Finance & economics
Why economics does not understand business
It is the mid-1990s and the economics faculty at a leading business school is meeting.
The assembled dons are in a prickly mood.
Many are upset that business-school fields, such as marketing and organisational behaviour, enjoy a higher standing despite their apparent lack of rigour.
That economics ought to command more respect is keenly felt.
One professor can barely contain his scorn.
Anyone with a good PhD in economics, he declares, could comfortably teach in any of the school's other departments.
It is tempting to see this as a story about the arrogance of economists.
And in part, it is.
The discipline's imperialism--its tendency to claim the territory of fields adjacent to economics as its own--is a bugbear of social scientists.
这门学科的帝国主义 -- 将与经济学相邻的领域据为己有的倾向 -- 一直令社会科学家头疼
Yet the professor had a point.
In the 1990s economics could plausibly claim to be moving towards a unified science of business.
A realistic theory of the firm was in prospect.
Alas, three decades on, it is no closer.
Economics has rich models of competition and markets.
But its powers still tend to falter once inside the factory gate or office building.
It is worth asking why.
Economics is--or at least is supposed to be--about the allocation of scarce resources.
经济学是 -- 或者至少应该是 -- 关乎稀缺资源的配置的
In neoclassical theory, markets take centre stage.
The factors of production (land, labour and capital) and the supply and demand of goods and services move in response to price signals from market exchange.
Resources go to the most profitable use. That is the theory.
It has a glaring omission, as Ronald Coase, an economist, pointed out in a paper in 1937.
Much of the allocation of resources in economies occurs not in markets but within firms.
The prime movers are employees.
They are directed not by price signals but by administrative fiat.
The theory that firms are profit-maximisers is another clash with reality.
They operate in a fog of ignorance and error, noted Herbert Simon, a pioneer of artificial intelligence and decision sciences.
No business could process all the information needed to extract maximum profit.
Instead firms operate under conditions of "bounded rationality", making decisions that are satisfactory rather than optimal.
For years, economics did little to advance along the lines drawn by Coase and Simon.
As late as 1972, Coase complained that his paper on the nature of the firm was "much cited and little used".
Yet almost as soon as Coase lamented its absence, a body of rigorous research on the firm began to emerge.
It proceeded to flourish over the course of the following two decades.
A key pillar of this research is the idea of the firm as the co-ordinator of team production, where each team member's contribution cannot be separated from the others.
Team output requires a hierarchy to delegate tasks, monitor effort and to reward people accordingly.
This in turn needs a different kind of arrangement.
In market transactions, goods are exchanged for money, the deal is done and there is little scope for dispute.
But because of bounded rationality, it is not possible in business to set down in advance all that is required of each party in every possible circumstance.
A firm's contracts with its employees are by necessity "incomplete".
They are sustained by trust and, ultimately, by the threat of breakdown, which is costly to all parties.