18 Management Fallacies

Teaching at the school of business, I often have many students who are interested in management or are taking courses in organizational behavior or other management style subject matter. As such I often get asked the question "Where do these management theories come from? do they actually have a rationale behind them or are they just some one's best idea at the time?"

My answer from my experience has been that these are simply best ideas based off of successful managers experiences and figuring out what works and what doesn't (kind of an evolutionary process).

Very similar to how I say that it is extremely unlikely that any firm (or individual) actually goes through the maximization process that we explain in economics. Just the same, due to natural pressures, those firms which get it right tend to succeed, while those who do not, fail to be competitive and are pushed out of the market.

All that being said, the following article by Steve Denning is a very interesting read as he presents several management beliefs which may turn out to be 'unquestioned religious doctrine' rather than refined theories due to evolutionary pressures weeding out incorrect beliefs.

Understanding The Religion Of Business: 18 Management Fallacies

What are your thoughts? feel free to comment below.

What is Carbon Pricing, why we need it and why no one wants it.

As promised, here is the follow-up post to do with the final topic which we covered in Microeconomics on environmental economics and some discussion on the current events.

Anyone viewing the news these days will certainly have come across the plethora of articles from various media outlets covering the proposed carbon price, either the one being proposed in Alberta or the national price floor which will be implemented by 2018. (of course, these links are just a few of the many pieces written on the topic over the last few weeks and months!).

Without getting into the politics of this policy (may not be possible)  I want to discuss what a carbon price does and why we might want it as a society, but why no one likely wants it from an individual perspective.

Keep in mind, I will be addressing these from a general theoretical standpoint, I am not evaluating the details of either policy nor am I getting into the spin-off effects such policies may have on the macroeconomy or the distributional effects.

Let us start by looking at a simplistic case of heating our homes. In this area, homes are primarily heated through natural gas, electric or wood heat. All emit a level of emissions into the atmosphere in the process of heating our homes (Some worse than others of course!).

Presently when you pay for any of these sources of heat without a price on carbon (carbon, or emissions tax), you are paying simply for the good which you are using to heat your home (wood, natural gas, electricity). thus when you make the decision of how hot you are going to keep your house given the cost of heating, you are primarily making this decision with little to no regard for how your choices affect others due to the emissions released.

Truthfully, you individually add very little to the problem in your personal emissions. the problem is that the little bit that everyone adds, cumulates and is felt by all, becoming a massive amount of emissions hanging around either locally or in the atmosphere.

If we were to add a cost (emissions tax) to heating your home in line with the cost you impose on society (others) due to your emissions, then when you make the decision on how hot to keep your house, you are not simply factoring in the cost to heat your house, but also the respective cost of your emissions.

This has two main effects on your consumption habits.

(I) You will reduce your consumption due to the increased price. That is, you will choose to have a lower level of heat and wear a sweater instead. This, of course, will largely depend on how sensitive you are to the price change. (Income effect)

(II) As 'cleaner' options of heating your home will not be taxed or at least taxed less, these options become a viable alternative and relatively cheaper. Thus you may choose alternative sources to heat your home.  (substitution effect).

By pricing carbon appropriately we adjust our consumption habits of carbon-intensive goods, resulting in us consuming fewer goods which are carbon intensive while shifting our consumption towards goods which are produced in a relatively 'clean' fashion.

Well, this seems positive, pay more for goods which are 'dirty' resulting in us choosing 'clean' goods instead. so why all the backlash?

From a societal viewpoint, a price on carbon is ideal, it allows us to internalize a cost which we impose on others without bearing directly ourselves. but in that lies the problem.

Let's shift the narrative slightly. We all know (especially those who live in large cities) that driving our vehicles creates harmful emissions, which in turn can lead to the development of smog and other air-quality concerns.

Where a lot of the climate change debate seems rather ethereal to the average person, something that may affect them or their children off in the future, smog and the impacts of it are apparent and can be witnessed and felt by anyone who has been in a large urban center and felt or seen the deterioration of the air quality.

