Tag Archives: business

Hail Industrial Organization

(ngrams)

Economists know many useful things about human social behavior, and about how to improve it. And the world would probably be better off if it listened to economists more. But while the world respects economists enough to mention when their analyses support favored policies, people are much less interested in deciding what to favor based on econ analyses. What could get people to listen more?

There are many relevant factors, but a big one where we might do better is: a track record for being useful. For example, the world listens to chemists, computer scientists, and engineers in part because of their widely-known reputations for having long track records of being directly and simply useful to diverse clients.

Yes, econ majors in college are among the best paid outside of computers and engineering. But that may only show that learning our methods is an impressive feat, not that we produce reliable results. And the fact that people like to point to our analyses to support their policies only shows that we have prestige, not that we are right. What we want is a track record of being, not just impressive, but directly and clearly right, and useful because of that.

Now it turns out that we economists have actually found a way to be frequently and directly useful to diverse clients, and via being right, not just impressive. But we’ve failed to claim sufficient credit for this, and now we seem to be dropping the ball in pursuing it. This place is: business strategy.

When a firm considers what products or services to make, what customers to seek and how, and what prices to charge, it can help to have a theory of that firm’s industry. A theory of its customer demands and producer costs. A theory that says who wants what, who can take what actions when, who knows what when doing what, and how each actor tends to respond to their expectations re other actions. With such a theory, one can predict which actions might be how profitable, and choose accordingly.

Firms today regularly debate key business choices, and hire management consultants to advise those decisions. In addition, new firms pitch their plans to investors, and frequently revise such plans. And while all these choices might seem to be done without theories, that is an illusion. In fact, all such analyses are based on at least implicit theories of how local industries work. Such theories might be simple, or wrong, but they are there.

Now many aspects of useful industry theories are quite context dependent. But other aspects are more general. There are in fact many common patterns in key industry features, and in the ways that industries compete. And in the last century, the world has made great progress in developing better general theories of how firms compete in industries. Furthermore, economics has been central to that story.

In particular, game theory has become a robust general account of how social decisions are made. And we’ve identified dozens of key factors that influence industrial competition. Key ways in which industries differ, that result in different styles of competition. And we’ve worked out a great many specific models of how small sets of these factors work together to create distinctive patterns of industry competition. And much, perhaps even most, of this has happened within the econ field of “industrial organization.”

Today, most who discuss business strategy do so using concepts and distinctions that are well integrated into this rich well-developed and useful econ account of how firms in industries compete. And firms are in fact constantly reconsidering their business strategies using such concepts. So we economists have in fact developed powerful tools that are very useful, and are widely being used.

But, alas, we economists are failing to take credit for it. We don’t teach courses in business strategy, and we don’t recommend students who take our industrial organization courses for such roles. We’ve instead allowed business schools to do that teaching, and to take that credit. And even to take most of the consulting gigs.

Furthermore, academic economists have drifted away from industrial organizations; it is no longer in fashion. It mostly uses old fashion game theory, instead of now popular behaviorism or machine learning. It isn’t well suited for controlled experiments, which are so much the fashion in econ these days that all other kinds of data are considered unclean. And it doesn’t give many chances to promote woke agendas. So few people publish in industrial organization, and few students take classes in it. I know, as I still teach it, but to few students, and nearby universities don’t even offer it.

As usual, academic research priorities are mostly set by internal coalition politics, not by what would be good for the world as a whole, or even each field as a whole.

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Beware The Moral Spotlight

Imagine a large theatre with a singer at center stage. A single bright spotlight illuminates this singer, and the rest of the crowded theatre is as dark as can be, given this arrangement. Morality can do the same thing in the theatre of our mind. Once one issue or choice gets a strong moral color, we can focus on it so much that we just don’t see a much larger theatre of action. This is fine when our moral sense works well. If one murder were happening in a stadium of 50,000 people, it could make sense for the Jumbotron to project it onto the big screen, and for the whole stadium to focus on it, to help them do something about it.

