Tyler Cowen - Big Business: A Love Letter to an American Anti-Hero

We must take a moment to appreciate the particular character of American business. By global standards, its overall performance is remarkably impressive. Stanford economist Nicholas Bloom and a group of co-authors studied and compared management practices in some of the major economies, including the United States. Their survey assessed how well a workplace uses incentives, the quality of performance measures and reviews, whether top management aims at long-term goals, whether top creators are well rewarded, and whether the firm attracts and retains quality employees, among other relevant metrics. These assessments were backed up by real-world results too, as the responses correlated with actual numbers on firm productivity, size, profitability, sales growth, market value, and firm survival.

So at the end of all of these measurements of management quality, which country comes out on top? The United States is a clear first, a testament to the scope and quality of business achievement in this country, the result of the efforts of both business leaders and workers. Not coincidentally, America is the global innovation leader in a wide array of areas.

Management really matters. Lets say we take two American plants producing comparable wares, but one of those plants is in the 90th percentile in terms of productivity, while the other is in the 10th percentile. The former plant will have a productivity level four times higher than the latter plant, due to superior management practices. It has been estimated that Chinese firms could increase their productivity by 30 to 50 percent and Indian firms could do so by 40 to 60 percent merely by bringing the quality of their management practices up to American levels.

And what might such improvements from the Chinese and Indians mean? Americas relatively high level of workplace trust allows its companies to run with much greater efficiency. Trust allows businesses to decentralize decisions, so top managers do not become bottlenecks holding up progress. With trust, delegation to subordinates is much easier and more effective, and so businesses based on trust can scale more rapidly and have greater flexibility. In an environment with relatively high levels of trust, workers are more likely to see that rewards are based on productive contributions more than on cronyism. In these regards, the virtues of business productivity are human virtues as well, and both show up in record high levels of business output and also relatively pleasurable jobs. As human beings, we enjoy being trusted and in turn being trustworthy. So often we see that business virtues correlate with social virtues.

There is another reason American business has done well: the American economy is relatively effective, compared with other countries, in weeding out the worst firms through competitive pressures. The very worst firms in the United States just arent that bad compared with the best firms, whereas for other countries the gap is typically much larger. This is another way of saying that Americans do the creative destruction part of capitalismthat is, the process by which people vote with their wallets as to which is the best restaurant, car, or suitcase, and the losers go out of businessbetter than the rest of the world. The problem with protectionism, which at first glance looks appealing because it claims to protect our workers, is that it becomes much harder for more productive businesses to displace the less productive ones, a fundamental source of economic progress.

Compared with other major regions, the United States also does the best job of funneling labor and resources into the best-managed firms. That is, successful American businesses can grow and extend their reach. For instance, an increase in management quality of one standard deviation (a statistical measure of difference) means, for an American firm, 268 extra employees on average. A comparable increase in management quality in southern Europe is associated with only 68 more employees in the firm; similar results are found after adjusting for differences in firm size. In other words, America is especially good at matching talent to talent and getting the most out of its biggest successes.