If the effects and the societal costs of smog are so apparent, why don't we willingly choose to reduce our driving?

the problem lies in the comparison of my personal benefit received from driving an additional Km vs my perceived cost of driving that additional Km. Specifically, driving has a huge benefit over taking transit or other alternatives, while at the same time the cost of driving that extra Km is minimal to me (Gas isn't that expensive, and from my individual viewpoint, I alone am not adding that much to the smog problem).

as a result, because my private costs are lower than the social costs, we all choose to drive more than we would socially want, resulting in high levels of smog and deterioration of air quality.

If we were to impose a tax on your driving and begin to charge people $X for every liter of gasoline, this would similarly have the effect of increasing your perceived cost of driving and thus you are left with two options, either drive less, or substitute towards a more fuel efficient vehicle.

Hence the reason why carbon pricing or tax is never going to be popular is because we see our individual contribution to the problem to be so small, that we personally see the tax as unjustified. Our personal consumption habits are hurt as we now have to arbitrarily pay more for a good that was cheaper just before the tax. that is we see this tax as having a great personal cost!

But what about the benefits, clearly the idea of this tax is that it reduces our consumption of 'dirty' goods, thereby reducing our levels of pollution, and cleaning up our air and environment. This is a good thing right!

It is a good thing, and society on whole benefits - the problem is the benefit any individual sees due to this tax is small, as this effect of reducing pollution seems rather ethereal or abstract and thus it appears in the end that this is actually just a money grab by the government over actually providing a cleaner environment. (The argument I often hear, is how is the government going to provide cleaner air by taking my money! This misses the point, the government doesn't provide cleaner air, we do by adjusting our consumption habits!)

By putting a price on carbon, we increase the cost of carbon-intensive goods, which decreases our output, but such policies are not going to be popular because although society on whole benefits, at the individual level we are left with higher costs and an unclear vision of how we personally benefit from paying these higher prices.

Personally. I think a carbon price is desperately needed to force us to individually realize the costs that we are imposing on society due to our choices. But of course this is just my opinion and there is much much more to this discussion.

There are of course distributional  (are the rich or the poor more greatly hurt or benefit from this policy?) as well as regional impacts to this policy (Some regions provide necessary goods to our way of life that are inherently 'dirty'), along with many other issues, which I do not mean to minimize, as they are serious effects which need to be addressed with any carbon pricing policy -- but due to scarce time, and attention on the part of the reader -- only so much can be discussed in one post.

There is still so much that can and could be said about other aspects of carbon pricing and its effects, what are your thoughts on the subject? feel free to add to the conversation in the comments below.

On the loss of American Manufacturing jobs.

Just as the semester is wrapping up we have had the chance to cover the final two chapters in Micro and Macro.

In Micro we had the chance to briefly look at environmental economics -- which has been making some prominent headlines in the news with the discussion of a federal carbon emission tax ... but we will save these headlines for a follow-up post.

First, I bring attention to an interesting article I came across in "The Atlantic" by Jared Bernstein and Dean Baker titled "Why Trade Deficits Matter".

For those of you in my Macro class - to relate this to what we discussed, this article falls right along the line of the familiar, traditional, almost mercantilist argument of "Exports are good, imports are bad", that is the false underlying belief that trade is a zero-sum game.

The argument which Bernstein and Banker make is that the view held by us economists that current account deficits are harmless and no different in effect than current account surpluses are, in fact, wrong.

The argument which they are referring too ... as far as I could decipher at least, follows the basic premise:

1. Following trade liberalisation, industry in each country will align itself along the sectors with a comparative advantage (lowest opportunity cost of production). 
2. Thus industries in the export sector will expand, while industries in the importing sector will contract -- however given a basic premise of scarce resources, in order for the export sector to expand, it needs to utilise the released resources from the contracting import sector. 

