It’s not uncommon for presidential candidates to tout their business experience, often claiming that they know “how the economy works.” Surprisingly, in a recent post, Krugman correctly shot this idea down, noting, “The idea that what America needs now is an executive type is just foolish.”
Unfortunately, Krugman does not arrive at this conclusion through sound economic reasoning. He notes that it’s efficient when a businessman is able to produce the same output with half the input. But he argues that an economy-wide scenario like this one would result in a recession. Evidently something that is efficient on a micro level becomes catastrophic for Krugman when it is amplified. Krugman is subscribing to the Keynesian doctrine of “idle resources” or “unutilized capacity.” For an excellent illustration of just what is wrong with Krugman’s thinking, see here.
As always, we must seek to understand the root cause of any economic phenomena. What might cause a sudden, economy-wide “under-utilization” of resources? This can only come about through an artificial lengthening of the structure of production. This structure is a heavily intertwined chain of goods that stretches from raw materials recently mined all the way to the new TV that you see on the shelf. When interest rates are artificially suppressed, businessmen invest more heavily in production processes that are farther and farther removed from the TV on the department store shelf. Unfortunately, consumers don’t currently desire investment in stages of production which are far removed from consumption. Resources are being tugged in two directions—towards producer goods by the entrepreneurs and towards the consumer goods by consumers themselves. This tug-of-war eventually shows the unprofitability of many entrepreneurial endeavors. When bankruptcy comes, factors go unutilized. The answer is not more intervention, but less.
We’ve seen how Krugman’s analysis is faulty (despite arriving at an accurate conclusion). Still, many think that a president with business experience is best because they expect him to be “pro-business.” In reality, the president should not be “pro-business,” only “pro-property.” As we explain here, businesses themselves are often the most ardent opponents of the unhampered market economy. The only “pro-business” policies that the president should advocate are one’s that protect private property. Only in this climate will business be able to arrange their assets in such a way that scarce societal resources are not squandered.
This gets to the heart of why business experience for the president is next to irrelevant. Entrepreneurs are in charge of assets that can be traded. Ownership claims to assets tell us how the market values them, and it prevents the entrepreneur from using them in a wasteful manner. Government also has assets, but there are no market claims to these. It is simply impossible to tell whether they have been configured in an efficient manner. After all, outside investors cannot buy these assets and put them to use in a different line of production (as is the case on the market). This is precisely why the “businessman-president” will find himself steering a rudderless ship.