Streetwise Professor

There is talk that the Obama administration is contemplating naming a corporate executive to replace Larry Summers as director of the National Economic Council.  The one name that has been floating around is Anne Mulcahy, former CEO of Xerox.

The politics of this are risible–as many on the left have already argued.  It is a clunky, inartful attempt to quell private sector misgivings (I am being charitable) about the Obama administration.

Uhm, it’s not the people that is the problem, it’s the policy.  And it’s the big policies, be it health care and taxes and spending, the ones that Obama has already made clear he is loath to change, that are the problem.  With major changes in those policies, you could have Karl Marx in the job and it wouldn’t matter.

But there’s another, more basic problem, that relates to yesterday’s “Gung Ho” post.  Specifically, it has a great risk of falling into the trap of thinking that the economy is like a big firm, and can be “managed” accordingly.

Wrong.

Corporate executives, including CEOs, interface with the market, sure.  But a vast amount of their time and expertise is involved in matters of organization, governance, personnel, etc.  It’s mostly about understanding organizations–and indeed, a particular organization in a particular industry–than understanding the interactions of myriad organizations in disparate industries.  It doesn’t really require all that deep of an understanding of decentralized coordination through trade and the price system, or spontaneous orders.  Much of the expertise of a particular CEO is not that useful in understanding the broader economy.*  Moreover, it is reasonable to believe that a firm is a unitary thing with a well-defined objective (profit maximization): most of the job of management is to determine and implement strategies and tactics to achieve that objective.  In that context, gung ho makes sense.  In contrast, the broader economy is not a unitary thing with a defined objective.  It is a collection of diverse individuals all striving towards their own ends, all acting on their own unique, idiosyncratic information.

Furthermore, the interests of large, incumbent, corporations are often at odds with the broader interests of producers and consumers in the economy.  Big incumbent corporations aren’t all that enthusiastic about creative destruction.  Their managers are often quite comfortable with laws and regulations that suppress competition, and protectionism.  They often take the “what’s good for GM is good for America” approach–which is exactly wrong.

So, with the rare exception, I am rather skeptical about the desirability of having a corporate type in a major economic policy position.  So, perhaps it isn’t surprising that Obama would think it’s a good idea.

*Hayek made a useful distinction here, but his terminology would be particularly confusing to most in this context because that nomenclature is contrary to the conventional use of the word “economy.”  In Hayekian terms, CEOs are indeed masters of economy.  This article by Norman Barry puts the Hayek definition of “economy” nicely:

An economy is a social practice defined in terms of the pursuit of a ‘unitary hierarchy of ends,’ where knowledge of how to achieve these ends is given. A single firm (or a household) is an economy and may be evaluated with the methods of an engineering type of science for its success in achieving prescribed goals, or common purposes.

In contrast, a catallaxy is:

a network of many firms and households and has no specific purpose of its own: it is that which results naturally from the interaction of firms and households through the exchange process: “the order of the market rests not on common purposes but on reciprocity; that is, on the reconciliation of different purposes for the mutual benefit of the participants.”

So, what is conventionally referred to as “the economy” is in Hayekian terms a catallaxy, and the policy big picture should be predicated on an understanding of catallaxy, not economy in the Hayekian sense.  (Now you see the confusion.)

From a Hayekian perspective, therefore, a CEO-type is completely mismatched with a big policy job.  CEOs are experts at Hayekian “economy,” not catallaxy