Last updated: April 21, 2012 12:12 am

Why CEOs shouldn’t run the world

Running an economy – let alone a country – is of a different order of complexity to running a firm
Illustration showing an old man on top of the world©Luis Grañena

Just before the US invaded Iraq in 2003, I was debating the matter over brunch with a friend who is a multimillionaire entrepreneur. “Of course we should invade,” he said. “The Middle East can’t get any worse, so if you change something, it’s bound to get better.” I don’t know what surprised me more: the weirdness of his argument or his certainty in expressing it. He was suffering from what I now know as the “CEO fallacy”: the belief that if you have run a successful company, you can run a country.

Mitt Romney’s campaign for president rests on the “CEO fallacy”. As Romney says, “Other people in this race have debated about the economy … but I’ve actually been in it.” However, the CEO fallacy is a fallacy. To quote Larry Summers, former adviser to Barack Obama, now professor at Harvard’s Kennedy School: “The idea that you can extrapolate from the one-business level to the national economy seems to me a profound confusion.”

The CEO fallacy goes like this: successful business people ran tight ships and made money. We, the country, want to run a tight ship and make money. Business types know how, and so they should rule. That’s why early admirers of George W. Bush’s administration called it “the CEO presidency”. The UK’s government wouldn’t have let a professor of medieval literature review the oil sector, but it got John Browne, former head of BP, to review British higher education.

In the CEO fallacy, the CEO typically presents a selective biography in which he pulled himself up by the bootstraps in a perfectly free market, something that more people could do if only “government would get out of the way”. The biography rarely includes context: the fact, say, that the CEO’s father ran the American Motors Corporation, or that government enforced his contracts, built roads and schooled his employees. (A corrective to the self-made CEO fallacy is to consider what happens to self-made businessmen in Congo: they die of cholera at 48.)

The CEO fallacy is relatively new. For centuries, it was soldiers and clergymen who ran states. Perhaps the shift began in 1974, when an obscure gathering of business types in Davos, the “European Management Forum”, first invited some politicians. Gradually, in the Reagan-Thatcher era, business became redefined as “the real world”. Today, Davos is where CEOs tell politicians how to run the world.

But the politicians should be careful. A company isn’t like an economy. Stefan Szymanski, my economics guru at the University of Michigan, says: “Most economists would be pretty adamant that that is a poor analogy.”

The analogy fails for many reasons, but above all, running an economy – let alone a country – is of a different order of complexity to running a firm. A CEO typically only has one target: to make a profit. A president has many targets.

The complexity researcher Vince Darley adds, “Running most companies, you are trying to do one thing extremely well. You’ve got one main product, or one main customer base. An economy is much more intricate. You’re looking to do hundreds of things, some of them conflicting.” Darley notes that when businesses attempt multiple things, they often fail. That’s why conglomerates went out of fashion. Many companies cannot even survive small changes in their one niche.

When Romney ran companies, he cut costs. But as Summers notes (channelling Keynes), that doesn’t work for whole economies. If one firm cuts costs, it benefits. If all firms cut costs, the economy shrinks and nobody benefits.

Could CEOs make governments more efficient? Darley replies: “Companies try to get the best deal, the best bang for the buck, but that’s not really what being a president is about. He’s the strategic force. Those efficiency skills would be great to have in the middle management of the federal bureaucracy.” Indeed, when the successful peanut farmer Jimmy Carter brought his skills to the presidency, he ended up a feared micromanager who even supervised the schedule for the White House tennis court.

The CEO fallacy is related to the “money fallacy”: the notion that life is a race to make money, and that rich people therefore possess special wisdom. This was nicely expressed in an argument tossed around during Occupy Wall Street: people with time to protest must be losers whose views didn’t matter. The money fallacy has recently propelled various Goldman Sachs alumni to high public office, from Mario Monti in Italy to Mario Draghi at the European Central Bank and Jon Corzine, former governor of New Jersey.

The collapse of Corzine’s MF Global Fund couldn’t dent the money fallacy, just as the CEO fallacy has outlived Silvio Berlusconi’s reign in Italy. In fact, both fallacies have become more popular as voters tire of professional politicians.

Oddly, Romney does have relevant experience for the presidency: he was a respected governor of Massachusetts. But he can’t mention that because he introduced universal healthcare there. Still, given popular confusion, the CEO fallacy might carry him all the way.

simon.kuper@ft.com

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An ilustration by Jason Ford depicting Silicon Valley as a golden city ©Jason Ford The Valley

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