Of course being good at business doesn't make you good at economics


Don Boudreaux makes an important and underappreciated point here:

Here’s a refrain that I’m being bombarded with by e-mail and on Facebook; this particular version is a Facebook comment by someone named Thomas Marise (whom I don’t know):

Trump has proven time and again he knows his stuff when it comes to economics. He has a personal wealth of $10Billion proving his understanding. Hard to argue with results.

Such a claim is illogical, even if we assume – falsely – that Trump earned every cent of his monetary fortune honestly rather that at least some of it through government-orchestrated theft.

Knowing how to run a business is not the same thing as knowing economics.

It's worse than just that they're not things being measured along the same axis of human endeavour. It's actually that rather a large amount of knowing how to run a business is in managing to avoid the things that economics, and economic policy, would like to do to that business.

Think it through for a moment: every business would love to make excess profits, profits above the average cost of capital. And much of business itself is trying to work out how to do so. but at the level of the economy we don't want anyone to be making excess profits: we don't want anyone to be making more than the average return to capital. And that's rather the difference between markets and capitalism as well as between business success and economics.

Sure, business is capitalism, let's make the profits where and when we can for private benefit. But it's markets that curb this tendency, markets which force only those pushing the technological boundaries capable of making those super-profits. It's also markets which compete away those excess profits as other producers catch up with that boundary pushing. Finally, it's economics which explains both why the markets are desirable and why they work.

Much of business is trying to avoid market forces, much of economics is discussing how much we've got to insist that market forces be allowed to work. They really are two very different subjects and success at one, knowledge of one, by no means even implies success at the other.