But our moral sense often doesn’t work well. We are so obsessed with showing off our moral feelings and inclinations, relative to being useful to a larger world, that we neglect large theatres where we could be useful, to obsess with a small circle highlighted by our moral spotlight, where we can’t actually do much. Let me give three examples.

1. Some friends were recently arguing about the motives of CEOs, relative to politicians and heads of government agencies. One person was arguing that people go into government in order to help others, but go into business to make money. Thus it is better, all else equal, for activities to be run by government. Another person argued that real business people have a wide range of motives, as do real government people. But first person pointed to official statements of purpose, claiming that governments say on paper that they are to help people, while businesses say on paper that they are to make money.

But even if business and government people do differ on average in their motives, you don’t get to elite positions in either area without paying close attention to the great many practical constraints that each area imposes. Business people must attend to customer reactions, employee moral, media coverage, etc. Government people must attend to official procedures, voter sentiment, rival factions maneuvering, etc. Elites must usually navigate such treacherous shoals successfully for decades before they are allowed to make big decisions on behalf of any organization.

Those selection pressures are what determine most behavior in both areas. If business or government is better at running activities, it is mostly because of differences in those pressures. Any remaining behavior differences due to fundamental motives being influenced by official statements of purpose must be small by comparison. While your moral spotlight might want to focus on purpose-statement-induced-motives, most of what matters is elsewhere.

2. I recently watched the documentary The Red Pill, which mostly reviewed Men’s Rights Movement arguments that I had encountered decades before in the book The Myth of Male Power. They point out that many official rules and widely held expectations, as well as many concrete typical outcomes, are unfavorable to men. Their talks and meetings have faced rude and violent interference by those who see this as undermining feminist consciousness-raising regarding areas where official rules and widely held expectations have been and to some extent continue to be unfavorable to women.

The conflict seems to come down emotionally to a perception of which sex is getting the worse deal overall. And there may in fact be some truth of that matter; maybe one sex does have a worse deal. But many seem eager to infer the existence of an entire system, e.g., “patriarchy”, designed in detail to achieve this worse-for-one-sex outcome, entrenched via the direct support of malicious people from the favored sex, and implicit support from most of the rest of that sex.

This seems to me to mostly result from a moral spotlight in overdrive. Yes one sex may have a worse deal overall. But most of the ways in which we’ve had sex-assymetric official rules and widely held expectations did not result from a conspiracy by one sex to repress the other. They were mostly reasonable responses to sex differences relevant in ancient societies. We may have failed to adapt them quickly enough to our new modern context. But many of them are still complex and difficult issues. We’d do better to roll up our sleeves and deal with each one, than to obsess over which sex has the worse overall deal.

3. When people think about changes they’d like in the world one of their first thoughts, and one they return to often, is wanting more democracy. It’s their first knee-jerk agenda for China, North Korea, ISIS, and so on. Surely with more democracy all the other problems would sort themselves out.

But in fact scholars can find few consistent difference in the outcomes of nations that depend much on their degree of democracy. Democracy doesn’t seem to cause differences in wealth, or even in most specific policies. Democracies today war a bit less, but in the past democracies warred more than others. Democracies have less political repression, and our moral spotlight finds that fact to be of endless fascination. But it is in fact a relatively small effect on nations overall.

Nations today have huge differences in outcomes, and we are starting to understand some of them. But most of them have little to do with democracy. Plausibly larger issues include urbanization, immigration, foreign trade, regulation, culture, rule of law, corruption, suppression or encouragement of family clans or religion, etc. If you want to help nations, you’ll have to look outside the moral spotlight on democracy.

Yes, why should you personally sacrifice to help the world? The world will reward you for taking a clear moral stance regarding whatever is in the shared moral spotlight. And it will suspect you of immorality and disloyalty if you pay too little attention to that spotlight. So why should you look elsewhere? I think you know.

Added 3 July: Bryan Caplan points out that democracy can reduce the worst excesses of totalitarian governments. I accept that point; I had in mind less extreme variations, so North Korea was a poor choice on my part.

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