Econ Advice Confirmed

We … construct management data on over 10,000 organizations across twenty countries, … [and] use a new double-blind survey tool. … We define “best” management practices as those that continuously collect and analyze performance information, that set challenging and interlinked short-and long-run targets, and that reward high performers and retrain/fire low performers. … Our management scoring grid … was developed by McKinsey as a first-contact guide to firms’ management quality. … We also test (and confirm) that these practices are indeed strongly linked to higher productivity, profitability, and growth. (more)

Not a bad quick measure of the quality of management practices. They find:

In manufacturing American, Japanese, and German firms are the best managed. Firms in developing countries, such as Brazil, China and India tend to be poorly managed. American retail firms and hospitals are also well managed by international standards, although American schools are worse managed than those in several other developed countries. We also find substantial variation in management practices across organizations in every country and every sector, mirroring the heterogeneity in the spread of performance in these sectors. One factor linked to this variation is ownership. Government, family, and founder owned firms are usually poorly managed, while multinational, dispersed shareholder and private-equity owned firms are typically well managed. Stronger product market competition … [is] associated with better management practices. Less regulated labor markets are associated with improvements in incentive management practices such as performance based promotion. …

Publicly (i.e., government) owned organizations have worse management practices across all sectors we studied. … Multinationals appear able to adopt good management practices in almost every country in which they operate. … The level of education of both managers and nonmanagers is strongly linked to better management practices.

So, the world would get more productivity and growth if it had fewer government-owned organizations, less labor regulation, stronger product market competition, and more things run by multinational firms. Gee, sounds a lot like standard economists’ advice.

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  • Robert Koslover

    Thank you.

  • Prasad

    Sounds like free markets are better at producing goods, true. But its unclear if this relationship holds for public goods. No developed state has, as yet, developed public consumptive goods off deregulation.

    • Poelmo

      There are two sides to the equation: private ownership means more efficiency but also higher executive compensations and a profit margin. So when the nature of the business is such that there isn’t much efficiency to be gained over the way public ownership handles the business then it is possible private ownership will actually be more expensive. Of course there is another big reason privatization fails sometimes: the advantages of private ownership disappear when there is no, or too little competition in the sector (e.g. the only post office in a small town in the desert, or the inner city metro system that physically can’t handle trains from many different operators).

  • TGGP

    This contrasts with Greg Clark’s theory that the problem with developing nations is the productivity of “the average working stiff”.

    Prasad,what about Gurgaon?

  • Doug S.

    I don’t care about total growth very much if most of it ends up making a handful of already wealthy people even richer while wealth for most other people stagnates. 🙁

    • Daniel

      In that case, make sure all the businesses are owned by multinationals, and then tax the rich disproportionately.

      Taxing has the minimum possible dead weight cost for wealth redistribution. Anything else is worse, or, if you’re really lucky, equivalent.

      Also, notice that this was saying that companies with dispersed share-holders do better than companies owned by one person. That sounds like it’s favoring the wealth being spread out.

      • Poelmo

        Unless you want to tax the rich so heavily that they’ll have less wealth than they do today, the workers are still worse off. If you do increase taxes enough so that workers will get something in return for their extra work (as in getting more wealth per worked hour) then the rich will have less wealth than do today, which they obiovusly wouldn’t like, while most workers would rather work 8 hours a day for 1 car than 16 hours for 2.3 cars, so they wouldn’t like the new system either, meanwhile increased material wealth means increased environmental damage: everybody loses. The alternatives are leaving things as they are (good for workers and the environment, bad for the rich), and adopting the new system but not increasing taxes by that much (good for the rich, bad for the environment and workers)a nd between you and me I think workers and the environment could use a break a lot more than the rich…

  • Jason

    “Economists find that heeding economists’ advice yields better results when measured by economists’ metrics.” 🙂

    At first I thought “Gee, sounds a lot like standard economists’ advice.” was sarcasm from irony, not sarcasm from understatement.

  • Poelmo

    So, the world would get more productivity and growth if it had fewer government-owned organizations, less labor regulation, stronger product market competition, and more things run by multinational firms. Gee, sounds a lot like standard economists’ advice.

    Right, but since pretty much all of the extra wealth would end up in the pockets of already rich people (and it would come at an environmental cost too), with taxes being mathematically unable to fully repair the damage, let alone reward the workers, why would a government that purports to represent all people, not just the 1%, heed this advice? Which brings me to my next question: why do economists believe that there is some cosmic Blessed Exchequer who has nothing better to do then hand out prizes 9whatever they may be) to civilizations with high productivity and economic output, and if they don’t believe that, then why do they insist on telling the 99% they should work harder to create more wealth that will only end up in the pockets of the 1%?

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