An economy is like a cloud…

A brilliant article by Henry Mintzberg of  McGill University and author of Managers not MBAs :-).

He begins by saying economy is like a cloud:

An economy is like a cloud: only when inside does one realize how diffuse it is – and that what matters are the particles of vapor that it comprises. Likewise, an economy is an accumulation of transactions involving goods and services, mostly carried out by business enterprises. Their behaviors are what matters, and they cannot be adequately perceived from the distant perspective of economic models and statistics, but only on the ground – where an economy is built, where it breaks, and where it must be fixed.

🙂

The crux of the article is that economic system is a combination of explorers (innovators) and exploiters. There are both in an economy. And the crucial bit is to have policies which promote explorers. In US (and most others) exploiters rule the rosst right now.

Economic development proceeds through a cycle that begins with young, exploring enterprises introducing new products, services, and processes. Over time, however, as they succeed, many explorers become exploiters. They saturate their markets, run out of new ideas, and get lazy. They then extend their product lines instead of developing new products; cut costs by putting pressure on their workers; lobby governments for favorable treatment; merge with competitors to reduce competition; and manipulate customers to squeeze out every last penny.

This, of course, makes these enterprises vulnerable to the creative challenges of the next wave of explorers – the fast new firms that confront the fat old corporations – and the cycle of destruction and reconstruction begins anew.

Apart from finance cronyism runs in other sectors in America. The idea is to allow new ventures to prosper and make it easier for them. He says productive has taken a different meaning in India. It means firing people and not bettering products and processes:

When economists boast about America’s great productivity, what they have in mind is exploration – finding ways to do things better, especially through superior processes. But much of this “productivity” has in fact been destructively exploitative. Think of all the corporations that have fired great numbers of people at the drop of a share price, leaving behind underpaid, overworked employees and burned-out managers, while the CEOs escape with their bonuses.

To see where this leads, imagine a company that fires all of its workers and then ships its orders from stock. Economic statistics would record this as highly productive – until, of course, the company runs out of stock. American enterprise is running out of stock.

He says first all the excess privileges to CEOs should be stopped. It also needs a new army of managers and econs:

 the American economy needs now are managers who know and care about their businesses. Armies of MBAs who have been trained to manage everything in general but nothing in particular are part of the problem, not the solution. So are economists who study clouds without ever getting wet.

Superb…

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