schumpeter

Mickey Edwards, former congressman from Oklahoma and guest lecturer at the Harvard School of Government, has written an interesting blog on the case for business leaders moving into politics. To Edwards, operational skills acquired in the private world are not easily translated to the political world:

I do have a problem, however, with the continued promotion of business success as a qualifier for public office. Success in the market is not an automatic disqualifier for public service, but it is a far different undertaking with different purposes and different values.

On this point, Edwards is absolutely correct, but I disagree with his conclusion that:

The business of business is business and the goal of business is to earn a profit in the provision of goods and services.

The goal of business is not merely to profit, but to create value for its shareholders. A firm must balance short and long term goals to produce wealth in both equity appreciation and dividends. How this is achieved depends on the interests of the shareholders. More importantly, the goal is not “profits” but “sustainable profits.” Firms that invest in productivity and new product development do so because they recognize that they live in the Schumpeterian world of creative destruction. Nothing they’re doing today will remain profitable in a decade. The firms who fail to acknowledge this fact do not survive, witnessed in the high turnover of the Fortune 500. The simple profit motive is a short-term, unsustainable notion of business practices.

To be sustainable, corporations must develop and maintain a good reputation with their customers, their employees, their suppliers, their shareholders, and any other group with whom they are economically-linked. The views of these groups can (and do) affect the ability of the firm to remain profitable over time. Moreover, a good reputation is hard to acquire, easy to lose. Considering these motivations, businesses are far more “political” than Edwards recognizes.

Business, however, is not guided by the benevolence Edwards attributes government:

The business of government is service- well managed, one hopes, and not wasteful, but never at a profit. There is no such thing as government money. Governments have no money; they have only what they take from their citizens, either in taxes or by inflation. And if government accrues profit, it can only have done so by taxing too much or eroding the value of the citizens’ income and savings — in either case doing harm, not good, to the people who have created it for the advantages such a common effort is presumed to bestow.

As a former congressman, Edwards certainly knows the appetite of government is infinite. Surplus revenues are never rebated to the taxpayers but spent without oversight on marginal projects. Increased cost of living allowances, earlier retirement programs, pork barrel spending to benefit local special interests. If government actually sought to advance the “public good”, the record would be far different.

Businesses seek maximum efficiency; governments seek sufficient efficiency. We might well save a considerable amount of money by delegating our national security to mercenary armies drawn from other countries (as opposed to keeping a high-cost standing army and paying U.S. wages to private combat zone contractors), thus erasing the need to maintain a perpetual and costly military infrastructure. We could assign the processing of Social Security checks and welfare payments to low-wage workers in Madras or Oaxaca. State governments could close welfare offices and require that all transactions with government be conducted electronically, with no recourse to potentially sympathetic human beings. These are choices governments make reluctantly and businesses make routinely.

This understates the problem. The concept of efficiency requires a metric. For business, it’s “sustainable profitability” whereas government is a grab bag of special programs, each administered by a siloed agency with a “mission” but no responsibility for the general public good.

Business cannot make utopian promises as government frequently does- social security, universal health care, generous cost-of-living increases, a cure for cancer, energy independence, zero pollution. And that lack of a metric can lead nations-and certainly firms- to bankruptcy. The plights of Greece and Illinois, to mention but two, are examples of the need for the “sustainability” virtue that business can offer to politics.

Even agencies with a clear mission- say the Department of Defense – are hindered by the political process and the 435 congressional districts continually second guessing their actions.

Yet, he is right. Those who’ve entered government from business have no great track record. Mitt Romney created a non-sustainable “universal” health care plan in Massachusetts allowing Obama his success at an even less sutainable plan at the federal level. Business doesn’t understand that the competitive forces that disciplined him in the private world are less present and much weaker in politics. Edwards argues that political leaders should ensure that government doesn’t impede profit-making unduly. But they do – and former business leaders freed of the sustainability restraints that made them successful in the private world may exacerbate the problems already extant.

So, in the end, I do find points of agreement with Edwards. The key role of a businessman turned politico would be to reform the institutions – the laws, the regulations, the legal structure – to remove all possible impediments to economic growth. Too few business leaders have ever sought to push for that role in the private sphere when the benefits would have been direct and immediate. Why should we expect them to do so in a world where the benefits would be privatized, the costs political?