Thus my interpretation of the argument being made is that because we have a prolonged trade deficit, (Imports are greater than exports) then this must mean that more jobs have been lost in the import sector (manufacturing) than have been gained in the export sector. 

Thus it is due to a prolonged trade deficit that we have weak demand (aggregate demand) resulting in a persistent recessionary output gap and high rates of overall unemployment. Thus to fix the problem Bernstein and Banker argues that we need to restore the trade balance and reduce the current account deficit. 

while it may be the case that there has been a correlation between the trade deficit and higher rates of unemployment in the states, I was extremely sceptical of the argument being made by Bernstein and Banker. I had a feeling that this was a case of correlation, not causation. (Remember just because A and B are correlated does not mean that A causes B or that B causes A, In fact, there could be a C that causes both!)

Specifically, I would have expected trade to have the effects mentioned above - regardless of trade surplus or deficit. 

As the US economy reallocates its resources to support its export industry (contracting the import industry) - jobs are created in the export industry, while jobs are lost in the import industry. The problem is, many of the skills or education held by the recently laid off labour (and capital) in the import industry may not be relevant for employment in the exporting industry. 

Although the exporting industry wants to hire more workers, the present labour force does not have the skills or education which is demanded by the export sector. As a result, we have a rising level of structural unemployment. I felt this would especially be the case given the exceptionally high cost faced by workers in the US to retrain due to the high cost of schooling.

This was at least my thoughts on the matter, however, these were based on some grand assumptions as I lacked (and lack) the actual data and information about the US economy, as well as other economies who may be experiencing the same thing, but with a current account surplus. 

Then by luck, I came across this article on Forbes by Tim Worstall "Memo for Trump...". Worstall does not comment on the rise of structural unemployment the same ways I hypothesised above, rather Worstall argues that manufacturing jobs are on the decline globally, and this holds for countries both with trade surpluses and deficits. 

Worstall makes the argument, which seems well founded from my view, that through the rise of new manufacturing technologies, productivity has risen, and as a result, there has been less demand for manufacturing jobs. Thus, the manufacturing worker has found themselves hard pressed for employment regardless of if they find themselves in a country where manufacturing is the export/import sector, or if they find themselves in a country with a trade surplus/deficit. 

With this bit of insight (and data) in mind, it would seem that the US manufacturing sector has two serious headwinds to face. 

1. The manufacturing industry in the US does not have a comparative advantage in relation to foreign countries, and thus finds itself in the position of the import sector - struggling to remain competitive. As a result, firms struggle to maintain a profit, and exit the industry, releasing their capital and labour for the export sector to utilise. however, realistically, we will first see a period of higher structural unemployment as the labour retrains and the capital is 're-purposed'.
2. Globally, manufacturing is shifting to capital intensive methods of production. this rise of technology, further displaces manufacturing workers, further adding to the structural unemployment. 

With these two headwinds in mind ... what can be done to save American manufacturing jobs? we could ignore the changing economy and put up protectionist measures in order to save these manufacturing jobs ... but this just delays the inevitable. (and , could potentially slow the shifting of scarce resources to the trying to expand export industry, thus limiting national income). 

Or alternatively, we could rethink the institutional makeup, and craft some forward thinking policies aimed at reducing the structural unemployment caused by these pressures. Specifically, subsidised education reduces the enormous cost of retraining, allowing laid off workers (who are already facing a cost of lost wages and uncertainty of future job prospects) to retrain, and reenter the job market at a much more rapid rate than we are potentially seeing. 

However this last point I make without any hard evidence, other than looking at other countries (Canada, Germany) which also have witnessed pains in their manufacturing sectors, but through subsidised education, have greatly reduced the cost of retraining, allowing these workers to upgrade their skills rather than be relegated to low-paying, low-skill jobs, which is what I am continually being told is happening to these manufacturing workers by the US media.

There is of course much more to this discussion! please feel free to continue the conversation in the comments below.