20Destroy%20Your%20Capacity%20to%20Do%20New%20Things.pdf

  9. Hi Ken
    Glad to see that the Harvard Business Review is still in the business of stating the bleedin’ obvious.

    Sunk costs: No history, no sunk cost. (Until you sink without trace like the other 70%.)
    EPS: What’s zero divided by zero?
    Stage-gate: How can an existing large firm do it any other way? (We aren’t told.)
    Stage-gate 2: Of course a start-up doesn’t. (It’s got a single product.)

    Sorry to be flippant but your link takes a long time to load…

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